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Filed pursuant to Rule 424(b)(3)
Registration No. 333-05190-A
PROSPECTUS
900,000 SHARES OF COMMON STOCK
900,000 COMMON STOCK PURCHASE WARRANTS
THRIFT MANAGEMENT, INC.
This Prospectus relates to the 900,000 shares of Common Stock and the
900,000 redeemable warrants to purchase Common Stock (the "Warrants") that
comprised the 900,000 Units originally sold by Thrift Management, Inc. (the
"Company") in its December 1996 initial public offering (the "Company IPO").
Each Unit was composed of one share of Common Stock and one Warrant; the Common
Stock and Warrants have traded separately since being issued, however.
This Prospectus also relates to the proposed sale of 150,000 shares of
Common Stock, 150,000 Warrants, and 150,000 shares of Common Stock underlying
the Warrants that are currently owned by certain security holders of the Company
(the "Selling Security Holders"). The Company will bear all of the expenses of
registering this offering and will not receive any of the proceeds from the sale
of the Selling Security Holders' securities.
The Selling Security Holders may offer their securities from time to
time in transactions in the over-the-counter market, in negotiated transactions,
or in a combination of these methods of sale. The sales prices may be at market
prices prevailing at the time of sale or at negotiated prices. The Selling
Security Holders may sell their securities to or through broker-dealers, and
these broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Security Holders and/or the
purchasers of the securities.
The Common Stock and Warrants of the Company are currently traded on
the over-the-counter ("OTC") Bulletin Board under the symbols THMM and THMMW,
respectively.
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You should carefully consider the risk factors beginning on page 8 of
this Prospectus.
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Neither the Securities and Exchange Commission (the "SEC") nor any
other state securities commission has approved or disapproved of these
securities or determined if this Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
You should only rely on the information incorporated by reference or
provided in this Prospectus or any supplement. We have not authorized anyone
else to provide you with different information. The common stock is not being
offered in any state where the offer is not permitted. You should not assume
that the information in this prospectus or any supplement is accurate as of any
date other than the date on the front of those documents.
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The date of this Prospectus is October 28, 1998
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TABLE OF CONTENTS
PAGE
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Summary......................................................................................3
Risk Factors.................................................................................8
Dividend Policy.............................................................................14
Management's Discussion and Analysis of Financial Condition and Results of Operations.......14
Business....................................................................................20
Management..................................................................................26
Principal and Selling Security Holders......................................................32
Certain Transactions........................................................................34
Description of Securities...................................................................36
Shares Eligible for Future Sale.............................................................40
Plan of Distribution........................................................................41
Legal Matters...............................................................................42
Experts.....................................................................................42
Where You can Find More Information.........................................................43
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SUMMARY
Because this is a summary, it does not contain all of the information
that may be important to you. You should read the more detailed information
contained in this Prospectus.
THE COMPANY
GENERAL
Thrift Management, Inc. (the "Company") manages and operates retail
outlets known as thrift stores, which deal in new and used articles of clothing,
miscellaneous household items, furniture, bric-a-brac and antiques at discounted
prices. The Company currently operates six thrift stores in South Florida: two
in Hallandale, Florida, one in Margate, Florida, one in Lauderdale Lakes,
Florida, one in Hialeah, Florida, and one in Pompano Beach, Florida. Inventory
for the Company's stores is obtained primarily as the result of donations made
to charities under contracts with the Company for the solicitation and purchase
of merchandise. The Company also purchases merchandise in bulk from various
independent contract collectors.
The Company has solicitation and purchasing agreements with three
charities in the South Florida area, the Missing Children Awareness Foundation,
Temple Beth Ahm Israel and the Samuel M. and Helen Soref Jewish Community
Center, Inc., a Florida not-for-profit corporation. The Company is registered
with the Department of Agriculture and Consumer Affairs of the State of Florida
as a professional solicitor. The charities receive a percentage of gross
sales and gain the benefit of the Company's expertise in solicitation and resale
of donated goods through a higher return on sales than the charity itself may be
able to realize through its own efforts.
The Company uses direct mail, newspaper advertising and telemarketing
to solicit donations for its client charities. The Company uses approximately 16
trucks to make scheduled pick-ups of donated goods. In addition, the Company
operates 11 manned Missing Children Awareness Foundation donation trailers and
has obtained approval for the placement of two additional trailers. The donors
are given receipts to document the items donated. Merchandise is then taken back
to the appropriate thrift shop, where it is inspected, sorted, priced, tagged
and displayed for sale. Items remaining unsold in the stores are sold in bulk to
exporters, which ship the items to countries throughout the Caribbean, Central
and South America and Eastern Europe.
The Company positions its outlets in lower socio-economic
neighborhoods, on heavily traveled streets, and preferably in the vicinity of
other thrift shops. The Company believes that competition, rather than being a
limiting factor as it is in many other industries, actually encourages sales
because the close proximity of other outlets attracts customers to the area to
shop for new bargains, as the merchandise changes frequently.
The Company was incorporated in Florida in July 1991. Its executive
offices are located at 3141 W. Hallandale Beach Boulevard, Hallandale, Florida
33009, telephone number (305) 985-8430.
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RECENT DEVELOPMENTS
The Company believes that economic and political conditions in the
overseas markets that purchase rags will continue to remain depressed for the
rest of this year and into the first quarter of 1999. The Company believes that
this will result in the Company having to continue to sell rags at prices
ranging from $0.05 to $0.10, as compared to $0.20 per pound in 1997. This
situation has resulted in an unfavorable variance in sales and, more
importantly, in a decline in the gross profit margins comparable to prior years.
In addition, the amount of donated merchandise received from the Company's
solicitation has not kept pace with the growth in sales and new stores. This has
resulted in the Company purchasing an ever-increasing amount of higher cost
merchandise from various independent contract collectors. The Company is
exploring other sources of supply in order to reduce the Company's cost of
purchased goods. The Company's new manned-trailer donation program is growing
and a new telephone solicitation program, which began in the third
quarter of 1998, is in its start-up phase. These programs are not expected to
begin to have a material positive impact on the sales or gross profit margins
until the first quarter of next year. The Company expects the gross profit
margins to remain in the 33%-36% range in the third and fourth quarters.
On August 4, 1998, the Company's sixth store opened in Pompano Beach,
Florida, and the Company expects to open its seventh store in Orlando, Florida
by year-end. The pre-opening expenses, grand opening promotional expenses and
start-up expenses of these new stores will cause these new stores to generate
operating losses in the third and fourth quarters of 1998. As the result of
these expenses and the projected gross profit margins, the Company currently
expects to report net losses in excess of $100,000 in both the third and fourth
quarters of 1998.
On October 29, 1998, the Company announced that it is reducing the
exercise price of the Warrants to $2.35 per share from $5.00 per share. The
Board of Directors made this decision based on various factors, including the
current trading prices of the Company's Common Stock and Company's desire to
obtain additional capital for acquisitions and opening new stores. The Board
also announced that the Company will redeem any Warrants remaining outstanding
as of the close of business on December 14, 1998. The redemption price of the
Warrants is $.10 per Warrant. On October 27, 1998, the closing price of the
Company's Common Stock was $3.00.
INITIAL PUBLIC OFFERING
The Company completed the Company IPO in December 1996, in which it
sold 900,000 Units at a price of $5.75 per Unit. Each Unit consisted of one
share of Common Stock and one Warrant to purchase one share of Common Stock. Of
the 900,000 shares of Common Stock underlying the Units, 615,000 shares were
offered by the Company and 285,000 shares were offered by Rozel International
Holdings, Inc. ("Rozel") directly to the Underwriter of the Company IPO, First
Hanover Securities, Inc. (the "Underwriter"). Lexington Capital Partners & Co.,
Inc. is the successor to the Underwriter's business. The Warrants are
exercisable until December 5, 2002 and may be redeemed by the Company on 30
days' notice at any time at a price of $.10 per Warrant if the closing bid price
of the Common Stock for 20 consecutive trading days ending on the 15th day prior
to the date that notice of redemption was given by the Company has been at least
150% of the current exercise price. The Company realized approximately
$2,596,950 in proceeds from the Company IPO, net of underwriting discounts and
expenses and other offering expenses.
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EXPANSION STRATEGY
The Company currently intends to expand its operations by opening
additional thrift stores, both in other counties in Florida as well as in
various out-of-state locations. The Company's current plans are to open
approximately four to six additional stores during 1998 and 1999. The Company
may also, from time to time, identify one or more established thrift stores or
other businesses related to the Company's current operations, such as wholesale
export businesses, as possible acquisition candidates. See "Business - Expansion
Strategy."
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Securities Offered by the Selling Security Holders.....................300,000 shares of Common Stock and 150,000
Warrants.(1) See "Description of Securities."
Common Stock Outstanding...............................................2,175,000 shares
Warrants Outstanding...................................................1,500,000 Warrants(2)
RISK FACTORS...........................................................THE SECURITIES OFFERED HEREBY INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK FACTORS."
OTC Bulletin Board
Symbols(3)...........................................................Common Stock THMM
Warrants THMMW
Units THMMU
The Company will not receive any of the proceeds from the sale by the
Selling Security Holders of their securities. The Company will, however, bear
all of the expenses (other than selling commissions or fees and other expenses
of the Selling Securities Holders) related to this registration of the Selling
Security Holders' securities.
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(1) Includes 150,000 shares of Common Stock underlying the Warrants.
(2) The Company announced on October 29, 1998 that it is reducing the
Warrant exercise price to $2.35 per share from $5.00 per share and that
it will redeem any Warrants remaining outstanding as of the close of
business on December 14, 1998. The redemption price of the Warrants is
$.10 per share. On October 27, 1998, the closing sale price of the
Company's Common Stock was $3.00.
(3) The Units, Common Stock and Warrants are currently traded on the OTC
Bulletin Board. The Company previously applied to list the Units,
Common Stock and Warrants on the Nasdaq system. The Company's
application for listing on the Nasdaq SmallCap Market was denied by the
Nasdaq staff, and the staff's denial was upheld by a Nasdaq Listing
Qualifications Panel. The Company does not currently intend to pursue
further appeals. There can be no assurance that an active trading
market for the Company's securities will develop. As a result, it may
be more difficult to dispose of, or to obtain adequate quotations as
to, the prices of the Units, Common Stock and Warrants offered hereby.
See "Risk Factors."
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of the Company's Consolidated Financial
Statements, which are included elsewhere in this Prospectus, and should be read
in conjunction therewith.
For the Six For the Six For the Years
Months Months Ended December 31,
Ended June 28, Ended June 30, ----------------------------------------
1998 1997 1997 1996(1)
------------------- ------------------ ------------------ -----------------
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 4,401,205 $ 3,660,848 $ 7,728,241 $6,104,905
Gross profit........................ $ 1,780,908 $ 1,912,999 $ 3,777,225 $3,289,695
(Loss) income before taxes.......... $ (44,614) $ 205,985 $ 425,942 $ 124,508
Income tax (benefit) expense........ $ (16,788) $ 104,700 $ 162,000 $ 46,900
------------------- ------------------ ------------------ ---------------
Net (loss) income................... $ (27,826) $ 101,285 $ 263,942 $ 77,608
=================== ================== ================== ===============
SHARE DATA:
Net (loss) income per share......... $ (0.01) $ 0.05 $ 0.12 $ .05
=================== ================== ================== ===============
Weighted average number
of common shares outstanding -
basic.............................. 2,150,000 2,125,000 2,131,000 1,638,125
=================== ================== ================== ===============
As of
As of June 28, December 31,
1998 1997
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(unaudited)
BALANCE SHEET DATA:
Cash................................ $ 1,872,790 $ 2,202,540
Total current assets................ $ 2,601,510 $ 2,720,661
Total assets........................ $ 3,417,111 $ 3,411,487
Total current liabilities........... $ 390,290 $ 382,162
Stockholders' equity................ $ 3,026,821 $ 3,024,273
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(1) Reflects the impact of federal corporate income taxes that the Company
previously would have paid if they had been Subchapter C corporations for tax
purposes during the entire period presented.
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RISK FACTORS
The securities offered are highly speculative. You should purchase them
only if you can afford to lose your entire investment in the Company. You should
carefully consider the following risk factors, as well as all other information
set forth elsewhere in this Prospectus.
The Company cautions readers that certain important factors may affect
the Company's actual results and could cause those results to differ
significantly from any forward-looking statements made in this Prospectus or
otherwise made by or on behalf of the Company. For this purpose, any statements
contained in this Prospectus that are not statements of historical fact should
be considered to be forward-looking statements. Words such as "may," "expect,"
"believe," "anticipate," "intend," "could," "estimate," or "continue" or the
negatives of those words, or other comparable terminology, are intended to
identify forward-looking statements. These statements appear in a number of
places in this Prospectus and include statements as to the intent, belief or
expectations of the Company and its management. Factors that may affect the
Company's results include, but are not limited to, its limited history of
profitability, dependence on charitable donations and a limited number of
charities, reliance on management, competition and seasonality. The Company is
also subject to other risks detailed below or elsewhere in this Prospectus, or
detailed from time to time in the Company's filings with the SEC.
LIMITED HISTORY OF PROFITABILITY
The Company achieved net income of $263,942 and $158,508, respectively,
for the years ended December 31, 1997 and 1996. The Company cannot assure that
it will continue to operate profitably. The Company believes that the cash flow
from its operations will be sufficient to meet its anticipated working capital
requirements for at least the next 24 months. However, the Company cannot assure
that this will be the case. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON CHARITABLE DONATIONS
The Company's operations depend significantly on charitable donations
of clothing and other items. If there is a change in the federal income tax law
eliminating the charitable contribution deduction, it is likely that the number
of people donating and the number of items donated would significantly decrease.
The Company's primary source of revenue is the sale of the donated merchandise;
therefore, a change in the tax law could materially adversely effect the
Company's business, operations, revenues and prospects. See "Business Inventory
Collection."
DEPENDENCE ON A LIMITED NUMBER OF CHARITIES
The Company currently has solicitation and purchasing agreements with
three charities in the South Florida area. A substantial portion of the
merchandise inventory offered in the Company's thrift stores is obtained as a
result of donations made to these three charities. The Company bears all costs
of and assumes all responsibility for the solicitation of donations and
operation of the thrift stores, and pays the charity a percentage of gross
sales. The operations, revenues and prospects of the Company could be materially
adversely affected if any of these
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charities defaulted upon or failed to renew their contracts with the Company.
See "Business - Inventory Collection."
PRIOR ACTS AND BANKRUPTCY OF MEMBERS OF MANAGEMENT
In 1985, Mr. Douglas, the Chief Executive Officer, President and a
director of the Company, pled guilty to one count of wire fraud in a federal
criminal action arising from his employment from 1980 to 1982 as a salesman of
oil and gas leases for U.S. Oil & Gas Corporation. A federal judge sentenced Mr.
Douglas to a 90-day jail term and five years' probation. In addition, Mr.
Douglas settled a related civil action brought by the Federal Trade Commission.
In connection with the settlement, he paid $65,000 in restitution. In February
1998, Mr. Douglas filed an application for a Presidential pardon with the U.S.
Department of Justice. It is not possible to determine at this time whether or
when this pardon may be received.
In 1989, Mr. Douglas, his spouse and M.J.S.S. Enterprises, Inc., a
corporation for which Mr. Douglas was an officer, filed for bankruptcy
protection. The Bankruptcy Court discharged the personal and corporate
bankruptcies in 1990.
TRANSACTIONS WITH MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The Company has from time to time entered into transactions with
certain of its principal shareholders and members of management. These
transactions are described more fully in the section of this Prospectus
captioned "Certain Transactions." The Company believes that these transactions
were on terms equally as favorable to the Company as those that would be
available from unaffiliated parties. The Company presents all proposed
transactions with affiliated parties to the Board of Directors for its
consideration and approval. Any Board member who has an interest in such
transaction abstains from voting.
DENIAL OF APPLICATION FOR INCLUSION ON NASDAQ
The Company's Units, Common Stock and Warrants are currently traded on
the OTC Bulletin Board and are not listed for trading on the Nasdaq system. An
issuer must meet certain quantitative criteria relating to its total assets, its
capital and the trading prices of its securities to be included on the Nasdaq
system. In addition, the Nasdaq staff may consider other factors, such as the
issuer's management and the circumstances surrounding the issuer's operations,
when determining whether to approve an issuer's application for inclusion in the
Nasdaq system. The Company previously applied for listing on the Nasdaq SmallCap
Market, but its application was denied. The Company appealed the staff's denial
before a Nasdaq Listing Qualifications Panel. The Panel upheld the staff's
determination based on the background of the Company's Chief Executive Officer
and President (see "Prior Acts and Bankruptcy of Members of Management," above)
and the determination that the Company's pre-offering financings were contrary
to just and equitable principles of trade. The Company does not currently intend
to pursue further appeals. As a result, you may find it more difficult to
dispose of, or to obtain adequate quotations as to, the prices of the Units,
Common Stock and Warrants.
SEC "PENNY STOCK" REGULATIONS
The SEC's regulations generally define "penny stock" to be any equity
security that has a market price less than $5.00 per share or an exercise price
less than $5.00 per share. Based on
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their current trading prices, the Units, Common Stock and Warrants are subject
to the SEC rules relating to "penny stock." These rules impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally
institutions with assets exceeding $5,000,000, or individuals with net worth
exceeding $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouses). For transactions covered by the rule, the broker-dealer
must determine that the investment is suitable for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale. The
broker-dealer must deliver to the purchaser a disclosure schedule prepared by
SEC relating to the penny stock market, unless there is an exemption. The
broker-dealer must also disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. In addition, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, the broker-dealer must send monthly statements
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. If applicable, these rules
may adversely effect the liquidity of the market for the Company's Units, Common
Stock and Warrants, making it more difficult for you to sell your securities.
BENEFITS TO SELLING SECURITY HOLDERS
The Selling Security Holders have received the benefit of the
registration of their Common Stock and Warrants for resale by them. The Selling
Security Holders include the 1997 Ileen Little Irrevocable Family Trust, the
beneficiary of which is Marc Douglas, a director, executive officer and
principal shareholder of the Company. The Company will pay all of the offering
expenses on behalf of the Selling Security Holders, except for the selling
commissions and fees and expenses of counsel or other advisors. Although the
expense attributable to the Selling Security Holders cannot be determined
precisely, the Company estimates that this expense will range from $5,000 to
$10,000. The Company will not receive any of the proceeds from the sale by the
Selling Security Holders of their securities. The Company cannot determine the
profits that may be realized by the Selling Security Holders, because their
profits will depend on the market prices of the Company's Common Stock and
Warrants at the time of sale and the selling commissions and fees incurred in
those sales.
CONTROL BY MANAGEMENT
The Company's officers and directors currently own, in the aggregate,
approximately 50% of the issued and outstanding shares of Common Stock of the
Company, excluding any Common Stock that may be issued upon the exercise of the
Warrants or upon the exercise of outstanding options to acquire Common Stock. In
addition, Marc Douglas, the Company's Chief Executive Officer and President,
beneficially owns 250,000 shares of Series A Preferred Stock, which, when
combined with the shares of Common Stock held by him, results in Mr. Douglas
holding approximately 77.2% of the voting power of the Company's outstanding
voting shares. Accordingly, management will continue to control the election of
the Company's Board of Directors and influence the Company's affairs and the
conduct of its business. See "Management" and "Principal and Selling Security
Holders."
GOVERNMENT REGULATION
In order to solicit donations of merchandise on behalf of charities,
the Company must register as a professional solicitor with the Department of
Agriculture and Consumer Affairs of
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the State of Florida, which oversees those activities. If the Company expands
its operations to other states, the Company will likely be subject to similar
licensing and oversight in those jurisdictions. As a professional solicitor, the
Company and its personnel are required to comply with various regulations
governing the manner and terms of solicitations, including, among others,
posting of a surety bond. The Company could be subject to disciplinary action,
such as significant fines and penalties or suspension or revocation of its
license, if its fails to comply with these regulations. This disciplinary
action, if taken, would likely have a material adverse effect on the operations,
revenues and prospects of the Company. See "Business - Government Regulation."
EXPANSION RISKS
The Company's strategy is to expand its operations by opening new
thrift stores or acquiring existing thrift stores or other businesses related to
the Company's current operations. If the Company decides to expand through
acquisitions, the Company would use cash, notes or shares of the Company's
capital stock. The use of cash, notes or stock would depend, in part, on the
Company's available working capital or other sources of funds. The Company does
not currently anticipate incurring external debt to fund any such acquisitions.
Management may determine, however, that the use of debt to fund an acquisition
may be advantageous based on the prevailing market interest rates, the cost of
funds available to the Company, and the extent of revenues generated by the
acquisition candidate. If the Company were able to obtain this debt financing on
acceptable terms, it would result in an ongoing interest obligation to the
Company. Issuance of shares of the Company's capital stock in an acquisition
could have the effect of diluting the Company's earnings on a per share basis or
diluting the voting control of existing shareholders, and could result in an
additional ongoing dividend obligation for the Company, depending on the terms
of the stock issued.
The successful expansion of the Company's operations will also depend
on the Company's ability to secure suitable sites for its outlets, obtain leases
on favorable terms, ensure adequate supplies of merchandise for sale, and hire,
train and retain qualified personnel. The Company has been required to obtain
additional merchandise as it opens new stores. The Company currently believes it
can obtain additional merchandise by increasing its advertising to encourage
donations to its charities, by seeking arrangements with additional charities,
or by seeking additional sources of merchandise (such as arrangements with other
independent contract collectors). The Company cannot assure that it will be
successful with any of these efforts, however. See "Business - Expansion
Strategy."
RELIANCE ON MANAGEMENT
The Company's business is dependent upon the experience of its
executive officers and key personnel, all of whom are familiar with the specific
processes of soliciting donations and selling donated merchandise through thrift
shops. The Company is party to an employment agreement with Marc Douglas, the
Company's Chief Executive Officer and President, Stephen L. Wiley, its Chief
Financial Officer, and Ray Bryce, its Senior Vice President -- Merchandise. The
Company's other executive officers and most of its key employees are
unrestricted by any contractual prohibitions and are free to leave at any time
in order to work for competitors or to pursue other opportunities. The Company
does not maintain "key man" insurance on Mr. Douglas or any other officer or key
employee. The loss of the services of Mr. Douglas or of any other officers or
key employees might adversely affect the business and prospects of the
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Company. In addition, the Company's ability to compete depends, in part, on its
ability to attract and retain qualified personnel. The Company cannot assure
that it will be able to attract or retain such personnel in the future on terms
economically feasible to the Company or otherwise. See "Management."
COMPETITION
The Company competes for donations of merchandise and sales with other
thrift stores. Some of these other thrift stores are located in the vicinity of
the Company's stores. In addition, the Company competes with a number of general
retail stores that offer new goods at discounted prices. See "Business -
Competition."
SEASONALITY
The Company's operations are currently located in South Florida, which
has numerous part-time residents during the winter. The Company's results of
operations reflect the seasonal nature of this market, with donations and sales
of merchandise being higher in the winter months. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DIVIDEND POLICY
Except for the payment of certain undistributed S corporation
dividends, the Company has not paid cash dividends and the Board of Directors
does not currently contemplate the payment of cash dividends on its Common
Stock. Any decisions as to the payment of cash dividends on the Common Stock
will depend on the Company's ability to generate earnings, its need for capital,
its overall financial condition, and such other factors as the Board of
Directors deems relevant. See "Dividend Policy."
AUTHORIZATION OF PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of
1,500,000 shares of "blank check" Preferred Stock, for which the Company's Board
of Directors is authorized to establish the terms. Accordingly, the Board of
Directors is empowered, without shareholder approval, to issue additional shares
of Preferred Stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of the Common Stock. Shares of Preferred Stock could be used as a method
of discouraging, delaying or preventing a change in control of the Company. In
connection with the Company IPO, however, the Company has agreed that it will
not issue additional shares of Preferred Stock until December 5, 1998 without
the consent of the Underwriter. The Company currently has outstanding 250,000
shares of Series A Preferred Stock, which were issued to Marc Douglas, the
Company's President and Chief Executive Officer, in connection with the
Reorganization. See "Certain Transactions - Reorganization" and "Description of
Securities Preferred Stock - Series A Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Of the 2,175,000 shares of Common Stock outstanding as of the date of
this Prospectus, 1,240,000 shares of Common Stock are restricted securities.
These shares are also currently
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subject to a "lock-up" period that expires on December 6, 1998. The Selling
Security Holders' Offering relates to 150,000 Warrants and 300,000 shares of
Common Stock (including 150,000 shares of Common Stock underlying the Warrants)
that have been registered for sale by the Selling Security Holders. The Company
has been advised that the Underwriter agreed to release both of the Selling
Security Holders from their lock-up agreements. The Company does not know at
this time whether the Underwriter may agree to release the remaining lock-up
agreements.
Of the 2,175,000 shares currently outstanding, 1,200,000 shares are
owned by affiliates of the Company. The sale of these shares is subject to Rule
144 unless they are registered under the Securities Act. Under Rule 144, a
person (including an affiliate of the Company) who has beneficially owned
restricted shares for at least one year is entitled to sell in any three-month
period a number of shares equal to 1% of the total number of outstanding shares,
or if the shares are quoted on Nasdaq, the average weekly trading volume during
the four calendar weeks preceding the sale, if certain other conditions are also
met. This limitation on the number of shares that may be sold does not apply to
any person who has not been an affiliate of the Company during the three months
preceding the sale and who has beneficially owned the shares for at least two
years.
The Company cannot predict the effect, if any, that sales of shares or
the availability of shares for sale as described above will have on the market
prices of the Common Stock prevailing from time to time. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the public
market may adversely affect the market prices for the Common Stock and could
impair the Company's ability to raise capital in the future through the sale of
equity securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Shares Eligible For Future Sale."
REQUIREMENTS FOR EXERCISE OF WARRANTS
The Warrants included in the Units offered in the Company IPO were
detachable from the Units and separately tradable immediately upon issuance.
Warrant holders will only be able to exercise their Warrants if there is a
current prospectus covering the Common Stock underlying the Warrants in effect
at the time and the underlying Common Stock is qualified for sale or exempt from
qualification under the applicable securities or "blue sky" laws of the states
in which the Warrant holders reside. Although the Company has used its
reasonable best efforts to maintain the effectiveness of a current prospectus
covering the Common Stock underlying the Warrants, the Company cannot assure it
will be able to do so. The value of the Warrants may be greatly reduced if a
current prospectus covering the Common Stock underlying the Warrants is not kept
effective or if the shares are not qualified or exempt from qualification in
states in which the Warrant holders reside.
REDEMPTION OF WARRANTS
The Warrants may be redeemed by the Company if the Company gives at
least 25 days' written notice and the average closing bid price has been at
least 150% of the exercise price for the 20 consecutive trading days ending on
the 15th day prior to the date of written notice of redemption. If the warrants
are redeemed, Warrant holders will lose their rights to exercise the Warrant
unless they exercise the right during the notice of redemption period. Upon
receipt of a notice of redemption, Warrant holders would be required to: (i)
exercise their Warrants (and pay the
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exercise price) at a time when it may be disadvantageous for them to do so; (ii)
sell their Warrants at the current price when they might otherwise wish to hold
the Warrants; or (iii) accept the redemption price of $.10 per Warrant, which
may be substantially less than the market value of the Warrants at the time of
redemption. On October 29, 1998, the Company announced that it is reducing the
exercise price of the Warrants to $2.35 per share and that the Company will
redeem any Warrants remaining outstanding as of the close of business on
December 14, 1998.
DIVIDEND POLICY
The Company does not currently contemplate the payment of cash
dividends for the foreseeable future, but instead will retain any earnings to
fund its growth. Any decisions as to the payment of cash dividends on the Common
Stock in the future will depend on the Company's ability to generate earnings,
its need for capital, its overall financial condition and such other factors as
the Board of Directors deems relevant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in the Prospectus.
GENERAL
The Company was organized in July 1991 for the purpose of managing the
operation of retail thrift stores that offer new and used articles of clothing,
furniture, miscellaneous household items and antiques. The Company is registered
with the State of Florida as a professional solicitor. The Company obtains its
merchandise primarily from two sources: (i) purchase contracts with charitable
organizations in return for an average of 2% - 3% of gross sales; and (ii)
various independent contract collectors from whom the Company purchases
merchandise in bulk.
Items from the stores that remain unsold are sold in bulk to exporters,
which ship the items to countries throughout the Caribbean, Central and South
America, and Eastern Europe. Through its subsidiaries, the Company currently
operates six retail stores. One of the Company's subsidiaries, Hallandale Thrift
Management, Inc. ("HTMI"), is responsible for the solicitation of donations on
behalf of the charities through direct mailings, newspaper advertising and
telemarketing. HTMI is, in addition, responsible for the pickup of the donated
merchandise throughout the communities surrounding the Company's stores.
In January 1998, the Company adopted a 52/53 week retail reporting
calendar, whereby all accounting periods end on a Sunday.
RESULTS OF OPERATIONS
The Company recognizes merchandise sales when the customer pays for the
merchandise upon exiting the Company store. Merchandise inventories consist of
donated and purchased
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used clothing, furniture, miscellaneous household items and antiques. Purchased
and donated inventories have been assigned a value based upon the retail method
of accounting including all costs connected to bringing the merchandise to the
selling floor. These costs include transportation, grading and processing costs
plus fees paid to the sponsoring charitable organization.
FOR THE SIX MONTHS ENDED JUNE 28, 1998 AND JUNE 30, 1997. Revenues for
the six months ended June 28, 1998 and June 30, 1997 totaled $4,401,205 and
$3,660,848, respectively. Sales increased $740,357 or 20.2% for the 1998
six-month period compared to the 1997 six-month period. The sales increase
resulted primarily from the opening of the Company's fifth store in Lauderdale
Lakes, Florida in July 1997. The same-store sales for the six months increased
by 3.2%. The Company's adoption of a 52/53 week reporting calendar resulted in
the six months of 1998 having two days less than the six months of 1997. If the
sales for those two days were added to the six months of 1998, the total sales
would have increased 21.1% and the same-store sales would have increased 4.0%.
Economic and political conditions in those overseas markets that
purchase rags have further deteriorated, with the Company selling rags for
approximately $0.14 per pound in the first quarter of 1998 and approximately
$0.13 per pound in the second quarter of 1998, as compared to approximately
$0.20 per pound in 1997. This significant decline in the market price for rags
represented a 3.9% unfavorable variance in total sales compared to the six
months of the prior year.
The Company's gross profit for the six months of 1998 decreased
$132,091 or 6.9% to $1,780,908, from $1,912,999 for the six months of 1997. This
decrease in the gross profit dollars and the gross profit margin from 52.3% in
the six months of 1997 as compared to 40.5% in the same period of 1998 is
attributable to the significant increase in the cost of goods sold, which was
due primarily to the increasing dependency of merchandise purchased from
independent contract collectors combined with the collapse of the export market
for rags. The decline in export prices for rags represent 33% of the decline in
the Company's gross profit margin. The Company is reviewing plans to adjust its
operational strategy in an attempt to lessen the gross profit impact of the
current rag market prices.
Cost of goods sold, as a percentage of sales, increased 11.8% points
for the six months of 1998 as compared to the six months of 1997, to 59.5% in
1998 from 47.7% in 1997. The Company has two sources for merchandise: direct
donated goods through the charities with which it has entered into purchase
contracts, and merchandise purchased in bulk from independent contract
collectors. In order to support the 20.2% increase in store sales, while also
acquiring merchandise for the Company's sixth store (which opened on August 14,
1998), the Company increased its purchases of merchandise from independent
contract collectors. The Company's purchases from independent contract
collectors for the first six months of 1998 increased 36.2% compared to the
prior year. More of the Company's purchases of merchandise are from sources in
other states, requiring additional freight costs than last year. These
additional costs resulting from the Company's greater reliance on purchased
goods is one of the primary factors resulting in a higher cost of goods sold.
The impact of the current market price for rags is the second primary factor in
the decline of the gross profit margins.
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The Company is accelerating its efforts to reduce its dependence on
purchased merchandise by continuing to develop its network of manned donation
trailers and by establishing a telephone solicitation division to increase the
Company's sources of donated merchandise. As of October 1998, the Company has a
total of 11 manned trailers and has approval to place two more. The Company
plans to continue to expand this new source of donated merchandise. In addition,
the Company has entered into a solicitation and purchasing agreement with the
Samuel M. and Helene Soref Jewish Community Center, a new charity for the
Company. The Company continues to purchase merchandise from various independent
contract collectors and plans to develop or acquire independent contract
collectors to provide another internal source of merchandise; however, there can
be no assurance that it will be able to do so.
Operating expenses for the six months of 1998 increased $136,109 or
7.8% to $1,883,843, as compared to $1,747,734 for the same period in 1997. This
increase is due primarily to the operating expenses of the Lauderdale Lakes
store, which opened in July 1997.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996. Revenues for the years
ended December 31, 1997 and 1996 totaled $7,728,241 and $6,104,905,
respectively. Revenues increased by $1,623,336, or 27%, for 1997, as compared to
1996. Although the Company's gross profit for 1997 increased to $3,777,225, as
compared to $3,289,695 for 1996, the Company's gross profit margins for 1997
decreased to 48.9% versus the 53.9% for 1996.
The net increase in the Company's sales during 1997, as compared to
1996, is attributable to the following:
1. The sales of the Company's fifth retail store, which opened
in July 1997, were $434,592.
2. The 1997 sales of the four other stores increased by
$1,188,744, for a 19.5% increase in same-store sales.
Although the Company's gross profits increased substantially, the
decrease in the gross profit percentage for 1997 as compared to 1996 is
principally attributable to the cost of the merchandise, partially offset by the
effect of a change in the method of accounting for inventories. The Company has
two sources for merchandise, direct donated goods through the charities with
which it has entered into purchase contracts, and the purchase of merchandise in
bulk from various independent contract collectors. In order for the Company to
support the 19% sales increase in four existing stores plus the sales of the new
store, the Company has relied to an even greater degree on purchased merchandise
as compared to merchandise acquired through direct donations. This affected the
mix of purchased goods to donated goods, with 1997 purchased goods increasing
60% over the prior year, whereas total cost of goods increased only 40%. The
additional cost resulting from the Company's greater reliance on purchased goods
is a primary factor resulting in a lower gross profit margin.
Merchandise inventory has been valued using the retail method of
accounting as of December 31, 1997. This accounting principle was adopted by the
Company on October 1, 1997. Merchandise inventory in prior periods and years was
valued using the specific identification method. The new method of valuing
inventories was adopted due to cost/benefit considerations of applying the
specific identification method of accounting for inventories in the Company's
current operating environment. The effect of this change in 1997 was to increase
gross profit by 1.4% and income before income taxes by approximately $106,000.
(See Note 3 to the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.)
In 1997, the Company entered into an additional agreement with the
Missing Children Awareness Foundation and began operating manned donation
trailers as an additional source of
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donated merchandise.
The Company's operating expenses for 1997 were $3,447,983 (or 45% of
sales) as compared to $3,163,455 (or 52% of sales) for 1996, representing an
increase of $284,528 or 9%. The 1997 operating expenses of the new North
Lauderdale store were $251,567. Operating expenses for 1996 included a $150,000
bonus for the tax reimbursement to the Company's President. In 1997, this
expense was largely offset by the $115,683 or 43% increase in professional and
consulting fees, from $271,364 in 1996 to $387,047 in 1997.
The income from operations increased $203,002 or 161% from $126,240 in
1996 (2.1% of sales), to $329,242 in 1997 (4.4% of sales). This is the effect of
a 27% increase in sales with only a 9% increase in operating expenses, partially
offset by the lower 48.9% gross profit percentage in 1997 as compared to 53.9%
in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 1998, the Company had working capital of $2,284,992, as
compared to working capital of $2,248,158 at June 30, 1997.
Cash and cash equivalents at June 28, 1998 totaled $1,872,790, a
decrease of $343,199, as compared with $2,215,989 at June 30, 1997. Net cash
used in operating activities totaled $194,486 for the six months ended June 28,
1998, as compared to $75,504 provided by operating activities for the six months
ending June 30, 1997.
At December 31, 1997, the Company had working capital of $2,338,499 as
compared to $2,260,670 at December 31, 1996. For 1997, cash decreased by
$367,648 as compared to an increase of $2,554,484 in 1996, which was principally
a result of purchases of property and equipment needed for the Company's new and
existing stores.
Net cash provided by operations for 1997 and 1996 amounted to $148,724
and $128,767, respectively, or an increase of $19,957. Net cash used in
financing activities for 1997 was $182,970 as compared to net cash provided by
financing activities of $2,501,865 for 1996. This decrease is primarily the
result of the following items in 1996: receipt of net proceeds of $2,596,950
from the Company IPO, receipt of net proceeds of $680,000 from two private
offerings, liquidation of the Company's liability to the Miami Jewish Home,
dividends and loans paid to the sole stockholder at that time, and the purchase
of Common Stock and Warrants for $500,000. As discussed in Note 12 to the
Company's Consolidated Financial Statements included elsewhere in this
Prospectus, the Company completed two private offerings in February and May of
1996, respectively. As discussed in Note 12 to the Consolidated Financial
Statements, the Company sold to a single investor in February 1996, and as
subsequently amended during October 1996, 300,000 shares of Common Stock and
Warrants for aggregate
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consideration of $250,000 in the form of a $250,000 promissory note, which bore
interest at 7% per annum. This note was paid in August 1996.
As discussed in Note 12 to the Consolidated Financial Statements,
during May 1996, and as subsequently amended during October 1996, the Company
sold 20 units of the Company's securities at $25,000 per unit. Each unit
consisted of 15,000 shares of Common Stock and 10,000 Warrants. The Company
received from this offering net proceeds of $430,000, after deducting the
placement agent's commission and legal costs of $60,000 and $10,000,
respectively. A portion of the net proceeds were used to liquidate current
liabilities, including reducing accounts payable and accrued expenses to reduce
vendors' payment cycles. In December 1996, the NASD deemed certain of the
investors in the private offering to be affiliates of the Underwriter of the
Company IPO for purposes of determining the fairness of the compensation payable
to the Underwriter in connection with the Company IPO. Accordingly, in order to
comply with the NASD's rules, upon completion of the Company IPO, the Company
redeemed the shares of Common Stock and Warrants sold in this private offering
for the aggregate of $500,000 originally paid by the investors. A portion of the
net proceeds of the IPO was used to effect the redemption.
In December 1996, the Company consummated the Company IPO, in which it
sold 900,000 Units at a price of $5.75 per Unit. Each Unit consisted of one
share of Common Stock and one Warrant to purchase one share of Common Stock for
$5.00 per share. Of the 900,000 shares of Common Stock underlying the Units,
615,000 shares were offered by the Company and 285,000 shares were offered by
the investor in the February 1996 private offering. The Warrants are exercisable
until December 5, 2002 and may be redeemed by the Company on not less than 25
days' notice at any time during such period at a price of $.10 per Warrant if
the closing bid price of the Common Stock for 20 consecutive trading days ending
on the 15th day prior to the date that notice of redemption was given by the
Company has been at least 150% of the exercise price then in effect. The Company
realized approximately $2,596,950 in proceeds from the Company IPO, net of
underwriting discounts and expenses and other offering expenses (which amounted
to $653,050).
The Company believes that its current capital resources, together with
cash flow from its operations, will be sufficient to meet its anticipated
working capital requirements through at least 1999. There can be no assurances,
however, that such will be the case.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine precisely the effects
of inflation, management does not believe that inflation currently has a
material effect on the Company's sales or results of operations.
The Company's operations are located in South Florida, which has
numerous part-time residents during the winter. The Company's results of
operations reflect the seasonal nature of this market, with donations and sales
of merchandise higher in the winter months.
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YEAR 2000
The Company has evaluated the potential impact of the year 2000 on its
business, including its information systems, and does not expect this issue to
have a significant effect on its results of operations.
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BUSINESS
GENERAL
The Company operates retail outlets known as thrift stores, which deal
in new and used articles of clothing, miscellaneous household items, furniture,
bric-a-brac and antiques at discounted prices. The Company currently manages and
operates six thrift stores in South Florida, two in Hallandale, Florida (Broward
County), one in Margate, Florida (Broward County), one in Lauderdale Lakes,
Florida (Broward County), one in Hialeah, Florida (Miami-Dade County) and one in
Pompano Beach, Florida (Broward County). Inventory for the Company's stores is
obtained primarily as the result of donations made to charities under contracts
entered into by the Company for the solicitation and purchase of merchandise.
The Company also purchases merchandise in bulk from various independent contract
collectors.
INVENTORY COLLECTION
A substantial portion of the merchandise offered in the Company's
thrift stores is obtained as the result of donations made to charities. The
Company enters into a contract with a participating charity pursuant to which
the Company solicits donations of merchandise on behalf of the charity, picks-up
and sorts donated merchandise and resells the merchandise, principally through
its thrift stores. The Company bears all costs of and assumes all responsibility
for the solicitation of donations and operation of the thrift stores and pays
the charity a percentage of gross sales for all merchandise (typically in the
range of 2% to 3%). The Company believes that such amount is comparable to, if
not better than, that which a charity would typically earn if it operated its
own thrift store and bore the costs of and responsibility for such operation,
including the costs of solicitation and collection of donated merchandise, rent
and other operating costs for the thrift store and hiring of personnel.
Moreover, the Company believes that its experience in soliciting donations of
and reselling merchandise make its services attractive to charities, which may
have little experience in the field. The Company currently has contracts with
the Missing Children Awareness Foundation, Temple Beth Ahm Israel, a Broward
County synagogue, and the Samuel M. and Helen Soref Jewish Community Center,
Inc. The Company believes that its arrangements with these charities will allow
the Company to generate an adequate amount of donated merchandise for its
present operations. As the Company expands its operations, it may seek
arrangements with additional charities. There can be no assurance, however, that
the Company will be able to successfully do so.
The Company supplements the inventory received from charitable
donations by purchasing merchandise in bulk from various independent contract
collectors.
THRIFT STORE OPERATIONS
The Company uses approximately 16 trucks to make scheduled pick-ups of
donated merchandise. In addition, the Company operates 11 manned Missing
Children Awareness Foundation trailers. At the manned trailers, donors are given
receipts to document the items donated.
Following pick-up, merchandise is taken to the appropriate thrift store
where it is sorted and inspected. Unsuitable items, such as those that are
broken, badly stained or torn, are either discarded or sold in bulk to
exporters, which currently pay the Company between $0.05 and $0.10 per pound and
resell the items in countries in the Caribbean, Central and South America and
Eastern
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Europe. Goods deemed suitable for sale in the Company's thrift stores are priced
and date-coded by color. Pricing is for the most part subjective and is based
upon the Company's experience of how much a customer is willing to pay for a
particular type of item.
Apparel accounts for a majority of the Company's sales. Other items
sold by the Company include furniture, bric-a-brac, antiques, small appliances
(such as toasters, stereos and televisions), linens and domestics, and other
merchandise such as toys, books, records and jewelry. Furniture is sold in two
of the Company's thrift stores.
Sales areas are well lighted and merchandise is displayed in loose
arrangements to promote browsing. Apparel is grouped and displayed by sex, type
and color. For example, all women's blouses are hung together by color.
Furniture items (which include brown goods, case goods, and upholstered pieces)
requiring minor repairs, such as loose legs or cracked parts, are repaired by
Company employees prior to display. Furniture and small appliances are sold "as
is." Items of bric-a-brac and antiques are evaluated by an antiques expert and
are displayed in a separate controlled-access area.
In order to tempt the frequent shopper and control inventory levels,
the Company encourages rapid inventory turnover and displays new merchandise on
a daily basis. For example, apparel items are generally allowed to remain in
inventory for up to four weeks, during which time the prices of the items are
subject to weekly markdowns. Merchandise remaining unsold at the end of a
specified time period is removed from inventory and sold in bulk to exporters.
In order to provide convenient shopping hours for customers, the
Company's thrift stores are open from 9:00 a.m. until 7:00 p.m. on Monday,
Tuesday, Thursday and Saturday; from 9:00 a.m. until 9:00 p.m. on Wednesday and
Friday; and from 10:00 a.m. until 5:00 p.m. on Sunday.
MARKETING
One of the Company's primary modes of soliciting donations is through
direct mail, using a colored 5-1/2" x 8-1/2" postcard, sent to between 50,000
and 75,000 households per week. Mailings are targeted to selected zip codes in
Dade, Broward and Palm Beach counties in South Florida. The post card
prominently bears the name of the charity sponsor and a telephone number to call
to offer donations. Supporting this effort is a team of telemarketers who field
pick-up calls and who telephone previous donors to solicit additional
merchandise donations. In order to encourage repeat donations, the Company
endeavors to provide prompt and courteous pick-up of donated merchandise. The
Company supplements its direct mail efforts through advertising in local
publications. In 1997, the Company began operating manned Missing Children
Awareness Foundation donation trailers, located primarily in high-traffic retail
strip centers. This is being expanded and is expected to become a significant
source of merchandise. In the third quarter of 1998, the Company also initiated
a large, sophisticated, telephone solicitation operation, and currently has more
than 30 part-time phone solicitors.
Customers at the Company's thrift stores can be classified into three
general categories: (i) shoppers who must clothe and supply their family on a
limited budget, (ii) "bargain hunters" who look for quality items in
bric-a-brac, antiques and new or nearly new clothing, and (iii) dealers in
antiques and clothing, flea market operators and wholesalers who are seeking
merchandise for their own operations. As many of the Company's customers are
repeat shoppers
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who frequently visit the Company's thrift stores searching for bargains, the
Company seeks to introduce new merchandise on a daily basis and display
merchandise in a manner designed to encourage browsing.
The Company also seeks to attract customers to its outlets by locating
its outlets in the vicinity of other thrift stores, which the Company believes
attracts potential customers to the area and through the use of high visibility
signage.
STORE LOCATIONS
The following sets forth information with respect to the Company's six
thrift stores:
Approximate Lease
Location Date Opened Square Footage Exp./Renewal
- -------- ----------- -------------- ------------
3149 W. August 1986 8,300 April 2001/
Hallandale one five-year
Beach Boulevard renewal option
Hallandale, FL
3141 W. August 1992 15,000 April 2001/
Hallandale one five-year
Beach Boulevard renewal option
Hallandale, FL
901 E. Tenth Ave November 1992 10,500 October 1999/
Hialeah, FL one seven-year
renewal option
1041 N. State Rd. 7 November 1995 10,050 November 2000/
Margate, FL one five-year
renewal option
3200 N. State Road July 1997 29,000 June 2002/
Lauderdale Lakes, FL two five-year
renewal options
1028 E. Sample Road August 1998 10,000 July 2003/
Pompano Beach, FL two five-year
renewal options
Aggregate monthly rental for the Company's six thrift stores is approximately
$43,000.
The Company seeks to locate its outlets in lower socio-economic
neighborhoods that have a high concentration of potential customers and, if
possible, in the vicinity of other thrift stores, which serves to attract the
potential customer base to the area. The Company also seeks locations on highly
traveled streets with adequate on-site parking and the availability under zoning
ordinances of high visibility signage. The Company believes that numerous
adequate locations exist, such as former supermarkets, drug stores and discount
outlets, that meet the
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Company's criteria for store locations and that can be leased at reasonable
rates. The Company is actively seeking additional store locations. There can be
no assurances, however, that the Company will be able to identify additional
suitable locations or, once identified, negotiate acceptable lease terms.
EXPANSION STRATEGY
The Company's strategy is to expand its operations by opening
additional thrift stores or acquiring existing thrift stores or other businesses
related to the Company's current operations. The strategy is to expand initially
in other counties in Florida, and ultimately in various out-of-state locations.
The Company currently anticipates that its new stores will range from 9,000 to
15,000 square feet with smaller stores selling men's, women's and children's
apparel, accessories, shoes and linens, with larger stores also selling
bric-a-brac and household items.
The Company currently intends to open approximately four to six
additional stores during the remainder of 1998 and 1999. The Company's ability
to expand its chain of thrift stores will depend on, among other things,
securing suitable locations, obtaining sufficient merchandise and having
adequate financing to effect its expansion plans. There can be no assurance that
the Company will be able to open any additional thrift stores or that any thrift
stores so opened will be profitable.
An additional area of potential expansion is the direct export of
certain merchandise. Currently, donated merchandise that is unsuitable for sale,
as well as merchandise that remains in inventory beyond a specific time period,
is sold in bulk to exporters who resell the items in countries in the Caribbean,
Central and South America, and Eastern Europe. The Company currently sells
approximately 85,000 pounds of merchandise per week in bulk to exporters. As the
Company opens additional thrift stores, it expects that the volume of bulk
merchandise available for export will increase. When it reaches a level of
approximately 150,000 pounds per week, the Company believes that it will be
economically advantageous to export such merchandise directly. In order to do
so, the Company will need to establish a separate facility to receive, sort and
grade the export merchandise, bale it and otherwise prepare the merchandise for
shipment. There can be no assurance that the Company's operations will generate
a sufficient amount of bulk merchandise to enable the Company to begin direct
export of such merchandise, that the Company will have the necessary financing
to establish the needed facility if it elects to do so, or that if the Company
expands into this field of business, that it can do so successfully or
profitably.
The Company may also, from time to time, identify one or more
established thrift stores or other businesses related to the Company's current
operations, such as wholesale export businesses, as possible acquisition
candidates. The Company's criteria for identifying existing stores as possible
acquisition candidates are similar to those used by the Company when identifying
locations for new stores. The Company would consider whether an existing store
would be an acquisition candidate based on the store's proximity to lower
socio-economic neighborhoods and to other thrift stores; the store's location on
highly traveled streets with adequate on-site parking and permitted
high-visibility signage; the store's size; the store's profitability; the terms
of the existing lease, if any; and the anticipated purchase price. The criteria
for identifying other businesses as acquisition candidates would be based on the
geographic area of the business' operations; the financial condition of the
business, including the nature of the assets used in its operations; the value
of any goodwill associated with the business;
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the business' profitability; the anticipated purchase price; and such other
criteria as are deemed relevant by the Board of Directors. The Company does not
at the present time expect that any such existing stores or businesses would be
acquired from or in a transaction involving the Company's management, principal
shareholders or other affiliates.
Such acquisitions would be consummated in exchange for combinations of
cash, notes, shares of the Company's capital stock and options to purchase
shares of the Company's capital stock, depending, in part, on the Company's
available working capital or other sources of funds and its anticipated capital
needs at the time of the proposed acquisition. Although the Company does not
currently anticipate incurring debt to fund any such acquisitions, management
may determine that, depending on prevailing market interest rates, the cost of
funds available to the Company, and the extent of revenues generated by the
acquisition candidate, the use of debt to fund an acquisition may be
advantageous to the Company. Such debt would result in an ongoing interest
expense obligation for the Company, however. Issuance of shares of the Company's
capital stock in an acquisition would enable the Company to preserve its cash,
but could have the effect of diluting the Company's earnings on a per share
basis or diluting the voting control of existing shareholders, and could result
in an additional ongoing dividend obligation, depending on the terms of the
stock issued.
There can be no assurance that the Company would be able to negotiate
with any such stores or other businesses or, even if negotiations are
undertaken, that the Company would be able to consummate any such acquisitions.
COMPETITION
The Company faces competition from a variety of discount retail stores.
The Company competes for donations of merchandise and with other thrift stores
for sales. Some of such other thrift stores are located in the vicinity of the
Company's outlets. The Company believes, however, that other thrift stores
located in close proximity allow customers to shop around for the best choices
and as a result be more efficient shoppers, which encourages business. In
addition to other thrift stores that sell used goods, low-end discounters such
as K-Mart and Wal-Mart, which offer new clothing, housewares and furniture at
deep discount prices, compete with the Company to a lesser extent. These
competitors generally have greater financial and other resources than the
Company.
GOVERNMENT REGULATION
In order to solicit donations of merchandise on behalf of charities,
the Company must be registered as a professional solicitor with and is subject
to oversight by the Department of Agriculture and Consumer Affairs of the State
of Florida. In the event the Company expands its operations to other states, the
Company will likely be subject to similar licensing and oversight in those
jurisdictions. As a professional solicitor, the Company and its personnel are
required to comply with various regulations governing the manner and terms of
solicitations, including, among other things, the requirement to post a surety
bond. Failure to comply with these regulations could result in disciplinary
action including significant fines and penalties or suspension or revocation of
licenses. Such disciplinary action, if taken, would likely have a material
adverse effect on the operations, revenues and prospects of the Company.
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EMPLOYEES
The Company currently employs approximately 275 full-time employees.
None of the Company's employees are members of labor unions. Management believes
that it enjoys satisfactory relations with its employees.
PROPERTIES
The Company's executive offices occupy a portion of its thrift store
located at 3141 W. Hallandale Beach Boulevard, Hallandale, Florida 33009. See
"Store Locations" above for more information, including the rental payments,
regarding the Company's other store locations.
LITIGATION
The Company is not currently a party to any action, proceeding or
litigation, which, if adversely determined, would have a material adverse effect
on the Company's business, operations, revenues and prospects.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- -----
Marc Douglas 39 President, Chief Executive Officer 1996
and Director
Ileen Little 60 Vice President, Secretary and Director 1991
Stephen L. Wiley 59 Chief Financial Officer and Director 1997
Stephen H. Bittel 41 Director 1998
Jay M. Haft 62 Director 1998
Ray Bryce 36 Senior Vice President -- Merchandise --
MARC DOUGLAS founded the Company in 1991 and has served as its Chief
Operating Officer since its inception, and, in February 1996, was elected
President and a director. Prior thereto, Mr. Douglas was Executive Director of
Thrift Shops of West Broward, Inc., and Southeast Thrift Shops of South Broward,
Inc., since 1986 and 1990, respectively. Mr. Douglas received his A.A. in
Business from Miami Dade College and his B.S. in Business from Florida
International University, Miami, Florida. Mr. Douglas is Ms. Little's son.
In 1985, Mr. Douglas pled guilty to one count of wire fraud in a
federal criminal action arising from his employment from 1980 to 1982 as a
salesman of oil and gas leases for U.S. Oil & Gas Corporation. Mr. Douglas was
sentenced to a 90-day jail term and five years' probation and, in addition,
entered into a settlement agreement in a related civil action brought by the
Federal Trade Commission, in connection with which he paid $65,000 as
restitution. In February 1998, Mr. Douglas filed an application for a
Presidential pardon with the U.S. Department of Justice. No estimate can be made
at this time, however, of the likelihood that a pardon will be granted and, if
granted, when it will be received.
In 1989, Mr. Douglas, his spouse and M.J.S.S. Enterprises, Inc., a
corporation for which Mr. Douglas was an officer, filed for bankruptcy
protection. Both the personal and corporate bankruptcies were discharged in
1990.
ILEEN LITTLE is currently the Vice President, Secretary and a director
of the Company. From its inception until February 1996, when she was elected to
her current position, she acted
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as President and a director of the Company. Prior to joining the Company, Ms.
Little was President of Thrift Shops of West Broward, Inc., and Southeast Thrift
Shops of South Broward, Inc., two companies which she co-founded in 1986 and
1990, respectively. Ms. Little received her B.S. in business from Brooklyn
College. Ms. Little is Mr. Douglas' mother.
STEPHEN L. WILEY became a director of the Company and its Chief
Financial Officer in 1997. Prior to joining the Company, Mr. Wiley had been
Senior Vice President and Chief Financial Officer of Linen Supermarket, Inc.
since 1989. Linen Supermarket, Inc. was a private company that operated 120
specialty linen retail stores in six states. In February 1997, Linen
Supermarket, Inc. filed for protection from its creditors under Chapter 13 of
the Bankruptcy Code, which was converted to Chapter 11 in May 1997. Mr. Wiley
has more than 25 years' experience in the retail industry, including more than
10 years with the W.R. Grace retail companies. Mr. Wiley received his B.S. in
Industrial Management from Purdue University in Indiana and his M.B.A. from the
University of Edinburgh in Edinburgh, Scotland.
STEPHEN H. BITTEL has been a director of the Company since January 1,
1998. Mr. Bittel is the President and Chief Executive Officer of Terranova
Corporation, a full-service real estate organization based in Miami, which he
founded in 1980. Until its August 1998 acquisition, Mr. Bittel was a director of
Spec's Music, Inc., a Florida specialty retail chain. He currently serves as a
trustee of the Greater Miami Chamber of Commerce, a director of the Community
Partnership for the Homeless, and served as a director of the Jackson Memorial
Hospital Foundation. Mr. Bittel received his B.A. from Bowdoin College and is a
graduate of the University of Miami School of Law and a member of the Florida
Bar.
JAY M. HAFT has been a director of the Company since January 1, 1998.
Mr. Haft is a Managing General Partner of Gen Am "1" Venture Fund, an
international venture capital fund, respectively. Mr. Haft is also a director of
numerous public and private corporations, including Robotic Vision Systems,
Inc., Noise Cancellation Technologies, Inc., Extech, Inc., Encore Medical
Corporation, PC Service Source, Inc., DUSA Pharmaceuticals, Inc., Oryx
Technology Corp. and CCA Companies Incorporated. He is a graduate of Yale
College and Yale Law School.
RAY BRYCE became Senior Vice President -- Merchandise in June, 1998.
Prior to joining the Company, Mr. Bryce had been director of Vendor Relations of
Value Village Stores, Inc. - Canada, a private company operating 66 retail
thrift stores in Canada. Mr. Bryce has more than 14 years' experience in charity
solicitations and thrift store operations, including 12 years with Value Village
Stores.
Until December 1999, Lexington Capital Partners & Co., Inc., the
underwriter of the Company IPO has the right to designate a representative as an
advisor to or an individual to serve as a member of the Company's Board of
Directors. The underwriter has not identified its designees as of the date of
this Prospectus.
Directors of the Company hold their offices until the next annual
meeting of the Company's shareholders and until their successors have been duly
elected and qualified.
Officers of the Company hold office until the first meeting of the
Board of Directors following the annual meeting of the Company's shareholders
and until their successors have been chosen and qualified, subject to early
removal by the Board of Directors.
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The non-employee directors of the Company receive compensation in the
form of options to purchase shares of the Company's Common Stock. The two
non-employee directors of the Company were each granted 30,000 stock options in
1998 at exercise prices of $2.50 and $1.75 per share, the fair market values of
the Common Stock on the dates of the grant. As long as they continue to serve as
a director, they will receive additional grants at the then fair market price of
5,000 options at the end of each quarter and 2,000 options upon each anniversary
of their appointment to the Board of Directors.
Effective January 1, 1998, the Company entered into a consulting
agreement with Jay M. Haft, a director of the Company, pursuant to which Mr.
Haft is assisting the Company in developing, studying and evaluating
capital-raising and proposals to expand the Company's business, including
through mergers and acquisitions. The agreement is for a six-month term that
automatically renews for additional terms unless terminated by the Company or
Mr. Haft at least 15 days prior to the end of the then-current term. As
compensation for his services under the agreement, the Company granted to Mr.
Haft five-year options to purchase 66,000 shares of the Company's Common Stock
at a price of $2.00 per share. The options vest as follows: 5,000 upon execution
of the consulting agreement, 5,000 at the end of the initial six-month term, and
14,000 at the end of every six-month period thereafter until all of the options
are vested and exercisable. Any unvested options will be cancelled if the
consulting agreement is terminated by either party.
During 1998, the Board of Directors established Audit and Compensation
Committees. Mr. Bittel chairs the Audit Committee and its other members are
Messrs. Haft and Wiley. Mr. Haft chairs the Compensation Committee and its other
members are Messrs. Bittel and Douglas.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE. The following table sets forth information
with respect to the total compensation earned by, or paid to, the Company's
Chief Executive Officer and Vice President (the "Named Executive Officers"), for
services rendered to the Company during 1997 and 1996. No other executive
officer of the Company earned total salary and bonus in excess of $100,000
during the fiscal year ended December 31, 1997.
Long-Term
Annual Compensation Compensation Awards
---------------------------------------- -------------------
Other Annual Shares Underlying
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options (#)
- --------------------------- ---- --------- -------- --------------- -----------
Marc Douglas 1997 314,050 75,627(1) 101,491(2) --
Chief Executive Officer 1996 297,000 150,000(1) (3) 700,000
and President
Ileen Little 1997 129,000 -- (3) 150,000
Vice President and 1996 113,600 -- (3) --
Secretary
- ------------------------------
(1) See "Certain Transactions - Reorganization" for information regarding
dividend distributions to Mr. Douglas arising from the Company and its
affiliated companies prior to the Reorganization in 1996. These
dividends were paid to Mr. Douglas in 1996 and in early 1997.
(2) Includes advances amortized into operations as compensation, car
allowances and life insurance payments.
(3) Perquisites and other personal benefits paid to the Named Executive
Officers for the periods indicated did not exceed 10% of the total of
annual salary and bonus reported.
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EXECUTIVE EMPLOYMENT AGREEMENTS. Effective as of June 1, 1996, the
Company entered into an employment agreement with Marc Douglas, its Chief
Executive Officer and President, for a term of 60 months. At the end of each
12-month period of the term of the employment agreement, the term will
automatically be extended for one additional 12-month period unless the Company
or Mr. Douglas gives written notice to the other party at least 90 days prior to
the end of each 12-month period of the intent not to renew. The employment
agreement provides for a base salary of $286,000 (subject to 10% annual
automatic cost-of living increases), an annual bonus in an amount equal to 1% of
the Company's annual gross revenues subsequent to the date of the agreement, and
an automobile allowance of $1,500 per month. The employment agreement generally
provides that Mr. Douglas will continue to receive his salary until the
expiration of the term of the employment agreement if terminated by the Company
for any reason other than death, disability or cause (as defined in the
employment agreement), or for a period of 12 months after termination of the
employment agreement as a result of his disability, and that Mr. Douglas' estate
will receive a lump sum payment equal to one year's salary plus a pro rata
portion of any bonus to which he is entitled upon termination of the employment
agreement by reason of his death. The employment agreement also prohibits Mr.
Douglas from directly or indirectly competing with the Company for one year
after termination of his employment agreement for any reason other than the
Company's termination of his employment without cause. If a change of control
(as defined in the employment agreement) occurs, the employment agreement
provides for the continued employment of Mr. Douglas until the later of three
years following the change of control or the then-scheduled expiration date of
the term of employment. The term "change of control," as defined in the
employment agreement, generally means (i) any person's or group's acquisition of
20% or more of the combined voting power of the Company's outstanding
securities, or (ii) in the event of any cash tender or exchange offer, merger or
other business combination, sale of assets or contested election, the persons
who were directors of the Company prior to such transaction cease to constitute
a majority of the Board of Directors following the transaction. In addition,
following a change of control, if Mr. Douglas' employment is terminated by the
Company other than for cause or by reason of his death or disability, or for
certain specified reasons (such as a representation or diminution of duties),
Mr. Douglas will receive a lump sum cash payment equal to the greater of three
times the aggregate compensation paid to him during the preceding year or the
remaining salary, plus any applicable bonus, payable to him for the remaining
term of the agreement.
In June 1997, the Company entered into an employment agreement with
Stephen L. Wiley, its Chief Financial Officer, for a term of 30 months. The
employment agreement provides for a base salary of $100,000, increasing to
$137,500 on January 1, 1998. The agreement also provides a leased automobile not
to exceed $669 per month, reimbursement for insurance, gasoline and repairs, and
$400 per month for the purpose of reimbursement of health insurance for his
family. The agreement provided for the grant of options to acquire an aggregate
of 25,000 shares of the Company's Common Stock under the 1996 Stock Option Plan,
as amended (the "1996 Plan"), at an exercise price of $3.125 per share. The
options vest as follows: options to acquire 10,000 shares of Common Stock vested
on January 1, 1998; options to acquire 10,000 shares of Common Stock shall vest
on January 1, 1999; and options to acquire 5,000 shares of Common Stock shall
vest on June 30, 1999, subject to meeting certain performance
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requirements. Upon termination of the employment agreement by the Company other
than for cause (as defined in the agreement), Mr. Wiley will be entitled to
receive a severance payment equal to three month's salary at the monthly rate in
effect at the time.
Effective as of May 1, 1998, the Company entered into an employment
agreement with Ray Bryce, its Senior Vice President - Merchandise, for a term of
four years. The employment agreement provides for a base salary of $100,000. The
agreement also provides for a leased automobile plus reimbursement of health
insurance for himself and his family. The agreement provided for the grant of
options to acquire an aggregate of 25,000 shares of the Company's Common Stock
under the Company's 1996 Plan, at an exercise price of $2.00 per share. The
options vest as follows: with respect to 25% of the options, at any time after
one year from the date of the agreement; with respect to an additional 25% of
the options, at any time after two years from the date of the agreement; with
respect to an additional 25% of the options, at any time after three years from
the date of the agreement; with respect to the remaining 25% of the options, at
any time after four years from the date of the agreement. Upon termination of
the employment agreement other than for cause (as defined in the agreement),
death or disability, Mr. Bryce will be entitled to receive a severance payment
equal to one year's total compensation.
STOCK OPTION PLAN. The Company adopted its 1996 Plan, under which
options to acquire up to 1,500,000 shares of Common Stock may be granted. The
1996 Plan is designed to serve as an incentive for retaining qualified and
competent employees, directors, consultants and independent contractors of the
Company.
The Compensation Committee of the Company's Board of Directors,
administers and interprets the 1996 Plan and is authorized to grant options
thereunder to all eligible employees of the Company, including executive
officers of the Company, as well as non-employee directors, consultants and
independent contractors. The 1996 Plan provides for the granting of both
"incentive stock options" (as defined in Section 422 of the Internal Revenue
Code (the "Code")) and nonstatutory stock options. Incentive stock options may
only be granted, however, to employees. Options can be granted under the 1996
Plan on such terms and at such prices as determined by the Board or a committee
thereof, except that the per share exercise price of incentive stock options
granted under the 1996 Plan will not be less than the fair market value of the
Common Stock on the date of grant and, in the case of an incentive stock option
granted to a 10% shareholder, the per share exercise price will not be less than
110% of such fair market value as defined in the 1996 Plan.
Options granted under the 1996 Plan that would otherwise qualify as
incentive stock options will not be treated as incentive stock options to the
extent that the aggregate fair market value of the shares underlying incentive
stock options exercisable for the first time by any individual during any
calendar year exceeds $100,000.
Options granted under the 1996 Plan will be exercisable after the
period or periods specified in the related option agreement. Options granted
under the 1996 Plan are not exercisable after the expiration of 10 years from
the date of grant and are not transferable other than by will or by the laws of
descent and distribution. Adjustment of the number of shares subject to options
granted under the 1996 Plan can be made by the Board of Directors or the
appropriate committee in the event of a stock dividend or recapitalization.
Under the 1996 Plan, options may become immediately exercisable in the event of
a change in control or approval by
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shareholders of the Company of a merger, reorganization, liquidation,
dissolution or disposition of all or substantially all of the assets of the
Company.
The exercise price of any stock option granted under the Plan may not
be less than the fair market value of the shares subject to the option on the
date of grant, provided, however, that the exercise price of any incentive
option granted to an eligible employee owning more than 10% of the outstanding
Common Stock may not be less than 110% of the fair market value of the shares
underlying such option on the date of grant.
The term of each option and the manner in which it may be exercised is
determined by the Board of Directors, or a committee appointed by the Board of
Directors, provided that no option may be exercisable more than 10 years after
the date of grant and, in the case of an incentive option granted to an eligible
employee owning more than 10% of the Common Stock, such option shall be
exercisable no more than five years after the date of grant. Options may be
granted to officers and employees. In the event of death or disability, options
may be exercised during a 12-month period following such event. In the event of
retirement of an option holder who is an officer or employee of the Company, an
option must be exercised within three months of the date of termination. In the
event that an option holder is terminated other than pursuant to death,
disability or retirement, all options must be exercised by the date of
termination. Options will not be transferable, except upon death of the
optionee.
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information concerning individual grants of stock options made during the fiscal
year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
----------------------- ------------------------- ------------------ -----------------
NUMBER OF
SHARES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE
- -------------------------- ---------------- --------------- ----------- ----------
Ileen Little 150,000 70% $1.625 5/18/07
STOCK OPTIONS HELD AT END OF 1997. The following table indicates the
total number and value of exercisable and unexercisable stock options held by
the Company's Named Executive Officers as of December 31, 1997. No options were
exercised by the Named Executive Officers during 1997.
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTION
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
--------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Marc Douglas 125,000(2) 575,000(2) -- --
Ileen Little 150,000 -- $112,500 --
- ------------------------------
(1) Based on a closing price on December 30, 1997 of $2.375 per share.
(2) Represents the 700,000 options granted to Marc Douglas in 1996 under
the Company's 1996 Plan. Of the total amount granted, 125,000 of these
options vested upon the opening of the Company's first thrift store
following the Company IPO and 125,000 will vest when that thrift store
operates profitably for one year. Similarly, 125,000 and 100,000 of
such options will vest upon the opening of each of the next two thrift
stores or other businesses, respectively, and 125,000 and 100,000 will
vest when those two thrift stores or related businesses, respectively,
operate profitably for one year. Subject to this vesting, the options
were exercisable commencing June 11, 1997.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior to
1998, the full Board of Directors determined the compensation for the Company's
executive officers. In 1998, the Board established a Compensation Committee,
which will set the compensation for the Company's executive officers.
PRINCIPAL AND SELLING SECURITY HOLDERS
PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of the date of this
Prospectus regarding the Company's Common Stock owned of record or beneficially
by (i) each shareholder who is known by the Company to beneficially own more
than of 5% of the outstanding shares of Common Stock, (ii) each director and
executive officer, and (iii) all directors and executive officers as a group.
Each shareholder listed below has sole voting and investment power.
In accordance with the SEC rules, shares that are not outstanding but
that are issuable upon the exercise of immediately exercisable options,
warrants, rights or conversion privileges have been included for the purpose of
computing the percentage of outstanding shares owned by the individual owning
the convertible security or right, but not when computing the percentage for any
other person. As of the date of this Prospectus, there were 2,175,000 shares of
Common Stock issued and outstanding.
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AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP PERCENT OF COMMON PERCENT OF TOTAL
NAME AND ADDRESS OF COMMON STOCK BENEFICIALLY OWNED VOTING POWER(1)
- ---------------- ---------------- ------------------- ----------------
Marc Douglas 1,300,000(2) (3) 53.6% 77.2%
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009
Ileen Little 10,000(4) 0.5% 0.2%
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009
Stephen L. Wiley 10,000(4) 0.5% 0.2%
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009
Stephen H. Bittel 6,125(5) 0.3% 0.1%
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009
Jay M. Haft 16,125(6) 0.7% 0.3%
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009
Ray Bryce -0- -0- -0-
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009
1997 Ileen Little 150,000 6.5% 3.1%
Irrevocable Family Trust
c/o Barry Nelson, Esq., Trustee
19495 Biscayne Boulevard
Aventura, Florida 33180
Rozel International Holdings, Inc. 150,000(7) 6.5% 3.1%
Whitehill House
Newby Rd Industrial Estates
Stockport Cheshire UK
All directors and executive 1,342,250(8) 54.4% 77.3%
officers as a group (six
persons)
- ------------------------------
(1) The Common Stock votes together with the Series A Preferred Stock on
all matters, except as otherwise legally required. The Series A
Preferred Stock entitles the holder to 10 votes per share and the
Common Stock entitles the holder to one vote per share. Mr. Douglas
holds 250,000 shares of Series A Preferred Stock, which are reflected
in Mr. Douglas' percentage of total voting power.
(2) Does not include 150,000 shares of Common Stock held by the 1997 Ileen
Little Irrevocable Family Trust (the "Trust") of which Mr. Douglas is
the beneficiary. Mr. Douglas does not exercise voting or dispositive
control of the shares held by the Trust. Of Mr. Douglas' total shares,
6,000 shares are held of record by Douglas Family Holdings, Inc.
("Douglas Holdings"), a corporation of which Mr. Douglas is the sole
shareholder, and 400,000 shares are held of record by Douglas Family
Limited Partnership, of which Douglas Holdings is the general partner.
(3) Includes 250,000 shares underlying options exercisable within 60 days.
(4) Reflects 10,000 shares underlying options exercisable within 60 days.
(5) Reflects 6,125 shares underlying options exercisable within 60 days.
(6) Reflects 16,125 shares underlying options exercisable within 60 days.
(7) Reflects 150,000 shares underlying options exercisable within 60 days.
(8) Includes 292,250 shares underlying options exercisable within 60 days.
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SELLING SECURITY HOLDERS
The following table sets forth certain information as of the date of
this Prospectus regarding the number of shares of Common Stock of the Company
(including the shares of Common Stock underlying the Warrants) and the number of
Warrants beneficially owned by each Selling Security Holder and the number of
such securities included for sale in this Prospectus.
NUMBER OFFERED
SELLING SECURITY BENEFICIAL OWNERSHIP BY SELLING BENEFICIAL OWNERSHIP
HOLDER PRIOR TO SALE(1) SECURITY HOLDER AFTER SALE(2)
- -------------------- --------------------------------------- --------------------- ---------------------------------------
COMMON STOCK WARRANTS COMMON STOCK WARRANTS
------------------ ----------------- COMMON ----------------- ------------------
NUMBER PERCENT NUMBER PERCENT STOCK WARRANTS NUMBER PERCENT NUMBER PERCENT
------- ------- ------ ------- ------ -------- ------ ------- ------ -------
1997 Ileen Little
Irrevocable Family 150,000 6.9% -- -- 150,000 -- 0 -- -- --
Trust(3)
Rozel International
Holdings, Inc.(4) 150,000 6.5% 150,000 10.0% -- 150,000 -- -- 0 --
- ------------------------------
* Less than 1%.
(1) The number of shares of Common Stock reflected for each Selling
Security Holder includes the number of shares of Common Stock
underlying the Warrants held by that Selling Security Holder. The
beneficial ownership percentages are based on the number of outstanding
shares of Common Stock and Warrants.
(2) Assumes that each of the Selling Security Holders sells all of its
securities.
(3) Barry Nelson, Esq. is trustee of the 1997 Ileen Little Irrevocable
Family Trust (the "Trust"), of which Mr. Douglas is the beneficiary.
Mr. Douglas does not exercise voting or dispositive control of the
shares held by the Trust.
(4) Harold Chaffe maintains voting control over the shares held by Rozel
International Holdings, Inc.
CERTAIN TRANSACTIONS
REORGANIZATION
In connection with the Reorganization, the Company acquired all of the
outstanding capital stock of each of the affiliated companies that originally
operated the Company's thrift store business from Marc Douglas, in exchange for
the issuance to Mr. Douglas of 1,050,000 shares of Common Stock and 250,000
shares of Series A Preferred Stock of the Company. The Reorganization was
completed as of May 31, 1996 as a tax-free reorganization within the meaning of
Section 368(a)(1)(B) of the Code. As a result of the Reorganization, each of
these affiliated companies became a wholly owned subsidiary of the
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Company. The Company also effected, in connection with the Reorganization, a
12,000-for-1 split of its outstanding shares of Common Stock.
Prior to the Reorganization, the Company and the affiliated companies
were treated for federal and state income tax purposes as S corporations under
Subchapter S of the Code. As a result, earnings through the date of termination
of the S corporation status (the "Termination Date") have been and will be taxed
for federal and state income tax purposes directly to the respective
shareholders of the corporations. The Termination Date for the Company occurred
on February 29, 1996, when the Company completed a private placement of shares
of Common Stock and Warrants; the Termination Date for the affiliated companies
occurred upon completion of the Reorganization on May 31, 1996.
The Company and the affiliated companies previously paid cash dividends
to their respective shareholders, representing earnings distributions and funds
necessary to pay federal and state income tax obligations attributable to
earnings. For the year ended December 31, 1996, such dividends totaled $283,384.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEFERRED COMPENSATION AGREEMENT
In March 1995, a subsidiary of the Company entered into a deferred
compensation agreement with Ileen Little, a director and executive officer of
the Company. Pursuant to such agreement, Ms. Little would have been entitled to
receive 5% of the gross proceeds from the liquidation of the Company or any of
its subsidiaries, payable in two equal annual installments following such
liquidation. Effective March 31, 1998, Ms. Little agreed to the termination of
the deferred compensation agreement.
LOANS TO MARC DOUGLAS
The Company has advanced Mr. Douglas monies from time to time on an
interest-free basis, the amount of which totaled approximately $126,312 as of
December 31, 1997 and $78,945 as of the end of the third quarter of 1998. Mr.
Douglas and the Company have agreed that the advances to Mr. Douglas will be
taken into income by Mr. Douglas over a three-year period through December 1999.
In January 1998, the Company's Board of Directors approved the
prepayment of up to $130,000 of the 1998 salary and bonus of Mr. Douglas,
subject to his payment of interest on the amount prepaid at the annual
rate of 8.5%. Prepaid expenses as of the end of the third quarter of 1998
include $68,348 attributable to prepaid salary and bonus payments.
DISPUTE WITH MIAMI JEWISH HOME; AGREEMENT WITH FORMER SHAREHOLDER
In February 1994, the Miami Jewish Home filed a motion for contempt
against Mr. Douglas (as the sole shareholder of the affiliated companies, prior
to the Reorganization) alleging violations of an injunction awarded to the Miami
Jewish Home in December 1993 against a former shareholder of one of the
affiliated companies and two other companies controlled by that shareholder. The
injunction had been awarded, together with monetary damages, as a result of an
action filed by the Miami Jewish Home in 1987 alleging trade name infringement
and unfair competition by the former shareholder and his companies.
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Although neither Mr. Douglas, Ms. Little, the Company nor any of the
affiliated companies was party to the 1987 action, in November 1994, the Miami
Jewish Home, Mr. Douglas and two of the affiliated companies agreed to be bound
by certain provisions of the injunction. As part of the settlement, the former
shareholder relinquished his right to receive further payments under
non-competition agreements entered into in 1993 with two of the affiliated
companies in connection with the termination of the former shareholder's and Mr.
Douglas' business relationship. Mr. Douglas and the two affiliated companies
also agreed to pay the Miami Jewish Home the sum of $176,130, payable in
installments through April 1997, and the sum of $20,000 for the use of a trade
name approved by the Miami Jewish Home. Such payments were allocated to Mr.
Douglas and each of the two affiliated companies in proportion to their
respective original obligations to the former shareholder. The payments were
secured by a pledge of the capital stock of all of the affiliated companies. The
balance remaining of the settlement was paid in full in May 1996 and,
accordingly, all of the capital stock was released and the Miami Jewish Home
agreed to withdraw its motion with prejudice and waive any further claims
thereunder.
CONSULTING AGREEMENTS
The Company is a party to a consulting agreement with a former
shareholder of one of the affiliated companies. Under this agreement, which
expires in 1999, the consultant is responsible for all facets of day-to-day
operations and is required to spend such time and attention as deemed necessary
in order to accomplish the objectives of the Company, with a minimum of 10 hours
per week. This agreement, as amended in 1997, provides for a monthly consulting
fee of $2,400.
See "Management" for a description of the consulting agreement between
the Company and Jay M. Haft, a director of the Company.
COMPANY POLICY REGARDING TRANSACTIONS WITH AFFILIATES
The Company believes that the transactions described above were on
terms no less favorable to the Company than those that would be available from
unaffiliated parties. The Company does not at the present time contemplate
entering into additional related party transactions. In the future, the Company
plans to present all proposed transactions with affiliated parties to the
Company's Board of Directors for its consideration and approval. Any Board
member who has an interest in such transaction will abstain from voting thereon.
DESCRIPTION OF SECURITIES
Set forth below is a summary of certain terms and provisions of the
Company's capital stock, which is qualified in its entirety by reference to the
Company's Articles of Incorporation and to the Statement of Designation setting
forth the resolutions establishing the rights and preferences of the outstanding
Series A Preferred Stock. Copies of the Articles of Incorporation and the
Statement of Designation have been filed as exhibits to, or incorporated by
reference into, the Registration Statement of which this Prospectus forms a
part.
Under the Articles of Incorporation, the authorized but unissued and
unreserved shares of the Company's capital stock will be available for issuance
for general corporate purposes,
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including, but not limited to, possible stock dividends, future mergers or
acquisitions, or private or public offerings. Except as may otherwise be
required, shareholder approval will not be required for the issuance of those
shares.
The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock, par value $.01 per share, and 1,500,000 shares of Preferred Stock,
par value $.01 per share. As of the date of this Prospectus, 2,175,000 shares of
Common Stock and 250,000 shares of Series A Preferred Stock are outstanding.
UNITS
Each Unit consisted of one share of Common Stock and one Warrant
exercisable at $5.00 to purchase one share of Common Stock. The Common Stock and
Warrants, which constitute a Unit, were detachable and separately tradable
immediately upon issuance.
COMMON STOCK
Each share of Common Stock entitles the holder to one vote on all
matters submitted to a vote of the shareholders. The holders of Common Stock are
entitled to receive dividends, when, as and if declared by the Board of
Directors, in its discretion, from funds legally available therefor. The Company
does not currently intend to declare or pay cash dividends in the foreseeable
future, but rather intends to retain any future earnings to finance the
expansion of its businesses. Upon liquidation or dissolution of the Company, the
holders of Common Stock are entitled to share ratably in the assets of the
Company, if any, legally available for distribution to shareholders after the
payment of all debts and liabilities of the Company and payment of the
liquidation preference of any outstanding shares of Preferred Stock.
The Common Stock has no preemptive rights and no subscription,
redemption or conversion privileges. The Common Stock does not have cumulative
voting rights, which means that the holders of a majority of the outstanding
shares of Common Stock voting for the election of directors can elect all
members of the Board of Directors. A majority vote is also sufficient for other
actions that require the vote or concurrence of shareholders.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 1,500,000
shares of Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designation, preferences and
relative participation, option or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights and dividend
rate, terms of redemption (including sinking fund provisions), redemption price
or prices, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the shareholders.
Except for the shares of Series A Preferred Stock currently outstanding, the
Board of Directors does not currently intend to issue additional shares of
Preferred Stock. In connection with the Company IPO, the Company agreed that it
will not issue additional shares of Preferred Stock during the two-year period
following the Company IPO.
SERIES A PREFERRED STOCK. The Company has designated 250,000 shares of
Preferred Stock as Series A Preferred Stock, which shares were issued to Marc
Douglas, Chief Executive
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Officer, President, and a director of the Company, in connection with the
Reorganization. See "Certain Transactions - Reorganization." Holders of the
Series A Preferred Stock are entitled to vote together with the holders of
Common Stock on all matters (except as required by law), with each share of
Series A Preferred Stock having 10 votes. The Series A Preferred Stock has a
liquidation preference of $.10 per share over the Common Stock. The Series A
Preferred Stock does not provide for the payment of a stated rate of dividends,
is not convertible into Common Stock, and is not mandatorily redeemable by the
Company.
WARRANTS
The Warrants have been issued pursuant to an agreement (the "Warrant
Agreement") between the Company and North American Transfer Co., as warrant
agent (the "Warrant Agent"). The following discussion of certain terms and
provisions of the Warrants is qualified in its entirety by reference to the
detailed provisions of the Warrant Agreement and the Warrant certificates, the
forms of which have been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
Each Warrant entitles its holder to purchase one share of Common Stock
at an exercise price of $2.35 per share, as amended in October 1998 by the
Company's Board of Directors to reduce the exercise price per share to a price
more in line with the current trading prices of the Company's Common Stock. The
Warrants, which expire on December 5, 2002, are exercisable for five years
commencing one year from the date of issuance, which is the date of this
Prospectus. The Warrants may be redeemed by the Company at any time, commencing
one year from the date of this Prospectus, at a redemption price of $.10 per
Warrant upon 30 days' prior written notice, provided the average closing bid
price of the Common Stock for 20 consecutive trading days ending on the 15th day
prior to the date notice of redemption was given by the Company has been at
least 150% of the exercise price then in effect. Warrant holders shall have
exercise rights until the close of the business day preceding the date fixed for
redemption. On October 29, 1998, the Company announced that it will redeem any
Warrants remaining outstanding as of the close of business on December 14, 1998.
In order for a holder to exercise a Warrant, and as required in the
Warrant Agreement, there must be a current registration statement on file with
the Securities and Exchange Commission pertaining to the shares of Common Stock
underlying the Warrants, and such shares must be registered or qualified for
sale under the securities laws of the state in which such Warrant holder resides
or such exercise must be exempt from registration in such state. The Company
will be required to file post-effective amendments to the Registration Statement
of which this Prospectus forms a part during the nine-month period from the date
hereof, when events require such amendments. In addition, the Company has agreed
with the Underwriter to use its best efforts to keep the registration statement
covering the shares underlying the Warrants current and effective. There can be
no assurance, however, that such registration statement (or any other
registration statement filed by the Company to cover shares of Common Stock
underlying the Warrants) can be kept current. If a registration statement
covering such shares of Common Stock is not kept current for any reason, of if
the shares underlying the Warrants are not registered in the state in which a
holder resides, the Warrants will not be exercisable and will be deprived of any
value. See "Risk Factors - Requirements for Exercise of Warrants; Adverse Effect
of Redemption of Warrants."
Holders of the Warrants will be protected against dilution upon the
occurrence of certain events, including, but not limited to, the issuance of any
Common Stock or other securities
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convertible or exercisable for Common Stock at a price per share less than the
exercise price or the market price of the Common Stock, or in the event of any
stock dividend, stock split, reclassification, recapitalization, stock
combination or similar transaction. Holders of the Warrants will have no voting
rights and will not be entitled to dividends. In the event of liquidation,
dissolution or winding up of the Company, holders of Warrants will not be
entitled to participate in any distribution of the Company's assets.
The purchase price payable upon exercise of the Warrants is to be paid
in lawful money of the United States. The Company is not required to issue
certificates representing fractions of shares of Common Stock upon the exercise
of Warrants; rather, with respect to any fraction of a share, the Company will
make payment in cash based upon the market price of the Common Stock as
determined by the Warrant Agent.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent and registrar for the Common Stock and the Warrant
Agent for the Warrants is North American Transfer Co., Freeport, New York.
"ANTI-TAKEOVER" PROVISIONS
Although the Board of Directors is not currently aware of any takeover
attempts, the Articles of Incorporation and Bylaws of the Company contain
certain provisions that may be deemed to be "anti-takeover" in nature, in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. These
provisions were adopted unanimously by the Board of Directors and approved by
the shareholders of the Company.
AUTHORIZED BUT UNISSUED SHARES. The Company has authorized 15,000,000
shares of Common Stock and 1,500,000 shares of Preferred Stock. These shares
were authorized for the purpose of providing the Board of Directors of the
Company with as much flexibility as possible to issue additional shares for
proper corporate purposes, including equity financing, acquisitions, stock
dividends, stock splits, the 1996 Plan, other grants of stock options, and other
purposes. With the exception of the grant of employee and director stock
options, the Company has no agreements, commitments or plans at this time for
the sale or use of additional shares of Common Stock or Preferred Stock. The
issuance of shares of Preferred Stock may have an adverse effect on the holders
of the Company's Common Stock. See "Preferred Stock." Shareholders of the
Company do not have preemptive rights with respect to the purchase of any
shares. Therefore, such issuances could result in a dilution of voting rights
and book value per share as to Common Stock of the Company.
NO CUMULATIVE VOTING. The Company's Bylaws do not contain any
provisions for cumulative voting. Cumulative voting entitles shareholders to as
many votes as equal the number of shares owned by such holder multiplied by the
number of directors to be elected. A shareholder may cast all these votes for
one candidate or distribute them among any two or more candidates. Thus,
cumulative voting for the election of directors allows a shareholder or group of
shareholders that hold less than 50% of the outstanding shares voting to elect
one or more members of a board of directors. Without cumulative voting for the
election of directors, the
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40
vote of holders of a plurality of the shares voting is required to elect any
member of a board of directors and would be sufficient to elect all the members
of the board being elected.
GENERAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The overall effect of these
provisions may be to deter a future tender offer or other takeover attempt that
some shareholders might view to be in their best interest, as the offer might
include a premium over the market price of the Company's Common Stock at that
time. In addition, these provisions may have the effect of assisting the
Company's current management in retaining its positions and better enable it to
resist changes that some shareholders may want to make if dissatisfied with the
conduct of the Company's business.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers
of Florida corporations. Section 607.0902 of the Florida Statutes (the Florida
Control Share Act) generally provides that shares acquired in excess of certain
specified thresholds will not possess any voting rights unless such voting
rights are approved by a majority vote of a corporation's disinterested
shareholders. Section 607.0901 of the Florida Statutes (the Florida Affiliated
Transactions Act) generally requires supermajority approval by disinterested
shareholders of certain specified transactions between a public corporation and
holders of more than 10% of the outstanding voting shares of the corporation (or
their affiliates). Florida law and the Company's Articles of Incorporation also
authorize the Company to indemnify the Company's directors, officers, employees
and agents. Pursuant to such authorization, the Company intends to enter into an
agreement with each of its directors and officers providing for indemnification
to the fullest extent allowed by law or obtain insurance with respect to
liabilities arising in connection with the directors' and officers' performance
of their duties.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 2,175,000 shares of Common Stock of the Company outstanding as
of the date of this Prospectus, 1,240,000 shares of Common Stock are restricted
securities, as that term is defined in Rule 144 promulgated under the Securities
Act. These shares are currently subject to a "lock-up" period that expires on
December 6, 1998. The Selling Security Holders' Offering relates to 150,000
Warrants and 300,000 shares of Common Stock (including 150,000 shares of Common
Stock underlying the Warrants) that have been registered for sale by the Selling
Security Holders. The Company has been advised that the Underwriter agreed to
release both of the Selling Security Holders from their lock-up agreements. It
is not known at this time whether, and to what extent, the Underwriter may agree
to a release of the remaining lock-up agreements.
Of the 2,175,000 shares currently outstanding, 1,200,000 shares are
owned by affiliates of the Company, as that term is defined under the Securities
Act. Absent registration under the Securities Act, such as in the Selling
Security Holders' Offering, the sale of these shares is subject to Rule 144.
Under Rule 144, if certain other conditions are satisfied, a person (including
an affiliate of the Company) who has beneficially owned restricted shares of
Common Stock for at least one year is entitled to sell within any three-month
period a number of shares up to the greater of 1% of the total number of
outstanding shares of Common Stock, or if the Common Stock is quoted on Nasdaq,
the average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of the Company for at least three
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41
months immediately preceding the sale, and who has beneficially owned the shares
of Common Stock for at least two years, is entitled to sell the shares under
Rule 144 without regard to any of the volume limitations described above.
No prediction can be made as to the effect, if any, that sales of
shares or the availability of shares for sale as described above will have on
the market prices of the Common Stock prevailing from time to time.
Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market may adversely affect prevailing prices for the Common
Stock and could impair the Company's ability to raise capital in the future
through the sale of equity securities.
PLAN OF DISTRIBUTION
The Selling Security Holders previously agreed not to sell or otherwise
dispose of any of their shares of Common Stock or shares of Common Stock
issuable upon conversion or exercise of securities convertible into Common
Stock, or any Warrants held by them, until December 6, 1998 without the prior
written consent of the Underwriter. The Underwriter agreed to release Rozel and
the 1997 Ileen Little Irrevocable Family Trust, the Selling Security Holders,
from their lock-up agreements as to the shares of Common Stock and Warrants
owned by each of them. At the present time, there are no current or future
plans, proposals, agreements, arrangements or understandings of the Underwriter
or known to the Underwriter with respect to engaging in further transactions
with or by the Selling Security Holders or with respect to waiving or shortening
the lock-up period applicable to the remaining securities. Depending on market
conditions, including, without limitation, the trading volume and the market
price of the Company's securities, the Underwriter may determine, in its sole
discretion, to waive or shorten the lock-up period applicable to such remaining
securities subject to the lock-up period. Prior to the release of the lock-up
with respect to any securities registered in this Prospectus, the Underwriter
has agreed to notify the NASD. Any transaction with respect to such securities
are also subject to review and approval by the NASD; therefore, the Underwriter
or any other NASD member intending to assist in sales by the Selling Security
Holders must file with and receive NASD approval prior to effecting any
transactions. In such event, the Company will amend or supplement this
Prospectus in accordance with applicable law and regulations.
The Selling Security Holders are free to offer and sell their
securities at such times, in such manner and at such prices as each shall
determine. Their securities may be offered by the Selling Security Holders in
one or more types of transactions, such as involving brokers, dealers or cash
transactions. The Selling Security Holders may also use Rule 144 under the
Securities Act to sell such their securities, if the criteria and the
requirements of this rule are met. There is no underwriter or coordinating
broker currently acting in connection with any such proposed sales by the
Selling Security Holders.
The Selling Security Holders may sell their securities in one or more
transactions (which may include "block" transactions) in the over-the-counter
market, in negotiated transactions, through the writing of options on the Common
Stock, or a combination of these methods of sale, at fixed prices that may be
changed, at market prices prevailing at the time of sale, or at negotiated
prices. Any broker-dealers involved in these sales may receive compensation in
the form of discounts, concessions, or commissions from the Selling Security
Holders and/or the purchasers of their securities and this compensation as to a
particular broker-dealer may be in
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excess of customary commissions. The Selling Security Holders and any
broker-dealers that act in connection with such sales may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of such securities
as principal may be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Security Holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of such securities against certain liabilities, including liabilities arising
under the Securities Act.
Because the Selling Security Holders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the Selling Security
Holders will be subject to prospectus delivery requirements under the Securities
Act. Furthermore, in the event of a "distribution" of securities, the Selling
Security Holders, any selling broker-dealer, and any "affiliated purchasers" may
be subject to Regulation M under the Securities Exchange Act of 1934, as
amended, which prohibits certain activities for the purpose of pegging, fixing
or stabilizing the price of securities in connection with an offering.
LEGAL MATTERS
Certain legal matters with respect to the securities offered by this
Prospectus will be passed upon for the Company by Broad and Cassel, a
partnership including professional associations, 201 South Biscayne Boulevard,
Suite 3000, Miami, Florida 33131.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1997 and 1996 and for each of the years ended December 31, 1997 and 1996
included in this Prospectus have been included herein in reliance upon the
reports of Berkowitz Dick Pollack & Brant LLP and Massella, Tomaro & Co., LLP,
independent certified public accountants, respectively, which appear elsewhere
in this Prospectus, and are included upon the authority of these firms as
experts in accounting and auditing.
In October 1998, Massella, Tomaro & Co., LLP, was engaged by the
Company to re-audit the Company's financial statements as of December 31, 1996
and for the year then ended. This change in accountants was due to the
dissolution of the Company's former accounting firm (Scarano & Tomaro, P.C.) and
not due to any discrepancies or disagreements between the Company and its former
accounting firm on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. The former accountants'
report on the Company's financial statements for the year ended December 31,
1996 did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
This change in accountants was approved by the Audit Committee of the Company's
Board of Directors.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a Registration Statement on Form SB-2 with
respect to the securities being offered hereby. This Prospectus does not contain
all of the information set forth in such Registration Statement, as permitted by
the Rules and Regulations of the SEC. For further information, you should refer
to the Registration Statement and to the exhibits filed with the Registration
Statement. Each statement made in this Prospectus referring to a document filed
as an exhibit to the Registration Statement is qualified by reference to the
exhibit for a complete statement of its terms and conditions.
We also file annual, quarterly and special reports and other
information with the SEC. You may read and copy any report or document we file,
and the Registration Statement, including the exhibits, may be inspected at the
SEC's public reference rooms located at 450 Fifth Street, N.W., Washington, D.C.
20549; at 7 World Trade Center, Suite 1300, New York, New York 10048; and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public from the SEC's web site at:
http://www.sec.gov.
We will provide without charge to each person, including any beneficial
owner, to whom a Prospectus is delivered, upon written or oral request of that
person, a copy of any and all of the information that has been incorporated by
reference in this Prospectus (excluding exhibits unless those exhibits are
specifically incorporated by reference into the documents requested). Please
direct such requests to the Chief Financial Officer, Thrift Management, Inc.,
3141 W. Hallandale Beach Blvd., Hallandale, Florida 33009, telephone number
(954) 985-8430.
The Company is not at this time required to send annual reports to its
shareholders. The Company will, however, mail copies of its most recent Annual
Report on Form 10-KSB in connection with its 1998 annual meeting of shareholders
currently planned for the fourth quarter of 1998.
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THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. F-2
Independent Auditors' Report.............................................. F-3
Consolidated Balance Sheet................................................ F-4
Consolidated Statements of Operations .................................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency).............. F-7
Consolidated Statements of Cash Flows..................................... F-8
Notes to Consolidated Financial Statements................................ F-10
Consolidated Balance Sheet as of June 28, 1998 (Unaudited)................ F-29
Consolidated Statements of Operations for the Six Months Ended
June 28, 1998 and June 30, 1997 (unaudited).............................. F-30
Consolidated Statements of Cash Flows for the Six Months Ended
June 28, 1998 and June 30, 1997 (unaudited).............................. F-31
Notes to Consolidated Financial Statements (unaudited).................... F-32
F-1
45
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Thrift Management, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Thrift
Management, Inc. and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Thrift
Management, Inc. and Subsidiaries as of December 31, 1997 and the consolidated
results of their operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for inventories in 1997.
/s/ Berkowitz Dick Pollack & Brant LLP
- --------------------------------------
Berkowitz Dick Pollack & Brant LLP
Miami, Florida
March 25, 1998
F-2
46
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Thrift Management, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 of
Thrift Management, Inc. and subsidiaries (the "Company"). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows for the year ended December 31, 1996 of the Company in conformity
with generally accepted accounting principles.
Massella, Tomaro & Co., LLP
Jericho, New York
October 15, 1998
F-3
47
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,202,540
Merchandise inventories 328,433
Prepaid expenses 126,532
Advances to stockholder 63,156
---------------
TOTAL CURRENT ASSETS 2,720,661
EQUIPMENT, FIXTURES AND IMPROVEMENTS, net 466,234
ADVANCES TO STOCKHOLDER 63,156
PREPAID CONSULTING SERVICES 25,000
COVENANTS NOT TO COMPETE, net 36,142
OTHER ASSETS 100,294
---------------
TOTAL ASSETS $ 3,411,487
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of note payable $ 4,665
Accounts payable 141,890
Accrued expenses 207,591
Accrued income taxes 28,016
---------------
TOTAL CURRENT LIABILITIES 382,162
NOTE PAYABLE, less current portion 5,052
---------------
TOTAL LIABILITIES 387,214
---------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY
Preferred stock: $.01 par value, authorized 1,500,000
shares, issued and outstanding 250,000 shares 2,500
Common stock: $.01 par value, authorized 15,000,000
shares, issued and outstanding 2,145,000 shares 21,450
Additional paid-in capital 3,052,266
Accumulated deficit (51,943)
---------------
TOTAL STOCKHOLDERS' EQUITY 3,024,273
---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,411,487
===============
See accompanying notes to consolidated financial statements.
F-4
48
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
Net sales $ 7,728,241 $ 6,104,905
Cost of goods sold 3,951,016 2,815,210
----------- -----------
GROSS PROFIT 3,777,225 3,289,695
Selling, general and administrative
expenses 3,372,356 3,013,455
Officer's bonus incentive 75,627 150,000
----------- -----------
TOTAL OPERATING EXPENSES 3,447,983 3,163,455
----------- -----------
INCOME FROM OPERATIONS 329,242 126,240
Interest expense (1,365) (1,732)
Interest income 98,065 --
----------- -----------
INCOME BEFORE INCOME
TAX EXPENSE (BENEFIT) 425,942 124,508
Income tax expense (benefit) 162,000 (34,000)
----------- -----------
NET INCOME $ 263,942 $ 158,508
=========== ===========
Pro forma data:
Income before pro forma income tax provision $ 124,508
Pro forma income tax provision 46,900
-----------
Pro forma net income $ 77,608
===========
F-5
49
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS--Continued
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
--------------- ---------------
Earnings per share:
Basic:
Net income $ 0.12 $ 0.10
=============== ===============
Diluted:
Net income $ 0.12 $ 0.10
=============== ===============
Weighted average number of shares:
Basic 2,131,000 1,638,125
=============== ===============
Diluted 2,169,000 1,638,125
=============== ===============
Pro forma earnings per common equivalent share:
Income before pro forma income tax expense $ 0.08
===============
Pro forma income tax provision $ 0.03
===============
Pro forma net income $ 0.05
===============
See accompanying notes to consolidated financial statements.
F-6
50
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 1997 and 1996
Preferred Stock Common Stock Additional Stockholders'
--------------------- ---------------------- Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
----------- -------- ---------- -------- ----------- ----------- --------------
Balances at December 31, 1995 -- $ -- 1,200,000 $ 2,200 $ 9,540 $ (191,009) $ (179,269)
Sale of Common stock in connection
with private placement -- -- 300,000 3,000 247,000 -- 250,000
Sale of common stock in connection
with confidential private offering
memorandum, net of costs of $70,000 300,000 3,000 427,000 -- 430,000
Issuance of preferred stock in
connection with reorganization 250,000 2,500 -- -- -- -- 2,500
Reorganization of affiliates -- -- -- 9,800 (9,800) -- --
Sale of common stock in connection
with initial public offering, net of
costs and deferred costs of
$901,524 -- -- 615,000 6,150 2,842,326 -- 2,848,476
Purchase and retirement of common
stock -- -- (300,000) (3,000) (497,000) -- (500,000)
Net income for the year ended
December 31, 1996 -- -- -- -- -- 158,508 158,508
"S" Corporation distributions -- -- -- -- -- (283,384) (283,384)
--------- -------- --------- --------- ----------- ----------- ---------
Balances at December 31, 1996 250,000 2,500 2,115,000 21,150 3,019,066 (315,885) 2,726,831
Common Stock issued for consulting
services 30,000 300 33,200 33,500
Net income for the year ended
December 31, 1997 263,942 263,942
--------- -------- --------- --------- ----------- ----------- ----------
Balances at December 31, 1997 250,000 $ 2,500 2,145,000 $ 21,450 $ 3,052,266 $ (51,943) $3,024,273
========= ======== ========= ========= =========== =========== ==========
See accompanying notes to consolidated financial statements.
F-7
51
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 263,942 $ 158,508
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 85,809 94,118
Loss on sale of equipment 1,708 --
Common stock issued for consulting services 33,500 --
Deferred income tax expense (benefit) 66,000 (66,000)
Changes in assets and liabilities:
Increase in merchandise inventories (213,461) (3,915)
Increase in prepaid expenses (33,586) (116,014)
Decrease in accounts payable (162,114) (126,822)
Decrease (increase) in other 4,835 (9,635)
Increase in accrued expenses 74,075 216,527
Increase (decrease) in accrued
income taxes 28,016 (18,000)
----------- -----------
Total adjustments (115,218) (29,741)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 148,724 128,767
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (369,714) (76,148)
Proceeds from disposal of property and equipment 36,312 --
----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (333,402) (76,148)
----------- -----------
F-8
52
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Cash flows from financing activities:
Advances to stockholder, net (145,386) (6,036)
Principal payments on notes payable (37,584) (81,606)
Principal repayments on stockholder loans -- (220,549)
Proceeds from sale of preferred stock -- 2,500
Proceeds from initial public offering and
private placements -- 4,500,000
Costs of initial public offering and private placements -- (931,524)
Repurchase of common stock -- (500,000)
Dividends paid -- (260,920)
----------- -----------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (182,970) 2,501,865
----------- -----------
NET (DECREASE) INCREASE
IN CASH (367,648) 2,554,484
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,570,188 15,704
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,202,540 $ 2,570,188
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 1,500 $ 5,750
=========== ===========
Income taxes $ 41,000 $ 50,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment through
issuance of notes payable $ -- $ 15,024
=========== ===========
See accompanying notes to consolidated financial statements.
F-9
53
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--GENERAL
Thrift Management, Inc. (the "Company" or "TMI"), was organized in the State of
Florida on July 22, 1991 for the purpose of managing the operation of retail
thrift stores which offer for sale new and used articles of clothing, furniture,
miscellaneous household items and antiques. The Company is registered with the
State of Florida as a professional solicitor. The Company obtains its
merchandise primarily from two sources, i) purchase contracts with charitable
organizations in return for an average of 2% to 3% of its gross sales from
certain of its thrift stores, and ii) purchases from various independent
contract collectors who maintain drop boxes from whom the Company purchases
merchandise in bulk at a flat rate per pound. Items from the stores which remain
unsold are sold in bulk to exporters for export to countries throughout the
Caribbean, Central and South America, and Eastern Europe. Through its
wholly-owned subsidiaries, the Company operates five (5) retail stores plus a
management company. Hallandale Thrift Management, Inc. ("HTMI") is responsible
for the solicitation of donations on behalf of the charities with which the
Company has contracts through direct mailing, newspaper advertising and
telemarketing. HTMI is responsible for operating donation trailers and the
pickup of donated merchandise throughout the communities in which the Company
operates. HTMI was organized in the State of Florida on December 9, 1993.
The Company's five (5) retail stores are operated under separate wholly-owned
subsidiaries as follows:
Thrift Shops of South Broward, Inc. ("TSSB")
Organized in the State of Florida on May 19, 1989.
Thrift Shops of West Dade, Inc. ("TSWD")
Organized in the State of Florida on October 8, 1992.
Hallandale Thrift, Inc. ("HTI")
Organized in the State of Florida on June 14, 1993.
North Broward Consignment, Inc. ("NBCI")
Organized in the State of Florida on May 10, 1995.
Thrift Shops of North Lauderdale, Inc. ("TSNL")
Organized in the State of Florida on January 24, 1997.
F-10
54
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 1--GENERAL--Continued
On January 23, 1998, Thrift Retail, Inc. was organized in the State of Florida
for the purpose of operating a new store to be opened in 1998.
On May 31, 1996, following the completion of the private offering, the Company
reorganized its capital structure as more fully discussed in Note 12. The
financial statements give retroactive effect to the reorganization of the
Company's capital structure.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements for the years ended
December 31, 1997 and 1996 include the accounts of the Company, HTMI, TSSB,
TSWD, HTI, NBCI and TSNL (collectively the "Companies"). As of May 31, 1996,
HTMI, TSSB, TSWD, HTI, NBCI and TSNL became wholly-owned subsidiaries of the
Company pursuant to the reorganization plan. All significant intercompany
accounts and transactions have been eliminated for financial statement
presentation purposes.
EQUIPMENT, FIXTURES AND IMPROVEMENTS: Equipment, fixtures and improvements are
recorded at cost. Depreciation is provided using the straight-line method over
the estimated useful lives (5-10 years) of the related assets. Leasehold
improvements are amortized over the lesser of the related lease terms including
options expected to be exercised or the estimated useful lives of the
improvements. Maintenance and repairs are charged to operations as incurred.
MERCHANDISE INVENTORIES: Merchandise inventories consist primarily of new and
used clothing, furniture, miscellaneous household items and antiques which are
stated at the lower of cost or market. In 1997, the Company adopted the retail
method of accounting. In 1996, a specific identification method of valuing the
inventory was used (Note 3). The cost of inventories includes the actual cost of
merchandise paid to the respective charities or the independent contract
collectors plus all expenses incurred that were directly associated with the
acquisition and processing of such inventory including certain store overhead
and salaries. Inventory write-downs are recorded in the period in which it
becomes reasonably evident that the merchandise is not saleable or the market
value is less than cost.
F-11
55
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
COVENANTS NOT TO COMPETE: Covenants not to compete consist of costs incurred in
connection with the buyout of a previous stockholder. Such covenants not to
compete are being amortized on a straight line basis over their contractual
lives of six years.
INTANGIBLE ASSETS: Included in other assets are intangible assets consisting of
organizational and trade name costs which have been recorded at cost.
Organizational and trade name costs are being amortized on a straight-line basis
over their estimated useful lives which range from five years to fifteen years.
EARNINGS PER SHARE: The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". Under
the provisions of SFAS 128, primary earnings per share has been replaced by
basic earnings per share, which does not include the dilutive effect of stock
options in its calculation. In addition, fully diluted earnings per share has
been replaced by diluted earnings per share. All prior period earnings per share
amounts have been restated to reflect the requirements of SFAS 128. Basic
earnings per share has been computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share has been
computed using the weighted average number of common shares and equivalents
(representing the dilutive effect of stock options) outstanding during the
period.
For purposes of computing diluted earnings per share, weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market value of the Company's common stock for the
period. For the year ended December 31, 1997, options to purchase 725,000 shares
of common stock at an average price of $4.94 were excluded from the computation.
Pro forma net income per share is computed using the weighted average number of
shares outstanding during each respective period, and is based on the number of
shares issued and outstanding giving retroactive effect to the Company's
reorganization in 1996.
INCOME TAXES: The Company provides for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases for assets and liabilities
F-12
56
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
is determined quarterly. Deferred income tax assets and liabilities are computed
for those differences that have future tax consequences using the currently
enacted tax laws and rates that apply to the periods in which they are expected
to affect taxable income. Valuation allowances are established, if necessary, to
reduce the deferred tax asset to the amount that will more likely than not be
realized. Income tax expense is the current tax payable or refundable for the
period plus or minus the net change in the deferred tax assets and liabilities.
Prior to the reorganization, the Companies, with the consent of their then sole
stockholder, elected under the Internal Revenue Code to be taxed as "S"
Corporations. In lieu of corporation income taxes, the stockholders of an "S"
Corporation are taxed on their proportionate share of a company's taxable income
or loss. Accordingly, no provision or liability for federal taxes is included in
the consolidated financial statements through May 31, 1996. Effective June 1,
1996, the Company was taxed as a "C" Corporation as a result of its new capital
restructure pursuant to the reorganization. The Company files a consolidated
federal and state income tax return with its subsidiaries. The 1996 pro forma
income tax provision represents the approximate Federal and State income taxes
that the Company would have incurred had the Company not been an "S" Corporation
during 1996 and accordingly, subject to Federal and State income taxes.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. At
December 31, 1997, cash equivalents include an investment in Federal Home Loan
Bank Bonds amounting to approximately $1,450,000 with an interest rate of 5.537%
maturing in March 1998.
FAIR VALUE DISCLOSURES: The carrying value of cash, prepaid expenses, advances
to stockholder, accounts payable and accrued expenses are a reasonable estimate
of their fair value. The carrying value of the Company's note payable at
December 31, 1997 is a reasonable estimate of its fair value based upon
currently available interest rates of similar instruments available with similar
maturities.
USE OF ACCOUNTING ESTIMATES: The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Accordingly,
actual results could differ from those estimates.
NOTE 3--CHANGE IN ACCOUNTING PRINCIPLE
Merchandise inventory has been valued using the retail method of accounting as
of December 31, 1997. This accounting principle was adopted by the Company on
October 1, 1997. Merchandise inventory in prior periods and years was valued
using the specific identification method. The newly adopted accounting principle
is preferable in the circumstances due to cost benefit considerations of
applying the specific identification method of accounting for inventories in the
Company's current operating environment. The effect of this change in
F-13
57
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 3--CHANGE IN ACCOUNTING PRINCIPLE--Continued
1997 was to increase income before income taxes by approximately $106,000 and
net income by approximately $66,000 (or $0.03 per share). The cumulative effect
of this accounting change and proforma amounts for prior years have not been
determined due to the unavailability of prior retail inventory data.
NOTE 4--ADVANCES TO STOCKHOLDER
As of December 31, 1997, the Company has a remaining advance amounting to
$126,312 to its majority stockholder. The advances are non-interest-bearing and
are being amortized into operations as compensation of $5,263 per month through
December of 1999.
NOTE 5--EQUIPMENT, FIXTURES AND IMPROVEMENTS, NET
Equipment, fixtures, and improvements consist of the following at December 31,
1997:
Furniture, fixtures and equipment $ 380,520
Leasehold improvements 180,369
Transportation equipment 75,227
-----------
636,116
Less accumulated depreciation (169,882)
-----------
$ 466,234
===========
F-14
58
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 5--EQUIPMENT, FIXTURES AND IMPROVEMENTS, NET--Continued
Depreciation and amortization expense for the years ended December 31, 1997 and
1996 amounted to $61,714 and $68,753, respectively.
NOTE 6--COVENANTS NOT TO COMPETE
In connection with two six-year non-competition agreements with a former
stockholder, the Company agreed to pay an aggregate of $182,500 as consideration
for said individual agreeing not to engage in any facet of the thrift shop
business within a defined geographic area. Pursuant to a final judgement against
such former stockholder in connection with a legal action, the former
stockholder relinquished his rights to receive further payments from the Company
under this agreement and the balance due under the agreement was assigned to a
not for profit corporation. For each of the years ended December 31, 1997 and
1996, amortization expense related to this amounted to approximately $24,100
(Note 11).
NOTE 7--ACCRUED EXPENSES
Accrued expenses at December 31, 1997 consist of the following:
Payroll $ 129,220
Sales taxes 32,666
Professional fees 18,891
Rent 10,652
Other 16,162
-----------
$ 207,591
===========
NOTE 8--NOTE PAYABLE
At December 31, 1997, the Company's note payable amounts to $9,717, bears
interest at the rate of 10.17%, and is payable in monthly installments of $505
including principal and interest. The note is collateralized by certain store
equipment.
F-15
59
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 8--NOTE PAYABLE--Continued
Maturities of the note payable are as follows:
Year Ending
December 31,
------------
1998 $ 4,665
1999 5,052
-------
Total $ 9,717
=======
NOTE 9--INCOME TAX EXPENSE (BENEFIT)
The components of income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
--------- ---------
Current:
Federal $ 82,000 $ 26,000
State 14,000 6,000
--------- ---------
96,000 32,000
--------- ---------
Deferred:
Federal 56,000 (56,000)
State 10,000 (10,000)
--------- ---------
66,000 (66,000)
--------- ---------
Total $ 162,000 $ (34,000)
========= =========
F-16
60
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 9--INCOME TAX EXPENSE (BENEFIT)--Continued
Income taxes differ from amounts computed at the U.S. Statutory rate due to:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
--------- ---------
U.S. Federal statutory rate applied to
pretax income $ 145,000 $ 42,500
State income taxes, net of federal
income tax benefit 11,000 4,500
Benefit of S Corporation election, federal
and state -- (76,000)
Benefit of graduated tax rates to statutory
tax rate (4,000) (11,500)
Effect of annualizing income for the short
C Corporation year -- 6,500
Other 10,000 --
--------- ---------
$ 162,000 $ (34,000)
========= =========
NOTE 10--EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per
share:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
Numerator:
Net income $ 263,942 $ 158,508
---------- ----------
Denominator:
Denominator for basic earnings per
share--weighted-average shares 2,131,000 1,638,125
Effect of dilutive securities:
Employee stock options 38,000 --
---------- ----------
Denominator for diluted earnings per share 2,169,000 1,638,125
========== ==========
Earnings per share:
Basic $ 0.12 $ 0.10
========== ==========
Diluted $ 0.12 $ 0.10
========== ==========
F-17
61
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--COMMITMENTS AND CONTINGENCIES
DEFERRED COMPENSATION AGREEMENT: Pursuant to a deferred compensation agreement
dated March 10, 1995 with the Company's former President, upon liquidation of
any of the companies, such liquidating entity shall pay the former President the
sum of five (5%) percent of the gross sales proceeds from such liquidation,
payable fifty (50%) percent in the first year after liquidation and 50% in the
second year after liquidation.
AGREEMENT TO SOLICIT AND PURCHASE SALVAGEABLE MERCHANDISE WITH MISSING CHILDREN
AWARENESS FOUNDATION, INC.: On December 1, 1993, the Company entered into an
agreement to solicit salvageable merchandise for the Missing Children Awareness
Foundation, Inc. ("MCAF"), a Florida not-for-profit corporation. MCAF shall pay
the Company on a monthly basis a fee equal to eight percent (8%), as amended on
January 1, 1996, of the total gross sales of the merchandise in excess of $1,600
per month to be sold by certain of its thrift stores, plus reimbursement of all
expenses incurred by the Company in fulfilling its obligations pursuant to such
agreement, provided however, that in no event shall the total fee, including
expense reimbursements, exceed fifty percent (50%) of the total gross sales
price of the merchandise. The fee shall be paid monthly to the Company within
twenty (20) days following the end of each calendar month. The term of this
agreement is five (5) years, commencing on December 1, 1993, and terminating on
November 30, 1998, with one (1) five (5) year renewal option commencing December
1, 1998, unless terminated sooner or extended pursuant to the terms and
conditions of this agreement.
Also on December 1, 1993, TSSB entered into an agreement to purchase salvageable
merchandise from MCAF. Pursuant to such agreement, MCAF agreed to sell to TSSB
all merchandise received as contributions. The price to be paid to MCAF shall be
based upon a percentage of the gross sales price of such merchandise. For the
purpose of the agreement, the term "gross sales" shall mean the income derived
from the sale of the merchandise. The purchase price shall be equal to the
greater of (1) $1,600 per month or (2) 10%, as amended on January 1, 1996, of
the gross sales of the merchandise per month, payable monthly, based upon gross
sales of merchandise during the preceding calendar month.
The term of this agreement shall be for a period of five (5) years, commencing
on December 1, 1993 and terminating on November 30, 1998, with one (1) five (5)
year renewal option, commencing on December 1, 1998, unless terminated sooner or
extended pursuant to the terms and conditions of this agreement.
F-18
62
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued
The net effect of the above agreements results in the Company paying a 2% fee on
gross sales of certain of its thrift stores.
AGREEMENT TO SOLICIT AND PURCHASE SALVAGEABLE MERCHANDISE WITH THE TEMPLE BETH
AHM ISRAEL: On February 1, 1994, HTMI entered into an agreement to solicit
salvageable merchandise for the Temple Beth Ahm Israel ("TBAI"), a Florida
not-for-profit corporation. Pursuant to such agreement, TBAI has retained the
services of HTMI to solicit and gather merchandise on its behalf. TBAI shall pay
HTMI on a monthly basis a sum equal to seven percent (7%), as amended on January
1, 1996, of the total gross sales of the merchandise in excess of $10,000 per
month to be sold by an affiliate of HTMI, plus reimbursement of all expenses
incurred by HTMI in fulfilling its obligations pursuant to such agreement,
provided however, that in no event shall the total fee, including expense
reimbursements, exceed fifty percent (50%) of the total gross sales price of the
merchandise. The fee shall be paid monthly to HTMI within five (5) days
following the charity's receipt of the fee due the charity from HTI. (See below
for agreement to purchase salvageable merchandise). In the event HTI fails to
pay TBAI, TBAI shall have no obligation to pay HTMI. The term of this agreement
shall be for a period of five (5) years, commencing on February 1, 1994, and
terminating on February 1, 1999, with one (1) five (5) year renewal option
commencing February 1, 1999, unless terminated sooner or extended pursuant to
the terms and conditions of this agreement.
Also on February 1, 1994, HTI entered into an agreement to purchase salvageable
merchandise from TBAI. Pursuant to such agreement, TBAI agreed to sell to HTI
all merchandise received as contributions. The price to be paid to TBAI shall be
based upon a percentage of the gross sales price of such merchandise. For the
purpose of the agreement, the term "gross sales" shall mean the income derived
from the sale of the merchandise. The purchase price shall be equal to the
greater of (1) $10,000 per month or (2) 10%, as amended on January 1, 1996, of
the gross sales of the merchandise, payable monthly, based upon gross sales of
merchandise during the preceding calendar month.
The term of this agreement is five (5) years, commencing on February 1, 1994,
and terminating on February 1, 1999, with one (1) five (5) year renewal option,
commencing on February 1, 1999, unless terminated sooner or extended pursuant to
the terms and conditions of this agreement.
F-19
63
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued
The net effect of above agreements results in the Company paying a 3% fee on
gross sales of HTI.
DEPENDENCE ON CHARITABLE DONATIONS: The Company realizes a significant portion
of its revenues through the sale of donated charitable property. A recession
and/or change in the federal tax laws relating to charitable donations could
materially adversely affect the Company's business, operations, revenues and
prospects.
OPERATING LEASES: The Companies lease properties and equipment under
non-cancelable operating lease agreements which expire through June 2002 and
require minimum annual rentals. Certain leases provide for renewal options to
extend the leases up to an additional seven (7) years. Below is a summary of
each of the Company's subsidiary's respective lease terms.
HTI leases its location pursuant to a non-cancelable operating lease which
commenced on May 1, 1996 and expires on April 30, 2001. The lease contains an
option to renew for one (1) five (5) year period under the same terms and
conditions, except that the rent for each option year shall increase five (5)
percent per annum.
TSSB leases its location pursuant to a non-cancelable operating lease which
commenced on May 1, 1996 and expires on April 30, 2001. The lease contains an
option to renew for one (1) five (5) year period under the same terms and
conditions, except that the rent for each option year shall increase five (5)
percent per annum.
TSWD leases its location pursuant to a non-cancelable operating lease which
commenced on November 1, 1992 and expires on October 31, 1999. The lease
contains an option to renew for one (1) seven year period under the same terms
and conditions as the initial term. Annual rent increases are based upon the
consumer price index ("CPI") from a minimum of 4% to a maximum of 8%.
F-20
64
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued
NBCI leases its location pursuant to a non-cancelable operating lease which
commenced in November 1995 and expires in November, 2000. The lease contains
two (2) successive five year renewal options. All terms and conditions of the
lease shall remain the same during the first and second option period as they
were during the initial term, except for rent increases. In addition to rent
payments, NBCI is liable for its pro-rata share of real estate taxes assessed.
NBCI receives a rent credit of $1 per square foot while the floor space adjacent
to its location remains vacant. As of December 31, 1997, this space was vacant
and NBCI was receiving the credit.
TSNL leases its location pursuant to a non-cancelable operating lease which
commenced on June 17, 1997 and expires on June 16, 2002. The lease contains two
(2) successive five year renewal options. All terms and conditions of the lease
shall remain the same during the first and second option period as they were
during the initial term, except for rent increases.
TMI leases an automobile pursuant to a non-cancelable operating lease dated
September 3, 1996 and expiring September 3, 1999. The lease requires monthly
payments of $518. The Company is responsible for all registration, maintenance
and insurance costs.
TMI leases an automobile pursuant to a non-cancelable operating lease dated
January 11, 1996 and expiring April 11, 1998. The lease requires monthly
payments of $615. The Company is responsible for all registration, maintenance
and insurance costs.
Total rent expense for the years ended December 31, 1997 and 1996 amounted to
$428,228 and $339,761, respectively.
A schedule of approximate consolidated future minimum rental payments is as
follows:
YEAR ENDING
-----------
1998 $ 499,000
1999 508,000
2000 430,000
2001 206,000
2002 64,000
----------
$1,707,000
==========
F-21
65
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued
CONSULTING AGREEMENTS: On October 1, 1992, TSWD entered into a seven year
consulting agreement with the previous 50% stockholder of TSSB. This consultant
is responsible for all facets of day-to-day operations, and is required to spend
such time and attention as deemed necessary in order to accomplish the
objectives of the Company. However, in no event shall consultant spend less than
10 hours per week. This agreement was amended in October 1997 providing that the
consultant be paid $2,400 per month for the duration of the agreement.
On January 1, 1997, the Company entered into a one-year consulting agreement.
This consultant is responsible for evaluating and identifying possible new
locations for thrift stores and analyzing potential acquisitions of related
businesses. This agreement provided for a $2,000 monthly fee and the issuance of
30,000 shares of the Company's restricted common stock upon the successful
opening of a new store location and an additional 30,000 shares of the Company's
restricted common stock upon the successful opening of a second new store
location. Effective January 1, 1998, the agreement was extended for an
additional year to allow for the opening of the second store and the $2,000
monthly fee was terminated (Note 12).
Effective January 1, 1998, the Company entered into a consulting agreement with
a director of the Company pursuant to which the director will assist the
Company in developing, studying and evaluating capital-raising and proposals to
expand the Company's business, including through mergers and acquisitions. The
agreement is for a six-month term that automatically renews for additional
six-month terms unless terminated by the Company or the director at least 15
days prior to the end of the then-current term. As compensation for services
under the agreement, the Company granted to the director five-year options to
purchase 66,000 shares of the Company's Common Stock at a price of $2.00 per
share. The options vest as follows: 5,000 upon execution of the consulting
agreement, 5,000 at the end of the initial six-month term, and 14,000 at the
end of every six-month period thereafter until all of the options are vested
and exercisable. Any unvested options will be cancelled if the consulting
agreement is terminated by either party.
Consulting fee expense for the year ended December 31, 1997 and 1996 amounted to
$96,425 and $38,547, respectively.
LEGAL MATTERS: On December 3, 1987, the Jewish Home, a not-for-profit
corporation, filed an action against a previous stockholder in United States
District Court alleging trade name infringement and unfair competition. The
Company's majority stockholder and the Companies were not a party to such
action. During December 1993, the Court entered a final judgment in favor of
Jewish Home which included both a damage award and a grant of injunctive relief
against the Companies' previous stockholder ("Weiner").
During February 1994, the Jewish Home filed a motion for contempt against the
now majority stockholder of the Company alleging violations of the injunction.
On October 23, 1994, the Companies settled with the Jewish Home and the
agreement provided for the Companies to use a trade name approved by the Jewish
Home. In return for the use of this trade name, the Companies were required to
pay the Jewish Home a fee of $20,000. Simultaneously, Weiner relinquished his
rights to receive further payments from the Companies under non-competition
agreements, whereby the balance due to Weiner plus the additional fee were
assigned to the Jewish Home. On October 23, 1994, amounts payable to the Jewish
Home amounted to $146,188 including imputed interest of $16,777. $8,300 of the
settlement amount was paid in November and December 1994, with the balance
payable in equal payments of $3,320, including imputed interest at an annual
rate of 7.50%, over a 41 month period ending in April 1998. Such payments were
secured by a promissory note and a pledge of all the capital stock of the
Companies. On May 28, 1996, the Company liquidated amounts due to the Jewish
Home and the aforementioned capital stock of the Companies was released.
F-22
66
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued
EXECUTIVE EMPLOYMENT AGREEMENT: The Company entered into a five year employment
agreement with its newly elected President. At the end of each 12-month period
of the term of the agreement, the term will automatically be extended for one
additional 12-month period unless either party gives written notice of the
intent not to renew. The employment agreement which is effective June 1, 1996,
provides for, among other things, an annual base salary of $286,000 (subject to
a 10% annual automatic cost-of-living increase), an annual bonus in an amount
equal to 1% of the Company's annual gross revenues subsequent to the date of the
agreement, payment of life insurance premiums of approximately $12,000 annually
and an automobile allowance of $1,500 per month.
In connection with the employment agreement, the President was also granted
non-statutory performance options under the Company's 1996 Stock Option Plan to
purchase 700,000 shares of common stock. Of the total amount granted, 125,000 of
such options will vest upon the opening or acquisition by the Company of the
first new thrift store or related business following the consummation of the IPO
and an additional 125,000 will vest when such first new thrift store or related
business has operated profitably for one year. Similarly, 125,000 and 100,000 of
such options will vest upon the opening or acquisition by the Company of each of
the next two thrift stores or other businesses, respectively, and 125,000 and
100,000 will vest when such two thrift stores or related business, respectively,
operate profitably for one year. Subject to such vesting, the options will be
exercisable upon the later of (1) six months after consummation of the IPO (June
11, 1997) or (2) six months after the date of grant, and will expire 10 years
from the date of grant. The exercise price of the options is $5.00 per share. As
of December 31, 1997, 125,000 options were vested.
Effective as of June 19, 1997, the Company entered into an employment agreement
with its Chief Financial Officer for a term of 30 months. The employment
agreement provides for a base salary of $100,000 increasing to $137,500 on
January 1, 1998. The agreement also provides an annual automobile allowance not
to exceed $8,000 plus reimbursement of certain automobile related expenses and
an annual health insurance allowance of $4,800. The agreement provides for the
grant of options to acquire an aggregate of 25,000 shares of the Company's
Common Stock under the Company's 1996 Stock Option Plan, as amended. The
exercise price is $3.125 per share of Common Stock. The Options vest in
accordance with the following: Options to acquire 10,000 share of Common Stock
vest on January 1, 1998; Options to acquire 10,000 shares of Common Stock shall
vest on January 1, 1999; and Options to acquire 5,000 shares of Common Stock
shall vest on June 30, 1999, subject to meeting certain performance
requirements. Upon termination of the employment agreement by the Company other
than for cause, as defined in the agreement, the agreement provides for a
severance payment equal to three month's salary at the monthly rate then in
effect.
NOTE 12--STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT: On February 29, 1996, the Company completed a private
placement originally selling 500,000 shares of common stock and 200,000 common
stock purchase warrants ("Warrants") to purchase one share of common stock each
to a single investor in a private transaction for an aggregate of $250,000. The
Company received a 7% $250,000 promissory note which was initially due on May
29, 1996 and extended to July 15, 1996. Such note was paid in full on August 2,
1996. During October 1996, such investor and the Company agreed to modify the
private transaction, whereby the number of shares were reduced to 300,000 and
the warrants were increased to 600,000. The Company has agreed to register under
the Securities Act of 1933, as amended, the resale of 100,000 of the 300,000
shares in the Company's Initial Public Offering ("IPO"). However, during
December 1996, the Company and the underwriter amended such
F-23
67
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 12--STOCKHOLDERS' EQUITY--Continued
registration whereby it registered 285,000 of such shares. The Company shall
bear all fees and expenses related to this initial registration. The remaining
15,000 shares and the 600,000 warrants are being concurrently registered on
behalf of the selling security holders under a selling security holders'
prospectus.
CONFIDENTIAL PRIVATE OFFERING MEMORANDUM: Pursuant to a confidential private
offering memorandum (the "Offering") dated March 4, 1996, the Company originally
offered to accredited investors, for a period of sixty (60) days, units at a
purchase price of $25,000 per unit through a placement agent. Each unit
consisted of 20,000 shares of common stock and 10,000 warrants. Each warrant was
exercisable for a period of four (4) years commencing one year from the date of
issuance to purchase one share of common stock at a purchase price of $4.80 per
share. On May 3, 1996, the offering period was extended by mutual agreement.
The Company offered a minimum of six (6) units ($150,000) (the "Minimum
Offering") and a maximum of twenty (20) units ($500,000) (the "Maximum
Offering"). During May 1996, the Company sold all twenty (20) units which
yielded net proceeds to the Company of $430,000. During October 1996, the
Company amended the offering by decreasing the number of shares in each unit
sold from 20,000 shares to 15,000 shares. Accordingly, the Company has issued
300,000 shares in connection with the modified offering.
The Company originally agreed to register under the Securities Act of 1933, as
amended, the resale of 300,000 shares in the Company's IPO. The Company was to
bear all fees and expenses related to this initial registration. Concurrently
with the Company's IPO, the 200,000 warrants issued in connection with the
private offering memorandum were to be registered on behalf of the selling
security holders under a selling security holders prospectus. During December
1996, in order to comply with NASD rules, the Company agreed that upon
completion of the IPO, it would re-acquire such shares of Common Stock and
Common Stock Purchase Warrants for an aggregate of $500,000 as originally paid
by such Accredited Investors. Accordingly, a portion of the proceeds from the
IPO have been used to repurchase such securities.
The placement agent received a commission equal to nine (9%) percent of the
price of each unit sold and a non-accountable expense allowance equal to three
(3%) of the price of each unit.
F-24
68
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 12--STOCKHOLDERS' EQUITY--Continued
REORGANIZATION: On May 31, 1996, TMI acquired all of the issued and outstanding
capital stock of its affiliates from its sole stockholder in exchange for a
total of 1,200,000 shares of common stock whereby 1,050,000 common shares and
250,000 shares of Series A Preferred Stock were issued to the prior sole
stockholder and 150,000 shares were issued to the former President/Director of
the Companies for nominal consideration pursuant to the exercise of an option.
Simultaneously, TMI effected a twelve thousand (12,000) for one (1) stock split
of its previous 100 outstanding shares of common stock. As a result of the
reorganization, each of the affiliated corporations became wholly-owned
subsidiaries of the Company.
The Company's authorized capital stock after the reorganization consists of
15,000,000 shares of common stock, par value $.01 per share and 1,500,000 shares
of preferred stock, par value $.01 per share. The financial statements give
retroactive effect to the reorganization of the Company's capital structure.
INITIAL PUBLIC OFFERING: On January 22, 1996, the Company signed a letter of
intent with an underwriter, which was subsequently amended during December 1996,
with respect to an IPO of units of securities on a "Firm Commitment" basis. The
Company was to offer 585,000 units at an IPO price of approximately $8.60 per
unit, for an aggregate public offering of approximately $5,031,000.
During December 1996, the Company and the underwriter agreed to amend the
offering whereby the Company offered a total of 900,000 units. Each unit
consisted of one share of Common Stock, (the "Common Stock") par value $.01 per
share and one redeemable warrant (the "Warrant") to purchase one share of Common
Stock for $5 per share. The 900,000 shares of Common Stock and Warrants were
offered to the public at $5.00 and $.75 each respectively. As an additional
incentive to the Company's President and majority stockholder, the Company
agreed to pay $150,000 to its President in the form of a bonus for reimbursement
for taxes. The Company accrued this bonus as of December 31, 1996 and the bonus
was paid during January 1997.
The offering was completed December 11, 1996, yielding the Company net proceeds
of $2,596,950 after deducting underwriter selling expenses and non-accountable
expense allowance, and purchase of securities previously sold. Simultaneously
with the offering, the Company charged all offering costs incurred to additional
paid-in capital which totaled $653,050. Of the 900,000 shares of Common Stock
included in the 900,000 units offered, 615,000 shares were offered by the
Company and 285,000 shares were offered by the holders thereof (the "initial
selling shareholders") directly to the Company's underwriter on the same terms
and conditions as the Company. The Company did not receive any of the proceeds
from the sale of the shares of common stock by the initial selling shareholders.
Accordingly, the gross offering proceeds to the Company was $3,750,000.
F-25
69
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 12--STOCKHOLDERS' EQUITY--Continued
The Warrants are exercisable for a period of five years commencing one year from
the date of issuance, subject to prior redemption. The Warrants may be redeemed
by the Company on 30 days' notice at any time after one year from the date of
issuance at a redemption price of $.10 per Warrant if the closing bid price of
the Common Stock for 20 consecutive trading days ending on the 15th day prior to
the date notice of redemption was given by the Company has been at least 150% of
the exercise price then in effect. The Common Stock and Warrants are detachable
and separately tradeable immediately upon issuance.
In order to cover over-allotments, the Company granted the underwriter the
over-allotment option to purchase all or part of an additional fifteen percent
(15%) or 135,000 of the units for a period of thirty (30) calendar days from the
date of the closing. The over-allotment was exercisable by the underwriter
in whole or in part, from time to time during the over-allotment period and
resold to the public on the same terms as the units. The over-allotment option
was not exercised by the underwriter upon completion of the IPO.
As additional compensation to the underwriter, the Company issued five-year
warrants, exercisable after one year, to purchase 90,000 units at $9.49 per
unit. Lastly, the underwriter entered into a three-year consulting agreement
with the Company as financial consultants for a total fee of $75,000, which was
paid in full as of December 31, 1996.
STOCK ISSUED FOR CONSULTING SERVICES: On June 17, 1997, the Company issued
30,000 shares of its restricted common stock to a consultant in payment for
services rendered to the Company. Such restricted common stock was valued at
$33,500 using the Shelton pricing model. (Note 11)
STOCK OPTION PLAN: The Company has adopted the 1996 Stock Option Plan, ("1996
Plan") under which options to acquire up to 1,000,000 shares of Common Stock may
be granted. The 1996 Plan is designed to serve as an incentive for retaining
qualified and competent employees, directors, consultants and independent
contractors of the Company. The 1996 Plan provides for the granting of both
"incentive stock options" (as defined in Section 422 of the Code) and
nonstatutory stock options.
F-26
70
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12--STOCKHOLDERS' EQUITY--Continued
The following summarizes the activity in the Plan for years ended December 31:
1997 1996
--------------------------- --------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
STOCK OPTIONS
Options at beginning of year 700,000 $ 5.00 -- $ --
Options granted 215,000 $ 1.86 700,000 $ 5.00
Options at end of year 915,000 $ 3.83 700,000 $ 5.00
At end of year:
Shares exercisable 290,000 $ 3.10 125,000 $ 5.00
Weighted average fair value of options
granted during the year $ .84 $ .24
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" in accounting for its employee stock options as permitted
under Statement of Financial Accounting Standards No. 123 ("FASB 123"),
"Accounting for Stock-Based Compensation," and, accordingly, recognized no
compensation expense for the stock option grants when the market price of the
underlying stock on the date of grant equals the exercise price of the Company's
employee stock option.
The stock options generally vest over a two year period and expire ten years
from the date of grant.
The Company issued 215,000 options to purchase restricted shares to employees
during 1997. Vesting periods range from the date of grant to two years. The
Company did not recognize any compensation expense during 1997 and 1996.
Proforma information has been determined as if the Company had accounted for its
employee stock options and restricted shares under the fair value method. The
fair value of each option grant is estimated on the date of grant using the
Shelton pricing model with an assumed dividend rate of 0%, an expected life of
10 years and a marketability discount of 55%. Had compensation cost for the
stock based compensation plan been determined in accordance with FASB 123, the
Company's net income (loss) would have been the following amounts:
Year Ended
December 31,
--------------------
1997 1996
---- ----
Net income, as reported $263,942 $158,508
Pro forma net income $144,942 $ 47,508
Pro forma earnings per share:
Basic $ .07 $ .03
Diluted $ .07 $ .03
The Company has adopted an Employee Stock Ownership Plan ("ESOP") covering all
eligible employees. The Company did not make any contributions to this Plan in
1997.
F-27
71
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 13--RELATED PARTY TRANSACTIONS
ADVANCES TO STOCKHOLDER: As of December 31, 1997, the Company has advanced
$126,312 to its majority stockholder. The advances are non-interest-bearing and
are being amortized into operations as compensation of $5,263 per month through
December of 1999.
COVENANTS NOT TO COMPETE: In connection with two six-year non-competition
agreements with a former stockholder, the Company agreed to pay an aggregate of
$182,500 as consideration for said individual agreeing not to engage in any
facet of the thrift shop business within a defined geographic area. Pursuant to
a final judgment against this former stockholder, the former stockholder
relinquished his rights to receive further payments from the Companies under the
non-competition agreement.
DEFERRED COMPENSATION AGREEMENT: Pursuant to a deferred compensation agreement
dated March 10, 1995 with the Companies' former President, upon liquidation of
any of the consolidated companies, such liquidating entity shall pay the former
President the sum of five (5%) percent of the gross sales proceeds from such
liquidation payable fifty (50%) percent in the first year after liquidation and
50% in the second year after liquidation.
F-28
72
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 28, 1998
---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,872,790
Merchandise inventories 343,976
Prepaid expenses 321,588
Advances to stockholder 63,156
-----------
TOTAL CURRENT ASSETS 2,601,510
EQUIPMENT, FIXTURES AND IMPROVEMENTS, net 587,536
ADVANCES TO STOCKHOLDER 31,578
PREPAID CONSULTING SERVICES 12,500
COVENANTS NOT TO COMPETE, net 24,094
DEFERRED TAX ASSETS 16,800
PREPAID INCOME TAXES 56,972
OTHER ASSETS 86,121
-----------
TOTAL ASSETS $ 3,417,111
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 189,715
Accrued expenses 200,575
-----------
TOTAL CURRENT LIABILITIES 390,290
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock: $.01 par value, authorized 1,500,000
shares, issued and outstanding 250,000 shares 2,500
Common stock: $.01 par value, authorized 15,000,000
shares, issued and outstanding 2,175,000 shares 21,750
Additional paid-in capital 3,082,341
Accumulated deficit (79,770)
-----------
TOTAL STOCKHOLDERS' EQUITY 3,026,821
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,417,111
===========
See accompanying notes to consolidated financial statements.
F-29
73
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDING
---------------------------------
JUNE 28, 1998 JUNE 30, 1997
-------------- ---------------
Net sales $ 4,401,205 $ 3,660,848
Cost of goods sold 2,620,297 1,747,849
----------- -----------
GROSS PROFIT 1,780,908 1,912,999
Selling, general and administrative
expenses 1,839,821 1,711,125
Officer's bonus incentive 44,022 36,609
----------- -----------
TOTAL OPERATING EXPENSES 1,883,843 1,747,734
----------- -----------
INCOME FROM OPERATIONS (102,935) 165,265
Interest expense 308 801
Interest income (58,629) (41,521)
----------- -----------
INCOME BEFORE INCOME
TAX (BENEFIT) EXPENSE (44,614) 205,985
Income tax (benefit) expense (16,788) 104,700
----------- -----------
NET (LOSS) INCOME $ (27,826) $ 101,285
=========== ===========
(Loss) Earnings per share:
Basic:
Net (loss) income $ (0.01) $ 0.05
=========== ===========
Diluted:
Net (loss) income $ (0.01) $ 0.05
=========== ===========
Weighted average number of shares
Basic 2,150,000 2,125,000
=========== ===========
Diluted 2,196,500 2,125,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-30
74
THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDING
--------------------------------
JUNE 28, 1998 JUNE 30, 1997
--------------- ---------------
Cash flows from operating activities:
Net (loss) Income $ (27,826) $ 101,285
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation and amortization 45,245 44,477
Loss (Gain) on sale of equipment 3,505 (1,684)
Payment of consulting expense with common stock 30,375 52,500
Deferred income tax (benefit) expense (16,800) 33,000
(Increase) in merchandise inventories (15,542) (117,932)
(Increase) in prepaid expenses (169,263) (5,760)
(Increase) in prepaid income taxes (56,972) --
Increase (decrease) in accounts payable 47,824 (95,885)
(Decrease) increase in accrued expenses (7,016) 52,803
(Decrease) increase in accrued income taxes (28,016) 12,700
----------- -----------
Total adjustments (166,660) (25,781)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (194,486) 75,504
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (157,124) (255,546)
Proceeds from disposal of property and equipment -- 38,038
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (157,124) (217,508)
----------- -----------
Cash flows from financing activities:
Advances to stockholder, net 31,578 (176,962)
Principal payments on notes payable (9,717) (35,233)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 21,861 (212,195)
----------- -----------
NET (DECREASE) IN CASH (329,749) (354,199)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,202,539 2,570,188
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,872,790 $ 2,215,989
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 308 $ 801
=========== ===========
Income taxes $ 80,000 $ --
=========== ===========
See accompanying notes to consolidated financial statements.
F-31
75
THRIFT MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the six months ended June 28, 1998 are not
necessarily indicative of the results to be expected for the full year.
These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Form 10-KSB for the
year ended December 31, 1997 of Thrift Management, Inc. (the "Company").
(2) ORGANIZATION
The consolidated financial statements at June 28, 1998 and June 30, 1997
include the accounts of the Company, Hallandale Thrift Management, Inc.
("HTMI"), Thrift Shops of South Broward, Inc. ("TSSB"), Thrift Shops of
West Dade, Inc. ("TSWD"), Hallandale Thrift, Inc. ("HTI"), North Broward
Consignment, Inc. ("NBCI"), Thrift Shops of North Lauderdale, Inc.
("TSNL"), Thrift Retail, Inc. ("TRI"), and Thrift Management Canada, Inc.
("TMCI"), (HTMI, TSSB, TSWD, HTI, NBCI, TSNL, TRI and TMCI are collectively
referred to herein as the "Subsidiaries"). All entities, except TSNL, TRI
and TMCI (which were incorporated in March 1997, January 1998 and June 1998
respectively), were wholly owned by a common stockholder until May 31,
1996. As of May 31, 1996, HTMI, TSSB, TSWD, HTI, and NBCI became wholly
owned subsidiaries of the Company pursuant to a reorganization plan.
Accordingly, as of June 28, 1998 and June 30, 1997 and for the periods then
ended, the Company has presented consolidated financial statements. All
significant intercompany accounts and transactions have been eliminated for
financial statement presentation purposes.
(3) STOCKHOLDERS' EQUITY
In December 1996, the Company consummated its initial public offering in
which it sold 615,000 units at a price of $5.75 per unit. Each unit
consisted of one share of common stock ("Common Stock") and one warrant to
purchase one share of Common Stock for $5.00 per share. The warrants are
exercisable for a period of five years commencing December 11, 1996 and may
be redeemed by the Company on 30 days' notice at any time during such
period at a price of $.10 per warrant if the closing bid price of the
Common Stock for 20 consecutive trading days ending on the fifteenth day
prior to the date that notice of redemption was given by the Company has
been at least 150% of the exercise price then in effect. The Company
realized approximately $2,596,950 in proceeds from the offering, net of
underwriting discounts and expenses and other offering expenses.
Simultaneously with the offering, the Company charged all offering costs
incurred to additional paid-in capital, which costs totaled $653,050.
F-32
76
On June 17, 1997, the Company issued 30,000 shares of its restricted Common
Stock to a business consultant in payment for service rendered to the
Company. Such restricted Common Stock was initially valued at $52,500 which
was later revised to $33,500. On June 15, 1998, the Company issued an
additional 30,000 shares of its restricted Common Stock to a business
consultant. Such restricted Common Stock was valued at $30,375.
(4) CHANGE IN ACCOUNTING PERIODS
The Company adopted a 52/53 week retail reporting calendar, whereby all
accounting periods end on a Sunday.
(5) CASH AND CASH EQUIVALENTS
At June 28, 1998, the Company had an investment in Federal Home Loan Bank
notes, with a maturity date of July 24, 1998 and a value of $1,492,862, an
investment in Dreyfus Treasury Prime Cash Management with a value of
$258,295, and investments in various bank money market accounts with an
aggregate value of $78,262.
Prepaid expenses as of June 28, 1998 include $97,248 in prepaid salary and
bonus payments to the Company's President. See Note (6) below.
(6) COMMITMENTS
In April 1998, the Company entered into a five-year lease for a sixth store
location in Pompano Beach in Broward County, Florida. The lease provides
for minimum monthly rental payments of approximately $4,000 and contains
two renewal options for five years under substantially the same terms and
conditions. This store is scheduled to open on August 14, 1998.
As part of the program of operating manned donation trailers as a new
source of donated merchandise, the Company has entered into month to month
rental agreements to rent space in parking lots of certain shopping
centers. As of June 28, 1998, the Company had entered into seven such
agreements with monthly rental payments totaling approximately $1,200.
The Company's Board of Directors approved the prepayment of up to $130,000
of the 1998 salary and bonus of the Company's President, subject to the
agreement of the President to pay interest on the amount prepaid at the
annual rate of 8.5%. Prepaid expenses as of June 28, 1998 include $97,248
in such prepaid salary and bonus payments to the Company's President.
F-33