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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996 Commission File No. 0-15399
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Dreams, Inc. (formerly known as StratAmerica Corporation)
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(Exact name of registrant as specified in its charter)
Utah 87-0368170
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42-620 Caroline Court, Palm Desert, California 92211
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 776-1010
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None N/A
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.05
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation SB is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Park III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
The issuer's revenues for its most recent fiscal year were $13,827,435.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 14, 1996, was approximately $762,587. The estimate is
based on an average of the ask and bid price per share during the 60-day period
ended June 14, 1996 and 3,253,105 shares estimated from transfer agency records
to be held by non-affiliates.
Transitional Small Business Disclosure Format. / / Yes /X/ No
The number of shares outstanding of the Registrant's $.05 par value common
stock as of June 14, 1996 was 24,000,000.
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PART I
Item 1. BUSINESS.
GENERAL.
During fiscal year ended March 31, 1996, Registrant's primary lines of
business were the offer and sale of Field of Dreams-Registered Trademark-
franchises and restaurant/food service. Registrant's 95% owned subsidiary,
Dreams Franchise Corporation ("DFC") operates no Field of Dreams-Registered
Trademark- stores. There are currently 19 Field of Dreams-Registered Trademark-
franchise stores open and operating. Additionally, two Area Development
Agreements which are currently effective have been sold to franchisees. One
franchised store has been opened pursuant to those two agreements. An
additional seven franchised stores may be opened under those agreements.
Registrant conducted its food service business through its wholly owned
subsidiaries Shari's Franchise Corp., a Utah corporation ("SFC"), (now known as
Heidi's Holding Corporation ("HHC")) and B.B. O'Briens, Inc., a Utah corporation
("B.B.'s"). In the fiscal year ended March 31, 1996, Registrant sold all but
two SFC restaurants and closed its B.B.'s restaurants. See "Consolidated
Financial Statements" for financial information.
FIELD OF DREAMS-Registered Trademark- RETAIL STORES.
Registrant conducts its Field of Dreams-Registered Trademark- operations
through its 95% owned subsidiary, Dreams Franchise Corporation, a California
corporation ("DFC"). DFC was formerly known as "Sports Archives, Inc."
Registrant acquired its original 80% interest in DFC in July, 1990 in
consideration for the issuance of 200,000 shares of Registrant's common stock in
connection with a stock-for-stock reorganization. Registrant acquired the final
20% interest in DFC in May 1991 in exchange for one building lot located in
Rancho Mirage, California. Prior to Registrant's investment in DFC, DFC owned
and operated a single Field of Dreams-Registered Trademark- retail store which
is located in Palm Desert, California. Also prior to Registrant's acquisition
of an interest in DFC, DFC licensed certain rights from MCA/Universal
Merchandising Inc. ("MCA") to use the name "Field of Dreams-Registered
Trademark-" in connection with its retail operations. Field of Dreams-
Registered Trademark- is a copyright and trademark owned by Universal City
Studios, Inc. with all rights reserved. Universal has authorized MCA to license
the marks. Neither company is in any way related to or an affiliate of
Registrant. In March 1995, Registrant released approximately $3,321,000 of debt
owed it by DFC in consideration for 4,428,132 DFC shares.
REGISTRANT OWNED STORES.
By the end of the fiscal year ended March 31, 1992, Registrant had conveyed
under contract to franchisees operations of all of its Field of Dreams-
Registered Trademark- stores. The transfers are subject to notes and other
obligations of the transferees to DFC. DFC remains liable on all leases for
assigned operations. Registrant presently operates no retail stores and does
not intend to open or acquire retail stores.
Registrant and/or DFC continue to be obligated pursuant to the terms of
five real estate leases for Field of Dreams-Registered Trademark- stores which
it conveyed to franchisees. Those leases are in default. Registrant has
settled and is making installment payments on two other leases. Registrant was
also named as a defendant in a lawsuit regarding delinquent payments in one
lease. That lawsuit has been settled. See Item 3 "Legal Proceedings".
MERCHANDISING LICENSE AGREEMENT.
DFC has acquired from MCA the exclusive license to use "Field of Dreams-
Registered Trademark-" as the name of retail stores in the United States and a
non-exclusive right to use the name "Field of Dreams-Registered Trademark-" as a
logo
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on products. DFC has also licensed from MCA the exclusive right to
sublicense the "Field of Dreams-Registered Trademark-" name to franchisees
for use as a retail store name. The license agreement between DFC and MCA is
referred to herein as the "MCA License". Under the terms of the MCA License,
DFC is obligated to pay to MCA a 1% royalty based on gross sales. DFC must
pay MCA a $2,500 advance on royalties for each company-owned store which is
opened. DFC is obligated to pay $5,000 to MCA upon the opening of each
franchised store. The $5,000 fee is not an advance on royalties. DFC
guarantees to pay MCA a minimum yearly royalty of $2,500 regardless of the
amount of gross sales. The current term of the MCA License expires in 2000.
DFC has successive five year options to renew the MCA License. The MCA
License requires DFC to submit all uses of the Field of Dreams-Registered
Trademark- mark for approval prior to use. Ownership of the Field of
Dreams-Registered Trademark- name remains with MCA and will not become that
of DFC or Registrant. Should DFC breach the terms of the MCA License, MCA
may, in addition to other remedies, terminate DFC's rights to use the "Field
of Dreams-Registered Trademark-" name. Such a termination would have a
seriously adverse effect on DFC's and Registrant's business.
If DFC is in compliance with the terms of the MCA License and if MCA wishes
to open and operate or license third parties to open and operate Field of
Dreams-Registered Trademark- stores outside of the United States, DFC has a
right of first refusal to obtain the license for such non-United States
territory. DFC must comply with certain terms and conditions in order to
exercise the right of first refusal.
DFC is required to indemnify MCA for certain losses and claims, including
those based on defective products, violation of franchise law and other acts and
omissions of DFC. DFC is required to maintain insurance coverage of $3,000,000
per single incident. The coverage must name MCA as an insured party.
Registrant has guaranteed the monetary obligations of DFC pursuant to the MCA
License.
FRANCHISING.
In June 1991 DFC began offering franchises for the development and
operation of Field of Dreams-Registered Trademark- stores in the United States.
The laws of each state vary regarding regulation of the sale of franchises.
Certain states require compliance with the regulations of the Federal Trade
Commission prior to commencement of sales activity (the "FTC States"). Other
states require compliance with specific additional registration procedures which
vary in complexity. DFC is currently offering franchises in FTC States and a
limited number of other states. It will offer franchises in other states as
compliance with each states' regulation is completed. DFC may acquire from MCA
the rights to open and franchise stores in Canada and other countries. As
summarized below, DFC offers five types of franchises: Individual Standard
Store ("Standard"), Individual Kiosk ("Kiosk"), Area Development ("Area
Development"), Conversion ("Conversion"), and Seasonal ("Seasonal").
STANDARD FRANCHISES:
Pursuant to a Standard franchise, a franchisee obtains the right to
open and operate a single Field of Dreams-Registered Trademark- store at a
single specified shopping mall location. Franchisees pay DFC $10,000 upon
execution of a Standard franchise agreement and an additional $22,500 upon
execution by the franchisee of a Lease for the franchised store. Standard
franchise agreements vary in length. It is DFC's general practice that the
term of Standard franchise agreements concur with the term of the
franchisee's lease. In addition to sublicensing the right to use the Field
of Dreams-Registered Trademark- name for a single franchised store, DFC is
required to provide the franchisee certain training, start-up assistance
and a system for the operation of the store. DFC reserves the right to
modify at any time the system used in the store, and DFC may also change
the name used in the system from Field of Dreams-Registered Trademark- to
any other name and require all franchisees to discontinue any use of any
aspect of the system or the name Field of Dreams-Registered Trademark-.
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Franchisees are required to pay DFC 6% of gross revenues as an on-
going royalty. Payments must be made weekly. Franchisees are required to
comply with certain accounting procedures and use computer systems
acceptable to DFC. Franchisees are also required to contribute an
additional 3% of gross revenues to a marketing and development fund which
is administered by DFC for the promotion of the Field of Dreams-Registered
Trademark- system. Each franchisee is also required to spend 1% of its
gross revenues for its own local advertising and promotion. During its
first 90 days of operation, each franchisee is required to spend a minimum
of $2,500 for promotion and advertising. Franchisees are required to
maintain standards of quality and performance and to maintain the
proprietary nature of the Field of Dreams-Registered Trademark- name.
Franchisees must commence operation of the franchised stores within 180
days after execution of the Standard franchise agreement. DFC has prepared
and amends from time-to-time an Approved Supplier List from which
franchisees may purchase certain inventory and other supplies. Each
franchisee is required to maintain specified amounts of liability insurance
which names DFC and MCA as insured parties. Franchisee's rights under the
Standard franchise are not transferable without the consent of DFC and DFC
has a right of first refusal to purchase any franchised store which is
proposed to be sold.
KIOSK:
Pursuant to a Kiosk franchise, a franchisee acquires the same rights
as a Standard franchise, except that the franchisee is licensed to open a
free-standing Kiosk in a shopping mall for an initial franchise fee of
$19,000 rather than $32,500. Other fees paid by Kiosk franchisees,
including on-going royalty, and marketing and development fund
contributions are the same as under a Standard franchise agreement.
AREA DEVELOPMENT:
Under an Area Development agreement, DFC grants rights to develop a
minimum of four Field of Dreams-Registered Trademark- stores in a
designated area. The stores are required to be open pursuant to a
specified time schedule. The Developer must execute separate Standard
franchises for each store as it is opened. Upon execution of the Area
Development agreement, the Developer is required to pay DFC $5,000 for each
store to be opened, with a minimum payment upon execution of $20,000. The
Developer must obtain DFC's approval for each store site the Developer
proposes to open. Developer then pays DFC an additional $20,000 for each
store upon execution by the Developer of a lease for that store.
Development Agreements are not transferrable without the consent of DFC.
CONVERSION:
DFC offers Conversion franchises to certain operators of businesses
which currently sell sport related merchandise, memorabilia, trading cards
and similar products. Among other conditions to the granting of a
Conversion franchise, an operator must have run such a business for a
minimum of three months. Such a business owner will execute a Standard
franchise agreement as well as a Conversion franchise addendum. A
Conversion franchisee is required to pay DFC $32,500 upon execution of the
Standard franchise and the Conversion addendum. The Conversion franchisee
is required to pay to DFC all amounts required in the Standard franchise.
Conversion franchises are not transferrable without the consent of DFC.
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SEASONAL:
DFC offers existing franchisees the right to open one or more
temporary holiday Seasonal location stores during the period beginning
October 15 and ending not later than the Monday following the second full
calendar week in January of the following year. Seasonal franchisees must
pay Registrant an initial fee of $2,500 for each seasonal location. As
Seasonal franchises are open for a very limited period of time, DFC offers
very limited service to such franchisees. Consequently, Seasonal
franchises are available only to existing Field of Dreams-Registered
Trademark- Franchisees.
DFC has sold only Standard franchises, Area Development rights, and
Seasonal franchises. It has sold no Kiosk or Conversion Franchises. It is
not anticipated that Kiosk or Conversion Franchises will be a substantial
portion of DFC's business in the future.
FRANCHISE BROKER.
From September 1, 1994 until June 1, 1995, DFC did not employ an active
franchise sales broker. Consequently, franchise sales during that nine month
period were not significant. On June 1, 1995 DFC engaged an experienced
franchise sales broker. Registrant hopes that its new franchise sales broker
will significantly improve franchise sales.
SPORT SHOWS.
During the fiscal year ended March 31, 1996 neither Registrant nor it
subsidiaries conducted sport shows. Registrant has no current intention to
conduct additional sports shows.
OTHER MEMORABILIA.
In the past, Registrant and its subsidiaries have acquired rights to use
the likeness and/or name of famous sports figures and celebrities. It employed
those rights to produce card sets, lithographs, autographed memorabilia and
other items. Registrant's 50% owned subsidiary Sports Time Card Company, Inc.,
acquired rights to produce a card set of certain Marilyn Monroe photographs.
The production of the Marilyn Monroe card sets resulted in litigation against
the Registrant. That litigation has been settled. Registrant has no immediate
plans to acquire other rights for use in product productions. See Item 3 "Legal
Proceedings".
COMPETITION.
DFC competes with other larger, more well known and substantially better
funded franchisors for the sale of franchises. Field of Dreams-Registered
Trademark- stores compete with other retail establishments of all kinds.
Registrant believes that the principal competitive factors in the sale of
franchises are franchise sales price, services rendered, public awareness and
acceptance of trademarks and franchise agreement terms.
EMPLOYEES.
Registrant employs eight full-time employees at its corporate offices and
twenty full-time employees at its single Heidi's restaurant. Registrant has 28
part-time employees.
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RESTAURANT FOOD SERVICE DIVISION.
Registrant's restaurant business was divided into two divisions, its 24-
hour family style restaurant division through its subsidiary SFC and its B.B.'s
sports bar division through its subsidiary B.B.'s. The single B.B.'s restaurant
was closed on July 23, 1995. An unaffiliated operator has resumed operations
upon the same premises under the same trademark. See "Legal Proceedings"
On March 28, 1996 Registrant's shareholders approved and Registrant sold
the assets of HHC and subsidiaries related to the operation of ten Shari's
format restaurants. The purchaser of the ten restaurants was Shari's
Management Corporation ("SMC"), an unaffiliated third party. HHC retained
two Heidi's format restaurants. HHC continues to operate one Heidi's
restaurant and one Heidi's restaurant is closed. Under the terms of the sale
to SMC, SMC and HHC entered into a new Service and Management Agreement under
which SMC will provide accounting and management services until the sale of
the Heidi's restaurants or the termination of the leases of those restaurants.
Item 2. PROPERTIES.
Registrant leases a small local office in Orem, Utah for $500 per month.
Registrant's principal office is located in 2,400 square feet of leased space in
Palm Desert, California. Registrant leases its office space on a three year
lease for approximately $1,920 per month. The Lease expires on February 1,
1997. Registrant believes that the space is sufficient for its current and
foreseeable needs. HHC leases four restaurant buildings from different
landlords. Base rent on all HHC restaurant buildings totals approximately
$31,629 per month, including two leases of restaurants which have been subleased
to third parties. Most of HHC's leases require payment of rent based upon a
percentage of gross sales with a monthly minimum. The minimum rent charged for
most leases will increase in the later years of the lease. In most cases, the
increase is tied to a consumer price index. Most of the landlords are owners of
shopping malls or developers. When the restaurants are located in connection
with shopping malls, HHC must pay merchants' association dues and common area
fees. In certain circumstances, HHC will also be subject to conditions,
covenants and restrictions of mall and merchants' association rules.
Prior to the fiscal year ended March 31, 1992, DFC owned nine Field of
Dreams-Registered Trademark- stores located in Southern California. In
September 1991 DFC closed one store which did not meet revenue projections. In
February 1992, Registrant conveyed operation of all eight remaining stores to
franchisees, some of whom were employees of DFC. At March 31, 1996, three of
these stores remain open. Each of the stores was the subject of a lease between
DFC and the mall owner. DFC signed three additional leases for which stores
were never constructed or opened. Registrant has guaranteed eight of the
leases, and the three leases for stores which presently remain unopened. When
Registrant conveyed operation of the stores to franchisees, neither Registrant
nor DFC was released from its obligations on the leases. DFC has settled with
landlords all but five of these leases. Settlement costs are approximately
$4,830 per month. Rent and other fees could reach an additional $22,924 per
month if subtenant franchisees should default. The remaining leases generally
run through 1998 or 1999 with the latest terminating on July 31, 1999. The five
leases are currently in default.
Item 3. LEGAL PROCEEDINGS.
Registrant has received a notice of default from the landlord regarding
unpaid rents and charges relating to a Field of Dreams lease at Plaza Camino
Real, California. The notice of default states that unless the unpaid charges
are paid in full legal action will be taken against DFC and against Registrant
as a guarantor of that lease. Registrant and DFC vacated the premises which
were the subject of that
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lease on September 25, 1993. Neither Registrant nor DFC has been served with
any legal proceedings on that matter.
Registrant has received a notice of default from the landlord regarding
unpaid rents and charges relating to a Field of Dreams lease at Plaza Bonita,
California. The notice of default states that unless the unpaid charges are
paid in full legal action will be taken against DFC and against Registrant as a
guarantor of that lease. Registrant and DFC vacated the premises which were the
subject of that lease on September 4, 1993. Neither Registrant nor DFC has been
served with any legal proceedings on that matter.
Registrant received written notice regarding events of default on contested
leases for retail premises in The Oaks and Horton Plaza in the State of
California. The notice provided that legal action may be taken against DFC and
Registrant as a guarantor of those leases. On May 19, 1995 a representative of
Registrant received a letter from the Hahn Company, the owner of the Oaks and
Horton Plaza centers stating that neither DFC nor Registrant has any outstanding
obligation with regard to any lease at either mall.
The Internal Revenue Service (the "IRS") conducted an audit of Registrant
with regard to its fiscal years ended March 31, 1990 and March 31, 1991. All
but a single issue were settled. On April 29, 1994 the IRS issued a Statutory
Notice of Deficiency alleging a deficiency of $13,815 for the year ended March
31, 1990. A Petition contesting the deficiency was filed with the United States
Tax Court on approximately July 22, 1994. On November 17, 1995, a decision was
entered by Judge Steven J. Swift of the United States Tax Court holding that
there is a deficiency in income tax due from Registrant in the amount of
$13,815, together with accrued interest thereon.
On April 8, 1993 Centermark Properties of West Covina, Inc. ("Centermark")
filed a Complaint against Registrant and DFC as Case No. KC013019 in the
Superior Court of the State of California, East District Court. In that action
Centermark is seeking damages for breach of contract, money had and received,
relating to a lease for retail space located in West Covina, California. The
total damages alleged in the Complaint are in the amount of $310,410 plus
interest and attorneys fees. That matter was referred to counsel for defense.
A settlement was negotiated in that matter for a total amount of $50,000,
payable $10,000 down and the balance of $40,000 with interest at the rate of
7.25% per annum payable in 36 equal payments of $1,239.66 commencing September
1, 1994. Pursuant to the settlement, Registrant executed a stipulation for
entry of judgment in the amount of $310,000 if the payments pursuant to the
settlement are not made. Registrant did not timely make the initial payment.
That payment has now been made and Landlord has verbally agreed that the
settlement is not in default.
On October 7, 1993, Santa Monica Place Associates, a California Limited
Partnership filed a Complaint against Registrant and DFC as Case No. BC089644 in
Los Angeles Superior Court. The complaint relates to breach of a lease between
DFC and Santa Monica Place Associates for retail space located in Santa Monica,
California. Damages alleged in that complaint are unspecified. The matter was
referred to counsel for defense. A settlement was negotiated in that matter for
a total amount of $40,000, payable $10,000 down and the balance of $30,000 with
interest at the rate of 7.25% per annum payable in 36 equal payments of $929.73
commencing January 1, 1995. Pursuant to the settlement, Registrant executed a
stipulation for entry of judgment in the amount of $250,000 if the payments
pursuant to the settlement are not made. Registrant has made the required
payments and there is no default under the Settlement Agreement.
By letter dated March 22, 1993, Registrant received a notice of default
from Centermark Properties regarding unpaid rentals on a lease located in
Topanga Plaza in California which was guaranteed by Registrant. The letter
states the past due rentals in the amount of $4,527 must be paid
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on or before April 5, 1993, or action would be taken. The amount was not
paid. In January 1994 the building was substantially damaged by earthquake
and the lease was terminated by the Landlord. No lawsuit has been commenced
against Registrant regarding this matter.
On November 18, 1993, a complaint was filed as Case No. 936986 KN (JHX)
in the United States District Court, for the Central District of California
by Shirley DeDienes against Sports Time Card Co., Inc., Registrant's 50%
owned subsidiary. The complaint alleged violation of copyright, false
designation of origin and unfair competition. The complaint requests
equitable relief and legal damages. The action is based upon Sports Time
Card Co., replication of two or more photos of Marilyn Monroe, which photos
were taken by the deceased husband of plaintiff. Sports Time Card Co., Inc.
had paid for and obtained a license from the estate of Marilyn Monroe and the
right to publish the photos from the parties from whom the photos were
obtained. That lawsuit was settled in the fiscal year ended March 31, 1996.
On March, 9, 1994, Glendale II Associates Limited Partnership, a California
Limited Partnership filed a Complaint as Case No. BC100226 in Los Angeles
Superior Court against DFC for breach of contract, money had and received. The
complaint and the damages relate to a lease between DFC and plaintiff for retail
space located in Glendale, California. The total damages alleged in that
complaint are in the amount of $209,824 plus interest and attorney fees. That
matter was referred to counsel for defense. A settlement was negotiated in that
matter for a total amount of $24,000, payable $10,000 down and the balance of
$14,000 with interest at the rate of 7.25% per annum payable in 9 equal payments
of $2,666.67 commencing January 1, 1995. Pursuant to the settlement, Registrant
executed a stipulation for entry of judgment in the amount of $50,000 if the
payments pursuant to the settlement are not made. Registrant has made the
required payments and there is no default under the Settlement Agreement.
On March 9, 1995 a Complaint was filed as Case No. CWW 109530 in San
Bernardino Superior Court, State of California against Registrant and DFC by
Acquiport Five Corporation relating to breach of a lease in a mall in Montclair,
California. The Complaint was an action for unlawful detainer and for past due
rents. Registrant and DFC have negotiated a settlement with the Landlord,
pursuant to which the monthly rent during the remaining term of the lease
commencing June 1, 1995 has been increased to an amount of $4,753.32 per month
which rental increases will compensate the Landlord for the past due rents.
Pursuant to that settlement, Registrant and DFC also executed a stipulation for
entry of judgment which provides that if rental payments required under the
lease are not made, after ten days written notice, the Plaintiff shall be
entitled to a judgment giving it possession of the premises and writ of
execution.
On June 17, 1994 Registrant received a notice of default from First
Fidelity Thrift and Loan. The letter states that the loan is in default and the
lender intends to commence foreclosure proceedings with respect to the
obligation and real estate securing the obligation. The loan is secured by real
estate sold by Registrant to BFG, a related party. The original loan was
satisfied by renegotiation of a new loan with the lender. The renegotiated loan
went into default and on October 19, 1995 the lender completed a foreclosure of
the real property securing that loan.
On April 15, 1991 an individual named Robert Batt obtained a judgment in
the Municipal court of California, San Diego Judicial District in Case No.
551606 against Registrant and B.B.'s for an amount of $3,422. That judgment has
not been satisfied.
On August 23, 1990 an individual named Steven S. Paschall filed suit
against and obtained a judgment against B.B.'s as Case No. 533889 in the
Municipal court of California, San Diego Judicial District in the approximate
amount of $1,500. That judgment has not been satisfied.
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On August 22, 1995, a Complaint was filed as Case No. 084182 in the
Municipal Court, County of Riverside, State of California, against Registrant
and B.B.'s by Shamrock Foods Company for $5,779 plus interest costs and fees on
an outstanding account for the supplying of goods to the restaurant operated by
B.B.'s. That matter was settled. Registrant agreed to pay the Plaintiff a
total amount of $6,595 payable in monthly payments of $500 per month commencing
June 5, 1996.
On September 26, 1995, San Diego Wholesale Credit Association, a California
corporation, obtained a judgment in the amount of $3,762 against B.B.'s in Case
No. 162000 in the Municipal Court of California, County of San Diego. That
judgment has not been satisfied.
On March 3, 1995, a Complaint was filed by Younger Associates, Inc., as
successor to Kraft Foods, against B.B.'s as Case No. 295113 in Orange County
Municipal Court seeking damages in the amount of $13,795 plus attorney's fees
and costs for goods, wares and merchandise furnished to B.B.'s for B.B.'s
restaurant.
On September 18, 1995, a Small Claims Complaint was filed as Case No. 77590
in the Municipal Court, County of Riverside, State of California, by Jadvision
against B.B.'s and Registrant for $1,327 for services rendered to the restaurant
operated by B.B.'s. That Complaint resulted in a judgment which has not been
satisfied.
On November 15, 1995, a Small Claims Complaint was filed as Case No. 78121
in the Municipal Court, County of Riverside, State of California against B.B.'s
by Franklin Communications, Inc. for advertising services rendered to the
restaurant operated by B.B.'s. That Complaint resulted in a judgment of $2,100
which has not been satisfied.
Registrant's majority owned subsidiary, DFC, has obtained a judgment in the
amount of $117,491 against the Stellar Companies, Inc., a Florida corporation.
The judgment was rendered by the Superior Court of California, County of
Riverside in Case No. 076297 on December 1, 1994. Registrant intends to engage
Florida counsel to domesticate the judgment in the State of Florida and bring
proceedings necessary for collection.
In August 1994 Registrant obtained a judgment as Case No. 2194418 in Third
District Court, State of Utah against B.B. O'Briens in the approximate amount of
$2,500,000. That judgment was recorded as a judgment in California as Case No.
77560 in the Riverside County Superior Court. Subsequently, Registrant assigned
the judgment to its wholly owned subsidiary, Sports Spectacular, Inc. B.B.'s
does not own sufficient assets to pay all or any portion of the judgment. That
judgment, at this time, is without value.
On April 19, 1995 Registrant, B.B.'s, Sam D. Battistone and Does I - X
inclusive, were named defendants in an action brought by Robert Airdo as Case
No. I69302 in the Superior Court of the State of California for the County of
Riverside. The action is based upon a note owed by B.B.'s to two individuals.
The action alleges that the note was assigned by those individuals and
plaintiffs subsequently received an interest in such note. The Plaintiffs in
the action seek damages in the amount of $70,000 plus interest, costs and other
amounts. Registrant has engaged counsel in California and intends to vigorously
defend the action.
On November 15, 1995 sixteen plaintiffs filed a Complaint as Case No.
95AS04293 in the Superior Court in the State of California for the County of
Sacramento against SFC's wholly owned subsidiary, Shari's of Sacramento, Inc.
The plaintiffs allege racial, color and/or age based discrimination at the
restaurant located in Sacramento, California. The plaintiffs seek injunctive
and declaratory relief, general damages in the amount of $1,000,000, statutory
damages, punitive damages, attorneys fees and
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costs. Shari's of Sacramento denies liability and intends to defend the
action. SFC and SMC have agreed that the lawsuit is not a liability assumed
by SMC in connection with the sale of the SFC Assets. That matter has been
settled.
On March 12, 1996, Kenneth J. Poole filed a complaint as Case No. YC 026159
in the Superior Court of California, County of Los Angeles, Southwest Branch
against Registrant which complaint asked for recovery of unpaid legal fees.
That matter was settled. The settlement agreement requires total payments of
$12,508.13, payable in the amount of $2,508.12 upon execution of the agreement
and the balance paid after in installments of $1,000 per month until the claim
is paid. On receipt of the final payment the claimant will dismiss the
litigation with prejudice.
On January 18, 1996 an individual named Kevin Reach filed a complaint as
Case No. 087016, in the Superior Court of the State of California for the
County of Riverside. The defendants in that action include an unrelated
third party B.B. O'Briens Sports Cafe, a California corporation, and Sam D.
Battistone together with Does 1 through 50, inclusive. That matter alleges
six separate claims arising out of an alleged assault upon a patron by an
employee of B.B. O'Briens. That matter has been referred to Registrant's
liability insurance carrier which has agreed to undertake defense of the
action.
On May 1, 1996 The State of California Franchise Tax Board sent a Notice of
Proposed Assessment resulting from its examination of Registrant's March 31,
1990 and March 31, 1991 income tax returns. The amount of the proposed
assessment is $69,653 plus accrued interest. Registrant is in the process of
reviewing with tax counsel that proposed assessment.
On June 6, 1996 Southern Wine and Spirits of America, Inc. filed a
complaint as Case No. 96C01680 in the Municipal Court of the Los Cerritos
Judicial District, County of Los Angeles, State of California, against
Registrant, Sam D. Battistone and Does 1 through 10. The complaint asks for
$4,636.74 plus interest, costs and fees on an outstanding account for the
supplying of goods to the restaurant operated by B.B.'s. Registrant intends to
refer that matter to counsel.
On June 3, 1996 Vintage Club Master Association filed a complaint as Case
No. 089728 in the Municipal Court of the State of California, County of
Riverside, Desert Judicial District, against Registrant and Does 1 through 10.
The complaint asks for an amount of $1,328.65 together with interest and
attorney's fees relating to an unpaid assessment on real property owned by
Registrant in 1995. Registrant intends to refer that matter to counsel.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An Annual Meeting of Registrant's shareholders was held on March 28, 1996.
At that meeting, shareholders voted upon the election of three Directors, a
resolution authorizing the sale of the assets of Registrant's wholly owned
subsidiary HHC (then known as Shari's Franchise Corporation) and resolutions to
adopt revisions to Registrant's Articles of Incorporation which increased
authorized shares from 10,000,000 to 50,000,000 and adopted provisions of the
Revised Utah Business Corporation Act regarding limitation of directors'
liability and changed Registrant's name to Dreams, Inc. The number of votes
cast for, against or withheld with respect to each matter and each nominee is
set out below.
10
<PAGE>
Matter Voted Upon For Against Withheld
----------------- --- ------- --------
Sam D. Battistone - Director 12,403,785 1,800 0
Dale E. Larsson - Director 12,403,785 1,800 0
Joseph D. Casey - Director 12,403,785 1,800 0
Sale of SFC Assets 11,816,961 2,200 0
Amendment of Registrant's
Articles of Incorporation:
(1) To increase authorized 12,402,585 1,000 0
Shares
(2) To limit Directors' 12,403,385 18,540 0
liability
(3) To change Registrant's 12,403,385 200 0
name
Registrant's Proxy Statement for its Annual Meeting of Stockholders, March 28,
1996 contains substantial additional information regarding the above-mentioned
matters.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Registrant's common stock is listed on the OTC Bulletin Board, an
electronic screen based market available to brokers on desk-top terminals. The
high and low bids of Registrant's common stock for each quarter during fiscal
years ended March 31, 1995 and 1996 are as follows:
High Bid Price Low Bid Price
Fiscal Year Ended March 31, 1996:
First Quarter $.375 $.21875
Second Quarter $.75 $.375
Third Quarter $.40625 $.15625
Fourth Quarter $.25 $.15625
Fiscal Year Ended March 31, 1995:
First Quarter $3/4 $1/8
Second Quarter $3/4 $1/8
Third Quarter $1/4 $1/32
Fourth Quarter $1/4 $1/32
11
<PAGE>
On June 14, 1996, the high bid price was $.28125 and the low bid price was
$.1875 for Registrant's common stock.
Such over-the-counter quotations reflect inter-dealer prices, without
retail markup, markdown or commission, and may not necessarily represent actual
transactions.
There are presently 24,000,000 shares issued and outstanding.
Presently, 22,384,799 of the shares of Registrant's outstanding common
stock are restricted. Twelve million three hundred fifteen thousand five
hundred seventy-nine (12,315,579) of such shares have been held for a period of
two years or more. Subject to the other requirements of Rule 144, such shares
are available for Rule 144 sales.
The records of Fidelity Transfer, Registrant's transfer agent, indicate
that there are 278 registered owners of Registrant's common stock. Registrant
believes that certain registered owners including broker-dealers and
depositories which hold shares for the benefit of beneficial owners. Registrant
believes that there are three hundred to five hundred beneficial owners of its
common stock.
Registrant's financial condition does not permit the payment of dividends
nor does Registrant have any intention of paying dividends in the future.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Fiscal 1996:
Total revenues for fiscal 1996 decreased by $658,000 when compared to
fiscal 1995. This decrease is due primarily to a decrease in restaurant revenues
of $1,814,000, resulting from a decrease in restaurant revenues at B.B.
O'Briens, Inc. of $1,009,000 and a decrease in restaurant revenues at Shari's
Franchise Corporation of $805,000 during fiscal 1996 when compared to fiscal
1995. The decrease at Shari's Franchise Corporation is due to the sale of three
restaurants (one "Shari's" and two "Heidi's") during February 1996 and other
overall sales decreases at the remaining restaurants. On March 28, 1996, the
Registrant sold the ten remaining "Shari's" restaurants to SMC. The decrease
in restaurant revenues at B.B. O'Briens, Inc. is due to declining sales and the
decision to close this operation. The restaurant was closed July 1995.
Franchise fees at Dreams Franchise Corporation were $18,000 less during fiscal
1996 when compared to fiscal 1995 due to fewer franchise sales in fiscal 1996.
Royalties during fiscal 1996 were $16,000 higher in fiscal 1996 when compared to
fiscal 1995 due to increasing franchisee sales in fiscal 1996. Interest income
during fiscal 1996 was $88,000 less than fiscal 1995 due to a decrease in
related party loans receivable. Retail sales in fiscal 1996 were $186,000 less
than fiscal 1995 due to fewer sales of sports memorabilia, primarily Bill
Russell product. During fiscal 1996, the Registrant realized a gain totalling
$1,460,000 resulting from the sale of "Shari's" and "Heidi's" restaurants to SMC
and other unrelated third parties.
Total expenses during fiscal 1996 were $14,541,000 compared to $16,582,000
during fiscal 1995, representing a decrease of $2,041,000. Restaurant cost of
sales decreased by $746,000 during fiscal 1996 when compared to fiscal 1995 due
to the sale of three restaurants in February 1996, closure of the B.B. O'Briens
restaurant in Palm Desert, California, and decreases due to lower overall sales
in the existing restaurants. The percentage of cost of goods sold has increased
during fiscal 1996 to 67.7 percent from 64.1 percent during fiscal 1995 due to
the non-variable labor costs included in cost of goods sold which do not
decrease in the same ratio as decreases in sales. Occupancy costs decreased
12
<PAGE>
$103,000 in fiscal 1996 as a result of the restaurants which were closed.
Restaurant operating costs decreased $931,000 during fiscal 1996 when compared
to fiscal 1995 due primarily to the sale of three restaurants during February
1996, $107,000 due to a workers compensation premium refund received during
fiscal 1996, and no royalties paid to SMC during fiscal 1996. Additionally, the
loss on restaurant closure during fiscal 1996 was $579,000 compared to loss on
restaurant closure during fiscal 1995 of $540,000.
Retail cost of sales during fiscal 1996 decreased by $59,000 when compared
to fiscal 1995 due to lower retail sales. The cost of goods sold percentage
increased in fiscal 1996 to 62 percent from 50 percent during fiscal 1995 due to
decreased profit margins. General and administrative expense increased in
fiscal 1996 by $236,000 when compared to fiscal 1995 due primarily to
compensation expense recorded in connection with issuing common shares to the
Registrant's president under a stock bonus plan.
The single remaining restaurant had sales during fiscal 1996 totalling
$1,155,000 compared to $1,074,000 during fiscal 1995, representing an increase
of $81,000. This restaurant has historically been a profitable restaurant.
Management believes that a significant portion of the settlement costs of
remaining closed restaurants can be paid through the positive operations of this
remaining restaurant. Additionally, substantially all of the general and
administrative expense of SFC will be eliminated as a result of the sale of the
restaurant assets.
Fiscal 1995:
Total revenue decreased $1,478,000 when comparing fiscal year 1995 to
fiscal year 1994. This overall decrease consists of a decrease in restaurant
revenue of $547,000, representing a decrease in the restaurant sales of the
Registrant's wholly-owned subsidiary B.B.'s of $235,000 and a decrease in
restaurant sales of the Registrant's wholly-owned subsidiary SFC of $312,000.
The decrease in SFC revenues is due to a closed restaurant totalling
$389,000, significant sales decreases at three other restaurants totalling
$618,000, offset by an increase in revenues of $630,000 from a restaurant
opened during fiscal 1994. The remaining net increase in sales is due to net
increases at the remaining restaurants. Retail sales decreased $666,000 when
comparing fiscal year 1995 to fiscal year 1994, due primarily to the fact
that during fiscal year 1994 the Registrant's wholly-owned subsidiary, Sports
Spectacular, Inc. held one baseball card/celebrity show which generated
retail revenues of $385,000 while operations of Sports Spectacular, Inc. were
discontinued during fiscal year 1995 generating no retail revenues.
Additionally, the Registrant had product sales of $252,000 to a related party
during fiscal year 1994 and had no product sales during fiscal year 1995 to a
related party. Total Franchise fees and royalties remained relatively
constant from fiscal year 1994 to fiscal year 1995, reflecting an increase in
royalties due to more franchises in operation during fiscal year 1995
compared to fiscal year 1994, offset by a decrease in franchise fees due to
the opening of three fewer new franchise stores in fiscal year 1995 compared
to fiscal year 1994. Interest revenue decreased $143,000, when comparing
fiscal 1995 to fiscal 1994, due to a reduction in related party receivables,
which were offset against certain related party obligations during fiscal
year 1995.
Total expenses decreased $2,779,000, when comparing fiscal year 1995 to
fiscal year 1994. This overall decrease is comprised of the following decreases
and increases. Restaurant cost of sales decreased $377,000 due to lower sales
at B.B's during fiscal year 1995 and the closure of one SFC restaurant location
during fiscal year 1995. Rent expense remained relatively constant and
represents rent for the complete fiscal year 1995 for a new SFC restaurant
location opened during fiscal year 1994, offset by a decrease in rent expense
due to the closure of one SFC restaurant location during fiscal year 1995.
Other restaurant occupancy and operating expenses decreased $195,000 due to a
decrease in these costs at B.B.'s of approximately $63,000 due to cost cutting
measures during fiscal year 1995 as
13
<PAGE>
a result of poor sales performance during fiscal year 1995. The remainder of
the decrease results from lower operating costs in connection with the
closure of SFC restaurant locations in both fiscal year 1995 and 1994. Retail
cost of sales decreased $624,000 when comparing fiscal year 1995 to fiscal
year 1994 due primarily to the fact that there were no baseball
card/celebrity card shows during fiscal year 1995 and cost of sales of
$252,000 during fiscal year 1994 resulting from the Registrant's product
sales to a related party. The decrease in retail occupancy and operating
expenses of $143,000 is due to fewer baseball card shows in fiscal year 1995.
General and administrative expenses decreased $1,089,000 when comparing
fiscal year 1995 to fiscal year 1994. This decrease results almost entirely
from decreasing costs at DFC. This is due to management's continuing efforts
to cut costs at this subsidiary and the resolution of the majority of the
defaulted retail store leases which have resulted in significant expense in
the prior years. Interest expense decreased $157,000 when comparing fiscal
year 1995 to fiscal year 1994 due primarily to a decrease in related party
debt which was offset during fiscal 1995 against certain related party
receivables. Restaurant closure costs increased $295,000 when comparing
fiscal year 1995 to fiscal year 1994, due to the closure of an SFC restaurant
location with significant remaining lease costs associated with this store
location.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Registrant has a working capital deficit of
$2,762,000 compared to a working capital deficit of $7,988,000 at March 31,
1995. The Registrant has made improvement during fiscal year 1996 by reducing
the loss for fiscal year 1996 by $1,376,000, when compared to the loss for
fiscal year 1995, due primarily to the gain on the sale of restaurant assets of
$1,460,000. Despite the significant improvement in the working capital deficit,
the working capital deficit continues to be significant. Because of this
deficit, required capital resources have been provided primarily by related
parties and at times at interest rates which exceed current market rates. These
costs of financing and the continued losses have created this significant
working capital deficit and makes finding sources of financing (other than
through related parties) extremely difficult and extremely costly. The failure
of the Registrant to obtain additional sources of working capital and/or
substantially improve its results of operations will have a significant negative
impact on the liquidity and capital resources of the Registrant and be
detrimental to the Registrant's ongoing future operations.
In an attempt to improve its operating position, the Registrant has
extinguished certain debt, has reduced its overhead structure, has reduced some
onerous interest rates on its borrowings, has improved the franchising efforts,
contained general and administrative expenses at its subsidiary DFC, and sold
unprofitable restaurant operations. While these efforts have contributed to the
reduction of the net loss in fiscal year 1996 compared to fiscal year 1995, as
discussed above, losses are still significant and put continued strain on
working capital requirements. The Registrant intends to focus its efforts on
DFC, and will continue to expand and develop the franchising of its Field of
Dreams retail stores. Through March 31, 1996, DFC has not significantly
increased the number of Field of Dreams franchisees. However, DFC has retained
a franchise sales consultant to assist in the addition of franchisees. DFC
plans to add approximately 15 additional franchises during fiscal 1997.
The sale of SFC assets provided $300,000 in cash to the Registrant upon
closing. Additionally, management believes operations of the remaining
restaurant and amounts collected from the notes received from the sale of SFC
will be sufficient to pay settlement costs of the Registrant's remaining closed
restaurant obligations.
Management is hopeful that the Registrant can continue to reduce its
operating overhead costs and that the Registrant will be successful in
furthering the business growth of DFC. However the Registrant anticipates that
even with these improvements, the Registrant will still require significant
capital resources during fiscal year 1997, and the Registrant is unable to
predict what additional financing will be available in the future. The failure
of the Registrant to meet any of these objectives could have a significant
negative impact on the liquidity and capital resources of the Registrant and be
detrimental to the Registrant's future operations.
Management does not believe that the effects of inflation and changing
prices will have a significant effect upon the Registrant.
Item 7. FINANCIAL STATEMENTS.
The information called for by this Item is contained in a separate section
of this report. See Index to Financial Statements on page F-1.
On July 17, 1996 Registrant received from Price Waterhouse, L.L.P. ("PW") a
letter acknowledging that Registrant had filed its Form 10-KSB on July 15,
1996 prior to the issuance of PW's signed audit opinion. The letter stated
that that audit opinion was being withheld pending satisfactory compliance
with the terms of the engagement letter between Registrant and PW as well as
the modification of certain disclosures made in the footnotes to the
financial statements included in the Form 10-KSB. PW stated that they were
prepared to sign the opinion on Monday, July 15, after additional discussion
regarding compliance with the engagement letter as well as modifications to
the financial statements' footnotes. Compliance with the terms of the
engagement letter involves payment of fees to PW.
15
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Registrant's Officers and Directors and persons who own more than 10% of a
registered class of Registrant's equities securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers and Directors and greater than 10% shareholders are required by
Securities and Exchange Commission regulation to furnish Registrant with copies
of all Section 16(a) forms they filed.
Based solely on review of the copies of such forms furnished to Registrant,
Registrant believes that during the fiscal year ended March 31, 1996 all
Section 16(a) filing requirements applicable to its Officers, Directors and
greater than 10% beneficial owners were complied with.
DIRECTORS AND OFFICERS. The Directors and Executive Officers of Registrant
and the positions held by each of them are as follows. All directors serve
until Registrant's next annual meeting of shareholders.(1)
___________________________
(1) All officers serve at the discretion of the Board of Directors.
16
<PAGE>
Serving as
Director of Position Held With the
Name Age Registrant Registrant and Its Subsidiaries
---- --- ----------- -------------------------------
Sam D. Battistone 56 1983 Registrant: Director,
President; HHC: Director,
Vice President; Dreams
Lithos Inc.: Director,
President; Sports
Spectacular Inc.: Director,
Vice President; Dreams
Franchise Corporation:
Director, Chairman
Dale E. Larsson 52 1983 Registrant: Director,
Secretary-Treasurer; SFC:
Director, Secretary-
Treasurer; Dreams Lithos,
Inc.: Director,
Secretary-Treasurer; Sports
Spectacular, Inc.: Director,
Secretary-Treasurer; Dreams
Franchise Corporation:
Director, Vice President,
Secretary-Treasurer
Joseph D. Casey 44 1992 Registrant: Director; Dreams
Lithos, Inc.: Director, Vice
President; Sports
Spectacular, Inc.: Director,
President; Dreams Franchise
Corporation: Director,
President
BIOGRAPHICAL INFORMATION.
SAM D. BATTISTONE. For more than the past five years, Sam D. Battistone
has been majority shareholder, Chairman, Chief Executive Officer, President and
a Director of Registrant. He was the principal owner, founder and served as
Chairman of the Board, President and Governor of the New Orleans Jazz and Utah
Jazz of the National Basketball Association (NBA) from 1974 to 1986. In 1983,
he was appointed by the Commissioner of the NBA to the Advisory Committee of the
Board of Governors of the NBA. He held that position until Registrant sold its
interest in the Team. He served as a founding director of Sambo's Restaurants,
Inc. and variously as President, Chief Executive Officer, Vice-Chairman and
Chairman of the Board of Directors from 1967 to 1979. During that period,
Sambo's grew from a regional operation of 59 restaurants to a national chain of
more than 1,100 Units in 47 states. From 1971 to 1973, he served on the Board
of Directors of the National Restaurant Association.
DALE E. LARSSON. For more than the past five years Dale E. Larsson has
been the Secretary-Treasurer and director of Registrant. Mr. Larsson graduated
from Brigham Young University in 1971 with a degree in business. From 1972 to
1980, Mr. Larsson served as controller of Invest West Financial Corporation, a
Santa Barbara, California based real estate company. From 1980 to 1981, he was
employed by Invest West Financial Corporation as a real estate representative.
From 1981 to 1982, he
17
<PAGE>
served as the corporate controller of WMS Famco, a Nevada corporation based
in Salt Lake City, Utah, which engaged in the business of investing in land,
restaurants and radio stations.
JOSEPH D. CASEY. Mr. Casey became President of DFC in September 1990 and
Vice President of Registrant in May 1992. Mr. Casey was appointed in September
1992 to fill the unexpired term of a director of Registrant who resigned. He
has been actively involved in the sports memorabilia business since 1973 and is
an expert on baseball, football, and basketball cards. He was an owner of four
retail sports memorabilia stores in Utah between 1980 and 1990. Between 1976
and 1987 he was involved with the "Taco Time" restaurant chain as a restaurant
manager, restaurant owner and Vice President of the Craig Food Industries (Taco
Time) sub-franchisee. Mr. Casey is an expert in trading cards and sports
memorabilia.
Item 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning compensation for
services in all capacities to the Registrant and its subsidiaries for fiscal
years ended March 31, 1994, 1995 and 1996 of those persons who were, at
March 31, 1996, the Chief Executive Officer of the Registrant and the other
three most highly compensated executive officers of the Registrant.
18
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Name and principal Other Annual Restricted
Position Year Salary Bonus Compensation Stock Award
-------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sam D. Battistone 1996 $120,000 $ -0- $ -0- $153,000
President and Chief 1995 $120,000 $ -0- $ -0- $ -0-
Executive Officer of 1994 $120,000 $ -0- $12,750(1) $ -0-
Registrant
Dale E. Larsson 1996 $96,000 $ -0- $ 3,500(3) $ -0-
Secretary/Treasurer 1995 $96,000 $ -0- $ 3,374(3) $ -0-
and Chief Financial 1994 $96,000 $ -0- $ 3,551(3) $ -0-
Officer of Registrant
Joseph D. Casey 1996 $96,000 $ -0- $ -0- $ -0-
Vice President of 1995 $96,000 $ -0- $ -0- $ -0-
Registrant and 1994 $96,000(2) $ -0- $ -0- $ -0-
President of Dreams
Franchise Corporation
</TABLE>
________________________
(1) Other Annual Compensation includes the following:
1996 1995 1994
---- ---- ----
Club Membership 0 0 $12,750
Life Insurance 0 0 $ -0-
Other 0 0 $ -0-
-------
Total 0 0 $12,750
-------
-------
(2) These amounts do not include interest earned on Notes payable to this
officer totaling $19,479 during the year ended March 31, 1994.
(3) Represents compensation resulting from use of a company automobile.
OPTION GRANTS IN LAST FISCAL YEAR
NONE
19
<PAGE>
OPTION EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Number of Unexercised Options In-The-Money Options
Shares at March 31, 1996 at March 31, 1996
Acquired On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Joseph D. Casey 1,000,000 300,000/700,000 $2,250/$5,250
</TABLE>
EMPLOYMENT/BONUS AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS. In
November 1988, Registrant entered into an Employment Agreement with Sam D.
Battistone. The Employment Agreement was amended on November 1, 1993. The
amended Employment Agreement provides that Registrant shall employ
Mr. Battistone through November 1998 at a minimum salary of $120,000 per year.
The Employment Agreement also provides that Mr. Battistone shall receive an
annual bonus equal to 10% of Registrant's pre-tax profits for each of
Registrant's fiscal years. The time that any bonus payment is paid to
Mr. Battistone is determined by the Board of Directors. Bonuses accrued but not
paid become liabilities of Registrant but do not accrue interest. The
Employment Agreement provides that bonus amounts may be paid quarterly based
upon estimates of profits. In no event shall the bonus exceed $1,000,000 during
any fiscal year even if Registrant's pre-tax income should exceed $10,000,000.
Should Registrant pay any quarterly bonus based upon estimated profits, which
bonus exceeds the amount that would have been paid annually based upon actual
profits, the excess amount will be subtracted from any salary payable to
Mr. Battistone. If Registrant terminates Mr. Battistone's employment other than
for cause, or if Mr. Battistone dies or becomes disabled during the term of
employment, Registrant is obligated to pay Mr. Battistone or his successor a
severance payment equal to twenty-four months salary and bonuses. In the event
that Mr. Battistone is discharged in anticipation of or subsequent to a change
of control, or Mr. Battistone's duties are changed or his compensation is
reduced, as the consequence of a change in control, then Registrant is obligated
to pay Mr. Battistone within 30 days after the date of such change in control or
change or breach in his employment a sum equal to all salary and bonuses due
from the date of such change in control through November 30, 1998 or twenty-four
months' salary and bonuses, whichever is greater. In addition, Registrant will
be obligated to pay Mr. Battistone any bonuses which have been accrued but have
not been paid. The Employment Agreement also provides for health and life
insurance, automobile use and professional dues. As partial compensation for
services from 1988 to 1993, Registrant assigned a country club membership to
Mr. Battistone. Registrant and Mr. Battistone intend to renew the employment
agreement on the same or different terms.
On March 31, 1992, Sam D. Battistone and Registrant entered into a Stock
Bonus Agreement (the "Stock Bonus Agreement") pursuant to which Mr. Battistone
paid for and was issued 69,220 shares of common stock and acquired the right to
require Registrant to issue to him 4,930,780 of its common stock (the "Stock").
In consideration for the stock and the right to acquire the Stock,
Mr. Battistone paid Registrant the sum of $250,000; $175,000 in the form of the
release of accrued wages and $75,000 in cash. At the time of the Stock Bonus
Agreement, Registrant did not have sufficient authorized shares to issue the
Stock to Mr. Battistone. At its meeting of shareholders in March 1996
Registrant increased authorized shares to a level sufficient for Registrant to
meet its obligation to issue 4,930,780 shares to Mr. Battistone. After the
Stock was issued to Mr. Battistone, Registrant has options to repurchase shares
of the Stock for a price of $0.05 per share, the same price Mr. Battistone paid
for the Stock. The options cover 100% of the stock until March 31, 1994.
Following March 31, 1994, Mr. Battistone vests in, and the options cease to
cover, an additional 10% per year until Mr. Battistone is 50% vested on the
20
<PAGE>
seventh anniversary of the Stock Bonus Agreement. On the eighth anniversary of
the Stock Bonus Agreement, Mr. Battistone becomes 80% vested in the shares, on
the ninth anniversary of the Stock Bonus Agreement, Mr. Battistone becomes 95%
vested in the shares and on the tenth anniversary of the Stock Bonus Agreement,
Mr. Battistone becomes vested in all of the shares. All of the shares of Stock
which will be received by Mr. Battistone pursuant to the terms of the Stock
Bonus Agreement will be restricted. Pursuant to the terms of a Stock Pledge
Agreement dated March 22, 1994, Mr. Battistone has agreed to pledge to B.A.
Leasing and Capital Corporation, upon acquisition, any and all additional shares
of stock of StratAmerica Corporation received by him. Pursuant to that
agreement, upon receipt of the 4,930,780 shares by Mr. Battistone,
Mr. Battistone will be obligated to pledge those shares to B.A. Leasing and
Capital Corporation, subject to the option of Registrant to buy them back, as
discussed above. Issuance of the shares to Mr. Battistone will decrease the
percentage of issued and outstanding shares held by the public.
DFC and Mr. Casey intend to, in the near future, enter into a two year
employment agreement under which Mr. Casey will receive a salary of $96,000 per
year.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS.
The following table sets forth as of March 31, 1996, the number of
Registrant's voting securities beneficially owned by persons who own five
percent or more of Registrant's voting stock, by each director, and by all
officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address Number of Percent
Title and of Type of Shares of
Class Beneficial Owner Ownership Owned Class
----- ---------------- --------- --------- -------
<S> <C> <C> <C> <C>
$.05 par value Sam D. Battistone Record and 13,924,275(1)(4)(5) 58%
Common Stock 42-620 Caroline Court Beneficial
Palm Desert, CA 92211
$.05 par value Dale E. Larsson Record and 1,011,800 4.2%
Common Stock 1776 N. State St., # 130 Beneficial
Orem, UT 84057
$.05 par value Joseph D. Casey Record and 300,500(3)(2) 1.3%
Common Stock 42-620 Caroline Court Beneficial
Palm Desert, CA 92211
$.05 par value
Common Stock All Officers and Record and 15,236,575(4)(5) 63.5%
Directors as a Beneficial
Group (3 persons)(3)
</TABLE>
________________________
(1)Includes 635,225 shares owned by family members of which Mr. Battistone
disclaims ownership.
(2)Includes 300,000 shares which are the subject of immediately exercisable
options.
(3)The directors and officers have sole voting and investment power as to
the shares beneficially owned by them.
21
<PAGE>
(4)Includes 4,000,000 shares owned by Battistone Financial Group which is
owned by J. Roger Battistone, the brother of Sam D. Battistone. Sam D.
Battistone disclaims ownership of those 4,000,000 shares.
(5)Includes 1,550,000 shares owned by Invest West Sports, Inc. which is
wholly owned by Mr. Battistone.
Sam D. Battistone, Registrant's majority shareholder and Chief Executive
Officer of Registrant has pledged to B.A. Leasing and Capital Corporation, an
unaffiliated corporation, all shares of common stock of Registrant which he now
owns or may acquire in the future to secure personal indebtedness. Should there
be a default on that indebtedness, and should a secured creditor foreclose on
its interest in Mr. Battistone's stock, control of Registrant could change.
Under Mr. Battistone's employment agreement with Registrant, if such event were
to occur and if Mr. Battistone were discharged or his duties changed or his
compensation were reduced as a consequence of such a change in control, then
Registrant is obligated to pay Mr. Battistone, within 30 days after the date of
such change in control, a sum equal to all salary and bonuses due Mr. Battistone
from the date of such change in control through November 30, 1998 or 24 months
salary and bonus, whichever is greater. In addition, Registrant would be
obligated to pay Mr. Battistone any bonuses which have been accrued but not yet
paid. The payments to be made to Mr. Battistone in such event could require a
significant expenditure of cash by Registrant, and significantly deplete
Registrant's working capital.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CONFLICTS OF INTEREST SPECIFICALLY RELATED TO THE SALE OF HHC ASSETS.
Substantial transactions between J. Roger Battistone, the brother of Sam D.
Battistone ("JRB") and Battistone Financial Corporation, a California
corporation owned by JRB ("BFG") and Registrant and SFC have occurred in the
past and rights and obligations between Registrant and those parties continue to
exist. Further as brothers, Sam D. Battistone and JRB have participated in
common financial transactions, including family business matters, acting as
trustees for each other's trusts, the trusts of each other's children and
numerous other family business matters. Sam D. Battistone and JRB are related
parties and consequently, Sam D. Battistone was deemed to have had a
"conflicting interest" in the sale of HHC Assets to SMC.
The sale of the HHC Assets to SMC involved the release of indebtedness owed
by Registrant to BFG and JRB and by HHC to JRB and certain other conflicts of
interest including: (1) Sam D. Battistone, Registrant's President and a
controlling shareholder of Registrant, and JRB, the sole owner of BFG, are
brothers. (2) BFG owns 4,000,000 shares of Registrant's common stock and,
following issuance of shares due to Sam D. Battistone, BFG became the second
largest shareholder of Registrant's common stock. (3) Sam D. Battistone is
personally indebted to BFG in the approximate amount of $1,870,650.
In consideration for ten HHC restaurants, SMC delivered to HHC $300,000 in
cash, a Note in the original principal balance of $380,000, a Note in the
original principal balance of $95,000 and assumed obligations and liabilities of
HHC allocated to the purchased restaurants which totalled approximately
$1,000,000. In addition, SMC released Registrant from approximately $64,000 of
indebtedness owed by Registrant to SMC. SFC assigned the $380,000 Note to JRB
and BFG in consideration for their release of $588,000 owed by Registrant to
those parties. The $380,000 Note and the $95,000 Note are subject to
substantial adjustments. The Registrant believes that those Notes will be
diminished substantially, and possibly in whole, by transaction costs and
certain operation management costs. Substantial additional information
regarding the sale of the HHC restaurants is available in the Registrant's Proxy
Statement for its Annual Meeting of Stockholders, March 28, 1996.
22
<PAGE>
INDEBTEDNESS OF REGISTRANT TO BFG. During the period from November 1990 to
the present, BFG has loaned Registrant a total of $5,581,000, which Registrant
has used for operations. Currently, Registrant is not indebted to BFG.
1995 LOAN BY BFG TO REGISTRANT. In September 1995, Registrant borrowed
$150,000 from BFG. Registrant delivered to BFG a convertible promissory note
which allows its holder to convert the $150,000 indebtedness into 100,000 shares
of DFC common stock. As additional consideration for such loan, Registrant
delivered to BFG an option to purchase 200,000 shares of DFC common stock at a
total exercise price of $300,000. Registrant has granted the holder a piggy-
back registration right which provides for registration of the DFC shares under
certain conditions. BFG has informed Registrant that it has assigned the
convertible note and 200,000 share option to an unaffiliated third party. The
$150,000 obligation was not released in connection with the sale of the HHC
Assets.
SALE OF REAL ESTATE TO BFG. On March 29, 1991, Registrant sold to BFG
for a total purchase price of $2,725,000 three parcels of real property
located in the Palm Desert, California area. BFG paid the purchase price in
part by delivery of a promissory note in the original principal amount of
$1,425,000 and by the assumption of obligations in the amount of $1,300,000,
secured by the property. The promissory note bears interest at 12% per annum
and was originally due and payable one year from the date of execution.
During March 1992 the term of the note was extended to March 31, 2002. The
note requires no payments until maturity at which time all accrued interest
and principal is due. On October 1, 1994 the $1,425,000 promissory note
payable by BFG to Registrant was offset against the same amount of
indebtedness owed by Registrant to BFG. After that offset, Registrant owed
BFG $375,000, which amount decreased to $353,000 at March 31, 1995. As a
result of the sale of HHC, Registrant is not indebted to BFG. The
indebtedness secured by the property was foreclosed upon by a third party in
October 1995. See "Legal Proceedings".
INDEBTEDNESS MODIFICATION. In connection with the acquisition of
restaurants from SMC in 1985, HHC (then known as Restaurants Etc.) delivered a
note to SMC in the principal amount of $750,000. The amended terms of that note
provided for an interest rate of 10% per annum beginning on September 1, 1988.
In August 1988, Registrant guaranteed payment of that note in an amount not to
exceed $460,000, and loaned SFC $1,000,000 of operating capital. SMC, in
consideration of Registrant's actions, subordinated its security interest in SFC
restaurants. In May 1990, subsequent to its acquisition of SFC, Registrant
assumed all obligations owed by SFC to SMC. Registrant believed that the
assumption of that indebtedness would aid SFC in its ability to obtain
financing. In connection with the assumption, all co-makers of the note,
including Sam D. Battistone and J. Roger Battistone were released from
liability. The balance owed by Registrant pursuant to the modified debt was, on
March 31, 1995, $142,000. That indebtedness was released by SMC as partial
consideration for the HHC Assets.
INDEBTEDNESS OF REGISTRANT AND HHC TO JRB AND FAMILY TRUST. JRB and a
family trust have loaned HHC $2,111,000 (including accrued interest). HHC used
those funds for operations and equipment purchases. Interest accrued at 12% per
annum on the debt owed JRB and 10% per annum on the debt owed to the family
trust. The amount owed to JRB by HHC was released in connection with the sale
of HHC Assets. The amount owed to the family trust was assumed by SMC in
connection with the sale of HHC Assets. Registrant's debt obligations to
certain related parties prior to sale of the HHC Assets, are summarized as
follows:
Amounts Owed By Amounts Owed to
--------------- ---------------
JRB BFG
--- ---
StratAmerica $ 460,000 $117,000
HHC $1,693,000
23
<PAGE>
Following the sale of the HHC Assets, neither Registrant nor HHC is indebted to
JRB or BFG.
JRB OBLIGATIONS ON HEIDI'S LEASES. JRB has personally guaranteed two real
property leases associated with two Heidi's restaurants. Those leases are
associated with the Heidi's restaurant located in El Cajon, California and the
Heidi's restaurant located in Lemon Grove, California.
ADDITIONAL CONFLICTS OF INTEREST
KRAUSZ ENTERPRISES LEASE AND NOTE. Registrant was guarantor of a lease
with Krausz Enterprises for restaurant premises located in Cerritos, California.
Schestag, Inc., an unaffiliated California corporation, is the lessee under that
lease. Schestag, Inc. is the successor to a lease which was originally between
Krausz Enterprises and SMC. That predecessor lease was guaranteed by Registrant
and Sam D. Battistone. In June 1995, SFC paid Krausz Enterprises $50,000 for
full release of all obligations of SMC, Registrant and Mr. Battistone.
STONEHIL FINANCIAL. During July 1991, Registrant borrowed $1,000,000 from
Stonehil Financial, a California general partnership, in which Sam D.
Battistone, Registrant's Chief Executive Officer, is a general partner. At the
time of the loan transaction the only other general partner was Robert Hild, an
individual unrelated to Registrant or Sam D. Battistone. The loan had an
interest rate of 24% per annum and required monthly payments of interest only
equal to approximately $20,000 each with a balloon payment of accrued interest
and principal on its third anniversary. As a general partner of Stonehil
Financial, Sam D. Battistone benefitted from payments made on the loan.
Negotiations for the loan transaction were conducted with Robert Hild. At that
time Stonehil Financial was the only entity willing to loan money to Registrant
and the 24% interest rate was demanded and negotiated by Mr. Hild. There are no
usuary laws restricting the amount of interest paid by a corporation in either
Utah or California. Registrant was allowed to prepay the loan at any time. The
holder of the loan was allowed to require early prepayment of all principal and
accrued interest on 60 days notice. The obligation to Stonehil Financial was
secured by 1,000,000 shares of Registrant's common stock owned by Sam D.
Battistone. Sam D. Battistone personally guaranteed all of Registrant's
obligations to Stonehil Financial in connection with the $1,000,000 loan. Four
Hundred Sixty-Six Thousand Dollars of loan proceeds was used to prepay amounts
owed BFG. The balance of the loan proceeds was used as operating capital.
During fiscal year ended March 31, 1993, Registrant paid Stonehil Financial
$96,261 pursuant to the above-referenced Note. As of December 31, 1992
Registrant owed Stonehil Financial $1,260,000 pursuant to the terms of the Note.
In October 1992, Stonehil Financial declared the obligations to be in default
and made demand for repayment. The determination by Stonehil Financial to
declare the obligations to be in default was made solely by Robert Hild, an
unrelated general partner of Stonehil Financial who, pursuant to the terms of
the partnership agreement, had complete power to make such demand. Subsequent
to that demand, Registrant commenced negotiations to resolve the default. Those
negotiations resulted in the withdrawal of the notice of default. As a result
of the negotiations, the note to Stonehil Financial was divided into two
separate notes. The first note runs directly to Robert Hild, who has received
distributions in redemption of his partnership interest, including his share of
the obligations of Registrant to Stonehil Financial. The note to Robert Hild is
dated effective as of January 1, 1993 in the amount of $498,931 with a
renegotiated interest rate of 12% per annum. A principal payment of $38,931 was
immediately paid on the note with the balance of $460,000 payable in equal
principal quarterly payments of $25,000 commencing April 1, 1993 until the note
is paid in full. On January 1, 1994, Registrant and Mr. Hild modified the
payment terms of the note. The modification required payments of $7,500 per
month for a period of one year until January 1, 1995. On January 1, 1995 the
original payment schedule requiring monthly payments of interest, quarterly
payments of principal of $25,000 was reinstated. Registrant is currently in
default on its obligations to Mr. Hild. The debt to Mr. Hild is secured by a
pledge of 1,000,000 shares of Registrant's common stock owned by Sam D.
Battistone. Sam D. Battistone has personally guaranteed all of Registrant's
obligations to Mr. Hild in
24
<PAGE>
connection with the restructured note to Mr. Hild. As a part of the
transaction redeeming Mr. Hild as a partner of Stonehil Financial, Dale E.
Larsson, Secretary of Registrant, became a general partner of Stonehil
Financial. The balance of the obligation of Registrant to Stonehil is
reflected in a second promissory note payable to Stonehil Financial in the
original principal amount of $631,000 plus accrued interest with an annual
rate of interest of 12% per annum. That note requires no payments until
January 1, 2003 at which time the balance of principal and unpaid interest is
due. At March 31, 1995 Registrant owed Mr. Hild $342,000. As of March 31,
1996 it owed Mr. Hild $360,671 principal and accrued interest.
INVEST WEST SPORTS, INC. From February 1992 to the present, Registrant
borrowed approximately $889,450 from Invest West Sports, Inc. At March 31,
1996, Registrant owed Invest West Sports, Inc. $220,000. Registrant currently
owes Invest West Sports, Inc. approximately $205,000 principal and accrued
interest. During the fiscal year ended March 31, 1996, Registrant repaid in
cash $105,443 owed to Invest West Sports, Inc. Invest West Sports, Inc. is
owned by Sam D. Battistone, Registrant's Chief Executive Officer. On March 31,
1996 Registrant issued 1,500,000 shares of Registrant's common stock to Invest
West Sports, Inc. in satisfaction of $270,000 of outstanding debt of Registrant
to Invest West Sports, Inc.
PLEDGED SHARES/REGISTRATION RIGHT. On March 22, 1994, in connection with
an amendment to an agreement for satisfaction for judgment, by and between Sam
D. Battistone, Carla Battistone and B.A. Leasing and Capital Corporation,
Registrant agreed to register, under certain conditions, 2,893,495 shares of
Registrant owned by Sam D. Battistone which are pledged to B.A. Leasing
Corporation. Registration of the shares is required only upon an event of
default under the Pledge Agreement. Sam D. Battistone has agreed to reimburse
or pay all costs incurred by Registrant in connection with such registration.
In connection with the transaction, BFG agreed to release its security interest
it held in 1,716,450 shares of the pledged shares. As a result of that release
by BFG, B.A. Leasing and Capital Corporation became the single pledgee of that
stock. Pursuant to the agreement with B.A. Leasing and Capital Corporation, Sam
D. Battistone agreed to pledge to B.A. Leasing and Capital Corporation any
additional shares of stock of Registrant received by Sam D. Battistone.
PURCHASE OF PRODUCT. During the year ended March 31, 1995, DFC purchased
from Sam D. Battistone's children for resale approximately $19,000 of sports
memorabilia. The product was resold by DFC at a profit.
In September, 1993 Registrant purchased 5,000 cases of Marilyn Monroe
trading cards from Sports Time Card Company, a company owned 50% by Registrant.
The purchase price for the 5,000 cases of Marilyn Monroe trading cards was
$500,000 cash.
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) See Exhibit Index immediately preceding Exhibits.
(b) Reports on 8-K.
On April 12, 1996 Registrant filed a Form 8-K disclosing the sale to SMC of
ten Shari's format restaurants owned by SFC.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DREAMS, INC.
By: __________________________________
Its: President
Date: ____________________
In accordance with the Exchange Act this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
_____________________________________
Sam D. Battistone
President/Principal Executive
Officer/Director
Date: ____________________
_____________________________________
Dale E. Larsson
Principal Financial Officer/
Director
Date: ____________________
26
<PAGE>
EXHIBIT INDEX
Number From
Item 601 Exhibit Page
Exhibit Table Description Number
------------- ----------- ------
3 Amended Articles of Incorporation E-1 - E-2
10 Asset Purchase Agreement, as Amended Incorporated by
reference from
Proxy Statement
dated March 14,
1996
21 Subsidiaries of small business issuer Incorporated by
reference from
Form 10-K for
fiscal year
ended March 31,
1995
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of
Shareholders' Deficit F-4
Consolidated Statements of Cash Flows F-5 - F-7
Notes to Consolidated Financial
Statements F-8 - F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
June 17, 1996
To the Board of Directors and Shareholders
of Dreams, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
Dreams, Inc. (formerly StratAmerica Corporation) and its subsidiaries at March
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As described in the notes to the consolidated financial statements, the Company
has extensive transactions and relationships with its majority shareholder and
other related entities. Because of these relationships, it is possible that
the terms of these transactions are not the same as those which would result
from transactions among wholly unrelated parties.
F-1
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------
March 31,
-------------------
1996 1995
--------- --------
ASSETS
Current assets:
Cash $ 367 $ 237
Restricted cash 30 35
Trade accounts receivable, less allowance
of $36 and $60 45 23
Interest receivable - related party - 15
Current portion of notes receivable 83 -
Inventories 109 161
Prepaid expenses 15 75
-------- -------
Total current assets 649 546
Notes receivable - including $611 from a
related party in 1995, less current portion 166 611
Property and equipment, net 86 1,204
Goodwill, less accumulated amortization of
$1,695 in 1995 - 550
Other assets 11 80
-------- -------
$ 912 $2,991
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 449 $ 765
Accrued liabilities, including $300 and
$1,168 to related parties 1,954 3,338
Current portion of long-term debt and
capital lease obligations, including
$731 to related parties in 1995 211 1,694
Notes payable, including $280 and
$2,032 to related parties 697 2,371
Payable to restricted cash (Note 1) 25 -
Deferred franchise fees 75 120
Deposit - 246
-------- -------
Total current liabilities 3,411 8,534
Long-term debt and capital lease obligations,
less current portion, including $203 to related
parties in 1995 294 417
Accumulated losses in excess of investment in 50%
owned company 121 121
Deferred revenue (Note 13) 378 378
Minority interest in consolidated subsidiary 357 350
-------- -------
4,561 9,800
-------- -------
Contingencies and commitments
Shareholders' deficit:
Common stock, $.05 par value - authorized
50,000,000 shares; 24,000,000 and 10,000,000
shares issued and outstanding 1,200 500
Capital in excess of par value 11,667 7,936
Deferred compensation (550) -
Accumulated deficit (15,966) (15,245)
-------- -------
(3,649) (6,809)
-------- -------
$ 912 $2,991
-------- -------
-------- -------
The accompanying notes are an integral part of these consolidated
financial statements.
F - 2
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------
1996 1995 1994
----------- ------------ --------------
<S> <C> <C> <C>
Revenues:
Restaurant $ 11,424 $13,238 $13,785
Retail, including $252 from
related parties in 1994 284 470 1,136
Franchise fees and royalties 595 597 585
Interest, including $63, $147
and $288 from related parties
in 1996, 1995 and 1994. 63 151 294
Other 1 29 163
Gain on sale of restaurants 1,460 - -
---------- ---------- ----------
13,827 14,485 15,963
---------- ---------- ----------
Expenses:
Restaurant cost of sales,
excluding depreciation 7,738 8,484 8,861
Restaurant rent 1,305 1,408 1,426
Other restaurant occupancy and
operating expense 1,818 2,749 2,944
Retail cost of sales, including
$252 from related parties in 1994,
excluding depreciation 176 235 859
Retail occupancy and
operating expense 332 241 309
Lease accrual reversals (Note 12) (175) (75) -
General and administrative expense 1,640 1,404 2,493
Depreciation and amortization 608 950 1,352
Interest, including $320, $432,
and $514 to related parties in
1996, 1995 and 1994 520 620 777
Restaurant closure 579 540 245
Equity in losses of 50% owned company - 26 95
---------- ---------- ----------
14,541 16,582 19,361
---------- ---------- ----------
Minority interest in earnings
of consolidated subsidiary 7 - -
---------- ---------- ----------
Net loss $ (721) $(2,097) $(3,398)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share $ (.07) $ (.21) $ (.34)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares
outstanding 10,115,068 10,000,000 10,000,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F - 3
<PAGE>
DREAMS, INC.
(formerly Stratamerica Corporation)
Consolidated Statements of Shareholders' Deficit
(Dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital
in excess
Shares Common of par Deferred Accumulated
outstanding stock value Compensation deficit Total
----------- ------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993 10,000,000 $ 500 $ 7,812 $ $ (9,750) $ (1,438)
Contribution of capital
124 124
Net loss for the year
ended March 31, 1994 (3,398) (3,398)
----------- ------- -------- ------- --------- --------
Balance at March 31, 1994 10,000,000 500 7,936 - (13,148) (4,712)
Net loss for the year
ended March 31, 1995 (2,097) (2,097)
----------- ------- -------- ------- --------- --------
Balance at March 31, 1995 10,000,000 500 7,936 - (15,245) (6,809)
Conversion of related
party debt to equity
7,269,220 363 904 1,267
Forgiveness of related
party debt 1,890 1,890
Exercise of employee
stock options
6,180,780 309 162 471
Deferred compensation
on stock bonus
plan 703 (550) 153
Conversion of third party
professional fees to
equity 550,000 28 72 100
Net loss for the year
ended March 31, 1996 (721) (721)
----------- ------- -------- ------- --------- --------
Balance at March 31, 1996 24,000,000 $1,200 $ 11,667 $ (550) $(15,966) $ (3,649)
----------- ------- -------- ------- --------- --------
----------- ------- -------- ------- --------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F - 4
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Consolidated Statements of Cash Flows
(Dollars in thousands)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------
1996 1995 1994
---------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $12,230 $14,316 $16,035
Cash paid to suppliers and employees (12,803) (14,345) (16,387)
Interest received 63 40 133
Interest paid (383) (553) (865)
-------- -------- --------
Net cash used in operating activities (893) (542) (1,084)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (53) (51) (212)
Loans made to franchisees and other (70) - (139)
Collection on notes receivable - 383 66
Proceeds from sale of real estate
properties held for investment - - 195
Proceeds from sale of restaurant assets 744 - -
-------- -------- --------
Net cash (used) provided by investing
activities 621 332 (90)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable 448 697 1,212
Proceeds from long-term debt 150 - -
Payments on notes payable - (160) (37)
Principal payments on long-term
debt and capital lease obligations (201) (522) (226)
Issuance of stock in consolidated subsidiary - 350 -
-------- -------- --------
Net cash (used) provided by financing
activities 397 365 949
-------- -------- --------
Net increase (decrease) in cash 125 155 (225)
Cash and restricted cash at beginning of year 272 117 342
-------- -------- --------
Cash and restricted cash at end of year $ 397 $ 272 $ 117
-------- -------- --------
-------- -------- --------
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated
financial statements.
F - 5
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Consolidated Statements of Cash Flows
(Dollars in thousands)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------
1996 1995 1994
---------- ---------- ------------
<S> <C> <C> <C>
Reconciliation of net loss to net cash
used in operating activities:
Net loss $ (721) $ (2,097) $(3,398)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 608 950 1,352
Gain on sale of restaurant assets (1,460) - -
Stock compensation 153 - -
Adjustment for write-off of assets - 540 245
Change in assets and liabilities:
Decrease (increase) in accounts receivable (44) (10) 83
Decrease in other receivables - - 141
Decrease (increase) in interest receivable 15 (111) (161)
Increase in inventories (41) (9) (276)
Decrease in prepaid expenses 17 1 44
Increase in accounts payable 39 159 21
Increase (decrease) in accrued liabilities 514 (37) 489
Decrease in deferred franchise fees (45) (8) (17)
Increase in accumulated losses in excess
of investment in 50% owned company - 26 95
Increase in deferred revenue - - 378
Other 72 54 (80)
-------- -------- -------
Net cash used in
operating activities $ (893) $ (542) $(1,084)
-------- -------- -------
-------- -------- -------
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated
financial statements.
F - 6
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Consolidated Statements of Cash Flows
(Dollars in thousands)
- ------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
YEAR ENDED MARCH 31, 1996:
The Company sold restaurant assets for $744 in cash, $560 in notes
receivable, $64 in debt forgiveness, and assumption by the buyer of $156 in
net liabilities. (Note 12.)
The Company settled notes payable of $611 as described in Note 3.
The Company reclassified $246 and $325 from deposits and accrued liabilities,
respectively, to common stock and additional paid-in capital for stock issued
to employees and to third parties under a stock option plan. (Note 11.)
The Company recorded additional paid-in capital totaling $1,890 due to
forgiveness of related party debt. (Note 13.)
The Company exchanged 7,269,220 shares of common stock in exchange for $1,267
of related party obligations.
YEAR ENDED MARCH 31, 1995:
The Company offset notes payable and accrued interest payable with notes
receivable and accrued interest receivable from a related party as described
in Note 13.
The Company acquired equipment by issuing notes payable of $26.
YEAR ENDED MARCH 31, 1994:
The Company acquired equipment by issuing long-term debt and capital lease
obligations totaling $333.
The Company settled notes payable and accrued interest by transferring inventory
totaling $1,100 to a related party as described in Notes 13.
The Company transferred notes receivable with a book value of $178 to a related
party to settle related party obligations as more fully described in Note 13.
The accompanying notes are an integral part of these consolidated
financial statements.
F - 7
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies
Dreams, Inc. (the Company), formerly StratAmerica Corporation, is engaged
in the ownership and operation of family style restaurants and a sports
cafe through its wholly-owned subsidiaries Shari's Franchise Corporation
(SFC) and B.B. O'Briens, Inc. (B.B.'s), respectively. B.B.'s ceased
operations during July 1995 (see Note 12). The Company also franchises
Field of Dreams-TM- retail stores which sell celebrity and sports-oriented
memorabilia merchandise through the Company's 95 percent-owned subsidiary
Dreams Franchise Corporation (DFC). The Company also owns a 50 percent
interest in Sports Time Card Company (Sports Time) which markets Marilyn
Monroe collector cards. Additionally, the Company sponsored sports
memorabilia trade shows through its wholly-owned subsidiary Sports
Spectacular, Inc. (Sport) during the year ended March 31, 1994. Sport has
not had any operations subsequent to March 31, 1994.
During February and March 1996, the Company sold the net assets of thirteen
family style restaurants owned by SFC to various third parties (Note 12).
Subsequent to March 31, 1996, SFC changed its name to Heidi's Holding
Corporation.
The President of the Company is referred to as the majority shareholder in
these notes to the consolidated financial statements. A summary of
significant accounting policies follows:
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, SFC, its wholly-owned subsidiary, B.B.'s,
its 95 percent-owned subsidiary, DFC, and its wholly-owned subsidiary
Sport. All significant intercompany transactions have been eliminated.
The Company accounts for its 50 percent interest in Sports Time using the
equity method of accounting. Summarized financial information related to
Sports Time is not material to the Company's financial condition and
results of operations. Sports Time incurred a loss of $26 for the year
ended March 31, 1996. The Company's portion of that loss has not been
recorded in the 1996 statement of operations as the Company has no future
obligation to fund Sports Time operating losses. If Sports Time earns
income in future years, the Company will not recognize its portion of that
income until losses unrecognized in prior periods have been fully
recovered.
Inventories
Inventories, consisting of restaurant supplies and sports memorabilia, are
stated at the lower of cost or market. Cost is determined using the first-
in, first-out (FIFO) method.
Prepaid expenses
Prepaid expenses consist of prepaid property taxes and other prepaid
expenses.
Property and equipment
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to operating expense as incurred. Expenditures for
additions and betterments are capitalized. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts and any resulting gain or loss
is included in operations.
Depreciation of equipment is computed using the straight-line method over
the estimated useful lives of the assets ranging from five to ten years.
Leasehold improvements are amortized over the lease period or the estimated
useful life of the improvements, whichever is less.
Goodwill
Goodwill represents the purchase price in excess of the value of net assets
acquired. Goodwill is being amortized using the straight-line method over
seven years.
The Company has adopted Statement of Financial Accounts Standards No. 121,
which requires that goodwill be evaluated based on the expected
undiscounted future cash flows of the Company. At March 31, 1996, the
Company offset unamortized goodwill against the gain recognized in
connection with the sale of the SFC restaurants.
Payable to restricted cash
Field of Dreams-TM- franchisees pay advertising royalties to DFC to be used
for designated franchise advertising and promotional activities. These
restricted funds are held by DFC. During the year ended March 31, 1996,
DFC used a portion of these restricted funds to fund its own operations.
Payable to Restricted Cash represents cash owed by DFC to this restricted
cash fund.
Franchise fee revenue and commission expense
Franchise fees received and commissions paid are initially deferred, and
are recognized in the statement of operations when all material services or
conditions related to the sale of a franchise have been performed by the
Company.
Loss per share
Loss per share is based on the weighted average number of common and common
equivalent shares outstanding, if dilutive. Common equivalent shares for
all years were anti-dilutive and accordingly the weighted average shares
were not adjusted to reflect common equivalent shares.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes." This
statement requires an asset and liability approach for accounting for
income taxes.
F - 8
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
- ------------------------------------------------------------------------------
Fair value of financial instruments
The fair value of cash, restricted cash, accounts receivable, notes
receivable, accounts payable, accrued liabilities, notes payable and long-
term debt approximate their respective book values at March 31, 1996.
Use of estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Stock Based Compensation
The Financial Accounting Standards Board issued a statement in October 1995
entitled "Accounting for Stock-Based Compensation" which will be effective
for the Company beginning April 1, 1996. This statement establishes an
accounting method based on the fair value of equity instruments awarded to
employees as compensation. However, companies are permitted to continue
applying previous accounting standards in the determination of net income
with disclosure in the notes to the financial statements of the differences
between previous accounting measurements and those formulated by the new
accounting standard. Beginning in April 1996, the Company intends to
determine net income using previous accounting standards and to make the
appropriate disclosures in the notes to the financial statements as
required by the standard.
Reclassification of prior year amounts
Certain reclassifications have been made in the March 31, 1995 and 1994
accounts to conform to the current year presentation. These
reclassifications are not material.
Minority Interest
During March 1995, DFC sold 233,333 shares of common stock to third party
investors for $350. The third party's investment is accounted for as
minority interest in the accompanying financial statements.
2. Financial Condition
The Company incurred a net loss of $721 for the year ended March 31, 1996
and has a working capital deficit of $2,762 and shareholders' deficit of
$3,649 at March 31, 1996. These factors indicate that the Company may be
unable to continue in its present form unless it is able to substantially
improve its operations, obtain new sources of capital and/or financing, is
able to refinance its short-term obligations under which it is in default,
and is able to settle lawsuits against the Company for failure to make
lease payments to landlords, as further described in Notes 9 & 12.
Management is hopeful that it can reduce its operating overhead costs and
that the Company will be successful in selling additional Field of Dreams
franchises. However, management is still dependent upon related parties to
provide financing and is hopeful that it can obtain additional required
related party financing throughout the next fiscal year. Failure to obtain
adequate related party financing would have a significant adverse effect
upon the Company and its ability to continue in its present form.
3. Notes Receivable
Notes receivable consist of the following:
March 31,
------------------------
1996 1995
------------------------
Note receivable from a consultant who sells
franchises for DFC, principal and accrued
interest at 8.25 percent due September
30, 1996. $ 70 $ -
Note receivable from a company owned by
the brother of the majority shareholder
of the Company, monthly interest payments
at 16 percent, due December 1998,
secured by real estate. $ - $ 611
Notes receivable from two individuals, who
purchased two Heidi's restaurants (Note 12),
monthly principal and interest payments at
10 percent, payable through October 2000
and November 2001. 84 -
F - 9
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
Note receivable, monthly interest payments
at 8 percent, principal payable at the
earlier of (1) the date all remaining SFC
restaurants are sold, (2) all SFC real property
leases for remaining restaurants have expired,
or (3) March 28, 2001. (Note 12) $ 95 $ -
------ ------
249 611
Less current portion (83) -
------ ------
$ 166 $ 611
------ ------
------ ------
The note receivable totaling $611 at March 31, 1995, reflect the
identical terms of a note payable to a financial institution.
This note was assumed by the related party in connection with the
real estate purchase (see Note 13). In October 1995, the bank
foreclosed on the real estate in full satisfaction of the
corresponding obligations resulting in the note receivable and
the note payable being offset at March 31, 1996.
4. Property and Equipment
Property and equipment consist of the following:
March 31,
------------------------
1996 1995
------------------------
Leasehold improvements $ 99 $ 1,059
Restaurant equipment 166 2,318
Office and other equipment 40 234
Vehicles 26 26
------ -------
331 3,637
Less accumulated depreciation
and amortization (245) (2,433)
------ -------
$ 86 $ 1,204
------ -------
------ -------
At March 31, 1995, restaurant equipment includes the cost of
equipment held by the Company under capital lease agreements.
Such costs and the related accumulated amortization aggregate $293
and $92.
5. Accrued Liabilities
Accrued liabilities consist of the following:
March 31,
------------------------
1996 1995
------------------------
Payroll costs $ 432 $ 861
Interest 73 541
Rent - 186
Restaurant closure accrual (Note 12) 584 670
Other 865 1,080
------- -------
$ 1,954 $ 3,338
------- -------
------- -------
6. Notes Payable
The components of notes payable are as follows:
March 31,
------------------------
1996 1995
---------- ----------
Note payable to related party (brother of
majority shareholder), interest at 12 percent,
due on demand, unsecured. $ - $ 807
Note payable to related party (company owned
by the brother of majority shareholder),
interest at 12 percent, due on demand,
unsecured. - 353
Notes payable to former landlords, interest
ranging to 7.25 percent, monthly principal
and interest payments of $5. 38 77
Note payable to a related party, non-interest
bearing, due on demand, unsecured. - 36
Note payable to a related party, interest at
12 percent, due on demand, unsecured. 34 -
F - 10
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
March 31,
------------------------
1996 1995
----------- ----------
Note payable to a related party (partnership
owned by majority shareholder), interest at
12 percent, due on demand, secured by
Company stock owned by the Company's
majority shareholder. $ 10 $ 631
Notes payable to a related party (company
owned by majority shareholder), interest
at 12 percent, due on demand, unsecured. 220 204
Note payable to former shareholder of B.B.'s
in connection with the acquisition of 50
percent of B.B.'s, interest imputed at 10
percent, due in monthly installments
of $3 through 2000, unsecured. At March 31,
1996, the Company is in default on this
note payable. 178 178
Various notes payable to others, interest
ranging to 24 percent, due on demand,
unsecured. 67 85
Note payable to an individual, interest at 10
percent, convertible into DFC common stock
at $1.50 per share, principal and interest
due December 31, 1996. 150 -
------- -------
$ 697 $ 2,371
------- -------
------- -------
7. Long-term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations
consist of the following:
March 31,
------------------------
1996 1995
---------- ----------
Capital lease obligations, net of imputed
interest at 15.75 percent, payable in
monthly installments through 1996,
secured by equipment. $ - $ 63
Note payable to related party (brother of
majority shareholder), interest at 12 percent,
monthly interest payments, principal due
February 1, 1995, unsecured. - 670
Note payable to a bank, interest ranging to
12 percent, monthly installment of $1 including
interest, secured by equipment. 15 19
Note payable to related party, interest at
11.75 percent, monthly principal and interest
payments of $7 through December 1999,
unsecured. - 264
Note payable to an individual, interest at 12
percent payable monthly, principal due
September 1998. 150 -
Note payable to Shari's Management Corporation
which forgave the balance of $64 at
March 26 in connection with the acquisition of
SFC, interest at 10 percent, monthly installments
of $8 through December 1996, secured by equipment
and guarantee of the Company. - 142
Note payable to a bank, monthly interest
payments at 16 percent, secured by real
estate sold to a related party. - 611
F - 11
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
March 31,
--------------------
1996 1995
--------------------
Note payable to an individual, monthly interest
payments at 12 percent (if in default, interest is
at 24 percent) quarterly principal payments of $25
beginning April 1, 1993, secured by Company
stock owned by the majority shareholder and
majority shareholder's personal guarantee. $ 340 $ 342
------ -------
505 2,111
Less current portion (211) (1,694)
------ -------
$ 294 $ 417
------ -------
------ -------
Future maturities of long-term debt are summarized as follows:
Fiscal Year
-----------
1997 $ 211
1998 104
1999 190
------
$ 505
------
------
8. Income Taxes
The Company's deferred tax balances consist of the following:
March 31,
--------------------
1996 1995
--------------------
Deferred tax assets:
Net operating loss carryforward $ 4,080 $3,926
Accelerated depreciation for book purposes 5 -
Accrued liabilities 467 531
Deferred revenue 224 241
------- -------
4,776 4,698
Deferred tax liability:
Accelerated depreciation for tax purposes - (236)
------- -------
4,776 4,462
Valuation allowance (4,776) (4,462)
------- -------
$ - $ -
------- -------
------- -------
A reconciliation of the Company's effective tax rate compared to
the statutory federal tax rate is as follows:
Year ended March 31,
1996 1995 1994
-------- -------- --------
Federal income taxes at statutory rate (34)% (34)% (34)%
State taxes, net of federal benefit (5) (5) (5)
Goodwill amortization 17 8 16
Valuation allowance 22 31 23
-------- -------- --------
-% -% -%
-------- -------- --------
-------- -------- --------
As a result of the loss for all years, no provision (benefit) for
income taxes is reflected in the accompanying financial
statements.
At March 31, 1996, the Company's tax net operating loss
carryforwards are as follows:
Expiration Date:
----------------
2007 $ 2,155
2008 806
2009 1,613
2010 1,234
2011 805
-------
$ 6,613
-------
-------
SFC has preacquisition tax net operating loss and investment tax
credit carryforwards which arose prior to becoming a member of
the consolidated group, which are available to offset future
taxable income of SFC. The possible benefit to be recognized
from realization of these amounts has not been recorded in
connection with the acquisition of SFC because there is no
assurance as to their ultimate realization. The tax benefits
ultimately realized, if any, are limited to approximately $180
per year, will be recorded as reductions in income tax expense.
SFC's preacquisition tax net operating loss carryforwards at
March 31, 1996 are as follows:
F - 12
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
Expiration Date:
----------------
2001 $ 310
2002 642
2003 249
2004 955
-------
$ 2,156
-------
-------
In addition to the net operating loss carryforwards, SFC has
approximately $248 of investment tax credit carryforwards and
$758 of state net operating loss carryforwards available to
reduce taxes payable. Investment tax credits expire through the
year 1998. The Company has sold a majority of the assets and
liabilities of SFC as described in Note 12 which makes it
doubtful that the tax benefits will ever be realized.
B.B.'s has preacquisition tax net operating loss carryforwards
which arose prior to becoming a member of the consolidated group
on November 1, 1990, which are available to offset future taxable
income of B.B.'s. The possible benefit to be recognized from the
realization of these amounts has not been recorded in connection
with the acquisition of B.B.'s because there is no assurance as
to their ultimate realization. The tax benefits which may
ultimately be realized are limited to approximately $100 per
year. B.B.'s preacquisition tax net operating loss carryforwards
at March 31, 1996 are as follows:
Expiration Date:
----------------
2004 $ 1,052
2005 449
-------
$ 1,501
-------
-------
The Company closed operations of B.B.'s during July 1995.
Because operations have ceased, it is doubtful that these tax
benefits will ever be realized.
If certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of
carryforwards which can be utilized.
9. Operating Lease Commitments
The Company leases restaurant buildings, office and retail space
under operating lease agreements with base terms expiring at
various dates through 2000. The majority of the leases require
the Company to pay the greater of an annual base rent or a
percentage of gross sales, as defined. Future minimum rental
commitments related to these non-cancelable leases are summarized
as follows:
Year Ended:
-----------
1997 $ 401
1998 349
1999 247
2000 8
-------
$ 1,005
-------
-------
Rent expense for the years ended March 31, 1996, 1995, and 1994
was $1,305, $1,384 and $1,535, including percentage rents of
$29, $24 and $31 in 1996, 1995 and 1994.
The lease commitments summarized above include five retail store
location leases for Field of Dreams-TM-. Of those five leases,
three are being sublet to former employees and other franchisees
on a month-to-month basis. The Company is in technical default
on two of these leases because the Company has not obtained written
landlord approval for these subleases.
Additionally, the Company is contingently liable as lessee or
sub-lessee under certain building leases with restaurant
operations sold by SFC. Although these operating leases have
been assigned to the new owners, the Company remains contingently
liable. Future maturities of these contingent obligations are as
follows:
Year Ended:
-----------
1997 $ 595
1998 600
1999 601
2000 513
2001 451
Thereafter 925
-------
$ 3,685
-------
-------
10. Common Stock
On March 28, 1996, the Company amended its articles of
incorporation to increase the number of authorized shares from
10,000,000 to 50,000,000 shares of common stock with a $.05 par
value per share.
11. Stock Transactions
STOCK BONUS PLAN
Effective March 31, 1992, the Company entered into a Stock Bonus
Agreement with the President of the Company to purchase 5,000,000
shares of the Company's common stock for $.05 per share or $250.
The President immediately exercised his option and deposited $250
with the Company. In March 1992,
F - 13
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
the Company issued 69,220 shares or $4 of the Company's common
stock. The remaining 4,930,780 shares were not issued pending
an increase in the Company's authorized shares, resulting in
the remaining $246 being reflected as a deposit in prior year
financial statements. Subsequent to increasing the number
of authorized shares in March 1996 (Note 10) the Company issued
the remaining 4,930,780 shares. In connection with the
issuance, the Company reclassified the $246 deposit as common
stock.
The terms and conditions of the Stock Bonus Agreement provide the
Company the option to repurchase, at a decreasing percentage,
these shares over a ten year period for $0.05 per share. Vesting
occurs as the Company's repurchase option expires. The Company
retained the option to repurchase 80% or 4,000,000 shares at
March 31, 1996. The repurchase option ends effective March 31,
2002.
Upon the issuance of the shares, the Company recorded
compensation expense and a corresponding increase in capital in excess
of par value of $153 for the difference between the estimated fair value
of the shares and the purchase price of $.05 for the 1,000,000 vested
shares. The Company also recorded unearned compensation and a
corresponding increase in capital in excess of par value of $550
equal to the difference between the purchase price of $.05 and the
estimated fair market value of the unvested shares. Compensation expense
relative to the unvested shares will be adjusted quarterly based on fair
market value, of the Company's shares until all shares are vested.
STOCK OPTION PLAN
During October 1992, the Company's board of directors adopted a
stock option plan for certain employees and franchisees
(Optionees) whereby Optionees are granted the right to purchase
shares of the Company's common stock on the date of grant. No
expense was recorded for the fair value of options granted to
franchisees as such amounts were immaterial. During October
1992, the Company granted options to purchase 3,000,000 shares of
common stock at a price of $.18 per share which equaled the fair
value of the shares on the date of grant. The Optionees vest in
the right to purchase the shares over a ten year period. At
March 31, 1996, 1,050,000 options are vested.
During the years ended March 31, 1995 and 1994, certain optioners
exercised their stock options and paid $225 to purchase 1,250,000
shares under this stock option plan. The Company recorded these
payments as accrued liabilities. Subsequent to increasing the number
of authorized shares in March 1996, as described in Note 10, the Company
issued these shares and reclassified the $225 of accrued liabilities to
common stock and capital in excess of par.
OTHER
The Company issued 550,000 shares of common stock at its approximate fair
market value to third parties in payment for professional fees of $100--
that were rendered in prior years.
12. Restaurants and Retail Stores Closed and Sold
SALE OF SHARI'S FRANCHISE CORPORATION RESTAURANTS
During the year ended March 31, 1996, SFC sold all eleven of its
"Shari's" restaurants to Shari's Management Corporation (SMC) and
sold two of its "Heidi's" restaurants to other third parties.
The following table lists pertinent information regarding these
sales:
<TABLE>
<CAPTION>
Book value of Consideration
Date of Sale Restaurant assets sold Received Gain
------------------- ----------------- ---------------- ------------------- -------
<S> <C> <C> <C> <C>
February 6, 1996 Heidi's of El $35 in fixtures, $14 cash and $ 24
Cajon, California equipment, and $45 note receivable
inventory
February 8, 1996 Shari's of $59 in fixtures $400 cash $ 341
Laramie, Wyoming and equipment
February 29, 1996 Heidi's of Lemon $35 in fixtures, $30 cash and $ 35
Grove, California equipment, and $40 note receivable
inventory
March 28, 1996 Remaining Shari's $1,158 in $300 cash, $380 $1,060
Restaurants assets and $95 in notes
(10 total) ** receivable, $64
in debt forgiveness,
and $1,379 in liabilities
</TABLE>
In conjunction with the sale of the ten restaurants to SMC, SFC
assigned the $380 note receivable to the brother of the majority
shareholder in exchange for forgiveness of the following amounts:
- $1,693 in debt and interest owed by SFC to the brother of the
majority shareholder
- $117 in interest owed by the Company to the brother of the
majority shareholder
- $460 in debt and interest owed by the Company to a company
owned by the brother of the majority shareholder.
The Company recorded $1,890 of capital in excess of par in
connection with these transactions.
SFC subleases the restaurant space at El Cajon and Lemon Grove to
the new owners but continues to be liable for the leased
restaurant space. (Note 9.) The Company has accrued $360 and
$165, respectively, for management's estimate of the difference
between the payments due to the lessors and the payments received
from the new owners over the terms of the leases. SFC also
remained liable for certain liabilities of these two restaurants
which totaled $10 and $14, respectively, at March 31, 1996. The
brother of the majority shareholder has personally guaranteed
payment on the two leases.
F - 14
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
At March 31, 1996, SFC owned two remaining "Heidi's restaurants",
located in La Mesa and San Mateo, California. SFC closed the La
Mesa restaurant during the year ended March 31, 1994, and the Company
recorded an obligation of $126 in the March 31, 1994 financial
statements to represent estimated future lease and other payments
to be made related to this restaurant. At March 31, 1996 and March 31,
1995, these estimated accrued expenses totaled $59 and $92
respectively. The company plans to continue to operate its restaurant
in San Mateo.
CLOSURE OF B.B. O'BRIENS
In July 1995, the Company closed its B.B. O'Briens sports bar.
All fixed assets and goodwill related to B.B.'s were fully
depreciated and amortized during the year ended March 31, 1995.
At March 31, 1996, B.B.'s has net liabilities owed to unrelated
third parties and former shareholders of approximately $535.
PROFORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited proforma results of operations of the Company
reflect the sale of the eleven Shari's and two Heidi's
restaurants, the closure of B.B.'s and the forgiveness of certain
related party debt obligations owed to the brother of the
majority shareholder as if these transactions occurred on April
1, 1995:
<TABLE>
<CAPTION>
Proforma Proforma
Year Ended Adjustments Year Ended
Description 3/31/96 Debit Credit at 3/31/96
--------------------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 12,367 $ 10,269 (1) $ - $2,098
Gain on sale of restaurants 1,460 - - 1,460
-------- --------- ------- ------
13,827 10,269 - 3,558
Expenses and minority
interest 14,548 - 10,722 (2)
270 (3)
- 231 (4) 3,325
-------- --------- -------- ------
Net income/(loss) $ (721) $ 10,269 $11,223 $ 233
-------- --------- ------- ------
-------- --------- ------- ------
</TABLE>
(1) Represents revenue from the restaurants sold and from B.B.'s
prior to its closure.
(2) Represents expenses incurred to operate the eleven Shari's
and two Heidi's restaurants that were sold.
(3) Represents expenses incurred to operate and close B.B.
O'Briens.
(4) Represents interest expense incurred by StratAmerica which
was forgiven by the brother of the majority shareholder in
connection with the sale of the restaurants as described
above.
DFC LEASE ACCRUALS
DFC is contingently liable on five retail store leases, three of
which it has subleased to former employees or current franchisees
on a month-to-month basis. DFC is in technical default on two of
these leases because it has not obtained written landlord
approval to sublease the properties.
LEASE ACCRUAL REVERSALS
Prior to the year ended March 31, 1995, DFC was in default on the
West Covina, Santa Monica, and Glendale leases and was sued by
the landlords of these properties for payment of past rents and
additional rents due under the leases. In the March 31, 1994
financial statements, DFC accrued $225 for potential losses on
these leases. During the year ended March 31, 1995, DFC settled
the leases and agreed to pay $50, $40, and $24, respectively, to
the landlords. As a result of these settlements, DFC reversed
$75 of the excess accrual in the March 31, 1995 financial
statements. DFC did not reverse the remaining excess accrual of
$36 due to potential losses on the Montclair lease (see below).
During the year ended March 31, 1995, DFC defaulted on the
Montclair lease and was sued by the lessor for payment of past
rents. In the March 31, 1995 financial statements, DFC accrued
$36 for potential losses from this lawsuit. The case was settled
in May 1996 for approximately $11. As a result of the
settlement, DFC reversed the remaining $25 accrual related to
this matter in the fourth quarter of 1996. In connection with
the settlement, the lessor agreed to allow DFC to sublease the
retail space to a DFC franchisee.
In September 1993, DFC closed its retail stores at Plaza Bonita
and Camino Real and defaulted on the related lease payments. In
the March 31, 1994 financial statements, DFC accrued $150 for
potential losses on these leases.
In the two and one half years since the closure of the stores,
the landlords of these retail stores have not taken any action
against DFC. During the year ended March 31, 1996, the Company's
management learned that after the closure of the stores, the
retail space was leased to other tenants at lease rates and terms
more favorable to the landlords than the lease rates and terms
contained in the lease agreements with DFC.
It is the opinion of DFC's management and legal counsel (Based solely
on information provided by DFC's management) that the landlords
have suffered little damage due to DFC's default on the leases,
that any damages suffered will be recovered through the favorable
rates and terms of the new leases, and that, given the fact that
neither landlord has taken any action since the defaults, future
action is unlikely. If such action is taken in the future, the
Company's legal counsel is of the opinion that neither landlord
will be able to prove or recover any damages caused by DFC's default on
these leases. Accordingly, DFC reversed the $150 accrual during the
fourth quarter of 1996.
F - 15
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
13. Related Party Transactions
1994 TRANSACTIONS
EMPLOYMENT AGREEMENT WITH MAJOR SHAREHOLDER
Effective November 1993, the Company entered into an employment
agreement with the majority shareholder of the Company through
November 1998. The employment agreement provides that the
majority shareholder will be paid a salary of $120 per year plus
an annual bonus equal to ten percent of the Company's income
before taxes.
TRANSFER OF INVENTORY TO SETTLE RELATED PARTY OBLIGATIONS
During the year ended March 31, 1994, the Company transferred
1,000 cases of Marilyn Monroe Trading Cards with a cost basis of
$100 in full satisfaction of a $250 note payable to a company
owned by the children of the majority shareholder. In connection
with this transaction, the Company transferred an additional
1,520 cases of Marilyn Monroe Trading Cards with a cost basis of
$152 to a third party in full satisfaction of $380 of notes
payable owed. The third party immediately sold the 1,520 cases
to the company owned by the children of the majority shareholder.
Due to the related party nature of this transaction, the Company
recorded $252 of revenue and expense for the cost basis of these
transactions and recorded $378 of deferred revenue. The Company
will recognize the deferred revenue as income when the company
owned by the children of the majority shareholder sells the cards
to unrelated third parties. Through March 31, 1996, sales of
trading cards to third parties have been nominal and the Company
continues to defer $378.
On March 31, 1994, the Company transferred 2,480 cases of Marilyn
Monroe Trading cards with a cost basis of $248 to a Company owned
by the majority shareholder in full satisfaction of $372 of
related party debt. The Company recorded the $124 excess over
cost as capital in excess of par value.
During the year ended March 31, 1994, the Company transferred
inventory with a cost basis of $600 to the president of DFC to
settle notes payable and accrued interest totaling $600. The
Company did not recognize any gain or loss on the transfer.
TRANSFER OF NOTES RECEIVABLE TO SATISFY RELATED PARTY OBLIGATIONS
During 1992, DFC sold the net assets of seven retail stores to
former employees and unrelated parties for notes receivable. At
March 31, 1994, DFC transferred these notes receivable with a
book value of $178 to the Company, which transferred these notes
to a company owned by the majority shareholder in exchange for
extinguishment of related party debt of $178.
1995 TRANSACTIONS
OFFSET OF RELATED PARTY OBLIGATIONS
During the year ended March 31, 1995, the Company entered into an
offset agreement with the brother of the majority shareholder.
Pursuant to the agreement, the Company offset notes receivable
and accrued interest totaling $1,686 and $252 against notes
payable and accrued interest owed by the Company to the brother
of the majority shareholder totaling $1,399 and $539.
COMPANY LAWSUIT AGAINST SUBSIDIARY
The Company filed suit against B.B.'s in the states of Utah and
California, claiming damages of $2,518 and $2,531, respectively.
The Company then assigned its rights in the lawsuit to Sport, its
wholly-owned subsidiary. On August 9, 1994 and September 7,
1994, Sport obtained from B.B.'s a statement and confession of
judgment in Utah and a sister state judgment in California for
these amounts.
OTHER
During the year ended March 31, 1995, DFC purchased inventory
from a related party totaling $19.
1996 TRANSACTIONS
REAL ESTATE FORECLOSURE
On March 29, 1991, a company owned by the brother of the majority
shareholder purchased real estate from the Company for a note
receivable of $1,425 and the assumption of notes payable totaling
$1,300. The transaction was at book value and did not result in
a gain or loss. Because the Company was still the primary
obligor on the notes payable to the lending institution, the note
receivable from the company owned by the brother of the majority
shareholder and the notes payable to the bank were recorded in
the financial statements through March 31, 1995. In October
1995, the bank foreclosed on the real estate in full satisfaction
of all outstanding obligations resulting in the note receivable
and the note payable being offset in the March 31, 1996 financial
statements.
RELATED PARTY OBLIGATIONS CONVERTED TO COMMON STOCK
In March 1996, the Company transferred approximately $116 of
liabilities and interest payable to a company owned by the
majority shareholder. The Company also converted $270,000 in
notes and interest payable to this company in exchange for
1,500,000 common shares of the Company. The $.18 conversion
price, approximated the fair value of the shares on the date of the
conversion.
In March 1996, the Company converted $997 in debt owed to a
partnership controlled by the majority shareholder in exchange
for 5,769,220 shares of the Company's common stock. The $.17
conversion price approximated the fair value of the shares on the
date of the conversion.
RELATED PARTY DEBT FORGIVENESS
In connection with the sale of the Shari's restaurants in March
1996, as more fully described in Note 12, the Company assigned to
the brother of the majority shareholder $380 of the notes
receivable from SMC in exchange for forgiveness of $2,270 of
obligations owed to the brother of the majority shareholder. The
Company recorded $1,890 of capital in excess of par value in
connection with this transaction.
F - 16
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
RELATED PARTY BORROWINGS
During the year ended March 31, 1996, the Company borrowed $150
from a company owned by the brother of the majority shareholder.
Shortly thereafter, the brother of the majority shareholder
assigned his interest in the note to an unrelated third party.
The note is included in long-term debt in the March 31, 1996
financial statements.
During the year ended March 31, 1996, the Company borrowed $34
from a company owned by the majority shareholder's children and
used the funds to pay liabilities owed to Sports Time.
OTHER
At March 31, 1996, the Company has various other notes payable to
related parties as described in Notes 6 and 7.
14. DFC Franchise Information
DFC Franchise activity is summarized as follows:
Year ended March 31,
-----------------------------
1996 1995 1994
-----------------------------
Sold during the year 6 4 7
Opened during the year 2 4 7
Closed during the year 2 1 6
In operation at year end 19 19 16
Under development at year end 5 3 3
15. Business Segment Information
The Company's business is currently operating in two segments: food
service and sports related sales and franchising.
Summarized financial information concerning these industry segments
for the three years ended March 31, 1996 is provided below:
<TABLE>
<CAPTION>
Sports
Food Related
March 31, 1996 Service Sales Corporate Consolidated
-------------- --------- -------- --------- ------------
<S> <C> <C> <C> <C>
Revenues - unaffiliated customers $ 12,884 $ 880 $ 63 $13,827
Loss from continuing operations 71 146 (938) (721)
Identifiable assets 619 270 23 912
Depreciation, amortization
expense 577 25 6 608
Acquisition of property and
equipment 53 - - 53
<CAPTION>
Sports
Food Related
March 31, 1996 Service Sales Corporate Consolidated
-------------- --------- -------- --------- ------------
<S> <C> <C> <C> <C>
Revenues - unaffiliated customers $ 13,238 $ 1,095 $ 152 $14,485
Loss from continuing operations (1,533) 304 (868) (2,097)
Identifiable assets 2,229 250 512 2,991
Depreciation, amortization
expense 906 38 6 950
Acquisition of property and
equipment 41 10 26 77
<CAPTION>
Sports
Food Related
March 31, 1996 Service Sales Corporate Consolidated
-------------- --------- -------- --------- ------------
<S> <C> <C> <C> <C>
Revenues - unaffiliated customers $ 13,791 $ 1,782 $ 390 $15,963
Loss from continuing operations (1,136) (1,221) (1,041) (3,398)
Identifiable assets 2,854 140 3,001 5,995
Depreciation, amortization
expense 770 576 6 1,352
Acquisition of property and
equipment 513 28 4 545
</TABLE>
16. Contingencies and Commitments
DREAMS, INC.
In connection with an employment agreement, as discussed in Note
13, if the Company terminates the majority shareholder's
employment other than for cause, or if the majority shareholder
dies or becomes disabled, the Company is obligated to pay the
majority shareholder or his successor a payment equal to twenty-
four month's salary and bonuses. If the majority shareholder is
discharged due to a change in control, the Company is obligated to
pay the majority shareholder all salary and bonuses due through
December 1, 1998 or twenty-four month's salary and bonuses,
whichever is greater.
The Company is in technical default on certain retail store leases
related to retail store locations sold to former employees and
unrelated parties because the Company has not obtained written
landlord approval for these subleases as described in Notes 9 and 12.
F - 17
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
In January 1996 a lawsuit was filed against B.B.'s, a B.B.'s employee
and the President of the Company alleging damages for negligence,
assault and battery, as well as other damages caused by a B.B.'s
employee. The case has been tendered to the company's insurance carrier
who will provide a defense for most of the claims. The plaintiffs have
requested that the damages be specified by the courts. Because no
estimate of potential losses for this lawsuit can be made, no provision
for this contingency has been made in the March 31, 1996 financial
statements.
SHARI'S FRANCHISE CORPORATION
SFC is contingently liable under certain building operating leases
with restaurant operations sold by SFC, prior to the Company's
acquisition. These leases have been assigned to the new owners
(see Note 9).
SFC is a party to a service agreement with SMC, for accounting,
operational, and marketing services for its one remaining
"Heidi's" restaurant. The agreement which applied to all SFC
restaurants prior to the sale, expires March 28, 2001, and
requires SFC to pay $1 per accounting period per restaurant to
SMC. The agreement can also be terminated at the end of any one
year period by written notice 120 days prior to the end of such
one year period. Total paid to SMC pursuant to the agreement for
the years ended March 31, 1996, 1995 and 1994 was $176, $185 and
$196.
Prior to the sale of the "Shari's" restaurants described above,
SFC paid a license fee to SMC for the use of the Shari's trade
name. During the years ended March 31, 1995, and 1994, SFC paid
continuing licensing fees of $244 and $238. In accordance with
the agreement to sell the Shari's restaurants, all license fees
for 1996 were suspended and not required to be paid. Therefore,
license fees have not been recorded in the 1996 statement of
operations. Had the Company recorded the license fees, there
would have been a $225 charge for license fees with a
corresponding increase to gain on sale of restaurants.
DREAMS FRANCHISE CORPORATION
DFC licenses the right to use the proprietary name Field of
Dreams-TM- from Merchandising Corporation of America (MCA).
Pursuant to the license agreement, DFC pays MCA one percent of
each company-owned store's gross sales, with a minimum annual
royalty of $2.5 per store. DFC pays royalties of $5 for each new
franchised store opened and one percent of each franchised
store's annual gross sales. At March 31, 1996, DFC had 19 stores
owned by franchisees and had no company-owned stores.
Effective June 1, 1991, DFC has the right to use and display the
Field of Dreams-TM- service mark in company-owned or franchised
retail stores located in the United States. It also provides for
the non-exclusive right to affix the Field of Dreams-TM- trademark
to approved licensed articles for resale. DFC also has certain
rights of first refusal related to the use of the service mark
outside the United States. With the exception of the right to
transfer this licensing agreement to the Company or to a newly
incorporated majority-owned subsidiary of the Company within a six
month period, these licensing rights are non-transferable and non-
assignable.
DFC may be precluded from offering franchises in certain states
where MCA may be deemed to be a franchisor under the laws of the
applicable states. Accordingly, before offering franchises in
said states, DFC shall notify MCA of its intent, and MCA must
conclude that it will not be deemed a franchisor in those states,
or the right to sell franchises may be withheld.
The initial term of the agreement expires December 31, 2000, but
may be renewed for additional five year terms, provided that DFC
is in compliance with all aspects of the agreement. If DFC fails
to comply with the license requirements of the agreement, either
during the initial term or during an option term, the agreement
may be terminated by MCA. Termination of the license agreement
would eliminate DFC's right to use the Field of Dreams-TM-
servicemark.
DFC is required to indemnify MCA for certain losses and claims,
including those based on defective products, violation of
franchise law and other acts and omissions of DFC. DFC is
required to maintain insurance coverage of $3,000 per single
incident. The coverage must name MCA as an insured party. At
March 31, 1996, DFC had the required insurance coverage.
The Company has entered into a continuing guarantee agreement with
MCA, whereby it has guaranteed the full and prompt payment to MCA
of all amounts due under this agreement. During the years ended
March 31, 1996, 1995 and 1994, royalty expense under this
agreement totaled $89, $77, and $74.
17. Significant 4th Quarter Adjustments
During the fourth quarter of the year ended March 31, 1996, SFC
recorded accruals for operating lease liabilities at the El Cajon
and Lemon Grove restaurants. These accruals resulted in a charge
to fourth quarter earnings of $525. See Note 12.
During the fourth quarter of the year ended March 31, 1996, DFC
reversed accruals for losses from operating lease defaults at
Montclair, Plaza Bonita, and Camino Real of $25, $75, and $75,
respectively. See Note 12.
The Company recorded a charge against fourth quarter earnings of
$153 for compensation expense related to stock issued to the
President of the Company. See Note 11.
18. Subsequent Event
In June of 1996 the landlord of a DFC store previously closed
notified DFC and the Company that DFC was in violation of its
August 1994 settlement agreement. This $50 settlement agreement
related to DFC's default on the lease of retail space in West
Covina, California, and requires DFC to make monthly payments to
the lessor until the $50 is paid. (Note 12.) At March 31, 1996
DFC owed approximately $21 under the agreement, all of which would
be paid during fiscal 1997.
According to the notification, DFC had been in arrear's on one month's
payment since the inception of the settlement agreement. Under the terms
of the settlement agreement and the related Stipulation for Entry of
Judgment, the landlord has the right to demand payment of $310, in
addition to the remaining amount owed under the settlement
agreement, if DFC does not make timely payments.
F - 18
<PAGE>
DREAMS, INC.
(formerly StratAmerica Corporation)
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
- ------------------------------------------------------------------------------
Upon receipt of this notification, DFC promptly cured the default
but could not obtain a letter of default waiver from the landlord.
The landlord did, however, assert that it is unlikely that it will
demand payment of the $310. Because of the landlord's verbal
assertion, DFC's prompt cure of the default, and the fact that only
$21 remains to be paid, the Company considers the possibility that
the landlord will demand payment to be remote. No provision for
this contingency has been made in the March 31, 1996 financial
statements.
F - 19
<PAGE>
ARTICLES OF AMENDMENT
Pursuant to Section 16-10a-1006 of the Utah Revised Business Corporation
Act, the corporation known prior to this amendment as StratAmerica Corporation
hereby files with the Utah Division of Corporations and Commercial Code the
following Articles of Amendment:
FIRST: The name of the corporation, prior to the effectiveness of this
amendment, is StratAmerica Corporation.
SECOND: The following articles replace in their entirety the
correspondingly numbered articles in the Company's Revised
Articles of Incorporation:
ARTICLE I - NAME
The name of this corporation is Dreams, Inc.
ARTICLE IV - STOCK
The aggregate number of shares of common stock which this corporation shall
have authority to issue is 50,000,000 (fifty million) $.05 par value per share.
ARTICLE V - INDEMNIFICATION AND
LIMITATION OF LIABILITY
This corporation shall indemnify all officers, directors and agents to the
fullest extent permitted by law.
To the fullest extent permitted by the Utah Revised Business Corporation
Act or any other applicable law as now in effect or as it may hereafter be
amended, directors of this corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for any action taken or any
failure to take any action as a director.
Neither any amendment nor repeal of this resolution, or the adoption of any
provision of the Articles of Incorporation of this corporation inconsistent with
this resolution, shall eliminate or reduce the effect of this resolution in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this resolution, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
THIRD: Each of the above amendments were adopted on March 28, 1996, by
the Shareholders of the Company in the manner prescribed by Utah
law.
E-1
<PAGE>
FOURTH: The number of shares of common stock, the Company's only class of
stock, issued and outstanding on March 28, 1996, was 10,000,000
(ten million).
FIFTH: The number of shares entitled to be voted was 10,000,000 (ten
million).
SIXTH: The total number of shares cast in favor of all the above
amendments was 8,117,490 and the total number of shares cast
against the above amendments was 18,540.
SEVENTH: 8,132,430 shares were indisputably represented at the meeting.
Filed in accordance with Section 16-10a-120 of the Utah Revised Business
Corporation Act this 28th day of March, 1996.
STRATAMERICA CORPORATION, a
Utah corporation
By:_________________________________
SAM D. BATTISTONE
Its: President
By:_________________________________
DALE E. LARSSON
Its: Secretary
E-2
