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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
DREAMS, INC.
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(Name of Small Business Issuer in its charter)
UTAH 87-0368170
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5009 HIATUS ROAD, SUNRISE, FLORIDA 33351
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number ( 954 ) 742 - 8544
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE N/A
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Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of class)
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(Title of class)
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PART I
Item 1. DESCRIPTION OF BUSINESS.
GENERAL.
Dreams, Inc. ("Registrant") is a Utah Corporation which was formed in
April 1980. During fiscal year ended March 31, 1999, Registrant's primary lines
of business were the offer and sale of Field of Dreams-Registered Tradmark-
franchises through its subsidiary Dreams Franchise Corporation ("DFC") and the
manufacture and sale of sports and celebrity memorabilia products through DFC's
wholly-owned subsidiary Dreams Products, Inc. ("DPI") which employs the
trademark "Mounted Memories". There are currently 35 Field of Dreams-Registered
Tradmark- franchise stores open and operating. Additionally, six Area
Development Agreements which are currently effective have been sold to
franchisees. Included among the total 35 Field of Dreams-Registered Tradmark-
franchise stores are thirteen franchised stores which have been opened pursuant
to those six agreements. An additional eleven franchised stores may be opened
under those agreements. DPI has a manufacturing and distribution facility
located in Sunrise, Florida and a distribution center in Denver, Colorado. See
"Mounted Memories" for information regarding the reorganization of Registrant
which resulted in the acquisition of the assets and business now employed by
DPI. See "Consolidated Financial Statements" for financial information.
Registrant is filing this Form 10-SB in order to efficiently provide to the
public information regarding its business and to maintain eligibility for
quotation of its common stock on the OTC Bulletin Board ("OTCBB"). If this Form
10-SB has not cleared all Securities and Exchange Commission comments before
November 4, 1999, Registrant's common stock will no longer be eligible for
quotation on the OTCBB.
Prior to November 1996, Registrant was a reporting company under
Section 12(g) of the Securities Exchange Act of 1934 (the "34 Act"). In November
of 1996, Registrant's financial condition made continued filing burdensome and
Registrant filed documents with the Securities and Exchange Commission which
allowed Registrant to cease its reporting status. From November 1996 to present,
Registrant has continued to be public but has not filed any documents pursuant
to the 34 Act.
FIELD OF DREAMS-REGISTERED TRADMARK- FRANCHISING BACKGROUND.
Registrant conducts its Field of Dreams-Registered Tradmark- operations
through its subsidiary DFC. DFC licenses certain rights from MCA/Universal
Merchandising Inc. ("MCA") to use the name "Field of Dreams-Registered
Tradmark-" in connection with retail operations and catalog sales. Field of
Dreams-Registered Tradmark- 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. Registrant does not own or operate any Field of Dreams-Registered
Tradmark- stores. Registrant does not presently have any Field of
Dreams-Registered Tradmark- catalog.
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In July 1995, Registrant closed and terminated the business of its
restaurant/sports bar located in Palm Desert, California. On March 28,1996,
Registrant's shareholders approved, and Registrant sold, its assets 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. Registrant retained two Heidi's format restaurants. In December of 1996,
the remaining Heidi's restaurants were sold to Battistone Financial Group in
consideration for the return of 2,000,000 shares of Registrant's common stock.
Except for tax liability in connection with the sale of its previous restaurant
operations, Registrant has no liabilities from restaurant operations. Registrant
is no longer involved in the restaurant or sports bar business.
MERCHANDISING LICENSE AGREEMENT.
DFC has acquired from MCA the exclusive license to use "Field of
Dreams-Registered Tradmark-" as the name of retail stores in the United States
and a non-exclusive right to use the name "Field of Dreams-Registered Tradmark-"
as a logo on products. DFC has also licensed from MCA the exclusive right to
sublicense the "Field of Dreams-Registered Tradmark-" 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 of Field of
Dreams-Registered Tradmark- stores. 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 2005. 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 Tradmark- mark for approval prior to use. Ownership of the
Field of Dreams-Registered Tradmark- 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 Tradmark-" 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 Tradmark- stores outside of the United States, DFC has a right
of first refusal to obtain the license for such non-United States territory.
Registrant may exercise its right of first refusal by notifying MCA of its
desire to undertake a proposed new territory and paying to MCA a non-refundable
advance license fee of $10,000. Following such notice and payment, Registrant
and MCA must negotiate in good faith to reach a definitive license agreement for
the additional territory. If Registrant fails to send notification, make the
$10,000 payment or if a definitive license cannot be reached, MCA may offer the
new territory to another party.
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
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as an insured party. Registrant has guaranteed the monetary obligations of DFC
pursuant to the MCA License. In September 1997, DFC and MCA settled and released
claims in connection with the payment of royalties pursuant to the MCA license.
FRANCHISING.
In June 1991 DFC began offering franchises for the development and
operation of Field of Dreams-Registered Tradmark- 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 (the "FTC Regulations") 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. Compliance with the FTC Regulations and various state regulations
requires preparation of an extensive offering circular and the filing of such
circular in certain states. Compliance with some state regulations requires
significant time in connection with satisfying comments of franchise offering
circular examiners. Compliance with FTC Regulations and certain state laws
significantly limits the means by which Registrant offers and sells franchises.
In the future, DFC intends to 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"). Registrant does not depend on any one or a few
franchisees for a material portion of its revenues. Royalties from the largest
franchisee accounted for only one percent of Registrant's consolidated revenues.
STANDARD FRANCHISES:
Pursuant to a Standard franchise, a franchisee obtains the
right to open and operate a single Field of Dreams-Registered Tradmark-
store at a single specified 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 Tradmark- 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. Prior to opening a Field of Dreams-Registered Tradmark- store, a
franchisee or its designated manager is required to attend and
successfully complete a 2-week training course. The course is conducted
at a DFC designated site. DFC also makes the same training available to
a reasonable number of the franchisee's employees. For a period of five
days during startup of a franchised store, DFC furnishes to a
franchisee a representative to assist in the store opening. DFC loans
to each franchisee a copy of its operations manual which sets out the
policies and procedures for operating a Field of Dreams-Registered
Tradmark- store. DFC does not provide an accounting system to
franchisees. DFC does provide operational advice to franchisees and
will, upon request, assist a franchisee in locating a site for a store.
DFC reserves the right to modify at any time
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the system used in the store. DFC also reserves the right to change the
name used in the system from Field of Dreams-Registered Tradmark- 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
Tradmark-. DFC considers it highly unlikely that it would change the
name of its system from Field of Dreams-Registered Tradmark- to another
name. DFC has reserved this right in its franchise agreements to
provide for the event that it determines that another name would be
better for its franchise system, that the royalty it pays to MCA in
connection with use of the name is excessive or if DFC should breach
the terms of the MCA license and lose the right to use the Field of
Dreams-Registered Tradmark- name.
DFC imposes certain controls and requirements on Field of
Dreams-Registered Tradmark- franchisees in connection with site
selection, site development, pre-opening purchases, initial training,
opening procedures, payment of fees, compliance with operating manual
procedures including purchasing through approved vendors, protection of
trademark and other proprietary rights, maintenance and store
appearance, insurance, advertising, owner participation in operations,
record keeping, audit procedures, autograph authenticity standards and
other matters. 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 1.5% of gross revenues to a marketing and development
fund which is administered by DFC for the promotion of the Field of
Dreams-Registered Tradmark- 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 Tradmark- 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 freestanding Kiosk for an initial franchise fee of $19,000
rather than $32,500. Other fees paid by Kiosk franchisees, including
ongoing royalties, and marketing and development fund contributions are
the same as under a Standard franchise agreement.
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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
franchise agreements 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.
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. DFC does not actively market Kiosk and Conversion
Franchises and there appears to be little interest in those types of franchises
from potential purchases.
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FRANCHISE BROKER.
DFC does not currently employ a franchise broker. The officers of DFC
currently act as sales agents for Field of Dreams-Registered Trademark-
franchises. Registrant may engage an outside Franchise broker in the future. DFC
advertises Field of Dreams-Registered Trademark- franchises in a very limited
number of business magazines. Most persons expressing an interest in purchasing
a Field of Dreams-Registered Trademark- franchise have visited a Field of
Dreams-Registered Trademark- store and have subsequently contacted DFC.
MOUNTED MEMORIES.
Mounted Memories ("MMI") is a wholesaler of sports and celebrity
memorabilia products and acrylic cases. MMI also organizes, operates and
participates in hobby and collectible shows. Registrant has several
non-exclusive informal agreements with a few well-known athletes, including Pete
Rose and Dan Marino who frequently provide autographs at agreed-upon terms. On
occasion, Registrant also enters into exclusive agreements with athletes. As of
October 18, 1999, Registrant has only one exclusive contract in effect which was
with Dick Butkus. That contract provides for exclusive autograph and memorabilia
show appearances for an 18-month period starting in January 1999 and ending in
June 2000. The contract provides for six public memorabilia show appearances at
approximately $9,000 per show, six corporate memorabilia show appearances at
approximately $10,000 per show and 1,000 autographs for inventory purposes at
$15 to $20 per autograph, depending on the item being signed. As of October 18,
1999, the unfulfilled portions of the contract were three public memorabilia
show appearances, four corporate memorabilia appearances and approximately 500
autographs. Through its relationships with athletes, agents and other persons
and entities in the sporting industry, MMI is able to arrange for the appearance
of popular athletes and celebrities at hobby and collectible shows, and at the
same time, generate inventory for sale. Registrant arranges for third parties
the appearance of individuals at shows usually by targeting specific athletes
with geographical ties to the city where the show is held. Registrant negotiates
directly with the athlete or with the athlete's agent to determine contract
specifics. These contracts are formal in that they stipulate the logistic
specifics, payment terms and number of autographs to be received. Registrant
generally receives a fee when it arranges an athlete for a business function.
MMI has been in business since 1989 and has achieved its industry
leading status partly due to its strict authenticity policies. The only
memorabilia products sold by MMI are those produced by MMI through private or
public signings organized by MMI or purchased from an authorized agent of MMI
and witnessed by an MMI representative. In addition to sports and celebrity
memorabilia products, MMI offers the largest selection and supply of acrylic
cases, with over 50 combinations of materials, colors and styles. The primary
raw material used in the production process is plastic. There are many vendors
who sell plastic throughout South Florida and Registrant seeks to obtain the
best pricing through competitive vendor bidding. Registrant does not produce the
helmets, footballs, baseballs or other objects which are autographed. Those
objects are available through numerous suppliers.
MMI's customer base varies greatly and includes, for example, internet
companies, traditional catalog retailers and retail stores which sell sports and
celebrity memorabilia products and
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cases. Field of Dreams-Registered Trademark- franchise stores purchase products
from MMI and have historically provided approximately ten percent of MMI's
revenues. No other customer provides greater than ten percent of MMI's total
revenue.
The sports memorabilia industry faces several challenges, most notably
the assurance of product authenticity. Through its caution in only selling items
produced internally or purchased from authorized agents, witnessed by an MMI
representative, MMI avoids significant authenticity problems. MMI feels the way
it has achieved a competitive advantage over its competitors is through accurate
and timely shipping. MMI uses approximately 2,000 square feet of its warehousing
facility for shipping. MMI has achieved a significant positive reputation in its
industry for timely and accurate shipments and commits to shipping orders within
72 hours of order receipt. Additionally, through the implementation of advanced
and effective fulfillment techniques and processes, and utilization of the most
current shipping software, MMI has experienced a very low breakage ratio over
the past several years.
MMI BACKGROUND.
In November 1998, Registrant through its wholly-owned subsidiary, DPI,
purchased all of the assets of Mounted Memories, Inc., a Florida corporation.
The purchase price for the MMI assets was $2,275,000 in cash and 15,000,000
shares of Registrant's common stock. MMI since 1989 had engaged in the
manufacture and wholesale of sports and celebrity memorabilia products. Upon the
acquisition of MMI's assets, Registrant, through DPI continued the business of
MMI and uses the Mounted Memories trademark.
FINANCING OF MMI ACQUISITION.
In connection with the purchase of the MMI assets, Registrant and all
of its subsidiaries borrowed $3,000,000 from Sirrom Investments, Inc.
("Sirrom"). The loan bears interest at 14% per annum and is payable interest
only monthly until November 16, 2003 at which time all principal and interest is
due and payable. The loan is secured by all of Registrant's assets and a pledge
of 27,059,470 shares (and 750,000 options to acquire shares) pledged by the
control persons of Registrant and certain of their family members and associated
persons and entities. The pledgedshares constitute approximately 67% of
Registrant's currently issued and outstanding shares. Registrant also granted to
Sirrom warrants to purchase a number of shares of Registrant's common stock. The
number of shares which may be purchased pursuant to exercise of the warrants
varies between a minimum of 14% and a maximum of 18.5% of the then issued and
outstanding shares. The exercise price of the warrants is $0.01 per share. The
warrants have anti-dilution rights, registration rights and co-sale rights. The
warrant also has a "put" feature which entitles Sirrom to require Registrant to
purchase the warrants for their fair market value. Fair market value is
determined by an appraisal process. In the appraisal process, each of the
Registrant and Sirrom appoint an experienced appraiser who is a member of a
professional association. Each appraiser estimates the value of the shares which
would be issued upon exercise of the warrant. If the two appraisals do not vary
by more than 10%, the fair market value is the average of the two. If the two
appraisals vary by more than 10%, a third appraiser is chosen and fair market
value is determined
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to be the mean of the three appraisals. Payment of the "put" price may be paid
by Registrant by issuance to Sirrom of a promissory note with 10% interest per
annum and 24 monthly payments of principal and interest.
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.
MMI competes with several major companies and numerous individuals in
the sports and celebrity memorabilia industry. MMI believes it competes well
within the industry because of the reputation it has established in its ten year
existence. MMI focuses on ensuring authenticity and providing the best possible
customer service. MMI has concentrated on maintaining and selling memorabilia
items of athletes and celebrities that have a broad national appeal. Several of
its competitors tend to focus on specific regional markets due to their
relationships with sports franchises in their immediate markets. The success of
those competitors typically depends on the athletic performance of those
specific franchises. Additionally, MMI typically focuses on the two core sports
that provide the greatest source of industry revenue, baseball and football.
Within the acrylic case line of business, MMI competes with other
companies which mass produce cases. MMI does not compete with companies which
custom design one-of-a-kind cases. MMI believes that because it is one of the
country's largest acrylic case manufacturers, it is very price competitive due
to its ability to purchase large quantities of material and pass the savings to
customers.
EMPLOYEES.
Registrant employs forty (40) full-time employees and four (4)
part-time employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL.
The Registrant's fiscal year ends March 31, and the fiscal years ended
March 31, 2000, March 31, 1999 and March 31, 1998 are referred to as "fiscal
2000", "fiscal 1999" and "fiscal 1998", respectively.
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Registrant operates through its wholly-owned subsidiary DFC and
through DPI and Dreams Entertainment, Inc. ("DEI"), wholly-owned subsidiaries
of DFC. DFC is a franchisor of Field of Dreams-Registered Trademark- retail
stores which sell sports and celebrity memorabilia products. As of September
1, 1999, there were 35 Field of Dreams-Registered Trademark- franchises
operating in 20 states and in the District of Columbia.
DPI is a wholesaler of sports memorabilia products and acrylic
cases. It sells to a wide customer base, which includes internet companies,
traditional catalog companies and other retailers of sports and celebrity
memorabilia products, including Field of Dreams-Registered Trademark- retail
stores. Approximately, ten percent of DPI's revenues are generated through
sales to Field of Dreams-Registered Trademark- franchises. DPI is licensed
by the National Football League and Major League Baseball as a distributor of
autographed products. DEI was incorporated in fiscal 1999 and has been
inactive since its inception. Registrant has no current plans to cause DEI to
engage in any business.
Registrant believes that the factors that will drive the future growth
of its business will be the opening of new franchised units and, to some extent,
capitalizing on its relationships with certain entities, such as the National
Football League, Major League Baseball, Universal Studios and with certain
well-known athletes, as those relationships and agreements will allow.
Registrant plans to open approximately ten franchised units each of the next
three fiscal years. There can be no assurance, however, that any such franchised
units will open or that they will be successful.
RESULTS OF OPERATIONS.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Total revenues increased 269.2% from $1.9 million in fiscal
1998 to $7.0 million in fiscal 1999.
Retail and wholesale revenues increased 826.9% from $595,000 in fiscal
1998 to $5.5 million in fiscal 1999, due primarily to the acquisition of MMI
effective November 1, 1999. MMI had wholesale sales of approximately $5.5
million in fiscal 1999. Excluding MMI's wholesale sales, Registrant's retail and
wholesale revenues declined from $595,000 in fiscal 1998 to $4,000 in fiscal
1999, due primarily to Registrant realizing $475,000 from sales of an NBA
lithograph in fiscal 1998 which was not sold in fiscal 1999. The balance of the
decrease reflects Registrant's efforts to change its core business focus, moving
more towards franchising and wholesale sales and away from retail sales.
Franchise fee and royalty revenues increased 55.1% from $882,000 in
fiscal 1998 to $1.4 million in fiscal 1999, due primarily to the opening of
eight franchised units in fiscal 1999 ($308,000 of the increase) and the
inclusion of a full year of royalties from seven franchises opened during fiscal
1998 ($110,000 of the increase.)
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Other revenue increased 302.5% from $40,000 in fiscal 1998 to $161,000
in fiscal 1999, due to Registrant realizing a full year of commission revenue in
fiscal 1999 from an outside party's sale of miscellaneous products with the
Field of Dreams-Registered Trademark- logo imprinted on them. Prior to November
1997, Registrant sold these products directly and recognized the sales as retail
revenues.
In fiscal 1998, Registrant purchased the remaining minority shares of
DFC and recognized a one-time gain of $386,000. Additionally, in fiscal 1998,
Registrant sold property and equipment and recognized a gain of $5,000.
COSTS AND EXPENSES. Registrant's fiscal 1999 cost of sales of $3.1
million represent MMI's cost of sales from the date of acquisition during fiscal
1999. Fiscal 1998 cost of sales represent costs associated with the sale of the
NBA lithographs and other retail items sold by Registrant, which were phased out
in fiscal 1999. Operating expenses increased 163.6% from $472,000 in fiscal 1998
to $1.2 million in fiscal 1999, due to the acquisition of MMI ($384,000 of the
increase), significant write-off of bad debts ($169,000 of the increase) and
costs associated with a lithograph project which realized immaterial sales
($150,000 of the increase).
General and administrative expenses increased 131.7% from $811,000 in
fiscal 1998 to $1.9 million in fiscal 1999 due to the acquisition of MMI
($591,000 of the increase) and a $409,000 preferential distribution to a company
owned by Registrant's Chairman in fiscal 1999. The preferential distribution was
treated as compensation expense and was the result of Registrant issuing shares
of its common stock at a discounted value. Depreciation and amortization
increased from $10,000 in fiscal 1998 to $126,000 in fiscal 1999 due to
amortization of goodwill and debt issuance costs associated with the fiscal 1999
acquisition of MMI ($92,000 of the increase). Registrant eliminated its minority
interests in fiscal 1998.
INTEREST EXPENSE, NET. Net interest expense increased 133.9% from
$127,000 in fiscal 1998 to $297,000 in fiscal 1999, due primarily to interest
charges associated with the $3.0 million note issued by Registrant in November
1999 ($158,000 of the increase).
PROVISION FOR INCOME TAXES. At March 31, 1999, Registrant had available
net operating loss carryforwards of approximately $4.7 million, which expire in
various years beginning in 2007 through 2014. Accordingly, a valuation allowance
was provided for the full amount of federal taxes as of the end of fiscal 1998
and fiscal 1999. However, a provision for state income taxes was provided for in
fiscal 1999 for applicable taxes.
See Note 10 to the Consolidated Financial Statements of Registrant.
OTHER. Registrant realized income from discontinued operations of
$190,000 and $268,000 in fiscal 1998 and 1999, respectively. The amounts
represent gains associated with the foregiveness of debt, or expiration of
liability, to former shareholders and unrelated third party creditors of a
restaurant segment discontinued by Registrant prior to fiscal 1998. Registrant
also realized income from discontinued operations of $114,000 in fiscal 1998 due
to the reversal of previously accrued losses and foregiveness of debt relating
to an investment in which Registrant had a 50% interest.
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THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues increased $2.7 million from $226,000 in the
first three months of fiscal 1999 to $2.9 million in the first three months of
fiscal 2000.
Retail and wholesale revenues increased $2.6 million from $19,000 in
the first three months of fiscal 1999 to $2.6 million in the first three months
of fiscal 2000, due primarily to the acquisition of MMI effective November 1,
1999 ($2.55 million of the increase).
Franchise fee and royalty revenues increased 42.5% from $207,000 in the
first three months of fiscal 1999 to $295,000 in the first three months of
fiscal 2000, due primarily to the opening of three franchised units in the first
quarter of fiscal 2000 versus two units in the first quarter of fiscal 1999
($23,000 of incremental franchise fees) and the opening of nine franchised units
since the first quarter of fiscal 1999 ($43,000 of additional royalties).
COSTS AND EXPENSES. Registrant's fiscal 2000 first quarter cost of
sales of $1.6 million represent MMI's cost of sales. Fiscal 1999 first quarter
cost of sales of $5,000 represent costs associated with the sale of
miscellaneous retail items sold by the Company, which were phased out during
fiscal 1999. Operating expenses increased 77.5% from $129,000 in the first three
months of fiscal 1999 to $229,000 in the first three months of fiscal 2000, due
primarily to the acquisition of MMI ($144,000 of the increase) offset by savings
realized by DFC through consolidating its company headquarters with MMI's during
the first quarter of fiscal 2000.
General and administrative expenses increased 138.7% from $230,000 in
the first three months of fiscal 1999 to $549,000 in the first three months of
fiscal 2000, due primarily to the acquisition of MMI ($408,000 of the increase)
offset by savings realized by DFC through consolidation of its company
headquarters with MMI's during the first quarter of fiscal 2000. Depreciation
and amortization increased from $2,000 in the first quarter of fiscal 1999 to
$66,000 in the first quarter of fiscal 2000 due to amortization of goodwill and
debt issuance costs associated with the November 1999 acquisition of MMI
($56,000 of the increase).
INTEREST EXPENSE, NET. Net interest expense increased 142.3% from
$52,000 in the first quarter of fiscal 1999 to $126,000 in the first quarter of
fiscal 2000, due primarily to interest charges associated with the $3.0 million
note issued by Registrant in November 1999 offset by elimination of debt after
the first quarter of fiscal 1999.
PROVISION FOR INCOME TAXES. At June 30, 1999, Registrant had available
net operating loss carryforwards of approximately $4.6 million, which expire in
various years beginning in 2007 through 2014. Accordingly, a valuation allowance
was provided for the full amount of federal taxes as of the end of the first
quarter for both fiscal 1999 and fiscal 2000. However, a provision for state
income taxes was provided for in the first quarter of fiscal 2000 for applicable
taxes. See Note 10 to the Consolidated Financial Statements of Registrant.
LIQUIDITY AND CAPITAL RESOURCES
12
<PAGE>
The primary sources of Registrant's cash are net cash flows from
operating activities and short-term vendor financing. Currently, Registrant does
not have available any established lines of credit with banking facilities.
Registrant's cash and cash equivalents were $346,000 as of June 30,
1999. At March 31, 1999, Registrant's cash and cash equivalents were $425,000
compared with $87,000 at March 31, 1998. During the three months ended June 30,
1999, consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") increased $672,000 to $534,000 from a loss of ($138,000)
for the three months ended June 30, 1998. The increase directly relates to DPI's
acquisition of MMI in November 1998, which provided $434,000, or 81.3%, of
Registrant's first quarter fiscal 2000 EBITDA.
Registrant presently does not operate or own any Field of
Dreams-Registered Trademark- stores, and does not plan to own any in the
future. It will continue to sell franchised units to prospective and current
third-party franchisees. Additionally, there are no major capital
expenditures planned for in the foreseeable future, nor any payments planned
for off-balance sheet obligations or other demands or commitments for which
payments become due after the next 12 months.
Registrant believes its current available cash position, coupled with
its cash forecast for the year and periods beyond, is sufficient to meet its
cash needs on both a short-term and long-term basis. The balance sheet reflects
a strong working capital ratio and its long-term debt obligations require
interest-only payments totaling $39,000 per month. Registrant's management is
not aware of any known trends or demands, commitments, events, or uncertainties,
as they relate to liquidity which could negatively affect Registrant's ability
to operate and grow as planned.
YEAR 2000 READINESS.
The year 2000 issue pertains to computer programs that were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize the year
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations.
During fiscal years 1998 and 1999, Registrant replaced its accounting
software package with the latest available version that purported to be "Y2K
compliant". Registrant uses only the modules within its accounting software
package to run its operations. The only other software utilized are modules
within the most current version of Microsoft Office, which proclaims that all of
its software is "Y2K compliant". Registrant's server operates using Microsoft NT
software which proclaims to be "Y2K compliant". All hardware utilized for
Registrant's local area network has been purchased during fiscal 1998 and 1999.
The total cost for all hardware and software programs purchased to help ensure
year 2000 readiness approximated $35,000. Registrant is not aware of any
difficulties that will arise from customers or vendors who have not updated
their software to be year 2000 compliant. However, there can be no guarantee
that the Company will not encounter unexpected year 2000 compliance problems
that will adversely affect its operations.
13
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTIES.
Registrant leases approximately 26,000 square feet of office,
manufacturing and warehouse space between two offices in Sunrise, Florida
(approximately 23,000 square feet) and Denver, Colorado (approximately 3,000
square feet). All manufacturing is performed at the Florida location.
Registrant's principal executive offices are located at its Florida facility.
Registrant's Colorado lease terminates in September 2002. Colorado rent
is approximately $3,500 per month and escalates to approximately $3,800 per
month in its final year.
Registrant's Florida lease terminates in April 2003. Florida rent is
approximately $15,700 per month plus certain expenses and escalates to
approximately $17,700 in its final year.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS.
The following table sets forth as of September 1, 1999, 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. The table presented below includes shares
issued and outstanding, and warrants to purchase shares and options exercisable
within 60 days.
<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>
No par value Common Stock Sam D. Battistone Record and 14,266,495(1)(3) 27.7%
2887 Green Valley Pkwy Beneficial
Henderson, NV 89014
No par value Common Stock Ross Tannenbaum Record and 12,500,000 24.3%
5009 Hiatus Road Beneficial
Sunrise, FL 33351
No par value Dale Larsson Record and 425,300 0.8%
Common Stock 1776 North State St, #130 Beneficial
Orem, UT 84057
No par value Common Stock Mark Viner Record and 83,333(5) 0.2%
5009 Hiatus Road Beneficial
Sunrise, FL 33351
14
<PAGE>
No par value Sirrom Investments, Inc. Record and 10,871,753(4) 21.1%
Common Stock 500 Church St., Suite 200 Beneficial
Nashville, TN 37219
No par value Common Stock All Officers and Record and 27,275,128 52.9%
Directors as a Beneficial
Group (4 persons)(2)
</TABLE>
- ----------------------------------------
(1) Includes 3,100,000 shares owned by the following family
members of which Mr. Battistone disclaims beneficial
ownership:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES OWNED
---- ---------------------
<S> <C>
J. Roger Battistone 1,000,000
Justin Battistone 350,000
Kelly Battistone 350,000
Dann Battistone 350,000
Brian Battistone 350,000
Mark Battistone 350,000
Cynthia Battistone Hill 350,000
</TABLE>
(2) The directors and officers have sole voting and investment
power as to the shares beneficially owned by them.
(3) Sam D. Battistone, 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. Mr. Battistone is
currently not in compliance with the terms of the applicable
agreements.
(4) Warrants to purchase shares issued in connection with Mounted
Memories financing.
(5) Includes 83,333 shares which are the subject of stock options.
27,059,470 shares of Registrant's no par value common stock (and
750,000 options) have been pledged to Sirrom to secure Registrant's obligations
in connection with a $3.0 million loan. Should Registrant default on any
obligation to Sirrom and should Sirrom exercise its rights as a secured party, a
change in control of Registrant would occur.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
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.
15
<PAGE>
<TABLE>
<CAPTION>
Serving as
Director of Position Held With
Name Age Registrant Since the Registrant
---- --- ---------------- -------------------
<S> <C> <C> <C>
Sam D. Battistone 59 1983 Chairman/Director
Ross Tannenbaum 37 1998 President/Director
Dale Larsson 55 1999 Director
Mark Viner 33 1998 Secretary/Treasurer/
Chief Financial Officer
</TABLE>
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.
ROSS TANNENBAUM. Mr. Tannenbaum has served as President and a director
of Registrant since November 1998. From August 1994 to November 1998, Mr.
Tannenbaum was President, director and one-third owner of MMI. From May 1992 to
July 1994, Mr. Tannenbaum was a co-founder of Video Depositions of Florida. From
1986 to 1992, Mr. Tannenbaum served in various capacities in the investment
banking division of City National Bank of Florida.
DALE E. LARSSON. For more than the past five years until 1999, Dale E.
Larsson was the Secretary-Treasurer and director of Registrant. Mr. Larsson was
re-elected a director in August 1999. 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 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.
MARK VINER. Mr. Viner has been Secretary, Treasurer and Chief Financial
Officer of Registrant since November 1998. He is a Certified Public Accountant.
From June 1994 to October 1997, Mr. Viner was the Director of Financial
Reporting for Planet Hollywood International, Inc.
16
<PAGE>
and was instrumental in every phase of that company's 1996 initial public
offering. From May 1992 to May 1994, Mr. Viner was a financial manager for the
Walt Disney Company, responsible for all financial activities of Pleasure
Island, a $75 million nighttime entertainment district.
Item 6. EXECUTIVE COMPENSATION.
The following table sets forth information concerning compensation for
services in all capacities by the Registrant and its subsidiaries for fiscal
years ended March 31, 1997, 1998 and 1999 of those persons who were, at March
31, 1999, the Chief Executive Officer of the Registrant and other highly
compensated executive officers and employees of Registrant.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Securities
Name and Principal Other Annual Underlying
Position Year Salary Compensation(3) Options/SARs
- ------------------ ---- ------ ------------ ----------------------
<S> <C> <C> <C> <C>
Ross Tannenbaum, 1997 - - -
CEO and Director 1998 - - -
1999 46,875(1) 4,000 -
Joseph Casey, former 1997 120,000 6,000 -
Officer and Director 1998 120,000 6,000 -
1999 120,000 6,000 500,000
John Walrod, Vice 1997 - - -
President 1998 21,846(2) - -
1999 120,000 - 200,000
</TABLE>
- -------------
(1) Mr. Tannenbaum's employment with Registrant commenced on November
10, 1998.
(2) Mr. Walrod's employment with Registrant commenced on January 27,
1998.
(3) Other Annual Compensation represents automobile allowances.
Registrant and Ross Tannenbaum entered into an Employment Agreement on
November 10, 1998. Under the terms of that Agreement, Mr. Tannenbaum is employed
for a five year period at a base salary rate of $250,000 per year subject to
certain adjustments based on Registrant's financial performance. Mr. Tannenbaum
also receives certain benefits including car allowance and insurance. The
Employment Agreement may be terminated for cause prior to expiration of its full
term.
Registrant and Mark Viner entered into an Employment Agreement on
September 4, 1998. Under the terms of that Agreement, Mr. Viner is employed for
a three year period at a base salary rate of $108,000 per year with minimum
eight percent per year increases. Mr. Viner received an incentive bonus in 1998
pursuant to the terms of the Agreement and was issued options to purchase
17
<PAGE>
250,000 shares of Registrant's common stock at an exercise price of $0.4375 per
share, the closing price of the common stock at the date of the Agreement. The
options are conditioned upon continued employment by Registrant of Mr. Viner and
vest 1/3 per year beginning on the first anniversary of his Employment
Agreement. Mr. Viner also receives certain benefits including car allowance and
insurance. The Employment Agreement may be terminated for cause prior to
expiration of its full term.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name (1) Granted (#) Fiscal Year ($ / Share) Date
- ------- ------------ -------------- ----------- ----------
<S> <C> <C> <C> <C>
Joseph Casey 500,000 53% $ 0.44 09/25/03
Mark Viner 250,000 26% $ 0.44 10/01/01
John Walrod 200,000 21% $ 0.19 01/01/02
</TABLE>
(1) All options were issued pursuant to terms provided for in employment
agreements at the fair market value at the date of grants.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From October 1997 to November 1998, Registrant borrowed a total of
$522,000 from Signature, Inc., a corporation owned by the children of Sam D.
Battistone, Chairman of Registrant. Registrant repaid that indebtedness plus
interest in November 1998 by issuing 2,275,000 shares (at $0.20 per share) of
its common stock to Signature, Inc. plus cash payments totaling $90,000.
In July 1998, Registrant borrowed $200,000 from J. Roger Battistone,
the brother of Sam D. Battistone. Registrant repaid the principal plus accrued
interest in November 1998 by issuing 1,020,000 shares (at $0.20 per share) of
its common stock to J. Roger Battistone.
From April 1997 to July 1998, Registrant borrowed a total of $210,000
from Invest West Sports, Inc., a corporation owned by Sam D. Battistone.
Registrant repaid all indebtedness to Invest West Sports, Inc. (including
interest) during fiscal years 1998 and 1999.
During the fiscal year ended March 31, 1999, Registrant borrowed
$70,000 from Dreamstar, a corporation owned by Sam D. Battistone. During the
same fiscal year, the Registrant repaid all principal and accrued interest owed
Dreamstar by issuing to Dreamstar 460,000 shares (at $0.10 per
18
<PAGE>
share) of common stock and paying $25,000 in cash. The stock was trading at
approximately $0.20 at the time of the exchange. The $46,000 discount was booked
as compensation expense, and charged to a operational income during fiscal 1999.
In November 1998, Dreamstar assumed an obligation of Registrant and
Registrant was released of a $362,500 obligation Registrant owed to the National
Basketball Association. In consideration for that assumption and release,
Registrant issued to Dreamstar 3,625,000 shares (at $0.10 per share) of common
stock. The stock was trading at approximately $0.20 at the time of the exchange.
The $362,500 discount was booked as compensation expense, and charged to a
operational income during fiscal 1999.
Prior to five years ago, Registrant agreed to issue to Sam D.
Battistone 5,000,000 shares of its common stock for $250,000 (at $0.05 per
share). At that time, Battistone delivered $250,000 to Registrant but Registrant
had insufficient authorized shares to issue and deliver those shares to
Battistone. In March 1997, Registrant and Battistone determined to rescind the
transaction and return $250,000 to Battistone. Upon return of those funds,
Battistone purchased from Registrant for a total of $250,000, ten lithographs
depicting the National Basketball Association's 50 greatest players.
ITEM 8. DESCRIPTION OF SECURITIES.
The Company has authorized 100,000,000 shares of Common Stock, no par
value per share, of which 40,148,500 shares of Common Stock are issued and
outstanding as of March 31, 1999. All presently outstanding shares of the
Company's Common Stock are validly issued, fully paid and non-assessable. The
holders of Common Stock do not have any preemptive or other subscription rights.
The holders of Common Stock are entitled to receive dividends, when, as
and if declared by the Board of Directors out of funds legally available
therefore. It is highly unlikely that dividends will be paid by the Company in
the foreseeable future on its Common Stock.
Each outstanding share has one vote on each matter voted on at a
shareholders' meeting.
Neither Registrant's Articles of Incorporation nor its Bylaws are
designed to delay, defer or prevent a change in control.
19
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER 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, 1998 and 1999 and the three month period ended June 30,
1999 are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1998: High Bid Price Low Bid Price
-------------- -------------
<S> <C> <C>
First Quarter .35 .21
Second Quarter .34375 .20
Third Quarter .3125 .23
Fourth Quarter .37 .23
Fiscal Year Ended March 31, 1999:
First Quarter .28 .17
Second Quarter .8125 .17
Third Quarter .4375 .1875
Fourth Quarter .375 .125
Fiscal Year Ended March 31, 2000:
First Quarter .6875 .34375
</TABLE>
On September 1, 1999, the high bid price was .375 and the low bid price
was $.375 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.
The records of Fidelity Transfer, Registrant's transfer agent, indicate
that there are 328 registered owners of Registrant's common stock as of
September 1, 1999.
Registrant has paid no dividends in the past two fiscal years.
Registrant has no intention of paying dividends in the future.
ITEM 2. LEGAL PROCEEDINGS.
None
20
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On March 10, 1999, Registrant dismissed Pritchett, Siler & Hardy, P.C.
("PSH") and on March 12, 1999 engaged Margolies, Fink and Wichrowski as its
principal independent accountants. The change of independent accountants was
approved by Registrant's Board of Directors. There were no disagreements with
PSH on any matter of accounting principles or practices, financial disclosure or
auditing scope or procedure. PSH's audit reports of the past two years did not
contain any adverse or disclaimed opinions, nor were the opinions qualified or
modified as to uncertainty, audit scope or accounting principles.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, Registrant has sold the following
securities without registration under the Securities Act of 1933. In each case,
sales were made directly by the Registrant without the involvement of an
underwriter. In each case Registrant relied upon the private placement exemption
set out in Section 4(2) of the Securities Act of 1933 and there was no
advertising or general solicitation. All purchasers were financially
sophisticated individuals with substantial net worth and/or met the definition
of "Accredited Investor" as set out in Regulation D promulgated pursuant to the
Securities Act of 1933. All purchasers received information regarding Registrant
and its financial condition and the opportunity to obtain additional information
from and ask questions of representatives of Registrant. Each purchaser provided
evidence of nondistributive intent and the transfer of shares was appropriately
restricted by Registrant. As sales were not made pursuant to Regulation D, no
Forms D were filed.
<TABLE>
<CAPTION>
Date of Sale Title of Security Amount Sold Total Purchase Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 1997 Common Stock 50,000 shares $9,000
($0.18 per share)
December 1997 Common Stock 1,450,000 shares Exchange for all shares of
Dreams Franchise
Corporation not owned by
Registrant
($700,000 at
$0.48 per share)
21
<PAGE>
September 1998 Common Stock (1) 4,085,000 shares Release of $46,000
indebtedness and
assumption of $362,500 of
debt owed by Registrant to
unrelated third party
($0.10 per share)
October 1998 Options to purchase shares 750,000 shares Issued in connection with
of Common Stock (2) employment agreements
(issued for services)
November 1998 Common Stock (3) 15,000,000 shares Partial consideration for
all assets of Mounted
Memories, Inc.
($1,500,000 at
$0.10 per share)
November 1998 Warrants to Purchase 11,873,758 shares Partial consideration for
Common Stock (4) loan by Sirrom
November 1998 Common Stock (5) 25,000 shares Fee For Subordination of
Debt
November 1998 Common Stock (5) 3,363,500 shares Release of $672,700 debt
owed to affiliates of
Registrant
($0.20 per share)
November 1998 Common Stock (5) 375,000 shares Issued in connection with
purchase of Mounted
Memories, Inc.
($75,000 at
$0.20 per share)
22
<PAGE>
November 1998 Common Stock (5) 800,000 shares Release of
$160,000 debt
($0.20 per share)
January 1999 Options to purchase shares 200,000 shares Issued in connection with
of Common Stock (2) employment agreement
(issued for services)
</TABLE>
- --------------------------
(1) Consideration paid by and all shares issued to corporation
owned and controlled by Sam D. Battistone, Chairman of
Registrant.
(2) Issued to one officer, one employee and one former officer of
Registrant in connection with employment agreements.
(3) Issued to three shareholders of Mounted Memories, Inc. in
connection with acquisition of Mounted Memories, Inc.
(4) Issued to Sirrom as partial consideration for loan to acquire
assets of Mounted Memories, Inc.
(5) Issued in connection with acquisition of Mounted Memories
assets.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following are the statutory, Articles of Incorporation, and Bylaw
provisions or other arrangements that insure or indemnify controlling persons,
directors or officers of the Registrant or affects his or her liability in that
capacity.
The Registrant's Articles of Incorporation provide the following:
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.
23
<PAGE>
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.
The Registrant's Bylaws provide the following:
ARTICLE VIII - INDEMNIFICATION
SECTION 1. INDEMNIFICATION. No officer or director shall be personally
liable for any obligations of the corporation or for any duties or obligations
arising out of any acts or conduct of said officer or director performed for or
on behalf of the corporation. The corporation shall and does hereby indemnify
and hold harmless each person and his heirs and administrators who shall serve
at any time as a director or officer of the corporation from and against any and
all claims, judgments and liabilities to which such persons shall become subject
by reason of his having heretofore or hereafter been a director or officer of
the corporation, or by reason of any action alleged to have been heretofore or
hereafter taken or omitted to have been taken by him as such director or
officer, and shall reimburse any such person for all legal and other expenses
reasonably incurred by him in connection with any such claim or liability;
PROVIDED that the corporation shall have the power to defend such person from
all suits or claims as provided for under the provisions of the Utah Business
Corporation Act; PROVIDED FURTHER, however, that no such person shall be
indemnified against, or be reimbursed for, or be defended against any expense or
liability incurred in connection with any claim or action arising out of his own
negligence or willful misconduct. The rights accruing to any person under the
foregoing provisions of this section shall not exclude any other right to which
he may lawfully be entitled, nor shall anything herein contained restrict the
right of the corporation to indemnify or reimburse such person in any proper
case, event though not specifically provided for herein or otherwise permitted.
The corporation, its directors, officers, employees and agents shall be fully
protected in taking any action or making any payment, or in refusing so to do in
reliance upon the advice of counsel.
SECTION 2. OTHER INDEMNIFICATION. The indemnification herein provided
shall not be deemed exclusive of any other right to indemnification to which any
person seeking indemnification may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action
taken in his official capacity and as to action taken in an other capacity while
holding such office. It is the intent hereof that all officers and directors be
and hereby are indemnified to the fullest extent permitted by the laws of the
State of Utah and these Bylaws. The indemnification herein provided shall
continue as to any person who has ceased to be a director, officer or employee,
and shall inure to the benefits of the heirs, estate and personal representative
of any such person.
SECTION 3. INSURANCE. The board of Directors may, in its discretion,
direct that the corporation purchase and maintain insurance on behalf of any
person who is or was a director, officer or employee of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other
24
<PAGE>
enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against liability under the
provision of this section.
SECTION 4. SETTLEMENT BY CORPORATION. The right of any person to be
indemnified shall be subject always to the right of the corporation by the Board
of Directors, in lieu of such indemnify, to settle any claim, action, suit or
proceeding at the expense of the corporation by the payment of the amount of
such settlement and the costs and expenses incurred in connection therewith.
The Utah Revised Business Corporation Act provides as follows:
16-10a-840. General Standards of Conduct for Directors and Officers.
(1) Each Director shall discharge his duties as a Director, including
duties as a member of a committee, and each officer with discretionary authority
shall discharge his duties under that authority:
(a) in good faith;
(b) with the care an ordinarily prudent person in a like
position would exercise under similar circumstances; and
(c) in a manner the Director or officer reasonably believes to
be in the best interests of the corporation.
(2) In discharging his duties, a Director or officer is entitled to
rely on information, opinions, reports, or statements, including financial
statements and other financial data, if prepared or presented by:
(a) one or more officers or employees of the corporation whom
the Director or officer reasonably believes to be reliable and
competent in the matters presented;
(b) legal counsel, public accountants, or other persons as to
matters the Director or officer reasonably believes are within the
person's professional or expert competence; or
(c) in the case of a Director, a committee of the board of
Directors of which he is not a member, if the Director reasonably
believes the committee merits confidence.
(3) A Director or officer is not acting in good faith if he has
knowledge concerning the matter in question that makes reliance otherwise
permitted by Subsection (2) unwarranted.
(4) A Director or officer is not liable to the corporation, its
shareholders, or any conservator or receiver, or any assignee or
successor-in-interest thereof, for any action taken, or any failure to take any
action, as an officer or Director, as the case may be, unless:
25
<PAGE>
(a) the Director or officer has breached or failed to perform
the duties of the office in compliance with this section; and
(b) the breach or failure to perform constitutes gross
negligence, willful misconduct, or intentional infliction of harm on
the corporation or the shareholders.
6-10a-841. Limitation of Liability of Directors.
(1) Without limiting the generality of Subsection 16-10a-840(4),
if so provided in the articles of incorporation or in the bylaws or a
resolution to the extent permitted in Subsection (3), a corporation may
eliminate or limit the liability of a Director to the corporation or to its
shareholders for monetary damages for any action taken or any failure to take
any action as a Director, except liability for:
(a) the amount of a financial benefit received by a Director
to which he is not entitled;
(b) an intentional infliction of harm on the corporation or
the shareholders;
(c) a violation of Section 16-10a-842; or
(d) an intentional violation of criminal law.
(2) No provision authorized under this section may eliminate or limit
the liability of a Director for any act or omission occurring prior to the date
when the provision becomes effective.
(3) Any provision authorized under this section to be included in the
articles of incorporation may also be adopted in the bylaws or by resolution,
but only if the provision is approved by the same percentage of shareholders of
each voting group as would be required to approve an amendment to the articles
of incorporation including the provision.
(4) Any foreign corporation authorized to transact business in this
state, including any federally chartered depository institution authorized under
federal law to transact business in this state, may adopt any provision
authorized under this section.
(5) With respect to a corporation that is a depository institution
regulated by the Department of Financial Institutions or by an agency of the
federal government, any provision authorized under this section may include the
elimination or limitation of the personal liability of a Director or officer to
the corporation's members or depositors.
6-10a-842. Liability of Directors for Unlawful Distributions.
(1) A Director who votes for or assents to a distribution made in
violation of Section 16- 0a-640 or the articles of incorporation is personally
liable to the corporation for the amount of the distribution that exceeds what
could have been distributed without violating Section 16-10a-640 or
26
<PAGE>
the articles of incorporation, if it is established that the Director's duties
were not performed in compliance with Section 16-10a-840. In any proceeding
commenced under this section, a Director has all of the defenses ordinarily
available to a Director.
(2) A Director held liable under Subsection (1) for an unlawful
distribution is entitled to contribution:
(a) from every other Director who could be held liable under
Subsection (1) for the unlawful distribution; and
(b) from each shareholder, who accepted the distribution
knowing the distribution was made in violation of Section 16-10a-640 or
the articles of incorporation, the amount of the contribution from each
shareholder being the amount of the distribution to the shareholder
multiplied by the percentage of the amount of distribution to all
shareholders that exceeded what could have been distributed to
shareholders without violating Section 16-10a-640 or the articles of
incorporation.
(3) A proceeding under this section is barred unless it is commenced
within two years after the date on which the effect of the distribution is
measured under Subsection 16-10a-640(5) or (7).
16-10a-902. Authority to Indemnify Directors.
(1) Except as provided in Subsection (4), a corporation may indemnify
an individual made a party to a proceeding because he is or was a Director,
against liability incurred in the proceeding if:
(a) his conduct was in good faith; and
(b) he reasonably believed that his conduct was in, or not
opposed to, the corporation's best interests; and
(c) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful.
(2) A Director's conduct with respect to any employee benefit plan for
a purpose he reasonably believed to be in or not opposed to the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of Subsection (1)(b).
(3) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the Director did not meet the standard of conduct
described in this section.
27
<PAGE>
(4) A corporation may not indemnify a Director under this section:
(a) in connection with a proceeding by or in the right of the
corporation in which the Director was adjudged liable to the
corporation; or
(b) in connection with any other proceeding charging that the
Director derived an improper personal benefit, whether or not involving
action in his official capacity, in which proceeding he was adjudged
liable on the basis that he derived an improper personal benefit.
(5) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
16-10a-903. Mandatory Indemnification of Directors.
Unless limited by its articles of incorporation, a corporation shall
indemnify a Director who was successful, on the merits or otherwise, in the
defense of any proceeding, or in the defense of any claim, issue, or matter in
the proceeding, to which he was a party because he is or was a Director of the
corporation, against reasonable expenses incurred by him in connection with the
proceeding or claim with respect to which he has been successful.
16-10a-904. Advance of Expenses for Directors.
(1) A corporation may pay for or reimburse the reasonable expenses
incurred by a Director who is a party to a proceeding in advance of final
disposition of the proceeding if:
(a) the Director furnishes the corporation a written
affirmation of his good faith belief that he has met the applicable
standard of conduct described in Section 16-10a-902;
(b) the Director furnishes to the corporation a written
undertaking, executed personally or on his behalf, to repay the advance
if it is ultimately determined that he did not meet the standard of
conduct; and
(c) a determination is made that the facts then known to those
making the determination would not preclude indemnification under this
part.
(2) The undertaking required by Subsection (1)(b) must be an unlimited
general obligation of the Director but need not be secured and may be accepted
without reference to financial ability to make repayment.
(3) Determinations and authorizations of payments under this section
shall be made in the manner specified in Section 16-10a-906.
28
<PAGE>
16-10a-905. Court-Ordered Indemnification of Directors.
Unless a corporation's articles of incorporation provide otherwise, a
Director of the corporation who is or was a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction. On receipt of an application, the court, after giving
any notice the court considers necessary, may order indemnification in the
following manner:
(1) if the court determines that the Director is entitled to mandatory
indemnification under Section 16-10a-903, the court shall order indemnification,
in which case the court shall also order the corporation to pay the Director's
reasonable expenses incurred to obtain court-ordered indemnification; and
(2) if the court determines that the Director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances, whether
or not the Director met the applicable standard of conduct set forth in Section
16-10a-902 or was adjudged liable as described in Subsection 16-10a-902(4), the
court may order indemnification as the court determines to be proper, except
that the indemnification with respect to any proceeding in which liability has
been adjudged in the circumstances described in Subsection 16-10a-902(4) is
limited to reasonable expenses incurred.
16-10a-906. Determination and Authorization of Indemnification of Directors.
(1) A corporation may not indemnify a Director under Section
16-10a-902 unless authorized and a determination has been made in the
specific case that indemnification of the Director is permissible in the
circumstances because the Director has met the applicable standard of conduct
set forth in Section 16-10a-902. A corporation may not advance expenses to a
Director under Section 16-10a-904 unless authorized in the specific case
after the written affirmation and undertaking required by Subsections
16-10a-904(1)(a) and (b) are received and the determination required by
Subsection 16-10a-904(1)(c) has been made.
(2) The determinations required by Subsection (1) shall be made:
(a) by the board of Directors by a majority vote of those
present at a meeting at which a quorum is present, and only those
Directors not parties to the proceeding shall be counted in satisfying
the quorum; or
(b) if a quorum cannot be obtained as contemplated in
Subsection (2)(a), by a majority vote of a committee of the board of
Directors designated by the board of Directors, which committee shall
consist of two or more Directors not parties to the proceeding, except
that Directors who are parties to the proceeding may participate in the
designation of Directors for the committee;
(c) by special legal counsel:
29
<PAGE>
(i) selected by the board of Directors or its
committee in the manner prescribed in Subsection (a) or (b);
or
(ii) if a quorum of the board of Directors cannot be
obtained under Subsection (a) and a committee cannot be
designated under Subsection (b), selected by a majority vote
of the full board of Directors, in which selection Directors
who are parties to the proceeding may participate.
(d) by the shareholders, by a majority of the votes entitled
to be cast by holders of qualified shares present in person or by proxy
at a meeting.
(3) A majority of the votes entitled to be cast by the holders of all
qualified shares constitutes a quorum for purposes of action that complies with
this section. Shareholders' action that otherwise complies with this section is
not affected by the presence of holders, or the voting, of shares that are not
qualified shares.
(4) Unless authorization is required by the bylaws, authorization of
indemnification and advance of expenses shall be made in the same manner as the
determination that indemnification or advance of expenses is permissible.
However, if the determination that indemnification or advance of expenses is
permissible is made by special legal counsel, authorization of indemnification
and advance of expenses shall be made by a body entitled under Subsection (2)(c)
to select legal counsel.
16-10a-907. Indemnification of Officers, Employees, Fiduciaries, and Agents.
Unless a corporation's articles of incorporation provide otherwise:
(1) an officer of the corporation is entitled to mandatory
indemnification under Section 16-10a-903, and is entitled to apply for
court-ordered indemnification under Section 16-10a-905, in each case to the same
extent as a Director;
(2) the corporation may indemnify and advance expenses to an officer,
employee, fiduciary, or agent of the corporation to the same extent as to a
Director; and
(3) a corporation may also indemnify and advance expenses to an
officer, employee, fiduciary, or agent who is not a Director to a greater
extent, if not inconsistent with public policy, and if provided for by its
articles of incorporation, bylaws, general or specific action of its board of
Directors, or contract.
16-10a-908. Insurance.
A corporation may purchase and maintain liability insurance on behalf
of a person who is or was a Director, officer, employee, fiduciary, or agent of
the corporation, or who, while serving as a Director, officer, employee,
fiduciary, or agent of the corporation, is or was serving at the request of the
corporation as a Director, officer, partner, trustee, employee, fiduciary, or
agent of another foreign or domestic corporation or other person, or of an
employee benefit plan, against
30
<PAGE>
liability asserted against or incurred by him in that capacity or arising from
his status as a Director, officer, employee, fiduciary, or agent, whether or not
the corporation would have power to indemnify him against the same liability
under Section 16-10a-902, 16-10a-903, or 16-10a-907. Insurance may be procured
from any insurance company designated by the board of Directors, whether the
insurance company is formed under the laws of this state or any other
jurisdiction of the United States or elsewhere, including any insurance company
in which the corporation has an equity or any other interest through stock
ownership or otherwise.
16-10a-909. Limitations on Indemnification of Directors.
(1) A provision treating a corporation's indemnification of, or advance
for expenses to, Directors that is contained in its articles of incorporation or
bylaws, in a resolution of its shareholders or board of Directors, or in a
contract (except an insurance policy) or otherwise, is valid only if and to the
extent the provision is not inconsistent with this part. If the articles of
incorporation limit indemnification or advance of expenses, indemnification and
advance of expenses are valid only to the extent not inconsistent with the
articles of incorporation.
(2) This part does not limit a corporation's power to pay or reimburse
expenses incurred by a Director in connection with the Director's appearance as
a witness in a proceeding at a time when the Director has not been made a named
defendant or respondent to the proceeding.
Registrant does not carry errors and omissions insurance covering its
officers, Directors or control persons.
31
<PAGE>
PART F/S
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DREAMS, INC.
INDEPENDENT AUDITORS' REPORTS F/S-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet F/S-3
Consolidated Statements of Income F/S-4
Consolidated Statements of Stockholders' Equity F/S-6
Consolidated Statements of Cash Flows F/S-7
Notes to Consolidated Financial Statements F/S-9
MOUNTED MEMORIES, INC.
INDEPENDENT AUDITORS' REPORTS F/S-28
FINANCIAL STATEMENTS:
Statements of Income F/S-29
Statements of Cash Flows F/S-30
Notes to Financial Statements F/S-31
PRO FORMA CONDENSED FINANCIAL STATEMENTS
PRO FORMA CONDENSED STATEMENTS OF INCOME (UNAUDITED) F/S-34
</TABLE>
Part FS Table of Contents
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Dreams, Inc.
We have audited the accompanying consolidated balance sheet of Dreams, Inc. and
subsidiaries as of March 31, 1999, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dreams,
Inc. and subsidiaries as of March 31, 1999 and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
June 23, 1999
Part FS Page 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
DREAMS, INC.
We have audited the accompanying consolidated balance sheet of Dreams, Inc. at
March 31, 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended March 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the consolidated financial position of Dreams,
Inc. as of March 31, 1998, and the consolidated results of its operations and
its cash flows for the year ended March 31, 1998, in conformity with generally
accepted accounting principles.
/s/
June 1, 1998
Pritchett, Siler & Hardy, P.C.
Salt Lake City, Utah
Part FS Page 2
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT EARNING PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(Unaudited)
June 30, March 31, March 31,
1999 1999 1998
ASSETS
------- ---------- --------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 346 $ 425 $ 87
Restricted cash 374 415 2
Accounts receivable, net 1,144 1,369 11
Inventories 2,890 2,799 139
Prepaid expenses and deposits 137 34 50
Due from related party - - 2
Notes receivable 19 19 5
----- ----- -----
Total current assets 4,910 5,061 296
PROPERTY AND EQUIPMENT, NET 130 119 -
INTANGIBLE ASSETS, NET 2,415 2,446 -
DEFERRED LOAN COSTS, NET 260 275 -
DEBT ISSUANCE COSTS, NET 423 437 -
----- ----- -----
TOTAL ASSETS $8,138 $8,338 $ 296
------ ------ ------
------ ------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 502 $ 883 $ 149
Accrued liabilities 782 865 655
Current portion of long-term debt - - 25
Notes payable, including $0, $0
and $91 to related parties - - 1,087
Payable to restricted cash - - 218
Deferred franchise fees 90 128 105
Net liabilities of discontinued
restaurant segment - - 268
------ ------ ------
Total current liabilities 1,374 1,876 2,507
LONG-TERM DEBT, LESS CURRENT PORTION 3,443 3,443 402
DETACHABLE STOCK WARRANTS 300 300 -
------ ------ ------
TOTAL LIABILITIES 5,117 5,619 2,909
------ ------ ------
COMMITMENTS AND CONTINGENCIES - - -
Part FS Page 3
<PAGE>
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.00, $0.00 and $0.05 par
value; authorized 100,000,000, 100,000,000
and 50,000,000 shares; 40,148,500,
40,148,500 and 16,500,000 shares
issued and outstanding 18,084 18,084 825
Additional paid-in-capital - - 12,530
Accumulated deficit (15,063) (15,365) (15,968)
------ ------ ------
Total stockholders' equity (deficit) 3,021 2,719 (2,613)
------ ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,138 $ 8,338 $ 296
------ ------ ------
------ ------ ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
DREAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
------------------------------
June 30, June 30, Fiscal Fiscal
1999 1998 1999 1998
-------- -------- ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Retail / Wholesale $ 2,578 $ 19 $ 5,515 $ 595
Franchise fees and royalties 295 207 1,368 882
Other 3 - 161 40
Gain on purchase of minority interest - - - 386
Gain on sale of property and equipment - - - 5
----------- ------------ ------------ -----------
Total revenues 2,876 226 7,044 1,908
----------- ------------ ------------ -----------
EXPENSES:
Cost of sales 1,564 5 3,064 354
Operating expenses 229 129 1,244 472
General and administrative expenses 549 230 1,878 811
Depreciation and amortization 66 2 126 10
Minority interest in earnings of
consolidated subsidiary - - - 6
----------- ------------ ------------ -----------
Total expenses 2,408 366 6,312 1,653
----------- ------------ ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST AND TAXES 468 (140) 732 255
----------- ------------ ------------ -----------
Interest, net 141 52 322 127
----------- ------------ ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 327 (192) 410 128
Current tax expense 25 - 416 -
Deferred tax expense - - (341) -
----------- ------------ ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 302 (192) 335 128
Part FS Page 4
<PAGE>
DISCONTINUED OPERATIONS:
Gain on disposal of restaurant segment - - 268 190
Gain on disposal of operations of
unconsolidated subsidiary - - - 114
----------- ------------ ------------ -----------
INCOME FROM DISCONTINUED OPERATIONS - - 268 304
NET INCOME (LOSS) $ 302 $ (192) $ 603 $ 432
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
EARNINGS PER SHARE:
BASIC:
Income from continuing operations $ 0.01 $ (0.01) $ 0.01 $ 0.01
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Net income $ 0.01 $ (0.01) $ 0.02 $ 0.03
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Weighted average shares outstanding 40,148,500 16,500,000 25,181,915 15,398,630
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
DILUTED:
Income from continuing operations $ 0.01 $ (0.01) $ 0.01 $ 0.01
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Net income $ 0.01 $ (0.01) $ 0.02 $ 0.03
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Weighted average shares outstanding 40,148,500 16,500,000 25,181,915 15,398,630
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Part FS Page 5
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT EARNING PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Additional Total
Shares Common Paid-in Accumulated Stockholders'
Outstanding Stock Capital Deficit Equity
----------- ------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 15,000,000 $ 750 $ 12,234 $ (16,400) $ (3,416)
Issuance of 50,000 shares common
stock for cash, December 1997, at
$0.18 per share 50,000 3 6 - 9
Shares issued to acquire minority
interest in subsidiary (See Note 9) 1,450,000 72 290 - 362
Net income for the year ended
March 31, 1998 - - - 432 432
---------- ------- -------- ------------ -----------
Balance at March 31, 1998 16,500,000 $ 825 $ 12,530 $ (15,968) $(2,613)
Shares issued in exchange of notes
payable (See Note 9) 8,248,500 412 1,237 - 1,649
Shares issued to acquire assets of
Mounted Memories, Inc. (See Note 3) 15,000,000 750 2,250 - 3,000
Conversion of third party fees to equity 400,000 20 60 - 80
Elimination of par value - 16,077 (16,077) - -
Net income for the year ended
March 31, 1999 - - - 603 603
---------- ------- -------- ------------ -----------
Balance at March 31, 1999 40,148,500 $18,084 $ - $ (15,365) $ 2,719
Net income for the three months ended
June 30, 1999 - - - 302 302
---------- ------- -------- ------------ -----------
Balance at June 30, 1999 (unaudited) 40,148,500 $18,084 $ - $ (15,063) $ 3,021
---------- ------- -------- ------------ -----------
---------- ------- -------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Part FS Page 6
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended (unaudited)
------------------------------
June 30, June 30, Fiscal Fiscal
1999 1998 1999 1998
-------- --------- -------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 302 $(192) $ 603 $ 432
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization:
Property and equipment 10 2 35 10
Goodwill 31 - 52 -
Debt issuance and debt discount costs 40 - 64 -
Provision for losses on accounts
and notes receivable - - 211 -
Gain on purchase of minority interest - - - (386)
Gain on sale of property and equipment - - - (5)
Gain on disposal of restaurant segment - - (268) (190)
Gain on disposal of operations
of unconsolidated subsidiary - - - (114)
Change in assets and liabilities, net of effects
from acquisition of business:
(Increase) decrease in accounts receivable 225 (3) (356) 25
(Increase) decrease in accounts
receivable - related party - 2 2 (2)
(Increase) decrease in inventories (91) 6 (590) 106
(Increase) decrease in prepaid
expenses (103) (7) 83 6
Increase in notes receivable - - (14) (77)
Increase (decrease) in accounts
payable (381) 19 249 (33)
Increase (decrease) in accrued
liabilities (83) 29 143 (212)
Increase (decrease) in deferred
franchise fees (38) (2) 23 (30)
Decrease in net liabilities of
discontinued operations - - - (7)
Other (11) (36) 52 -
-------- --------- -------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (99) (182) 289 (477)
-------- --------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mounted Memories, Inc.,
net of cash acquired - - (2,218) -
Purchase of property and equipment (21) - (24) (8)
-------- --------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES (21) - (2,242) (8)
-------- --------- -------- -------
</TABLE>
Part FS Page 7
<PAGE>
<TABLE>
<CAPTION>
Three months ended (unaudited)
------------------------------
June 30, June 30, Fiscal Fiscal
1999 1998 1999 1998
-------- --------- -------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 232 591 232
Proceeds from long-term debt - - 3,000 368
Payments on notes payable - (137) (450) (504)
Financing costs capitalized - - (437) -
Purchase of common stock - - - 8
Minority interest - - - 6
-------- --------- -------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 95 2,704 110
-------- --------- -------- -------
NET INCREASE (DECREASE) IN CASH, CASH
EQUIVALENTS AND RESTRICTED CASH $(120) $ (87) $ 751 $(375)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
AT BEGINNING OF PERIOD 840 89 89 464
-------- --------- -------- -------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
AT END OF PERIOD $ 720 $ 2 $ 840 $ 89
-------- --------- -------- -------
-------- --------- -------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Part FS Page 8
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Dreams, Inc. (the "Company") operates through its wholly-owned
subsidiary, Dreams Franchise Corporation ("DFC") and through Dreams
Entertainment, Inc. ("DEI") and Dreams Products, Inc. ("DPI"),
wholly-owned subsidiaries of DFC. DFC is in the business of selling
Field of Dreams retail store franchises and generates revenues through
the sale of those franchises and continuing royalties. DEI was
incorporated in fiscal 1999 and was inactive throughout fiscal 1999 and
as of March 31, 1999. DPI is a wholesaler of sports memorabilia
products and acrylic cases. DPI pays an annual fee to the National
Football League which officially licenses DPI's football memorabilia
products.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All material intercompany
transactions and accounts have been eliminated in consolidation.
Results of operations of acquired companies accounted for as purchases
are included from their respective dates of acquisition. The fiscal
years ended March 31, 1999 and March 31, 1998 are herein referred to as
"fiscal 1999" and "fiscal 1998", respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as highly liquid investments with
original maturities of three months or less and consist of amounts held
as bank deposits.
RESTRICTED CASH
Field of Dreams franchisees pay advertising royalties to DFC to be used
for designated franchise advertising and promotional activities. These
restricted funds are held by the Company. Restricted cash relating to
advertising royalties paid by franchisees was $90 and $2 at March 31,
1999 and 1998, respectively. The Company also had $325 restricted as to
use at March 31, 1999 relating to an acquisition (see Note 3).
ACCOUNTS RECEIVABLE
The Company's accounts receivable principally result from uncollected
royalties and advertising royalties from Field of Dreams franchisees
and from credit sales to third-party customers.
RETAIL AND WHOLESALE REVENUES
Retail and wholesale revenues are recognized as the products are sold
and shipped to customers. DPI had wholesale sales to Field of Dreams
franchises of $755 and $0 in fiscal 1999 and 1998, respectively.
Part FS Page 9
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
FRANCHISE FEE AND ROYALTY REVENUES
Revenues from the sale of franchises are deferred until the Company
fulfills its obligations under the franchise agreement and the
franchised unit opens. The franchise agreements provide for continuing
royalty fees based on a percentage of gross receipts.
ADVERTISING AND PROMOTIONAL
COSTS All advertising and promotional costs associated with advertising
and promoting the Company's lines of business are expensed in the
period incurred.
INVENTORIES
Inventories, consisting primarily of sports memorabilia products and
acrylic cases, are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method for both raw
materials and finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the
assets ranging from three to ten years. Leasehold improvements are
amortized over the lease period or the estimated useful life of the
improvements, whichever is less.
Maintenance and repairs are charged to expense as incurred and major
renewals and betterments are capitalized. Gains and losses are credited
or charged to earnings upon disposition.
INTANGIBLE ASSETS
The excess of cost over the fair value of net assets of purchased
companies (goodwill) is being amortized by the straight-line method
over 20 years. As of March 31, 1999, unamortized goodwill was $487, net
of accumulated amortization of $10. Trademarks acquired are also being
amortized by the straight-line method over 20 years. As of March 31,
1999, unamortized trademarks were $1.9 million, net of accumulated
amortization of $42. Goodwill and other intangibles are reassessed
annually to determine whether any potential impairment exists.
Costs relating to the issuance of debt are capitalized and amortized
over the term of the related debt. As of March 31, 1999, the
unamortized debt issuance costs were $437, net of accumulated
amortization of $40.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the carrying
value of long-lived assets, including associated intangibles, may be
impaired, an evaluation of recoverability is
Part FS Page 10
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
performed by comparing the estimated future undiscounted cash flows
associated with the asset to the asset's carrying amount to determine
if a write-down to market value or discounted cash flow is required.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximated their fair values
because of the short maturity of these instruments. The fair value of
the Company's notes payable and long-term debt is estimated based on
quoted market prices for the same or similar issues or on current rates
offered to the Company for debt of the same remaining maturities. At
March 31, 1999 and 1998, the aggregate fair value of the Company's
notes payable and long-term debt approximated its carrying value.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method
with SFAS No. 109, deferred income taxes are required for the tax
consequences of temporary differences by applying enacted statutory
rates applicable to future years to the difference between the
financial statement carrying amounts and the tax bases of existing
assets and liabilities. Under SFAS No. 109, the effect on deferred
taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
NET INCOME PER SHARE
During fiscal 1998, the Company adopted the provisions of SFAS No. 128,
"Earnings Per Share". SFAS No. 128 requires companies to present basic
earnings per share ("EPS") and diluted EPS, instead of the primary and
fully diluted EPS presentations that were formerly required by the
Accounting Principles Board Opinion No. 15, "Earnings Per Share". Basic
EPS is computed by dividing net income available to common stockholders
by the weighted average of common shares outstanding during the period.
Dilutive earnings per share was not presented, as its effect was not
material to the financial statements for fiscal years presented. When
applicable, the Company's diluted EPS will include the dilutive effect
of potential stock options and certain warrant exercises, calculated
using the treasury stock method.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock Based Compensation", is effective for fiscal years beginning
after December 15, 1995. Statement No. 123 provides companies with a
choice to follow the provisions of No. 123 in determination of stock
based compensation expense or to continue with the provisions of
Part FS PAGE 11
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
APB 25, "Accounting for Stock Issued to Employees". The Company will
continue to follow APB 25 and will provide proforma disclosure as
required by Statement No. 123 in the notes to the consolidated
financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and related notes to the financial statements.
Estimates are used when accounting for uncollectable accounts
receivable, inventory obsolescence, depreciation, taxes, contingencies,
among others. Actual results could differ from those estimated by
management and changes in such estimates may affect amounts reported in
future periods.
RECLASSIFICATION
Certain items previously reported in specific financial statement
captions have been reclassified to conform with the fiscal 1999
presentation.
2. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and
accounts receivable arising from its normal business activities.
Franchisee receivables subject the Company to credit risk. The
Company's franchisee receivables are derived primarily from royalties
on franchisee sales, sales of merchandise to franchisees and the
reimbursement of various costs incurred on behalf of franchisees.
Regarding retail accounts receivable, the Company believes that credit
risk is limited due to the large number of entities comprising the
Company's customer base and the diversified industries in which the
Company operates. The Company performs certain credit evaluation
procedures and does not require collateral. The Company believes that
credit risk is limited because the Company routinely assesses the
financial strength of its customers, and based upon factors surrounding
the credit risk of customers, establishes an allowance for
uncollectable accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowances is
limited. The Company had a consolidated allowance for doubtful accounts
at March 31, 1999 of approximately $211. The Company believes any
credit risk beyond this amount would be negligible.
Part FS PAGE 12
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
3. BUSINESS COMBINATION
During November 1998, DPI acquired all of the assets of Mounted
Memories, Inc. ("MMI"), a wholesaler of sports memorabilia products and
acrylic cases. The aggregate consideration paid was $5.3 million,
consisting of cash in the amount of $2.3 million and the issuance of
15,000,000 shares of Dreams, Inc. common stock, which was trading at
approximately $0.20 at the date of the transaction. The purchase price
was financed through the issuance of a long-term note of $3.0 million
(see Note 8). The acquisition was accounted for as a purchase and,
accordingly, MMI's results are included in the consolidated financial
statements since the date of acquisition. The aggregate of the net
assets acquired was approximately $2.8 million, which was allocated
based on the fair values of the assets and liabilities acquired at the
date of acquisition. The excess of purchase price ($5.3 million) over
net assets acquired of $2.5 million has been allocated to goodwill
($498) and $2.0 million to trademarks. These amounts will be amortized
on the straight-line basis over 20 years. Liabilities of $552 were
assumed in connection with the acquisition, consisting primarily of
accounts payable and accrued liabilities.
As of March 31, 1999, $325 of the loan proceeds was being held by an
escrow agent of the lender until certain criteria have been met. The
criteria relates to Dreams, Inc.'s payment, or creditor's acceptance of
a plan for payment, of liabilities for certain state income taxes,
penalties and interest (see Note 10). Upon these conditions being met,
the funds in escrow will be released to the shareholders of MMI to be
used to pay its tax liability attributable to MMI's operations from
January 1, 1998 through the date of acquisition, and the Company will
accordingly adjust goodwill. If the conditions are not met, the funds
must be returned to the lender. Since the conditions for release have
not been met as of March 31, 1999, the Company appropriately
categorized the escrowed funds as restricted cash on the balance sheet.
The following unaudited proforma information has been prepared assuming
MMI had been acquired as of the beginning of the periods presented. The
proforma information is presented for information purposes only and is
not necessarily indicative of what would have occurred if the
acquisition had been made as of those dates. In addition, the proforma
information is not intended to be a projection of future results and
does not reflect synergies expected to result from the integration of
MMI and the Company's operations.
Part FS PAGE 13
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PROFORMA INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31 1999 1998
-------------------- ---- ----
<S> <C> <C>
Sales and other income $12,446 $9,334
Net income from continuing operations 575 220
Earnings per share from continuing operations $ 0.01 $ 0.01
</TABLE>
4. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, March 31, March 31,
1999 1999 1998
---------- ----------- ----------
<S> <C> <C> <C>
Memorabilia products $ 2,298 $ 2,199 $139
Licensed products 391 370 -
Acrylic cases and raw materials 276 305 -
------- ------- ----
2,965 2,874 139
Less reserve for obsolescence (75) (75) -
------- ------- ----
$ 2,890 $ 2,799 $139
------- ------- ----
</TABLE>
5. PROPERTY AND EQUIPMENT
The components of property and equipment as of March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Leasehold improvements $ 23 $ 20
Machinery and equipment 71 -
Office and other equipment 232 47
Transportation equipment 47 -
----- ----
373 67
Less accumulated depreciation
and amortization (254) (67)
----- ----
$ 119 $ -
----- ----
</TABLE>
During the year ended March 31, 1998 the Company wrote down the
remaining property and equipment in connection with the purchase of the
minority interest (see Note 9).
Part FS PAGE 14
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
6. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consisted of the following at March 31:
1999 1998
---- ----
<S> <C> <C>
Payroll costs (including commissions) $ 99 $ 25
Interest 35 15
Rent - 50
Sales taxes 9 -
Income taxes, penalties and interest
(see Note 10) 491 425
Other 231 140
---- ----
$865 $655
---- ----
---- ----
</TABLE>
7. NOTES PAYABLE
Notes payable consisted of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Notes payable to a related party (company owned
by major shareholder), interest at 12%, due on
demand, unsecured $ - $ 91
Various notes payable to others, interest ranging to
24 percent, due on demand, unsecured - 3
Notes payable to franchisee at a rate of 12 percent
interest, convertible into DFC common stock at $1.50 per
share, principal and interest due March 1,
1998, unsecured - 25
Note payable to bank, interest at variable rate equal to
1.5% percent over index rate, principal and interest
payments due April 1998 - 149
Note payable to vendor, interest at 18%, principal and
interest payment of $1 due May 1998 - 1
Part FS Page 15
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
Note payable to NBA Legends Foundation for inventory
financing, payments based on sales with minimum payments
of no less than $125 per quarter beginning
July 15, 1997 until January 15, 1998 at which time
payments shall be no less than $250 - 363
Unsecured demand notes payable to an individual,
interest at 12% - 305
Six $25 unsecured demand notes payable to four
individuals, loans bear a flat rate of interest of $5
per note - 150
------ ------
$ - $1,087
------ ------
</TABLE>
In July 1998, the Company borrowed $200 at a rate of 12% interest
from the brother of the Company's Chairman. The Company repaid
the principal and accrued interest of $4 through the issuance of
1,020,000 shares of its common stock in November 1998. The stock
was trading at approximately $0.20 at the time of the exchange.
In November 1998, Dreamstar, a corporation owned by the Company's
Chairman, assumed the Company's obligation of $363 owed to the
NBA Legends Foundation. In consideration for that assumption and
release, the Company issued Dreamstar 3,625,000 shares of common
stock. The stock was trading at approximately $0.20 at the time
of the exchange. The preferential distribution of $363 was booked
as compensation expense, and charged to operational income during
fiscal 1999.
In addition, Dreamstar loaned the Company $70, at a rate of 12%
interest, during fiscal 1999. As of November 1998, the Company
owed Dreamstar $46, net of repayments and accrued interest of $1.
The Company paid this obligation in November 1998 by issuing
460,000 shares of its common stock. The stock was trading at
approximately $0.20 at the time of the exchange. The preferential
distribution of $46 was booked as compensation expense, and
charged to operational income during fiscal 1999.
In November 1998, the Company exchanged its remaining notes
payable for 3,143,500 of its common shares. The total amount of
remaining notes payable at the time of the exchange was $629, net
of repayments and accrued interest of $32. The stock was trading
at approximately $0.20 at the time of the exchange.
Part FS Page 16
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
8. LONG-TERM DEBT
Long-term debt consists of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable to a lending institution at 14% interest, with monthly
interest only payments of $35 through November 2003. Principal
balance of $3.0 million due November 2003. Secured by all of the
assets of the Company and Company stock pledged by the Company's
Chairman, President and other key employees, family members and
associated persons
and entities. $3,000 $ -
Note payable to an individual at 12% interest, with monthly interest
only payments of $4 through November 2007. Secured through a personal
guarantee of the Company's Chairman and is
subordinate to the 14% note described above 443 427
------ -----
3,443 427
Less current portion (-) (25)
------ ------
$3,443 $ 402
------ ------
</TABLE>
Future maturities of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
2000 $ -
2001 -
2002 -
2003 -
2004 3,000
Thereafter 443
------
$3,443
</TABLE>
9. STOCKHOLDERS' EQUITY
On January 14, 1999 the stockholders of the Company approved a
resolution which amended the Company's Restated Articles of
Incorporation to increase the number of authorized shares of common
stock from 50,000,000 shares, par value $0.05, to 100,000,000 shares,
of no par value common stock. As a result of this amendment, the
additional paid-in capital account has been combined with common stock
as presented in the Consolidated Statements of Stockholders' Equity.
Part FS Page 17
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
COMMON STOCK
During December 1997, the Company issued 50,000 shares of its
previously authorized, but unissued common stock. Total proceeds from
the sale of stock amounted to $9.
During December 1997, the Company issued 1,450,000 common shares valued
at $0.25 per share or $362 to purchase the 5,111,465 remaining minority
shares of DFC. In connection with the purchase, the Company wrote down
the value of all non-current assets including $18 in property and
equipment, $72 in long-term notes receivable and $4 in other assets.
This transaction resulted in the Company recognizing a one-time gain of
$386 during fiscal 1998.
During November 1998, the Company issued 400,000 shares of its
previously authorized, but unissued common stock to third parties for
services rendered. The value assigned to the issuance of these shares
totaled $80. The stock was trading at approximately $0.20 per share at
the time of the transaction.
WARRANTS
The Company granted the lending institution which loaned the Company
$3.0 million in fiscal 1999 warrants to purchase approximately
6,658,000 of the Company's common stock. The number of shares which may
be purchased pursuant to exercise of the warrants varies between a
minimum of 14% and a maximum of 18.5% of the issued and outstanding
shares. In connection with the issuance of the debt, $300 of the
proceeds has been allocated to the detachable stock warrants. Upon
surrender of a warrant, the holder is entitled to purchase one share of
the Company's common stock for $0.01. The amount allocated to the
warrants has been recorded as a liability as of March 31, 1999. The
related deferred debt discount has been recorded and amortized to
interest expense over the life of the loan. Amortization of debt
discount of $25 has been included in interest expense for the year
ended March 31, 1999. The warrants have anti-dilution rights,
registration rights and co-sale rights. The warrants also have a "put"
feature which entitles the lending institution to require the Company
to purchase the warrants for their fair market value determined by an
appraisal process. Payment of the "put" price may be paid by the
Company by issuance to the lending institution of a promissory note
with 10% interest per annum and 24 monthly payments of principal and
interest.
STOCK OPTIONS
During fiscal 1999, 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 at a price of 100% of the fair market value of the shares
at the date of grant, 110% in the case of a holder of more than 10% of
the Company's stock. The options generally vest over a three or five
year period.
Part FS Page 18
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
Transactions and other information relating to the plan for fiscal 1999
are summarized as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
-------------------------------
SHARES WTD. AVG. PRICE
---------- ---------------
<S> <C> <C>
Outstanding at April 1, 1998 -0-
Granted 950,000 $ .38
Exercised -
-------
Outstanding at March 31, 1999 950,000 $ .38
-------
-------
</TABLE>
The exercise prices of the stock options discussed below were the fair market
value of the common stock on the date the options were granted.
On August 25, 1998, the Company issued options to purchase 500,000
shares at $.4375 per share to a former employee, officer and director
of the Company. The options expire on September 25, 2003 and 250,000
were exercisable upon issuance. The remaining 250,000 vest ratably over
five years beginning on the first anniversary date of the grant.
On September 4, 1998, the Company issued options to purchase 250,000
shares at $.4375 per share to an employee and officer of the Company.
The options expire on October 1, 2001. The options vest ratably over
three years beginning on the first anniversary date of the grant.
On January 1, 1999, the Company issued options to purchase 200,000
shares at $.1875 per share to an employee of the Company. The options
expire on January 1, 2002 and 100,000 were exercisable upon issuance.
The remaining 100,000 vest on the first anniversary date of the grant.
Part FS Page 19
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
The following table summarizes information about all of the stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Outstanding options Exercisable options
---------------------------------------------------------------------
Weighted
average
Range of remaining Weighted Weighted
exercise prices Shares life (years) avg. price Shares avg. price
--------------- -------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C>
$ .15 - .25 200,000 2.75 $ .19 100,000 $ .19
.26 - .50 750,000 3.83 .44 250,000 .44
- ----------------------------------------------------------------------------------------------------
$ .15 - .50 950,000 3.61 $ .38 350,000 $ .37
--------------- -------- --------- ---------- ------- --------
--------------- -------- --------- ---------- ------- --------
</TABLE>
For purposes of the following proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in fiscal 1999: no dividend yield; volatility of
24%; risk-free interest rate of 6%; and an expected term of five years. The
weighted average Black-Scholes value of options granted during fiscal 1999 was
$.31 per option. Had compensation cost for the Company's fixed stock-based
compensation plan been determined based on the fair value at the grant dates for
awards under this plan consistent with the method of SFAS 123, the Company's pro
forma net income and pro forma net income per share would have been as indicated
below:
<TABLE>
<CAPTION>
For the years ended March 31,
1999 1998
--------------- --------------
<S> <C> <C>
Net income -
As reported $ 628 $ 432
--------------- ---------------
--------------- ---------------
Pro forma $ 630 $ 432
--------------- ---------------
--------------- ---------------
Basic income per share -
As reported $ .02 $ .03
--------------- ---------------
--------------- ---------------
Pro forma $ .02 $ .03
--------------- ---------------
--------------- ---------------
Diluted income per share -
As reported $ .02 $ .03
--------------- ---------------
--------------- ---------------
Pro forma $ .02 $ .03
--------------- ---------------
--------------- ---------------
</TABLE>
Part FS Page 20
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
10. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current:
Federal tax expense $ 341 $ -
State tax expense 75 -
Deferred:
Federal tax expense $(341) $ -
State tax expense - -
----- -----
$ 75 $ -
----- -----
</TABLE>
The Company's deferred tax balances consist of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 1,608 $ 1,992
Accelerated depreciation for book purposes - 5
Accrued liabilities 54 73
Deferred revenue 50 41
Inventory capitalization adjustment 15 -
Allowance for doubtful accounts 52 -
---------- -------
1,779 2,111
Deferred tax liability:
Accelerated depreciation for tax purposes (9) -
---------- -------
1,770 2,111
Valuation allowance (1,770) (2,111)
---------- -------
$ - $ -
---------- -------
</TABLE>
SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets will
not be realized. At March 31, 1999, a valuation allowance for the full
amount of the net deferred tax asset was recorded because of pre-1999
losses and uncertainties as to the amount of taxable income that would
be generated in future years. The net change in the valuation allowance
for the years ended March 31, 1999 and 1998 was $341 and $17,
respectively.
Part FS Page 21
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate for the years ended March 31, 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal income taxes at statutory rate 34% 34%
State taxes, net of federal benefit 6 5
Gain on acquisition of minority interest - (35)
Valuation allowance (52) (4)
Stock based compensation adjustment 24 -
Other (1) -
----- -----
$ 11% $ - %
----- -----
</TABLE>
The Company at March 31, 1999 and 1998 has $415 and $425, respectively,
owing to certain states for income taxes, penalties and fees, and
interest. The amount has been accrued by the Company and is included in
accrued liabilities (see Note 6).
At March 31, 1999, the Company had available net operating loss
carryforwards of approximately $4,728, which expire in various years
beginning in 2007 through 2014.
The Company closed operations of its B.B. O'Brien's sports bar ("BB's")
during July 1995. Since 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 that could be
utilized. BB's had pre-acquisition tax net operating loss carryforwards
which arose prior to becoming a member of the consolidated group on
November 1, 1990, which were available to offset future taxable income
of BB's. The possible benefit to be recognized from the realization of
these amounts has not been recorded, as there is no assurance as to
their ultimate realization. The tax benefits, which may ultimately be
realized, are limited to approximately $100 per year. BB's
pre-acquisition tax net operating loss carryforwards total
approximately $1,501, which expire in various years through 2005.
11. COMMITMENTS AND CONTINGENCIES
As of March 31, 1999, the Company leases office and warehouse space
under operating leases in Florida (approximately 23,000 square feet)
and Colorado (approximately 3,000 square feet). The leases for these
two facilities expire in April 2003 and September 2002, respectively.
Rent expense charged to operations for fiscal 1999 and fiscal 1998 was
$118 and $29, respectively.
Part FS Page 22
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
The aggregate minimum annual lease payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL
<S> <C>
2000 $ 208
2001 206
2002 204
2003 212
2004 17
Thereafter -
------
Total minimum lease commitments $ 847
------
</TABLE>
The Company has executed employment agreements with several of its key
employees. The most significant agreement is with its President. This
employment agreement, which expires in November 2003, calls for a
salary of $250 per year and an annual car allowance of $10.
The Company's Chairman does not have an employment agreement but can be
compensated under terms set forth by the lending institution which lent
the Company $3.0 million in fiscal 1999 (see Note 8). The Chairman does
not receive a base salary. However, for fiscal years 2000 - 2003, the
Company may make a bonus payment to the Chairman in the amount of $90
if the Company's audited earnings before interest, depreciation and
amortization ("EBITDA") exceeds $1.5 million for such fiscal year. An
additional $90 bonus payment may be made to the Chairman if EBITDA in
such fiscal year exceeds $2.0 million.
The Company's Chairman did not receive any salary or bonus payments in
fiscal 1999.
12. DISCONTINUED OPERATIONS OF RESTAURANTS CLOSED AND SOLD
The Company was formerly engaged in the ownership and operation of
family style restaurants and a sports cafe through Heidi's Holding
Corporation ("HHC") (formerly known as Shari's Franchise Corporation
("SFC")) and B.B. O'Brien's, Inc. ("BB's"), respectively. These
operations were discontinued with the sale of HHC and the related
restaurants. During February and March 1996, the Company sold a
majority of the family style restaurants owned by HHC to various third
parties.
Effective December 31, 1996, the Company sold the stock of HHC, which
included the one remaining Heidi's restaurant to Battistone Financial
Group, a related party, for the return of 2,000,000 shares of the
Company's common stock. The gain on the sale of this stock totaling
$631 was accounted for as an increase in additional paid-in capital
during the year ended March 31, 1997.
Part FS Page 23
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
In July 1995, the Company closed its BB O'Brien's sports bar. All fixed
assets and goodwill related to BB's were fully depreciated and
amortized during the year ended March 31, 1995. At March 31, 1998, BB's
had net liabilities owed to unrelated third parties of $268. The
Company received an opinion during fiscal 1999 from independent counsel
concluding that the statute of limitations for liability on these
obligations had expired. Consequently, the Company eliminated these
liabilities from its balance sheet and recognized the effect in
discontinued operations in fiscal 1999.
13. RELATED PARTY TRANSACTIONS
The Company's Chairman often makes advances to the Company, which are
non-interest bearing and payable upon demand. These net advances
totaled $52 and $59 at March 31, 1999 and 1998, respectively, and have
been included in accrued liabilities on the balance sheet for those
respective dates.
The Company had certain amounts payable and receivable to related
parties for purchases of certain sports memorabilia merchandise. During
the year ended March 31, 1998, the payable and receivable were combined
leaving a receivable from the related parties for $2. This amount was
repaid in fiscal 1999.
During the years ended March 31, 1999 and 1998 a shareholder and
officer of the Company through December 1998, loaned the Company $92
and $29, respectively, to pay for obligations of the Company. The
fiscal 1998 loan included a flat rate of interest of $2. As of March
31, 1998, the fiscal 1998 loan and applicable interest was paid in
full. The fiscal 1999 loans included interest at 12% per annum. The net
amount due, including accrued interest of $1, at November 18, 1999 was
$14 and was repaid through issuance of the Company's common stock at
the market rate at the time of the exchange (see Note 7).
14. DFC FRANCHISE INFORMATION
DFC licenses the right to use the proprietary name Field of Dreams from
Universal Studios Licensing, Inc. ("USL"), formerly known as Universal
Merchandising, Inc. Pursuant to the license agreement, DFC pays USL one
percent of each company-owned unit's gross sales, with a minimum annual
royalty of $3 per store. DFC pays royalties of $5 for each new
franchised unit opened and one percent of each franchised unit's gross
sales. This $5 fee is not an advance against royalties. At March 31,
1999, DFC had 34 units owned by franchisees and had no company-owned
units.
Effective June 1, 1991, DFC has the right to use and display the Field
of Dreams service mark in company-owned or franchised retail units
located in the United States. It also provides for the non-exclusive
right to affix the Field of Dreams trademark to approved
Part FS Page 24
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
licensed articles for resale. DFC also has certain rights of first
refusal related to the use of the service mark outside the United
States. There is an exception of the right to transfer this licensing
agreement to Dreams, Inc. or to a newly incorporated majority-owned
subsidiary of Dreams, Inc. within a six-month period; these licensing
rights are non-transferable and non-assignable.
The license agreement expires December 2000. The agreement 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 of during an option term, the agreement may be terminated
USL. Termination of the license agreement would eliminate DFC's right
to use the Field of Dreams service mark.
On June 5, 1997, DFC received from USL a notice of termination of the
USL License based upon an allegation of more than four material
breaches within a period of eighteen (18) months. Subsequently, USL
suspended the notice of termination as DFC and USL negotiated a
settlement of and amendment to the License agreement. Effective
September 1997, DFC and USL agreed that the USL License is in good
standing. Under the terms of the settlement agreement, DFC was required
to pay to USL $100 over a one year period and immediately pay all
royalties due. The Company paid USL $75 in fiscal 1998 and the
remaining $25 in fiscal 1999. The settlement agreement also modified
the USL License to exclude USL properties and the surrounding five-mile
radius (excluding large regional malls) from DFC's exclusive territory.
DFC has the right of first refusal to the third-party retail sports
memorabilia operation on the USL properties. Should DFC fail to meet
its obligation under the settlement agreement, the USL license would
again be in breach and subject to termination by USL.
DFC may be precluded from offering franchises in certain states where
USL may be deemed to be a franchisor under the laws of the applicable
states. Accordingly, before offering franchises in said states, DFC
shall notify USL of its intent, and USL must conclude that it will not
be deemed a franchisor in those states, or the rights to sell
franchises may be withheld.
DFC is required to indemnify USL from 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 million per single incident. The coverage must
name USL as an insured party. At March 31, 1999, DFC had the required
insurance coverage.
Part FS Page 25
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
The Company has entered into a continuing guarantee agreement with USL,
whereby the Company has guaranteed the full and prompt payment to USL
of all amounts due under this agreement. Royalty expense for the years
ended March 31, 1999 and 1998 was $189 and $126, respectively.
DFC franchise activity is summarized as follows for the years ended
March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
In operation at year end 34 27
Opened during the year 8 7
Closed during the year 1 3
Under development at year end 3 2
</TABLE>
15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during fiscal 1999 and 1998 was $156 and $131,
respectively. The Company did not pay any income taxes during fiscal
1999 or fiscal 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Noncash investing and financing activities:
Capital stock issued for acquisition $ 3,000 $ -
Capital stock issued as consideration to
extinguish debt 1,649 -
Capital stock issued for payment of services
to third parties 80 -
Capital stock issued to acquire minority
interest in subsidiary - 362
Details of acquisition:
Fair value of assets acquired $ 3,577 $ -
Liabilities assumed (552) -
Capital stock issued (750) -
---------- -------
Cash paid 2,275 -
Less cash acquired (57) -
----------- -------
Net cash paid for acquisition $ 2,218 $ -
----------- -------
</TABLE>
Part FS Page 26
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
16. UNAUDITED INTERIM STATEMENTS
The financial statements as of June 30, 1999 and for the three months
ended June 30, 1999 and 1998 are unaudited; however, in the opinion of
the management of Dreams, Inc., all adjustments (consisting solely of
normal recurring adjustments) necessary to a fair presentation of the
financial statements for these interim periods have been made. The
results for the interim period ended June 30, 1999 are not necessarily
indicative of the results to be obtained for a full fiscal year.
Part FS Page 27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Mounted Memories, Inc.
We have audited the accompanying statements of income and cash flows of Mounted
Memories, Inc. for the seven month period ended October 31, 1998 and the year
ended March 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of income and cash flows are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of income and cash
flows. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of income and cash flows presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statements of income and cash flows referred to above
present fairly, in all material respects, the results of Mounted Memories, Inc.
operations and their cash flows for the seven month period ended October 31,
1998 and the year ended March 31, 1998, in conformity with generally accepted
accounting principles.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
June 23, 1999
Part FS Page 28
<PAGE>
MOUNTED MEMORIES, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Seven Months Twelve Months
Ended Ended
October 31, 1998 March 31, 1998
---------------- ---------------
<S> <C> <C>
REVENUES $ 5,402 $ 7,426
EXPENSES:
Cost of sales 3,530 4,244
Operating expenses 596 1,109
General and administrative expenses 661 1,306
Depreciation and amortization 21 41
----------- ------------
Total expenses 4,808 6,700
INCOME BEFORE INTEREST 594 726
Interest, net 8 1
----------- ------------
NET INCOME $ 586 $ 725
----------- ------------
----------- ------------
EARNINGS PER SHARE:
BASIC:
Income from continuing operations $ 0.04 $ 0.05
----------- ------------
----------- ------------
Net income $ 0.04 $ 0.05
----------- ------------
----------- ------------
Weighted average shares outstanding 16,500,000 15,398,630
----------- ------------
----------- ------------
DILUTED:
Income from continuing operations $ 0.04 $ 0.05
----------- ------------
----------- ------------
Net income $ 0.04 $ 0.05
----------- ------------
----------- ------------
Weighted average shares outstanding 16,500,000 15,398,630
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Part FS Page 29
<PAGE>
MOUNTED MEMORIES, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Seven Months Twelve Months
Ended Ended
October 31, 1998 March 31, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 586 $ 725
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 21 41
Provision for losses on accounts receivable 56 55
Change in assets and liabilities:
Increase in accounts receivable (565) (145)
Increase in inventories (658) (426)
Increase (decrease) in prepaid expenses 137 (193)
Increase (decrease) in accounts payable (11) 211
Increase (decrease) in accrued expenses (65) 26
Other (53) 17
---------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (552) 311
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (52) (50)
NET CASH USED IN INVESTING ACTIVITIES (52) (50)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 175 -
NET CASH PROVIDED BY FINANCING ACTIVITIES 175 -
---------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (429) 261
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 486 225
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57 $ 486
---------------- --------------
---------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Part FS Page 30
<PAGE>
MOUNTED MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Mounted Memories, Inc. (the "Company") is a wholesaler of sports
memorabilia products and acrylic cases. The Company pays an annual fee
to the National Football League which officially licenses the Company's
football memorabilia products.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as highly liquid investments with
original maturities of three months or less and consist of amounts held
as bank deposits.
WHOLESALE REVENUES
Wholesale revenues are recognized as the products are sold and shipped
to customers.
ADVERTISING AND PROMOTIONAL COSTS
All advertising and promotional costs associated with advertising and
promoting the Company are expensed in the period incurred.
INVENTORIES
Inventories, consisting primarily of sports memorabilia products and
acrylic cases, are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method for both raw
materials and finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
for using the straight-line method over the estimated useful lives of
the assets ranging from three to ten years. Leasehold improvements
are amortized over the lease period or the estimated useful life of
the improvements, whichever is less.
Maintenance and repairs are charged to expense as incurred and major
renewals and betterments are capitalized. Gains and losses are credited
or charged to earnings upon disposition.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event facts and circumstances indicate that the carrying value
of long-lived assets may be impaired, an evaluation of recoverability
is performed by comparing the estimated future undiscounted cash flows
associated with the asset to the asset's carrying amount to determine
if a write-down to market value or discounted cash flow is required.
Part FS Page 31
<PAGE>
MOUNTED MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximated their fair values
because of the short maturity of these instruments.
INCOME TAXES
The Company is taxed under the provisions of Subchapter S (S
Corporation) of the Internal Revenue Code and for Florida tax purposes
under applicable sections of the state income tax laws. These elections
eliminate federal and state income taxes at the corporate level and
profits are taxed directly to the Company's stockholders.
NET INCOME PER SHARE
During the year ended March 31, 1998, the Company adopted the
provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires
companies to present basic earnings per share ("EPS") and diluted EPS,
instead of the primary and fully diluted EPS presentations that were
formerly required by the Accounting Principles Board Opinion No. 15,
"Earnings Per Share". Basic EPS is computed by dividing net income
available to common stockholders by the weighted average of common
shares outstanding during the period. Dilutive EPS was not presented,
as its effect was not material to the financial statements for the
periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and related notes to the financial statements. Estimates are
used when accounting for uncollectable accounts receivable, inventory
obsolescence, depreciation, contingencies, among others. Actual results
could differ from those estimated by management and changes in such
estimates may affect amounts reported in future periods.
2. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and
accounts receivable arising from normal business activities.
Regarding accounts receivable, the Company believes that credit risk is
limited due to the large number of entities comprising the Company's
customer base and the diversified industries in which the Company
operates. The Company performs certain credit evaluation procedures and
does not require collateral. The Company believes that credit risk is
limited because the Company routinely assesses the financial strength
of its customers, and based upon factors surrounding the credit risk of
customers, establishes an allowance for
Part FS Page 32
<PAGE>
MOUNTED MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
uncollectable accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowances is
limited. The Company had an allowance for doubtful accounts at October
31, 1998 of approximately $111. The Company believes any credit risk
beyond this amount would be negligible.
3. COMMITMENTS AND CONTINGENCIES
As of October 31, 1998, the Company leases office and warehouse space
under operating leases in Florida (approximately 23,000 square feet)
and Colorado (approximately 3,000 square feet). The leases for these
two facilities expire in April 2003 and September 2003, respectively.
Rent expense charged to operations for the seven months ended October
31, 1998 and for the twelve months ended March 31, 1998 was $126 and
$143, respectively.
The aggregate minimum future lease payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Five months ended March 31, 1999 $ 85
Twelve months ended March 31, 2000 208
Twelve months ended March 31, 2001 206
Twelve months ended March 31, 2002 204
Twelve months ended March 31, 2003 212
Twelve months ended March 31, 2004 17
Thereafter -
------
Total minimum future lease commitments $ 932
------
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the seven months ended October 31, 1998
and the twelve months ended March 31, 1998 was $8 and $1, respectively.
The Company did not pay any income taxes during either of those two
periods.
Part FS Page 33
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During November 1998, Dreams Products, Inc. ("DPI") acquired all of the
assets of Mounted Memories, Inc. ("MMI"), a wholesaler of sports memorabilia
products and acrylic cases. The aggregate consideration paid was $5.3 million,
consisting of cash in the amount of $2.3 million and the issuance of 15,000,000
of Dreams, Inc. common stock, which was trading at approximately $0.20 at the
date of the transaction. DPI financed the purchase price through the issuance of
a long-term note in the amount of $3.0 million.
The acquisition was accounted for as a purchase and, accordingly, MMI's
results are included in the consolidated financial statements since the date of
acquistion. The aggregate of the net assets acquired was approximately $2.8
million, which was allocated based on the fair values of the assets and
liabilities acquired at the date of acquisition. The excess of purchase price
over net assets acquired of $2.5 million has been allocated with $498,000 to
goodwill and $2.0 million to trademarks. These amounts will be amortized on the
straight-line basis over 20 years. Liabilities of $552 were assumed in
connection with the acquisition, consisting primarily of accounts payable and
accrued liabilities.
The accompanying Pro Forma Condensed Consolidated Statement of
Income for the year ended March 31, 1999 assumes that the acquisition of MMI
took place on April 1, 1998, the beginning of Dreams, Inc.'s fiscal year
ended March 31, 1999. The Pro Forma Condensed Consolidated Statement of
Income does not include the effect of any non-recurring write-offs directly
attributable to the acquisition.
The accompanying pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
results of operations which would actually have been reported had the
acquisition been in effect during the period presented, or which may be
reported in the future.
The accompanying Pro Forma Condensed Consolidated Statements of Income
should be read in conjunction with the historical financial statements and
related notes thereto for Dreams, Inc. and MMI.
Part FS Page 34
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the twelve months ended March 31, 1999 (Unaudited)
(In thousands, except per share date)
<TABLE>
<CAPTION>
Dreams, Inc. MMI
Twelve Months Seven Months
Ended Ended Pro Forma Pro Forma
March 31, 1999 October 31, 1998 Adjustments Combined
-------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 7,044 $ 5,402 $ - $ 12,446
Cost of sales 3,064 3,530 - 6,594
-------------- ---------------- ------------ ------------
Gross profit 3,980 1,872 - 5,852
Operating and general
and administrative expenses 3,122 1,257 - 4,379
Depreciation and amortization 126 21 128 (1) 275
-------------- ---------------- ------------ ------------
Income from continuing operations before
interest and taxes 732 594 (128) 1,198
Interest, net 322 8 201 (2) 531
-------------- ---------------- ------------ ------------
Income from continuing operations before taxes 410 586 (329) 667
Deferred tax expense 75 - 90 (3) 165
-------------- ---------------- ------------ ------------
Income from continuing operations 335 586 (419) 502
Gain on disposal of restaurant segment 268 - - 268
-------------- ---------------- ------------ ------------
Net income $ 603 $ 586 $ (419) $ 770
-------------- ---------------- ------------ ------------
-------------- ---------------- ------------ ------------
Net income per share $ 0.02 $ 0.02
-------------- ------------
-------------- ------------
Weighted average shares outstanding 25,181,915 40,148,500
-------------- ------------
-------------- ------------
</TABLE>
(1) Reflects amortization of goodwill, trademarks and debt issuance costs
resulting from acquisition.
(2) Interest expense adjusted to reflect debt remaining after acquisition.
(3) Related tax effect of pro forma adjustments and combined businesses.
Part FS Page 35
<PAGE>
PART III
Item 1
Exhibit Index
Exhibit Number Page #
2 (i) Articles of Incorporation
(ii) Bylaws
6 Material Contracts
(i) Sirrom Financing Agreements
(ii) Ross Tannenbaum Employment Agreement
(iii) Merchandise License Agreement
(iv) Standard Franchise Documents
7 Letter on change in certifying accountant
Exhibit Index
<PAGE>
Pursuant to the requirements of Section 12 of the Securities Exchange Age of
1934, the Registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
DREAMS, INC.
Date: November 3, 1999 By: /s/
---------------------------- ------------------------------------
(Signature)
Signature Page
