<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
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.
- -------------------------------------------------------------------------------
(Name of Small Business Issuer in its charter)
Utah 87-0368170
- ------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5009 Hiatus Road, Sunrise, Florida 33351
- ------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number ( 954 ) 742 - 8544
------- ---------- ------------
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
- ------------------------------------- ---------------------------------------
- ------------------------------------- ---------------------------------------
Securities to be registered under Section 12(g) of the Act:
Common stock, no par value
- -------------------------------------------------------------------------------
(Title of class)
- -------------------------------------------------------------------------------
(Title of class)
<PAGE>
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 Trademark-
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
Trademark- franchise stores open and operating. Additionally, six Area
Development Agreements which are currently effective have been sold to
franchisees. Thirteen franchised stores 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.
FIELD OF DREAMS-Registered Trademark- FRANCHISING BACKGROUND.
Registrant conducts its Field of Dreams-Registered Trademark- operations
through its subsidiary DFC. DFC licenses certain rights from MCA/Universal
Merchandising Inc. ("MCA") to use the name "Field of Dreams-Registered
Trademark-" in connection with retail operations and catalog sales. Field of
Dreams-Registered Trademark- is a copyright and trademark owned by Universal
City Studios, Inc. with all rights reserved. Universal has authorized MCA to
license the marks. Neither company is in any way related to or an affiliate of
Registrant. Registrant does not own or operate any Field of Dreams-Registered
Trademark- stores.
Until December 1996 the Registrant was engaged in the restaurant
business as the owner of certain Shari's restaurants and until July 1995 as
the owner of a restaurant/bar in Palm Desert, California. 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 Trademark-" as the name of retail stores in the United States
and a non-exclusive right to use the name "Field of Dreams-Registered
Trademark-" as a logo on products. DFC has also licensed from MCA the exclusive
right to sublicense the "Field of Dreams-Registered Trademark-" name to
franchisees for use as a retail store name. The license agreement between DFC
and MCA is referred to herein as the "MCA License". Under the terms of the MCA
License, DFC is obligated to pay to MCA a 1% royalty based on gross sales of
Field of Dreams-Registered Trademark- 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
2
<PAGE>
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 Trademark- mark for approval prior to use. Ownership of the
Field of Dreams-Registered Trademark- name remains with MCA and will not become
that of DFC or Registrant. Should DFC breach the terms of the MCA License, MCA
may, in addition to other remedies, terminate DFC's rights to use the "Field of
Dreams-Registered Trademark-" name. Such a termination would have a seriously
adverse effect on DFC's and Registrant's business.
If DFC is in compliance with the terms of the MCA License and if MCA wishes
to open and operate or license third parties to open and operate Field of
Dreams-Registered Trademark- stores outside of the United States, DFC has a
right of first refusal to obtain the license for such non-United States
territory. DFC must comply with certain terms and conditions in order to
exercise the right of first refusal.
DFC is required to indemnify MCA for certain losses and claims, including
those based on defective products, violation of franchise law and other acts and
omissions of DFC. DFC is required to maintain insurance coverage of $3,000,000
per single incident. The coverage must name MCA as an insured party.
Registrant has guaranteed the monetary obligations of DFC pursuant to the MCA
License. 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 Trademark- stores in the United States.
The laws of each state vary regarding regulation of the sale of franchises.
Certain states require compliance with the regulations of the Federal Trade
Commission prior to commencement of sales activity (the "FTC States"). Other
states require compliance with specific additional registration procedures which
vary in complexity. DFC is currently offering franchises in FTC States and a
limited number of other states. It will offer franchises in other states as
compliance with each states' regulation is completed. 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").
STANDARD FRANCHISES:
Pursuant to a Standard franchise, a franchisee obtains the right to
open and operate a single Field of Dreams-Registered Trademark- store at a
single specified location. Franchisees pay DFC $10,000 upon execution of a
Standard franchise agreement and an additional $22,500 upon execution by
the franchisee of a lease for the franchised store. Standard franchise
agreements vary in length. It is DFC's general practice that the term of
Standard franchise agreements concur with the term of the franchisee's
lease. In addition to sublicensing the right to use the Field of
Dreams-Registered Trademark- name for a single franchised store, DFC is
required to provide the franchisee certain training, start-up assistance
and a system for the operation of the store. DFC reserves
3
<PAGE>
the right to modify at any time the system used in the store, and DFC may
also change the name used in the system from Field of Dreams-Registered
Trademark- to any other name and require all franchisees to discontinue
any use of any aspect of the system or the name Field of Dreams-Registered
Trademark-.
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
Trademark- system. Each franchisee is also required to spend 1% of its
gross revenues for its own local advertising and promotion. During its
first 90 days of operation, each franchisee is required to spend a minimum
of $2,500 for promotion and advertising. Franchisees are required to
maintain standards of quality and performance and to maintain the
proprietary nature of the Field of Dreams-Registered Trademark- name.
Franchisees must commence operation of the franchised stores within 180
days after execution of the Standard franchise agreement. DFC has prepared
and amends from time-to-time an approved supplier list from which
franchisees may purchase certain inventory and other supplies. Each
franchisee is required to maintain specified amounts of liability insurance
which names DFC and MCA as insured parties. Franchisee's rights under the
Standard franchise are not transferable without the consent of DFC and DFC
has a right of first refusal to purchase any franchised store which is
proposed to be sold.
KIOSK:
Pursuant to a Kiosk franchise, a franchisee acquires the same rights
as a Standard franchise, except that the franchisee is licensed to open a
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.
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.
4
<PAGE>
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.
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.
MOUNTED MEMORIES.
Mounted Memories ("MMI") is one of the nation's largest suppliers of sports
and celebrity memorabilia products and acrylic cases. MMI also organizes,
operates and participates in hobby and collectible shows. Through its numerous
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.
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.
5
<PAGE>
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 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. 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.
6
<PAGE>
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Certain statements in this Form 10-SB constitute "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Registrant to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
competition; seasonality; success of operating initiatives; new product
development and introduction schedules; acceptance of new product offerings;
franchise sales; advertising and promotional efforts; adverse publicity;
expansion of the franchise chain; availability, locations and terms of sites for
franchise development; changes in business strategy or development plans;
availability and terms of capital; labor and employee benefit costs; changes in
government regulations; the effects of Year 2000 issues; and other factors
particular to Registrant.
7
<PAGE>
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.
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 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.
8
<PAGE>
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.)
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.
9
<PAGE>
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.
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.
10
<PAGE>
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
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.
11
<PAGE>
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.
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
12
<PAGE>
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
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 family members of which
Mr. Battistone disclaims ownership.
(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.
13
<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.
14
<PAGE>
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. 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.
15
<PAGE>
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 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 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 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.
16
<PAGE>
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 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 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 that time, Battistone
delivered $250,000 to Registrant but Registrant had insufficient authorized
shares to issue and deliver those shares to Battistone. InMarch 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.
17
<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
18
<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.
<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
December 1997 Common Stock 1,450,000 shares Exchange for all shares of
Dreams Franchise
Corporation not owned by
Registrant
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
19
<PAGE>
October 1998 Options to purchase shares 750,000 shares Issued in connection with
of Common Stock (2) employment agreements
November 1998 Common Stock (3) 15,000,000 shares Partial consideration for
all assets of Mounted
Memories, Inc.
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
November 1998 Common Stock (5) 375,000 shares Issued in connection with
purchase of Mounted
Memories, Inc.
November 1998 Common Stock (5) 800,000 shares Release of
$160,000 debt
January 1999 Options to purchase shares 200,000 shares Issued in connection with
of Common Stock (2) employment agreement
</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.
20
<PAGE>
(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.
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
21
<PAGE>
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 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;
22
<PAGE>
(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:
(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;
23
<PAGE>
(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 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
thedistribution 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.
24
<PAGE>
(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.
(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.
25
<PAGE>
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.
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
26
<PAGE>
(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:
(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.
27
<PAGE>
(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 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.
28
<PAGE>
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.
29
<PAGE>
PART F/S
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORTS F/S-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 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
</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
-------- -------- ---------
<S> <C> <C> <C>
ASSETS
------
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 -
GOODWILL, NET 2,415 2,446 -
DEBT ISSUANCE COSTS, NET 423 437 -
------- ------- -------
TOTAL ASSETS $7,878 $8,063 $ 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
------- ------- -------
TOTAL LIABILITIES 4,817 5,319 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 (15,023) (15,340) (15,968)
------- -------- --------
Total stockholders' equity (deficit) 3,061 2,744 (2,613)
------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,878 $ 8,063 $ 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 126 52 297 127
------- -------- --------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 342 (192) 435 128
Current tax expense 25 - 416 -
Deferred tax expense - - (341) -
------- -------- --------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 317 (192) 360 128
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) $ 317 $ (192) $ 628 $ 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 - - - 628 628
----------- --------- --------- ---------- ------------
Balance at March 31, 1999 40,148,500 $ 18,084 $ - $ (15,340) $ 2,744
Net income for the three months ended
June 30, 1999 - - - 317 317
----------- --------- --------- ---------- ------------
Balance at June 30, 1999 (unaudited) 40,148,500 $ 18,084 $ - $ (15,023) $ 3,061
========== ========== ========= ========== ============
</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 $ 317 $ (192) $ 628 $ 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 costs 25 - 39 -
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)
------- ------- ------- -------
Part FS Page 7
<PAGE>
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. 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 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 10
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED 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. 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 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.
Part FS Page 11
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
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.
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
Part FS Page 12
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
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 purchase price exceeded
the fair value of the net assets acquired by approximately $2.5 million,
which is recognized as goodwill and is being amortized over 20 years.
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.
PROFORMA INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
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>
Part FS Page 13
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
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
Accrued liabilities consisted of the following at March 31:
<TABLE>
<CAPTION>
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
</TABLE>
Part FS Page 15
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C> <C>
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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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
shares 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. The
exercise price of the warrants is $0.01 per share. 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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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 -
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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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.
Part FS Page 23
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
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.
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
Part FS Page 24
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
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 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.
Part FS Page 25
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
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.
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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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>
PART III
--------
Item 1
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Number Page #
<S> <C>
2 (i) Articles of Incorporation
(ii) Bylaws
6 Material Contracts
(i) Sirrom Financing Agreements
(ii) Ross Tannenbaum Employment Agreement
(iii) Merchandise License Agreement
7 Letter on change in certifying accountant
</TABLE>
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: By:
----------------------------- ----------------------------------
(Signature)
Signature Page
<PAGE>
EXHIBIT 2(i)
Articles of Incorporation
Articles of Inc
<PAGE>
ARTICLES OF AMENDMENT
Pursuant to Section 16-10a-1006 of the Utah Revised Business
Corporation Act, Dreams, Inc., a Utah corporation hereby files with the Utah
Division of Corporations and Commercial Code the following Articles of
Amendment:
FIRST: The name of the corporation is Dreams, Inc.
SECOND: The following Article replaces in its entirety the
correspondingly numbered Article in the Company's Revised
Articles of Incorporation:
ARTICLE IV - STOCK
THE AGGREGATE NUMBER OF SHARES OF COMMON STOCK WHICH
THIS CORPORATION SHALL HAVE AUTHORITY TO ISSUE IS 100,000,000
(ONE HUNDRED MILLION) NO PAR VALUE PER SHARE.
UPON THE EFFECTIVENESS OF THESE ARTICLES OF AMENDMENT
PURSUANT TO THE UTAH REVISED BUSINESS CORPORATION ACT, EACH
SHARE OF THE CORPORATION'S PREVIOUSLY ISSUED AND OUTSTANDING
$0.05 PAR VALUE COMMON STOCK SHALL BE DEEMED CONVERTED INTO
ONE SHARE OF THIS CORPORATION'S NO PAR VALUE COMMON STOCK. THE
CORPORATION SHALL INSTITUTE PROCEDURES TO PROVIDE FOR THE
ORDERLY EXCHANGE OF CERTIFICATES.
THIRD: Provisions for implementing the conversion of $0.05 par value
common shares into no par value common shares are contained in
Article IV.
FOURTH: The Amendment was adopted on January 14, 1999.
FIFTH: The Amendment was approved by the Company's shareholders. The
number of shares of common stock, the Company's only class of
stock, issued and outstanding on January 14, 1999 was
40,148,500 (Forty Million One Hundred Forty Eight Thousand
Five Hundred).
SIXTH: The number of shares entitled to be voted was 40,148,500
(Forty Million One Hundred Forty Eight Thousand Five Hundred).
SEVENTH: 23,946,495 (Twenty Three Million Nine Hundred Forty Six
Thousand Four Hundred Ninety Five) shares were indisputably
represented at the meeting.
EIGHTH: The total number of shares cast in favor of the above
amendment was 23,946,495 (Twenty Three Million Nine Hundred
Forth Six Thousand Four Hundred Ninety Five) and the total
number of shares cast against the above
ArtOfInc Page 1
<PAGE>
amendment was - 0 - (None). The number of votes cast for
the amendment was sufficient for approval.
Filed in accordance with Section 16-10a-120 of the Utah Revised
Business Corporation Act this 14th day of January, 1999.
DREAMS, INC., a Utah corporation
By:
----------------------------------
SAM D. BATTISTONE
Its: President
By:
----------------------------------
MARK VINER
Its: Secretary
STATE OF NEVADA )
: ss.
COUNTY OF CLARK )
On the 14th day of January, 1999, before me, the undersigned Notary,
personally appeared Sam D. Battistone, known or identified to me to be the
President of Dreams, Inc., a Utah corporation, and acknowledged to me that such
corporation executed the foregoing instrument.
Dated this 14th day of January, 1999.
------------------------------------
NOTARY PUBLIC
My Commission Expires:
ArtOfInc Page 2
<PAGE>
STATE OF NEVADA )
: ss.
COUNTY OF CLARK )
On the 14th day of January, 1999, before me, the undersigned Notary,
personally appeared Mark Viner, known or identified to me to be the Secretary of
Dreams, Inc., a Utah corporation, and acknowledged to me that such corporation
executed the foregoing instrument.
Dated this 14th day of January, 1999.
------------------------------------------
NOTARY PUBLIC
My Commission Expires:
ArtOfInc Page 3
<PAGE>
ARTICLES OF AMENDMENT
Pursuant to Section 16-10a-1006 of the Utah Revised Business
Corporation Act, the corporation known prior to this amendment as StratAmerica
Corporation hereby files with the Utah Division of Corporations and Commercial
Code the following Articles of Amendment:
FIRST: The name of the corporation, prior to the effectiveness of
this amendment, is StratAmerica Corporation.
SECOND: The following articles replace in their entirety the
correspondingly numbered articles in the Company's Revised
Articles of Incorporation:
ARTICLE I - NAME
The name of this corporation is Dreams, Inc.
ARTICLE IV - STOCK
The aggregate number of shares of common stock which this corporation
shall have authority to issue is 50,000,000 (fifty million) $.05 par value per
share.
ARTICLE V - INDEMNIFICATION AND
LIMITATION OF LIABILITY
This corporation shall indemnify all officers, directors and agents to
the fullest extent permitted by law.
To the fullest extent permitted by the Utah Revised Business
Corporation Act or any other applicable law as now in effect or as it may
hereafter be amended, directors of this corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for any
action taken or any failure to take any action as a director.
Neither any amendment nor repeal of this resolution, or the adoption of
any provision of the Articles of Incorporation of this corporation inconsistent
with this resolution, shall eliminate or reduce the effect of this resolution in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this resolution, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
THIRD: Each of the above amendments were adopted on March 28, 1996,
by the Shareholders of the Company in the manner prescribed by
Utah law.
FOURTH: The number of shares of common stock, the Company's only
class of stock, issued and outstanding on March 28, 1996,
was 10,000,000 (ten million).
ArtOfInc Page 4
<PAGE>
FIFTH: The number of shares entitled to be voted was 10,000,000 (ten
million).
SIXTH: The total number of shares cast in favor of all the above
amendments was 8,117,490 and the total number of shares cast
against the above amendments was 18,540.
SEVENTH: 8,132,430 shares were indisputably represented at the meeting.
Filed in accordance with Section 16-10a-120 of the Utah Revised
Business Corporation Act this 28th day of March, 1996.
STRATAMERICA CORPORATION, a
Utah corporation
By:____________________________________
SAM D. BATTISTONE
Its: President
By:____________________________________
DALE E. LARSSON
Its: Secretary
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
On the 28th day of March, 1996, before me, the undersigned Notary,
personally appeared Sam D. Battistone, known or identified to me to be the
President of StratAmerica Corporation, and acknowledged to me that such
corporation executed the foregoing instrument.
Dated this 28th day of March, 1996.
-----------------------------------
NOTARY PUBLIC
My Commission Expires:
ArtOfInc Page 5
<PAGE>
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
On the 28th day of March, 1996, before me, the undersigned Notary,
personally appeared Dale E. Larsson, known or identified to me to be the
Secretary of StratAmerica Corporation, and acknowledged to me that such
corporation executed the foregoing instrument.
Dated this 28th day of March, 1996.
-----------------------------------
NOTARY PUBLIC
My Commission Expires:
ArtOfInc Page 6
<PAGE>
REVISED ARTICLES OF INCORPORATION
OF STRATAMERICA CORPORATION
ARTICLE I - NAME
The name of this corporation is StratAmerica Corporation.
ARTICLE II - DURATION
The duration of this corporation is perpetual.
ARTICLE III - PURPOSES
A. The purposes for which this corporation is organized are to
engage in all aspects of the restaurant business.
B. This corporation shall have all of the powers granted or
allowed by the Utah Business Corporation Act, as may be amended from time to
time, and all of the powers necessary or convenient to effect any or all of the
purposes for which this corporation is organized.
C. This corporation shall have power to acquire by purchase,
exchange, gift, bequest, subscription or otherwise, and to hold, own, mortgage,
pledge, hypothecate, sell, assign, transfer, exchange or otherwise dispose of or
deal in or with its own corporate securities or stock or other securities,
including, without limitation, any shares of stock, bonds, debentures, notes,
mortgages, or other obligations, and any certificates, receipts or other
instruments representing rights or interest therein or any property or assets
created or issued by any person, firm, association, or corporation, or any
government or subdivisions, agencies or instrumentalities thereof; to make
payment therefor in any lawful manner or to issue in exchange therefor its own
securities or to use its unrestricted any unreserved earned surplus and/or
unrestricted and unreserved capital surplus for the purchase of its own shares,
and to exercise as owner or holder of any securities, any and all rights, powers
and privileges in respect thereof.
D. This corporation shall have power to act as fully and to the
same extent as a natural person might, or could do, in any part of the world as
principal, agent, partner, general or limited, trustee or otherwise, either
alone or in conjunction with any person, firm or corporation.
ARTICLE IV - STOCK
The aggregate number of shares of common stock which this corporation
shall have authority to issue is 10,000,000 shares, $.05 par value share.
ArtOfInc Page 7
<PAGE>
Effective upon the issuance by the Utah Division of Corporations and
Commercial Code of a Certificate of Revision effecting these Revised Articles of
Incorporation, each five shares of the corporation's previously issued and
outstanding $.01 par value stock shall be deemed converted into one share of the
corporation's $.05 par value common stock. The corporation shall institute
procedures to provide for the orderly exchange of certificates and payment for
fractional shares.
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 Business Corporation Act as
the same exists or may hereafter be amended, a director of this corporation
shall not be liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director.
ARTICLE VI - PRE-EMPTIVE RIGHTS
Shareholders shall not have pre-emptive rights to acquire shares of
common stock of this corporation.
ARTICLE VII - DIRECTORS
The number of Directors shall be not less than three (3). The number of
Directors constituting the initial Board of Directors is three (3). Thereafter,
the number of Directors shall be determined by the Bylaws.
ARTICLE VII - COMMON DIRECTORS
No contract or other transaction between this corporation and one or
more of its Directors or any other corporation, firm, association or entity in
which one or more of its Directors are directors or officers or are financially
interested, shall be either void or voidable because of such relationship or
interest, or because such Director or Directors are present at the meeting of
the Board of Directors, or a committee thereof, which authorizes, approves or
ratifies such contract or transaction, or because his or their votes are counted
for such purpose of: (a) the fact of such relationship or interest is disclosed
or known to the Board of Directors or committee which authorizes, approves or
ratifies the contract or transaction by vote or consent of such interested
Director; or (b) the fact of such relationship or interest is disclosed or known
to the shareholders entitled to vote and they authorize, approve or ratify such
contract or transaction by vote or written consent; or (c) the contract or
transaction is fair and reasonable to the corporation. Common or interested
Directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or committee thereof which authorizes, approves or
ratifies such contract or transaction.
ArtOfInc Page 8
<PAGE>
ARTICLE IX - REVISED ARTICLES
These Revised Articles of Incorporation supercede the original Articles
of Incorporation and all amendments thereto.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF STRATAMERICA CORPORATION
Pursuant to the provisions of the Utah Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The following Amendment to the Articles of Incorporation was
adopted by the shareholders of StratAmerica Corporation on June 2, 1989 in the
manner prescribed by the Utah Business Corporation Act:
The attached Revised Articles of Incorporation were adopted and are
incorporated by this reference.
SECOND: The number of shares of common stock of the corporation
outstanding at the time of such adoption was 24,630,981 and the number of shares
entitled to vote thereon was 24,630,981.
THIRD: The number of shares voted for such amendment was 18.585,683
and the number of shares voted against such amendment was 57,750.
FOURTH: The exchange and cancellation of issued certificates and the
issuance and delivery of new certificates shall be effected in the manner set
forth in the Revised Articles of Incorporation.
FIFTH: Stated capital of StratAmerica Corporation is not changed by
this Amendment.
STRATAMERICA CORPORATION
By:
---------------------------------
Sam D. Battistone, President
ATTESTED AND VERIFIED this 8th day of June, 1989.
- -----------------------------------
Dale E. Larsson, Secretary
ArtOfInc Page 9
<PAGE>
STATE OF CALIFORNIA )
:ss.
COUNTY OF RIVERSIDE )
The foregoing instrument was acknowledged before me this 8th day of
June, 1989, by Sam D. Battistone, President of StratAmerica Corporation, a Utah
corporation.
---------------------------------------
NOTARY PUBLIC
Residing at:
--------------------------
ArtOfInc Page 10
<PAGE>
STATE OF UTAH )
:ss.
COUNTY OF SALT LAKE )
The foregoing instrument was acknowledged before me this 8th day of
June, 1989, by Dale E. Larsson, Secretary of StratAmerica Corporation, a Utah
corporation.
---------------------------------------
NOTARY PUBLIC
Residing at:
---------------------------
My Commission Expires:
- ---------------------
ArtOfInc Page 11
<PAGE>
EXHIBIT 2(ii)
Bylaws
Bylaws
<PAGE>
BYLAWS
OF
DREAMS, INC.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C> <C>
ARTICLE I NAME, REGISTERED OFFICE, AND REGISTERED
AGENT
1.1
Name.........................................................1
1.2 Business Office..............................................1
1.3 Registered Office............................................1
ARTICLE II SHAREHOLDERS
2.1 Annual Shareholder Meetings..................................1
2.2 Special Shareholder Meetings ................................2
2.3 Place of Shareholder Meeting.................................2
2.4 Notice of Shareholder Meeting................................2
2.5 Fixing of Record Date........................................4
2.6 Shareholder List ...........................................5
2.7 Shareholder Quorum and Voting Requirements...................5
2.8 Increasing Either Quorum or Voting Requirements..............5
2.9 Proxies .....................................................6
2.10 Voting of Shares.............................................6
2.11 Corporation's Acceptance of Votes ...........................6
2.12 Informal Action by Shareholders..............................7
2.13 Voting For Directors.........................................8
2.14 Shareholder's Right to Inspect Corporate Records.............8
2.15 Financial Statements shall be Furnished to the Shareholders..9
2.16 Dissenter's Rights..........................................10
ARTICLE III BOARD OF DIRECTORS
3.1 General Powers..............................................10
3.2 Number, Tenure, and Qualifications of Directors.............10
3.3 Regular Meetings of the Board of Directors..................10
3.4 Special Meetings............................................11
Bylaws Index Page i
<PAGE>
3.5 Notice of, and Waiver of Notice for, Special Director
Meetings....................................................11
3.6 Director Quorum ............................................11
3.7 Directors, Manner of Acting.................................12
3.8 Establishing a "Supermajority" Quorum or Voting
Requirement for the Board of Directors....................12
3.9 Director Action Without a Meeting...........................13
3.10 Removal of Directors........................................13
3.11 Board of Director Vacancies.................................13
3.12 Director Compensation ......................................14
3.13 Director Committees.........................................14
3.14 Chairman....................................................15
ARTICLE IV OFFICERS
4.1 Number of Officers..........................................15
4.2 Appointment and Term of Office .............................15
4.3 Removal of Officers ........................................16
4.4 President ..................................................16
4.5 The Vice-Presidents ........................................16
4.6 The Secretary ..............................................16
4.7 The Treasurer ..............................................17
4.8 Assistant Secretaries and Assistant Treasurers..............17
4.9 Salaries ...................................................17
4.10 Other Officers .............................................17
4.11 Surety Bonds................................................18
ARTICLE V INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS,
AND EMPLOYEES
5.1 Indemnification of Directors................................18
5.2 Advance Expenses for Directors..............................19
5.3 Indemnification of Officers, Agents and
Employees Who Are Not Directors...........................19
ARTICLE VI CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 Certificates for Shares.....................................19
6.2 Shares Without Certificates.................................20
6.3 Registration of the Transfer of Shares......................20
6.4 Restrictions on Transfer of Shares Permitted................21
6.5 Acquisition of Shares ......................................22
6.6 Lost or Destroyed Certificates..............................22
Bylaws Index Page ii
<PAGE>
ARTICLE VII DISTRIBUTIONS
7.1 Distributions ..............................................22
ARTICLE VIII CORPORATE SEAL
8.1 Corporate Seal .............................................22
ARTICLE IX CONTRACTS, LOANS, CHECKS AND DEPOSITS
9.1 Contracts...................................................23
9.2 Loans.......................................................23
9.3 Deposits....................................................23
9.4 Checks and Drafts...........................................23
9.5 Bonds and Debentures........................................23
ARTICLE X EMERGENCY BYLAWS
10.1 Emergency Bylaws............................................23
ARTICLE XI AMENDMENTS
11.1 Amendment...................................................24
ARTICLE XII EXEMPTION FROM CONTROL SHARES ACQUISITION ACT..........25
</TABLE>
Bylaws Index Page iii
<PAGE>
BYLAWS OF
DREAMS, INC.
ARTICLE I
NAME, OFFICES AND REGISTERED AGENT
1.1 NAME.
The name of this corporation is Dreams, Inc.
1.2 BUSINESS OFFICE.
The principal office of the corporation shall be located at any place
either within or outside the State of Utah as designated in the company's most
recent document on file with the Utah Department of Commerce, Division of
Corporations and Commercial Code (the "Division") providing information
regarding the principal office of the corporation. The corporation may have such
other offices, either within or without the State of Utah as the board of
directors may designate or as the business of the corporation may require from
time to time. The corporation shall maintain at its principal office a copy of
certain records, as specified in Section 2.14 of Article II of these bylaws.
1.3 REGISTERED OFFICE.
The registered office of the corporation, required by Section 501 of
the Utah Revised Business Corporation Act (the "Act") shall be located within
Utah. The address of the registered office may be changed from time to time. The
name of the initial registered agent of this corporation is Dale E. Larsson.
ARTICLE II
SHAREHOLDERS
2.1 ANNUAL SHAREHOLDER MEETING.
The annual meeting of the shareholders shall be held on the 31st day of
July, in each year, beginning with the year 2000, at the hour of 11:00 o'clock
a.m., or at such other time on such other day within such month as shall be
fixed by the board of directors, for the purpose of electing directors and for
the transaction of such other business as may come before the meeting. If the
day fixed for the annual meeting shall be a legal holiday in the State of Utah,
such meeting shall be held on the next succeeding business day.
If the election of directors shall not be held on the day designated
herein for any annual meeting of the shareholders, or at any subsequent
continuation after adjournment thereof, the board of directors may cause the
election to be held at a special meeting of the shareholders when convenient.
Failure to hold an annual meeting shall not work a forfeiture or
dissolution of the corporation.
Bylaws Page 1
<PAGE>
2.2 SPECIAL SHAREHOLDER MEETINGS.
Special meetings of the shareholders, for any purpose or purposes,
described in the meeting notice, may be called by the president, or by the board
of directors and shall be called by the president at the request of the holders
of not less than one-tenth of all outstanding votes of the corporation entitled
to be cast on any issue at the meeting.
2.3 PLACE OF SHAREHOLDER MEETING.
The board of directors may designate any place for any annual or
special meeting of the shareholders, unless a majority of the shareholders
entitled to vote at the meeting agree by written consents (which may be in the
form of waiver of notice or otherwise) to another location, which may be either
within or without the State of Utah. If no designation is made, the place of
meeting shall be the principal office of the corporation.
2.4 NOTICE OF SHAREHOLDER MEETING.
(a) REQUIRED NOTICE.
Written notice stating the place, day and hour of any annual
or special shareholder meeting shall be delivered not less than 10 nor
more than 60 days before the date of the meeting, either personally or
by mail, by or at the direction of the president, the board of
directors, or other persons calling the meeting, to each shareholder of
record, entitled by the Act or the articles of incorporation to receive
notice of the meeting. Notice shall be deemed to be effective at the
earlier of:
(1) When deposited in the United States mail, addressed
to the shareholder at his address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid;
(2) On the date shown on the return receipt if sent by
registered or certified mail, return receipt requested, and the receipt
is signed by or on behalf of the addressee;
(3) When received; or
(4) Five days after deposit in the United States mail, if
mailed postpaid and correctly addressed to an address other than that
shown in the corporation's current record of shareholders.
Bylaws Page 2
<PAGE>
(b) ADJOURNED MEETING.
If any shareholder meeting is adjourned to a different date,
time, or place, notice need not be given of the new date, time and
place, if the new date, time and place is announced at the meeting
before adjournment. But if a new record date for the adjourned meeting
is, or must be fixed then notice must be given pursuant to the
requirements of paragraph (a) of this Section 2.4, to those persons who
are shareholders as of the new record date.
(c) WAIVER OF NOTICE.
The shareholder may waive notice of the meeting (or any notice
required by the Act, articles of incorporation, or bylaws), by a
writing signed by the shareholder entitled to the notice, which is
delivered to the corporation (either before or after the date and time
stated in the notice) for inclusion in the minutes or filing with the
corporate records.
A shareholders's attendance at a meeting:
(1) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting or
transacting business at the meeting;
(2) waives objection to consideration of a
particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless
the shareholder objects to considering the matter when it is
presented.
(d) CONTENTS OF NOTICE.
The notice of each special shareholder meeting shall include a
description of the purpose or purposes for which the meeting is called.
Except as provided in this Section 2.4(d), or as provided in the
corporation's articles, or otherwise in the Act, the notice of an
annual shareholder meeting need not include a description of the
purpose or purposes for which the meeting is called.
If a purpose of any shareholder meeting is to consider either:
(1) A proposed amendment to the articles of
incorporation (including any restated articles requiring
shareholder approval);
(2) A plan of merger or share exchange;
(3) The sale, lease, exchange or other
disposition of all, or substantially all of the corporation's
property;
(4) The dissolution of the corporation; or
Bylaws Page 3
<PAGE>
(5) The removal of a director, the notice must
so state and be accompanied by respectively a copy or summary
of the:
(i) Articles of amendment;
(ii) Plan of merger or share exchange; and
(iii) Transaction for disposition of all
the corporation's property.
If the proposed corporate action creates dissenters' rights, the notice
must state that shareholders are, or may be entitled to assert dissenters'
rights, and must be accompanied by a copy of Part 13 of the Act. If the
corporation issues, or authorizes the issuance of shares for promissory notes or
for promises to render services in the future, the corporation shall report in
writing to all the shareholders the number of shares authorized or issued, and
the consideration received with or before the notice of the next shareholder
meeting. Likewise, if the corporation indemnifies or advances expenses to a
director, this shall be reported to all the shareholders with or before notice
of the next shareholder's meeting.
2.5 FIXING OF RECORD DATE.
For the purpose of determining shareholders of any voting group
entitled to notice of or to vote at any meeting of shareholders, or shareholders
entitled to receive payment of any distribution or dividend, or in order to make
a determination of shareholders for any other proper purpose, the board of
directors may fix in advance a date as the record date. Such record date shall
not be more than 70 days prior to the date on which the particular action,
requiring such determination of shareholders, is to be taken. If no record date
is so fixed by the board for the determination of shareholders entitled to
notice of, or to vote at a meeting of shareholders, or shareholders entitled to
receive a share dividend or distribution, the record date for determination of
such shareholders shall be at the close of business on:
(a) With respect to an annual shareholder meeting or any special
shareholder meeting called by the board or any person specifically authorized by
the board or these bylaws to call a meeting, the day before the first notice is
delivered to shareholders;
(b) With respect to a special shareholder's meeting demanded by
the shareholders, the date the first shareholder signs the demand;
(c) With respect to the payment of a share dividend, the date the
board authorizes the share dividend;
(d) With respect to actions taken in writing without a meeting
(pursuant to Article II, Section 2.12), the date the first shareholder signs a
consent;
(e) And with respect to a distribution to shareholders, (other
than one involving a repurchase or reacquisition of shares), the date the board
authorizes the distribution.
Bylaws Page 4
<PAGE>
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof unless the board of directors fixes a new
record date which it must do if the meeting is adjourned to a date more than 120
days after the date fixed for the original meeting.
2.6 SHAREHOLDER LIST.
The officer or agent having charge of the stock transfer books for
shares of the corporation shall make a complete record of the shareholders
entitled to vote at each meeting of shareholders thereof, arranged in
alphabetical order, with the address of and the number of shares held by each.
The list must be arranged by voting group (if such exists, see Article II,
Section 2.6) and within each voting group by class or series of shares. The
shareholder list must be available for inspection by any shareholder, beginning
two business days after notice of the meeting is given for which the list was
prepared and continuing through the meeting. The list shall be available at the
corporation's principal office or at a place identified in the meeting notice in
the city where the meeting is to be held. A shareholder, his agent, or attorney
is entitled on written demand to inspect and, subject to the requirements of
Section 2.13 of this Article II, to copy the list during regular business hours
and at his expense, during the period it is available for inspection. The
corporation shall maintain the shareholder list in written form or in another
form capable of conversion into written form within a reasonable time.
2.7 SHAREHOLDER QUORUM AND VOTING REQUIREMENTS.
If the articles of incorporation or the Act provides for voting by a
single voting group on a matter, action on that matter is taken when voted upon
by that voting group.
Shares entitled to vote as a separate voting group may take action on a
matter at a meeting only if a quorum of those shares exists with respect to that
matter. Unless the articles of incorporation, a bylaw or the Act provide
otherwise, a majority of the votes entitled to be cast on the matter by the
voting group constitutes a quorum of that voting group for action on that
matter. If the articles of incorporation or the Act provide for voting by two or
more voting groups on a matter, action on that matter is taken only when voted
upon by each of those voting groups counted separately. Action may be taken by
one voting group on a matter even though no action is taken by another voting
group entitled to vote on the matter.
Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting. If a quorum exists, action on a matter (other than the
election of directors) by a voting group is approved if the votes cast within
the voting group favoring the action exceed the votes cast opposing the action,
unless the articles of incorporation, a bylaw or the Act require a greater
number of affirmative votes.
Bylaws Page 5
<PAGE>
2.8 INCREASING EITHER QUORUM OR VOTING REQUIREMENTS.
For purposes of this Section 2.8 a "supermajority" quorum is a
requirement that more than a majority of the votes of the voting group be
present to constitute a quorum; and a "supermajority" voting requirement is any
requirement that requires the vote of more than a majority of the affirmative
votes of a voting group at a meeting.
The shareholders, but only if specifically authorized to do so by the
articles of incorporation, may adopt, amend, or delete a bylaw which fixes a
"supermajority" quorum or "supermajority" voting requirement.
The adoption or amendment of a bylaw that adds, changes, or deletes a
"supermajority" quorum or voting requirement for shareholders must meet the same
quorum requirement and be adopted by the same vote and voting groups required to
take action under the quorum and voting requirement then in effect or proposed
to be adopted, whichever is greater.
A bylaw that fixes a supermajority quorum or voting requirement for
shareholders may not be adopted, amended, or repealed by the board of directors.
2.9 PROXIES.
At all meetings of shareholders, a shareholder may vote in person, or
vote by proxy which is executed in writing by the shareholder or which is
executed by his duly authorized attorney-in-fact. Such proxy shall be filed with
the secretary of the corporation or other person authorized to tabulate votes
before or at the time of the meeting. No proxy shall be valid after 11 months
from the date of its execution unless otherwise provided in the proxy.
2.10 VOTING OF SHARES.
Unless otherwise provided in the articles, each outstanding share
entitled to vote shall be entitled to one vote upon each matter submitted to a
vote at a meeting of shareholders.
Except as provided by specific court order, no shares held by another
corporation, if a majority of the shares entitled to vote for the election of
directors of such other corporation are held by the corporation, shall be voted
at any meeting or counted in determining the total number of outstanding shares
at any given time for purposes of any meeting. Provided, however, the prior
sentence shall not limit the power of the corporation to vote any shares,
including its own shares, held by it in a fiduciary capacity.
Redeemable shares are not entitled to vote after notice of redemption
is mailed to the holders and a sum sufficient to redeem the shares has been
deposited with a bank, trust company, or other financial institution under an
irrevocable obligation to pay the holders the redemption price on surrender of
the shares.
Bylaws Page 6
<PAGE>
2.11 CORPORATION'S ACCEPTANCE OF VOTES.
(a) If the name signed on a vote, consent, waiver, or proxy
appointment corresponds to the name of a shareholder, the corporation if acting
in good faith is entitled to accept the vote, consent, waiver, or proxy
appointment and give it effect as the act of the shareholders.
(b) If the name signed on a vote, consent, waiver, or proxy
appointment does not correspond to the name of its shareholder, the corporation
if acting in good faith is nevertheless entitled to accept the vote, consent,
waiver, or proxy appointment and give it effect as the act of the shareholder
if:
(1) The shareholder is an entity as defined in the Act
and the name signed purports to be that of an officer or agent of the
entity;
(2) The name signed purports to be that of an
administrator, executor, guardian, or conservator representing the
shareholder and, if the corporation requests, evidence of fiduciary
status acceptable to the corporation has been presented with respect to
the vote, consent, waiver, or proxy appointment;
(3) The name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the corporation
requests, evidence of this status acceptable to the corporation has
been presented with respect to the vote, consent, waiver, or proxy
appointment;
(4) The name signed purports to be that of a pledgee,
beneficial owner, or attorney-in-fact of the shareholder and, if the
corporation requests, evidence acceptable to the corporation of the
signatory's authority to sign for the shareholder has been presented
with respect to the vote, consent, waiver, or proxy appointment;
(5) Two or more persons are the shareholder as co-tenants
or fiduciaries and the named signed purports to be the name of at least
one of the co-owners and the person signing appears to be acting on
behalf of all the co-owners.
(c) The corporation is entitled to reject a vote, consent, waiver
or proxy appointment if the secretary or other officer or agent authorized to
tabulate votes, acting in good faith, has reasonable basis for doubt about the
validity of the signature on it or about the signatory's authority to sign for
the shareholder.
(d) The corporation and its officer or agent who accepts or
rejects a vote, consent, waiver, or proxy appointment in good faith and in
accordance with the standards of this section are not liable in damages to the
shareholder for the consequences of the acceptance or rejection.
(e) Corporate action based on the acceptance or rejection of a
vote, consent, waiver, or proxy appointment under this section is valid unless a
court of competent jurisdiction determines otherwise.
Bylaws Page 7
<PAGE>
2.12 INFORMAL ACTION BY SHAREHOLDERS.
Any action required or permitted to be taken at a meeting of the
shareholders may be taken without a meeting if one or more consents in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
shares having no less than the minimum number of votes that would be necessary
to authorize or take the action and are entitled to vote with respect to the
subject matter thereof and are delivered to the corporation for inclusion in the
minute book. If the act to be taken requires that notice be given to non-voting
shareholders, the corporation shall give the non-voting shareholders written
notice of the proposed action at least 10 days before the action is taken, which
notice shall contain or be accompanied by the same material that would have been
required if a formal meeting had been called to consider the action. A consent
signed under this section has the effect of a meeting vote and may be described
as such in any document.
2.13 VOTING FOR DIRECTORS.
Unless otherwise provided in the articles of incorporation, directors
are elected by a plurality of the votes cast by the shares entitled to vote in
the election at a meeting at which a quorum is present.
2.14 SHAREHOLDER'S RIGHT TO INSPECT CORPORATE RECORDS.
(a) MINUTES AND ACCOUNTING RECORDS. The corporation shall keep as
permanent records minutes of all meetings of its shareholders or board of
directors, a record of all actions taken by the shareholders or board of
directors without a meeting, and a record of all actions taken by a committee of
the board of directors in place of the board of directors on behalf of the
corporation. The corporation shall maintain appropriate accounting records.
(b) ABSOLUTE INSPECTION RIGHTS OF RECORDS REQUIRED AT PRINCIPAL
OFFICE. If he gives the corporation written notice of his demand at least five
business days before the date on which he wishes to inspect and copy, a
shareholder (or his agent or attorney) has the right to inspect and copy, during
regular business hours any of the following records, all of which the
corporation is required to keep at its principal office:
(1) Its articles or restated articles of incorporation
and all amendments to them currently in effect;
(2) Its bylaws or restated bylaws and all amendments to
them currently in effect;
(3) Resolutions adopted by its board of directors
creating one or more classes or series of shares, and fixing their
relative rights, preferences, and limitations, if shares issued
pursuant to those resolutions are outstanding;
(4) The minutes of all shareholders' meetings, and
records of all action taken by shareholders without a meeting, for the
past three years;
Bylaws Page 8
<PAGE>
(5) All written communications to shareholders generally
within the past three years, including the financial statement
furnished for the past three years to the shareholders;
(6) A list of the names and business addresses of its
current directors and officers; and
(7) Its most recent annual report delivered to the
Secretary of State.
(c) CONDITIONAL INSPECTION RIGHT. In addition, if he gives the
corporation a written demand made in good faith and for a proper purpose at
least five business days before the date on which he wishes to inspect and copy,
he describes with reasonable particularity his purpose and the records he
desires to inspect, and the records are directly connected with his purpose, a
shareholder of a corporation (or his agent or attorney) is entitled to inspect
and copy, during regular business hours at a reasonable location specified by
the corporation, any of the following records of the corporation:
(1) Excerpts from minutes of any meeting of the board of
directors, records of any action of a committee of the board of
directors on behalf of the corporation, minutes of any meeting of the
shareholders, and records of action taken by the shareholders or board
of directors without a meeting, to the extent not subject to inspection
under paragraph (a) of this Section 2.13;
(2) Accounting records of the corporation; and
(3) The record of shareholders (compiled no earlier than
the date of the shareholder's demand).
(d) COPY COSTS. The right to copy records includes, if reasonable,
the right to receive copies made by photographic, xerographic, or other means.
The corporation may impose a reasonable charge, covering the costs of labor and
material, for copies of any documents provided to the shareholder. The charge
may not exceed the estimated cost of production or reproduction of the records.
(e) SHAREHOLDER INCLUDES BENEFICIAL OWNER. For purposes of this
Section 2.14, the term "shareholder" shall include a beneficial owner whose
shares are held in a voting trust or by a nominee on his behalf.
2.15 FINANCIAL STATEMENTS SHALL BE FURNISHED TO THE SHAREHOLDERS.
(a) The corporation shall furnish its shareholders annual
financial statements, which may be consolidated or combined statements of the
corporation and one or more of its subsidiaries, as appropriate, that include a
balance sheet as of the end of the fiscal year, an income statement for that
year, and a statement of changes in shareholders' equity for the year unless
that information appears
Bylaws Page 9
<PAGE>
elsewhere in the financial statements. If financial statements are prepared for
the corporation on the basis of generally accepted accounting principles, the
annual financial statements for the shareholders also must be prepared on that
basis.
(b) If the annual financial statements are reported upon by a
public accountant, his report must accompany them. If not, the statements must
be accompanied by a statement of the president or the person responsible for the
corporation's accounting records:
(1) Stating his reasonable belief whether the statements
were prepared on the basis of generally accepted accounting principles
and, if not, describing the basis of preparation; and
(2) Describing any respects in which the statements were
not prepared on a basis of accounting consistent with the statements
prepared for the preceding year.
(c) A corporation shall mail the annual financial statements to
each shareholder within 120 days after the close of each fiscal year.
Thereafter, on written request from a shareholder who was not mailed the
statements, the corporation shall mail him the latest financial statements.
2.16 DISSENTER'S RIGHTS.
Each shareholder shall have the right to dissent from and obtain
payment for his shares when so authorized by the Act, articles of incorporation,
these bylaws, or in a resolution of the board of directors.
ARTICLE III
BOARD OF DIRECTORS
3.1 GENERAL POWERS.
Unless the articles of incorporation have dispensed with or limited the
authority of the board of directors by describing who will perform some or all
of the duties of a board of directors, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the corporation
shall be managed under the direction of the board of directors.
3.2 NUMBER, TENURE, AND QUALIFICATIONS OF DIRECTORS.
Unless otherwise provided in the articles of incorporation, the number
of directors of the corporation shall be not less than three (3) nor more than
seven (7). Each director shall hold office until the next annual meeting of
shareholders or until removed. However, if his term expires, he shall continue
to serve until his successor shall have been elected and qualified or until
there is a decrease in the number of directors. Directors need not be residents
of the State of Utah or shareholders of the corporation unless so required by
the articles of incorporation.
Bylaws Page 10
<PAGE>
3.3 REGULAR MEETINGS OF THE BOARD OF DIRECTORS.
A regular meeting of the board of directors shall be held without other
notice than this bylaw immediately after, and at the same place as, the annual
meeting of shareholders. The board of directors may provide, by resolution, the
time and place for the holding of additional regular meetings without other
notice than such resolution. (If so permitted by Section 3.7, any such regular
meeting may be held by telephone.)
3.4 SPECIAL MEETINGS OF THE BOARD OF DIRECTORS.
Special meetings of the board of directors may be called by or at the
request of the president or any one director. The person authorized to call
special meetings of the board of directors may fix any place, only within the
county where this corporation has its principal office as the place for holding
any special meeting of the board of directors, or if permitted by Section 3.7,
such meeting may be held by telephone.
3.5 NOTICE OF, AND WAIVER OF NOTICE FOR, SPECIAL DIRECTOR MEETINGS.
Unless the articles of incorporation provide for a longer or shorter
period, notice of any special director meeting shall be given at least two days
previously thereto either orally or in writing. If mailed, notice of any
director meeting shall be deemed to be effective at the earlier of:
(a) When received;
(b) Five days after deposited in the United States mail, addressed
to the director's business office, with postage thereon prepaid; or
(c) The date shown on the return receipt if sent by registered or
certified mail, return receipt requested, and the receipt is signed by or on
behalf of the director.
Any director may waive notice of any meeting. Except as provided in the
next sentence, the waiver must be in writing, signed by the director entitled to
the notice, and filed with the minutes or corporate records. The attendance of a
director at a meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business and at the beginning of the meeting (or
promptly upon his arrival) objects to holding the meeting or transacting
business at the meeting, and does not thereafter vote for or assent to action
taken at the meeting. Unless required by the articles of incorporation, neither
the business to be transacted at, nor the purpose of, any special meeting of the
board of directors need be specified in the notice or waiver of notice of such
meeting.
3.6 DIRECTOR QUORUM.
If bylaw Section 3.2 establishes a fixed board size, a majority of the
number of directors shall constitute a quorum for the transaction of business at
any meeting of the board of directors, unless the articles require a greater
number.
Bylaws Page 11
<PAGE>
If bylaw Section 3.2 permits a variable-range size board (a board size
set by resolution within a given range), a majority of the number of directors
prescribed by resolution, (or if no number is prescribed the number in office
immediately before the meeting begins) shall constitute a quorum for the
transaction of business at any meeting of the board of directors, unless the
articles require a greater number.
Any amendment to this quorum requirement is subject to the provisions
of Section 3.8 of this Article III.
3.7 DIRECTORS, MANNER OF ACTING.
The act of the majority of the directors present at a meeting at which
a quorum is present when the vote is taken shall be the act of the board of
directors unless the articles of incorporation require a greater percentage. Any
amendment which changes the number of directors needed to take action, is
subject to the provisions of Section 3.8 of this Article III.
Unless the articles of incorporation provide otherwise, any or all
directors may participate in a regular or special meeting by, or conduct of the
meeting through the use of, any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
A director who is present at a meeting of the board of directors or a
committee of the board of directors when corporate action is taken is deemed to
have assented to the action taken unless:
(a) He objects at the beginning of the meeting (or promptly upon
his arrival) to holding it or transacting business at the meeting; or
(b) His dissent or abstention from the action taken is entered in
the minutes of the meeting; or
(c) He delivers written notice of his dissent or abstention to the
presiding officer of the meeting before its adjournment or to the corporation
immediately after adjournment of the meeting.
The right of dissent or abstention is not available to a director who
votes in favor of the action taken.
3.8 ESTABLISHING A "SUPERMAJORITY" QUORUM OR VOTING REQUIREMENT FOR THE
BOARD OF DIRECTORS.
For purposes of this Section 3.8, a "supermajority" quorum is a
requirement that more than a majority of the directors in office constitute a
quorum; and a "supermajority" voting requirement is any requirement that
requires the vote of more than a majority of those directors present at a
meeting at which a quorum is present to be the act of the directors.
Bylaws Page 12
<PAGE>
A bylaw that fixes a supermajority quorum or supermajority voting
requirement may be amended or repealed:
(a) If originally adopted by the shareholders, only by the
shareholders (unless otherwise provided by the shareholders);
(b) If originally adopted by the board of directors, either by the
shareholders or by the board of directors.
A bylaw adopted or amended by the shareholders that fixes a
supermajority quorum or supermajority voting requirement for the board of
directors may provide that it may be amended or repealed only by a specified
vote of either the shareholders or the board of directors.
Subject to the provisions of the preceding paragraph, action by the
board of directors to adopt, amend, or repeal a bylaw that changes the quorum or
voting requirement for the board of directors must meet the same quorum
requirement and be adopted by the same vote required to take action under the
quorum and voting requirement then in effect or proposed to be adopted,
whichever is greater.
3.9 DIRECTOR ACTION WITHOUT A MEETING.
Unless the articles of incorporation provide otherwise, any action
required or permitted to be taken by the board of directors at a meeting may be
taken without a meeting if all the directors take the action, each one signs a
written consent describing the action taken, and the consents are filed with the
records of the corporation. Action taken by consents is effective when the last
director signs the consent, unless the consent specifies a different effective
date. A signed consent has the effect of a meeting vote and may be described as
such in any document.
3.10 REMOVAL OF DIRECTORS.
The shareholders may remove one or more directors at a meeting called
for that purpose if notice has been given that a purpose of the meeting is such
removal. The removal may be with or without cause unless the articles provide
that directors may only be removed with cause. If a director is elected by a
voting group of shareholders, only the shareholders of that voting group may
participate in the vote to remove him. If cumulative voting is not authorized, a
director may be removed only if the number of votes sufficient to elect him
under cumulative voting is voted against his removal. If cumulative voting is
not authorized, a director may be removed only if the number of votes cast to
remove him exceeds the number of votes cast not to remove him.
3.11 BOARD OF DIRECTOR VACANCIES.
Unless the articles of incorporation provided otherwise, if a vacancy
occurs on the board of directors, including a vacancy resulting from an increase
in the number of directors, the shareholders may fill the vacancy. During such
time that the shareholders fail or are unable to fill such vacancies then and
until the shareholders act:
Bylaws Page 13
<PAGE>
(a) The board of directors may fill the vacancy; or
(b) If the directors remaining in office constitute fewer than a
quorum of the board, they may fill the vacancy by the affirmative vote of a
majority of all the directors remaining in office.
If the vacant office was held by a director elected by a voting group
of shareholders, only the holders of shares of that voting group are entitled to
vote to fill the vacancy if it is filled by the shareholders.
A vacancy that will occur at a specific later date (by reason of a
resignation effective at a later date) may be filled before the vacancy occurs
but the new director may not take office until the vacancy occurs.
The term of a director elected to fill a vacancy expires at the next
shareholders' meeting at which directors are elected. However, if his term
expires, he shall continue to serve until his successor is elected and qualifies
or until there is a decrease in the number of directors.
3.12 DIRECTOR COMPENSATION.
Unless otherwise provided in the articles, by resolution of the board
of directors, each director may be paid his expenses, if any, of attendance at
each meeting of the board of directors, and may be paid a stated salary as
director or a fixed sum for attendance at each meeting of the board of directors
or both. No such payment shall preclude any director from serving the
corporation in any capacity and receiving compensation therefor.
3.13 DIRECTOR COMMITTEES.
(a) CREATION OF COMMITTEES. Unless the articles of incorporation
provide otherwise, the board of directors may create one or more committees and
appoint members of the board of directors to serve on them. Each committee must
have two or more members, who serve at the pleasure of the board of directors.
(b) SELECTION OF MEMBERS. The creation of a committee and
appointment of members to it must be approved by the greater of:
(1) A majority of all the directors in office when the
action is taken; or
(2) The number of directors required by the articles of
incorporation to take such action, (or if not specified in the articles
the numbers required by Section 3.7 of this Article III to take
action).
(c) REQUIRED PROCEDURES. Sections 3.4, 3.5, 3.6, 3.7, 3.8 and
3.9 of this Article III, which govern meetings, action without meetings,
notice and waiver of notice, quorum and voting requirements of the board of
directors, apply to committees and their members.
Bylaws Page 14
<PAGE>
(d) AUTHORITY. Unless limited by the articles of incorporation,
each committee may exercise those aspects of the authority of the board of
directors which the board of directors confers upon such committee in the
resolution creating the committee. Provided, however, a committee may not:
(1) Authorize distributions;
(2) Approve or propose to shareholders action that the
Utah Revised Business Corporation Act requires be approved by
shareholders;
(3) Fill vacancies on the board of directors or on any of
its committees;
(4) Amend the articles of incorporation pursuant to the
authority of directors, to do so granted by Section 10.02 of the Utah
Revised Business Corporation Act;
(5) Adopt, amend, or repeal bylaws;
(6) Approve a plan of merger not requiring shareholder
approval;
(7) Authorize or approve reacquisition of shares, except
according to a formula or method prescribed by the board of directors;
or
(8) Authorize or approve the issuance or sale or contract
for sale of shares or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, except
that the board of directors may authorize a committee (or a senior
executive officer of the corporation) to do so within limits
specifically prescribed by the board of directors.
3.14 CHAIRMAN.
The board of directors may elect from its own number a chairman of the
board, who shall preside at all meetings of the board of directors, and shall
perform such other duties as may be prescribed from time to time by the board of
directors.
ARTICLE IV
OFFICERS
4.1 NUMBER OF OFFICERS.
The officers of the corporation shall be a president, a secretary, and
a treasurer, each of whom shall be appointed by the board of directors. Such
other officers and assistant officers as may be deemed necessary, including any
vice-presidents, may be appointed by the board of directors. If specifically
authorized by the board of directors, an officer may appoint one or more
officers or assistant officers. The same individual may simultaneously hold more
than one office in the corporation.
Bylaws Page 15
<PAGE>
4.2 APPOINTMENT AND TERM OF OFFICE.
The officers of the corporation shall be appointed by the board of
directors for a term as determined by the board of directors. (The designation
of a specified term grants to the officer no contract rights, and the board can
remove the officer at any time prior to the termination of such term). If no
term is specified, they shall hold office until they resign, die, or until they
are removed in the manner provided in Section 4.3 of this Article IV.
4.3 REMOVAL OF OFFICERS.
Any officer or agent may be removed by the board of directors at any
time, with or without cause. Such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Appointment of an officer or
agent shall not of itself create contract rights.
4.4 PRESIDENT.
The president shall be the principal executive officer of the
corporation and, subject to the control of the board of directors, shall in
general supervise and control all of the business and affairs of the
corporation. He shall, when present, preside at all meetings of the shareholders
and of the board of directors. He may sign, with the secretary or any other
proper officer of the corporation thereunto authorized by the board of
directors, certificates for shares of the corporation and deeds, mortgages,
bonds, contracts, or other instruments which the board of directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the board of directors or by these
bylaws to some other officer or agent of the corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of president and such other duties as may be
prescribed by the board of directors from time to time.
4.5 THE VICE-PRESIDENTS.
If appointed, in the absence of the president or in the event of his
death, inability or refusal to act, the vice-president (or in the event there be
more than one vice presidency, the vice-presidents in the order designated at
the time of their election, or in the absence of any designation, then in the
order of their appointment) shall perform the duties of the president, and when
so acting, shall have all the powers of and be subject to all the restrictions
upon the president.) Any vice-president may sign, with the secretary or an
assistant secretary, certificates for shares of the corporation the issuance of
which have been authorized by resolution of the board of directors; and shall
perform such other duties as from time to time may be assigned to him by the
president or by the board of directors.
4.6 THE SECRETARY.
The secretary shall:
(a) Keep the minutes of the proceedings of the shareholders and of
the board of directors in one or more books provided for that purpose;
Bylaws Page 16
<PAGE>
(b) See that all notices are duly given in accordance with the
provisions of these bylaws or as required by law;
(c) Be custodian of the corporate records and of any seal of the
corporation and if there is a seal of the corporation, see that it is affixed to
all documents the execution of which on behalf of the corporation under its seal
is duly authorized;
(d) When requested or required, authenticate any records of the
corporation;
(e) Keep a register of the post office address of each shareholder
which shall be furnished to the secretary by such shareholder;
(f) Sign with the president, or a vice-president, certificates for
shares of the corporation, the issuance of which shall have been authorized by
resolution of the board of directors;
(g) Have general charge of the stock transfer books of the
corporation; and
(h) In general perform all duties incident to the office of
secretary and such other duties as from time to time may be assigned to him by
the president or by the board of directors.
4.7 THE TREASURER.
The treasurer shall:
(a) Have charge and custody of and be responsible for all funds
and securities of the corporation;
(b) Receive and give receipts for moneys due and payable to the
corporation from any source whatsoever, and deposit all such moneys in the name
of the corporation in such banks, trust companies, or other depositaries as
shall be selected by the board of directors; and
(c) In general perform all of the duties incident to the office of
treasurer and such other duties as from time to time may be assigned to him by
the president or by the board of directors. If required by the board of
directors, the treasurer shall give a bond for the faithful discharge of his
duties in such sum and with such surety or sureties as the board of directors
shall determine.
4.8 ASSISTANT SECRETARIES AND ASSISTANT TREASURERS.
The assistant secretaries, when authorized by the board of directors,
may sign with the president or a vice-president certificates for shares of the
corporation the issuance of which shall have been authorized by a resolution of
the board of directors. The assistant treasurers shall respectively, if required
by the board of directors, give bonds for the faithful discharge of their duties
in such sums and with such sureties as the board of directors shall determine.
The assistant secretaries and assistant treasurers, in general, shall perform
such duties as shall be assigned to them by the secretary or the treasurer,
respectively, or by the president or the board of directors.
Bylaws Page 17
<PAGE>
4.9 SALARIES.
The salaries of the officers shall be fixed from time to time by the
board of directors.
4.10 OTHER OFFICERS.
Other officers may be elected by the board of directors and shall
perform such duties and have such powers as may be assigned to them by the board
of directors.
4.11 SURETY BONDS.
If the board of directors shall so require, any officer or agent of the
corporation shall execute to the corporation a bond in such funds and with such
surety or sureties as the board of directors may direct.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS, AND EMPLOYEES
5.1 INDEMNIFICATION OF DIRECTORS.
Unless otherwise provided in the articles, the corporation shall
indemnify any individual made a party to a proceeding because he is or was a
director of the corporation, against liability incurred in the proceeding, but
only if the corporation has authorized the payment in accordance with Section
906 of the Act and a determination has been made in accordance with the
procedures set forth in Section 906(2) of the Act that the director met the
standards of conduct in paragraph (a), (b) and (c) below.
(a) STANDARD OF CONDUCT. The individual shall demonstrate that:
(1) He conducted himself in good faith; and
(2) He reasonably believed:
(i) In the case of conduct in his official
capacity with the corporation, that his conduct was in its
best interests;
(ii) In all other cases, that his conduct was at
least not opposed to its best interests; and
(iii) In the case of any criminal proceeding, he
had no reasonable cause to believe his conduct was unlawful.
(b) NO INDEMNIFICATION PERMITTED IN CERTAIN CIRCUMSTANCES. The
corporation shall not indemnify a director under this Section 5.1 of Article V:
Bylaws Page 18
<PAGE>
(1) In connection with a proceeding by or in the right of
the corporation which the director was adjudged liable to the
corporation; or
(2) In connection with any other proceeding charging
improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis
that personal benefit was improperly received by him.
(c) INDEMNIFICATION IN DERIVATIVE ACTIONS LIMITED. Indemnification
permitted under this Section 5.1 of Article V in connection with a proceeding by
or in the right of the corporation is limited to reasonable expenses incurred in
connection with the proceeding.
5.2 ADVANCE EXPENSES FOR DIRECTORS.
If a determination is made, following the procedures of Section 906
that the director has met the following requirements; and if an authorization of
payment is made, following the procedures and standards set forth in Section 906
of the Act then unless otherwise provided in the articles of incorporation, the
company shall 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 meet the standard of conduct described in
Section 5.1 of this Article V;
(b) The director furnishes 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 (which undertaking 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); and
(c) A determination is made that the facts then known to those
making the determination would not preclude indemnification under Section 5.1 of
this Article V or the Act.
5.3 INDEMNIFICATION OF OFFICERS, AGENTS AND EMPLOYEES WHO ARE NOT
DIRECTORS.
Unless otherwise provided in the articles of incorporation, the board
of directors may indemnify and advance expenses to any officer, employee, or
agent of the corporation, who is not a director of the corporation, to any
extent consistent with public policy, as determined by the general or specific
action of the board of directors.
Bylaws Page 19
<PAGE>
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 CERTIFICATES FOR SHARES.
(a) CONTENT. Certificates representing shares of the corporation
shall at minimum, state on their face the name of the issuing corporation and
that it is formed under the laws of Utah; the name of the person to whom issued;
and the number and class of shares and the designation of the series, if any,
the certificate represents; and be in such form as determined by the board of
directors. Such certificates shall be signed (either manually or by facsimile)
by the president or a vice president and by the secretary or an assistant
secretary and may be sealed with a corporate seal or a facsimile thereof. Each
certificate for shares shall be consecutively numbered or otherwise identified.
(b) LEGEND AS TO CLASS OR SERIES. If the corporation is authorized
to issue different classes of shares or different series within a class, the
designations, relative rights, preferences, and limitations applicable to each
class and the variations in rights, preferences, and limitations determined for
each series (and the authority of the board of directors to determine variations
for future series) must be summarized on the front or back of each certificate.
Alternatively, each certificate may state conspicuously on its front or back
that the corporation will furnish the shareholder this information on request in
writing and without charge.
(c) SHAREHOLDER LIST. The name and address of the person to whom
the shares represented thereby are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the corporation.
(d) TRANSFERRING SHARES. All certificates surrendered to the
corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and canceled, except that in case of a lost, destroyed, or mutilated
certificate a new one may be issued therefor upon such terms and indemnity to
the corporation as the board of directors may prescribe.
6.2 SHARES WITHOUT CERTIFICATES.
(a) ISSUING SHARES WITHOUT CERTIFICATES . Unless the articles of
incorporation provide otherwise, the board of directors may authorize the issue
of some or all the shares of any or all of its classes or series without
certificates. The authorization does not affect shares already represented by
certificates until they re surrendered to the corporation.
(b) INFORMATION STATEMENT REQUIRED. Within a reasonable time after
the issue or transfer of shares without certificates, the corporation shall send
the shareholder a written statement containing at minimum:
(1) The name of the issuing corporation and that it is
organized under the law of this state;
Bylaws Page 20
<PAGE>
(2) The name of the person to whom issued; and
(3) The number and class of shares and the designation of
the series, if any, of the issued shares.
If the corporation is authorized to issue different classes of shares
or different series within a class, the written statement shall describe the
designations, relative rights, preferences, and limitations applicable to each
class and the valuation in rights, preferences, and limitations determined for
each series (and the authority of the board of directors to determine variations
for future series).
6.3 REGISTRATION OF THE TRANSFER OF SHARES.
Registration of the transfer of shares of the corporation shall be made
only on the stock transfer books of the corporation. In order to register a
transfer, the record owner shall surrender the shares to the corporation for
cancellation, properly endorsed by the appropriate person or persons with
reasonable assurances that the endorsements are genuine and effective. Unless
the corporation has established a procedure by which a beneficial owner of
shares held by a nominee is to be recognized by the corporation as the owner,
the person in whose name shares stand on the books of the corporation shall be
deemed by the corporation to be the owner thereof for all purposes.
6.4 RESTRICTIONS ON TRANSFER OF SHARES PERMITTED.
The board of directors (or shareholders) may impose restrictions on the
transfer or registration of transfer of shares (including any security
convertible into, or carrying a right to subscribe for or acquire shares). A
restriction does not affect shares issued before the restriction was adopted
unless the holders of the shares are parties to the restriction agreement or
voted in favor of the restriction.
A restriction on the transfer or registration of transfer of shares may
be authorized:
(a) To maintain the corporation's status when it is dependent on
the number or identity of its shareholders;
(b) To preserve exemptions under federal or state securities law;
(c) For any other reasonable purpose. A restriction on the
transfer or registration of transfer of shares may:
(1) Obligate the shareholder first to offer the
corporation or other persons separately, consecutively, or
simultaneously) an opportunity to acquire the restricted shares;
(2) Obligate the corporation or other persons
(separately, consecutively, or simultaneously) to acquire the
restricted shares;
Bylaws Page 21
<PAGE>
(3) Require the corporation, the holders or any class of
its shares, or another person to approve the transfer of the restricted
shares, if the requirement is not manifestly unreasonable;
(4) Prohibit the transfer of the restricted shares to
designated persons or classes of persons, if the prohibition is not
manifestly unreasonable.
A restriction on the transfer or registration of transfer of shares is
valid and enforceable against the holder or a transferee of the holder if the
restriction is authorized by this section and its existence is noted
conspicuously on the front or back of the certificate or is contained in the
information statement required by Section 6.2 of this Article VI with regard to
shares issued without certificates. Unless so noted, a restriction is not
enforceable against a person without knowledge of the restriction.
6.5 ACQUISITION OF SHARES.
The corporation may acquire its own shares and unless otherwise
provided in the articles of incorporation, the shares so acquired constitute
authorized but unissued shares.
If the articles of incorporation prohibit the reissue of acquired
shares, the number of unauthorized shares is reduced by the number of shares
acquired, effective upon amendment of the articles of incorporation, which
amendment shall be adopted by the shareholders or the board of directors without
shareholder action. The articles of amendment must be delivered to the Secretary
of State and must set forth:
(a) The name of the corporation;
(b) The reduction in the number of authorized shares, itemized by
class and series; and
(c) The total number of authorized shares, itemized by class and
series, remaining after reduction of the shares.
6.6 LOST OR DESTROYED CERTIFICATES.
The board of directors may direct a new certificate to be issued to
replace any certificate heretofore issued by the corporation and alleged to have
been lost or destroyed if the owner makes an affidavit that the certificate is
lost or destroyed. The board of directors may, at its discretion, require the
owner of such certificate or has legal representative to give the corporation a
bond in such sum and with such sureties as the board of directors may direct to
indemnify the corporation and transfers, agents and registrars, if any, against
claims that may be made on account of the issuance of such new certificates. A
new certificate may be issued with declaring any bond.
Bylaws Page 22
<PAGE>
ARTICLE VII
DISTRIBUTIONS
7.1 DISTRIBUTIONS.
The board of directors may authorize, and the corporation may make,
distributions (including dividends on its outstanding shares) in the manner and
upon the terms and conditions provided by law and in the corporation's articles
of incorporation.
ARTICLE VIII
CORPORATE SEAL
8.1 CORPORATE SEAL.
The board of directors may provide a corporate seal which may be
circular in form and have inscribed thereon any designation including the name
of the corporation, State of Utah as the state of incorporation, and the words
"Corporate Seal."
ARTICLE IX
CONTRACTS, LOANS, CHECKS AND DEPOSITS
9.1 CONTRACTS.
The board of directors may authorize any officer(s), or agent(s), to
enter into any contract or execute and deliver any instrument in the name and on
behalf of the corporation, and such authority may be either general or confined
to specific instances.
9.2 LOANS.
No loan or advances shall be contracted on behalf of the corporation,
no negotiable paper or other evidence of its obligation under any loan or
advance shall be issued in its name, and no property of the corporation shall be
mortgaged, pledged, hypothecated, or transferred as security for the payment of
any loan, advance, indebtedness, or liability of the corporation unless and
except as authorized by the board of directors. Any such authorization may be
either general confined to specific instances.
9.3 DEPOSITS.
All funds of the corporation not otherwise employed shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies, or other depositories as the board of directors may select, or as may
be selected by an officer or agent so authorized by the board of directors.
Bylaws Page 23
<PAGE>
9.4 CHECKS AND DRAFTS.
All notes, drafts, acceptances, checks, endorsements, and evidences of
indebtedness of the corporation shall be signed by the president and by the
treasurer of the corporation and in such manner as the board of directors from
time to time may determine. Endorsements for deposit to the credit of the
corporation in any of its duly authorized depositories shall be made in such
manner as the board of directors from time to time may determine.
9.5 BONDS AND DEBENTURES.
Every bond or debenture issued by the corporation shall be evidenced by
an appropriate instrument which shall be signed by the president or a
vice-president and by the treasurer or by the secretary and the seal of the
corporation may, but need not, be affixed thereto.
ARTICLE X
EMERGENCY BYLAWS
10.1 EMERGENCY BYLAWS.
Unless the articles of incorporation provide otherwise, the following
provisions of this Article IX, Section 9.1 "Emergency Bylaws" shall be effective
during an emergency which is defined as when a quorum of the corporation's
directors cannot be readily assembled because of some catastrophic event. During
such emergency:
(a) NOTICE OF BOARD MEETINGS. Any one member of the board of
directors or any one of the following officers: president, vice-president,
secretary, or treasurer, may call a meeting of the board of directors. Notice of
such meeting need be given only to those directors whom it is practicable to
reach, and may be given in any practical manner, including by publication and
radio. Such notice shall be given at least six hours prior to commencement of
the meeting.
(b) TEMPORARY DIRECTORS AND QUORUM. One or more officers of the
corporation present at the emergency board meeting, as is necessary to achieve a
quorum, shall be considered to be directors for the meeting, and shall so serve
in order of rank, and within the same rank, in order of seniority. In the event
that less than a quorum (as determined by Article III, Section 3.6) of the
directors are present (including the officers serving as directors) shall
constitute a quorum.
(c) ACTIONS PERMITTED TO BE TAKEN. The board as constituted in
paragraph (b), and after notice as set forth in paragraph (a) may:
(1) OFFICERS' POWERS. Prescribe emergency posers to any
officer of the corporation;
(2) DELEGATION OF ANY POWER. Delegate to any officer or
director, any of the powers of the board of directors;
Bylaws Page 24
<PAGE>
(3) LINES OF SUCCESSION. Designate lines of succession of
officers and agents, in the event that any of them are unable to
discharge their duties;
(4) RELOCATE PRINCIPAL PLACE OF BUSINESS. Relocate the
principal place of business, or designate successive or simultaneous
principal places of business;
(5) ALL OTHER ACTION. Take any other action, convenient,
helpful, or necessary to carry on the business of the corporation.
ARTICLE XI
AMENDMENTS
11.1 AMENDMENTS.
The corporation's board of directors may amend or repeal the
corporation's bylaws unless:
(a) The articles of incorporation or the Act reserve this power
exclusively to the shareholders in whole or part; or
(b) The shareholders in adopting, amending, or repealing a
particular bylaw provide expressly that the board of directors may not amend or
repeal that bylaw; or
(c) The bylaw either establishes, amends, or deletes, a
supermajority shareholder quorum or voting requirement (as defined in Section
2.7 of Article II).
Any amendment which changes the voting or quorum requirement for the
board must comply with Article III, Section 3.8, and for the shareholders, must
comply with Article II, Section 2.8.
The corporation's shareholders may amend or repeal the corporation's
bylaws even though the bylaws may also be amended or repealed by its board of
directors.
ARTICLE XII
EXEMPTION FROM CONTROL SHARES ACQUISITION ACT
The provisions of the Control Shares Acquisition Act as set out in
Section 61-6-1 et. seq. as amended or any replacement Act shall not apply to
control share acquisitions of shares of this Corporation.
Bylaws Page 25
<PAGE>
I certify that the foregoing Bylaws are the Bylaws of Dreams, Inc., a
Utah corporation and that the same remain in effect unchanged to the present
date.
DATED: This day of , 1999.
------- -----------------------
------------------------------------
Mark Viner, Secretary
Bylaws Page 26
<PAGE>
EXHIBIT 6(i)
Sirrom Financing Agreements
Loan Agreement
Secured Promissory Note
Stock Purchase Warrant
Security Agreement - Dreams, Inc./DFC/DEI/DPI
Intellectual Property Security Agreement
Pledge and Security Agreement - Dreams, Inc.
Pledge and Security Agreement - DFC
Sirrom Financing Agreements
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement"), dated as of the ____ day of November,
1998, is made and entered into on the terms and conditions hereinafter set
forth, by and between DREAMS, INC., a Utah corporation, DREAMS FRANCHISE
CORPORATION, a California corporation, DREAMS ENTERTAINMENT, INC., a Utah
corporation and DREAMS PRODUCTS, INC., a Utah corporation (individually a
"Borrower" and collectively the "Borrowers"), and SIRROM INVESTMENTS, INC., a
Tennessee corporation ("Lender").
RECITALS:
WHEREAS, Borrowers have requested that Lender make available to Borrowers
a term loan in the original principal amount of Three Million Dollars
($3,000,000) (the "Loan") on the terms and conditions hereinafter set forth, and
for the purpose(s) hereinafter set forth; and
WHEREAS, in order to induce Lender to make the Loan to Borrowers,
Borrowers have made certain representations to Lender; and
WHEREAS, Lender, in reliance upon the representations and inducements of
Borrowers, has agreed to make the Loan upon the terms and conditions hereinafter
set forth.
AGREEMENT:
NOW, THEREFORE, in consideration of the agreement of Lender to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender hereby agree as follows:
ARTICLE 1
THE LOAN
1.1 EVIDENCE OF LOAN INDEBTEDNESS AND REPAYMENT. Subject to the terms
and conditions contained herein, the Lender shall make the Loan to Borrowers by
wire transfer in immediately available funds. The Loan shall be evidenced by a
Secured Promissory Note in the original principal amount of Three Million
Dollars ($3,000,000), dated as of the date hereof, executed by Borrowers in
favor of Lender (the "Note"). The Loan shall be payable in accordance with the
terms of the Note. The Note, this Agreement and any other instruments and
documents executed by Borrowers, or any shareholder, member, partner, subsidiary
or affiliate of Borrowers ("Affiliates"), now or hereafter evidencing, securing
or in any way related to the indebtedness evidenced by the Note are herein
SirromAgmts Page 1
<PAGE>
individually referred to as a "Loan Document" and collectively referred to as
the "Loan Documents." The term "Obligations" as used herein shall refer to (a)
the Loan to be made concurrently or in connection with this Agreement, as
evidenced by the Note, and any renewals or extensions thereof, (b) the full and
prompt payment and performance of any and all other indebtednesses and other
obligations of Borrowers to Lender, direct or contingent (including but not
limited to obligations incurred as indorser, guarantor or surety), however
evidenced or denominated, and however and whenever incurred, including but not
limited to indebtednesses incurred pursuant to any present or future commitment
of Lender to Borrowers and (c) all future advances made by Lender for taxes,
levies, insurance and preservation of the collateral securing the Loan and all
attorneys' fees, court costs and expenses of whatever kind incident to the
collection of any of said indebtedness or other obligations and the enforcement
and protection of the security interest created hereby or by the other Loan
Documents.
1.2 PROCESSING FEE. Borrowers shall pay Lender a processing fee of
Ninety Thousand Dollars ($90,000), Twenty Thousand Dollars ($20,000) of which
has previously been paid to Lender and Seventy Thousand Dollars ($70,000) of
which shall be paid on the date the Loan is funded.
1.3 PREPAYMENT. Borrowers may prepay the indebtedness evidenced by
the Note in whole or in part at any time and from time to time, without penalty
or premium.
1.4 PURPOSES OF LOAN AND USE OF PROCEEDS. The purpose of the Loan
shall be to (i) provide additional working capital to Borrowers and (ii) finance
the acquisition of Mounted Memories, Inc.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 BORROWER'S REPRESENTATIONS. Each Borrower hereby represents and
warrants to Lender as follows (except as set forth on a disclosure schedule
hereto which shall be labeled to correspond to the appropriate provision
hereof):
(a) CORPORATE STATUS. Each Borrower is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Utah or California, as applicable; and has the corporate
power to own and operate its properties, to carry on its business as
now conducted and to enter into and to perform its obligations under
this Agreement and the other Loan Documents to which it is a party.
Each Borrower is duly qualified to do business and in good standing in
each state in which a failure to be so qualified would have a material
adverse effect on Borrower's financial condition or its ability to
conduct its business in the manner now conducted.
(b) SUBSIDIARIES. Schedule 2.1(b) hereto is a complete list
of each corporation, partnership, joint venture or other business
organization (the "Subsidiary" or, with respect to all such
organizations, the "Subsidiaries") in which each Borrower or any
Subsidiary
SirromAgmts Page 2
<PAGE>
owns, directly or indirectly, any capital stock or other equity
interest, or with respect to which each Borrower or any Subsidiary,
alone or in combination with others, is in a control position, which
list shows the jurisdiction of incorporation or other organization and
the percentage of stock or other equity interest of each Subsidiary
owned by such Borrower. Each Subsidiary which is a corporation is
duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and is duly qualified to
transact business as a foreign corporation and is in good standing in
the jurisdictions listed in Schedule 2.1(b), which are the only
jurisdictions where the properties owned or leased or the business
transacted by it makes such licensing or qualification to do business
as a foreign corporation necessary, and no other jurisdiction has
demanded, requested or otherwise indicated that (or inquired whether)
it is required so to qualify. Each Subsidiary which is not a
corporation is duly organized and validly existing under the laws of
the jurisdiction of its organization. The outstanding capital stock
of each Subsidiary which is a corporation is validly issued, fully
paid and nonassessable. Each Borrower and its Subsidiaries have good
and valid title to the equity interests in the Subsidiaries shown as
owned by each of them on Schedule 2.1(b), free and clear of all liens,
claims, charges, restrictions, security interests, equities, proxies,
pledges or encumbrances of any kind. Except where otherwise indicated
herein or unless the context otherwise requires, any reference to
Borrowers herein shall include Borrowers and all of their Subsidiaries.
(c) AUTHORIZATION. Each Borrower has full legal right, power
and authority to conduct its business and affairs. Each Borrower has
full legal right, power and authority to enter into and perform its
obligations under the Loan Documents, without the consent or approval of
any other person, firm, governmental agency or other legal entity. The
execution and delivery of this Agreement, the borrowing hereunder, the
execution and delivery of each Loan Document to which each Borrower is a
party, and the performance by each Borrower of its obligations thereunder
are within the corporate powers of each Borrower and have been duly
authorized by all necessary corporate action properly taken and each
Borrower has received all necessary governmental approvals, if any, that
are required. The officer(s) executing this Agreement, the Note and all
of the other Loan Documents to which each Borrower is a party are duly
authorized to act on behalf of such Borrower.
(d) VALIDITY AND BINDING EFFECT. This Agreement and the other
Loan Documents are the legal, valid and binding obligations of each
Borrower, enforceable in accordance with their respective terms, subject
to limitations imposed by bankruptcy, insolvency, moratorium or other
similar laws affecting the rights of creditors generally or the
application of general equitable principles.
(e) CAPITALIZATION. As of the date hereof and giving effect to
the Mounted Memories, Inc. acquisition, the authorized capital stock of
Dreams, Inc. consists solely of 50,000,000 shares of common stock, $.05
par value per share ("Common Stock"), of which 40,898,500 shares are
issued and outstanding (the "Shares") and 11,873,758 shares of which are
reserved for issuance upon exercise of the Stock Purchase Warrant dated
as of the date hereof and issued to Lender (the "Warrant"); provided,
however, that the number of shares
SirromAgmts Page 3
<PAGE>
reserved for issuance upon exercise of the Warrant may be increased
from time to time in accordance with the term of the Warrant.
Attached hereto as Schedule 2.1(e) as a table showing the
capitalization of Dreams, Inc., as of the date hereof, on a fully
diluted basis. As of the date hereof, Dreams, Inc. does not have
outstanding any stock or securities convertible or exchangeable for
any shares of its Common Stock or containing any profit participation
features, and does not have outstanding any rights or options to
subscribe for or to purchase its Common Stock or any stock
appreciation rights or phantom stock plans, except as set forth on
Schedule 2.1(e) and the Warrant. Schedule 2.1(e) accurately sets
forth the following with respect to all outstanding options and rights
to acquire the Dreams, Inc.'s Common Stock: (i) the total number of
shares issuable upon exercise of all outstanding options; (ii) the
range of exercise prices for all such outstanding options; (iii) the
number of shares issuable, the exercise price and the expiration date
for each such outstanding option; and (iv) with respect to all
outstanding options, warrants and rights to acquire Dreams, Inc.'s
capital stock other than the Warrant, the holder, the number of shares
covered, the exercise price and the expiration date. As of the date
hereof, Dreams, Inc. is not subject to any obligation (contingent or
otherwise) to repurchase, redeem, retire or otherwise acquire any
shares of its capital stock or any warrants, options or other rights
to acquire its capital stock, except as set forth in the Warrant or on
Schedule 2.1(e). As of the date hereof, all of the outstanding shares
of Dreams, Inc.'s capital stock are validly issued, fully paid and
nonassessable. Except as set forth on Schedule 2.1(e), there are no
statutory or contractual preemptive rights, rights of first refusal,
anti-dilution rights or any similar rights, held by stockholders or
option holders of Dreams, Inc., with respect to the issuance of the
Warrant or the issuance of the Common Stock upon exercise of the
Warrant and all such rights have been effectively waived with regard
to the issuance of the Warrant, the exercise of the Warrant and the
issuance of the Common Stock upon exercise of the Warrant. Dreams,
Inc. has not violated any applicable federal or state securities laws
in connection with the offer, sale or issuance of any of its capital
stock, and the offer, sale and issuance of the Warrant hereunder do
not require registration under the Securities Act of 1933, as amended,
or any applicable state securities laws. To the best of Dreams,
Inc.'s knowledge, there are no agreements among Dreams, Inc.'s
shareholders with respect to any other aspect of Dreams, Inc.'s
affairs, except as set forth on Schedule 2.1(e). Dreams, Inc. owns
all of the issued and outstanding shares of capital stock of Dreams
Franchise Corporation and Dreams Entertainment, Inc. and Dreams
Franchise Corporation owns all of the issued and outstanding shares of
capital stock of Dreams Products, Inc.
(f) TRADEMARKS, PATENTS, ETC. Schedule 2.1(f) is an accurate
and complete list of all patents, trademarks, tradenames, trademark
registrations, service names, service marks, copyrights, licenses,
formulas and applications therefor owned by each Borrower or used or
required by each Borrower in the operation of its business, title to each
of which is, except as set forth in Schedule 2.1(f) hereto, held by such
Borrower free and clear of all adverse claims, liens, security
agreements, restrictions or other encumbrances. Except as set forth in
Schedule 2.1(f), each Borrower owns or possesses adequate (and will use
its best efforts to obtain as expediently as possible any additional)
licenses or other rights to use all patents, trademarks, trade names,
service marks, trade secrets or other intangible property rights and
SirromAgmts Page 4
<PAGE>
know-how necessary to entitle such Borrower to conduct its business as
presently being conducted. There is no infringement action, lawsuit,
claim or complaint which asserts that any Borrower's operations violate
or infringe the rights or the trade names, trademarks, trademark
registrations, service names, service marks or copyrights of others with
respect to any apparatus or method of such Borrower or any adversely held
trademarks, trade names, trademark registrations, service names, service
marks or copyrights, and no Borrower is not in any way making use of any
confidential information or trade secrets of any person, except with the
consent of such person. Except as set forth in Schedule 2.1(f), each
Borrower has taken reasonable steps to protect its proprietary
information (except disclosure of source codes pursuant to licensing
agreements) and is the lawful owner of the proprietary information free
and clear of any claim of any third party. As used herein, "proprietary
information" includes without limitation, (i) any computer programming
language, software, hardware, firmware or related documentation,
inventions, technical and nontechnical data related thereto, and (ii)
other documentation, inventions and data related to patterns, plans,
methods, techniques, drawings, finances, customer lists, suppliers,
products, special pricing and cost information, designs, processes,
procedures, formulas, research data owned or used by any Borrower or
marketing studies conducted by any Borrower, all of which such Borrower
considers to be commercially important and competitively sensitive and
which generally has not been disclosed to third parties.
(g) NO CONFLICTS. Consummation of the transactions
contemplated hereby and the performance of the obligations of each
Borrower under and by virtue of the Loan Documents do not conflict with,
and will not result in any breach of, or constitute a default or trigger
a lien under, any mortgage, security deed or agreement, deed of trust,
lease, bank loan or credit agreement, corporate charter or bylaws,
agreement or certificate of limited partnership, partnership agreement,
license, franchise or any other instrument or agreement to which any
Borrower is a party or by which any Borrower or its respective properties
may be bound or affected or to which any Borrower has not obtained an
effective waiver.
(h) LITIGATION. Except as set forth on Schedule 2.1(h), there
are no actions, suits, arbitrations, administrative hearings or other
proceedings pending, or, to the knowledge of each Borrower threatened,
against or affecting any Borrower or any of Borrower's property or
involving the validity or enforceability of any of the Loan Documents at
law or in equity, or before any governmental or administrative agency.
To each Borrower's knowledge, such Borrower is not subject to any order,
writ, injunction, decree or demand of any court or any governmental
authority.
(i) FINANCIAL STATEMENTS. The financial statements of
Borrowers dated March 31, 1998, which are attached hereto as
Schedule 2.1(i)(A), are true and correct in all material respects, have
been prepared on the basis of generally accepted accounting principles
consistently applied, and fairly present the financial condition of
Borrowers as of the date(s) thereof. No material adverse change has
occurred in the financial condition of any Borrower since the date(s)
thereof, and no additional borrowings have been made by any Borrower
since the date(s) thereof other than as set forth on Schedule 2.1(i)(B).
SirromAgmts Page 5
<PAGE>
(j) OTHER AGREEMENTS; NO DEFAULTS. Schedule 2.1(r) is a list
of the contracts and corporate restrictions that could have a material
adverse effect on the business, properties, assets, operations or
conditions, financial or otherwise, of any Borrower, or the ability of
Borrower to carry out its obligations under the Loan Documents to which
it is a party. No Borrower is in default in any respect in the
performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any agreement or instrument material
to its business to which it is a party, including but not limited to this
Agreement and the other Loan Documents, and no other default or event has
occurred and is continuing that with notice or the passage of time or
both would constitute a default or event of default under any of same.
(k) COMPLIANCE WITH LAW. Each Borrower has obtained all
necessary licenses, permits and approvals and authorizations necessary or
required in order to conduct its business and affairs as heretofore
conducted and as hereafter intended to be conducted except to the extent
that any failure to obtain such licenses, permits, approvals or
authorizations, in the aggregate, cannot be reasonably expected to have a
material adverse effect on its business, operations, property or
financial condition and will not materially adversely affect such
Borrower's ability to perform its obligations under the Loan Documents.
To each Borrower's knowledge, such Borrower is in compliance with all
laws, regulations, decrees and orders applicable to it (including but not
limited to laws, regulations, decrees and orders relating to
environmental, occupational and health standards and controls, antitrust,
monopoly, restraint of trade or unfair competition), except to the extent
that any noncompliance, in the aggregate, cannot reasonably be expected
to have a material adverse effect on its business, operations, property
or financial condition and will not materially adversely affect such
Borrower's ability to perform its obligations under the Loan Documents.
(l) DEBT. Schedule 2.1(l) is a complete and correct list of
all credit agreements, indentures, purchase agreements, promissory notes
and other evidences of indebtedness, guaranties, capital leases and other
instruments, agreements and arrangements presently in effect providing
for or relating to extensions of credit (including agreements and
arrangements for the issuance of letters of credit or for acceptance
financing) in respect of which each Borrower or any of its properties is
in any manner directly or contingently obligated and the maximum
principal or face amounts of the credit in question that are outstanding
and that can be outstanding are correctly stated, and all liens of any
nature given or agreed to be given as security therefor are correctly
described or indicated in Schedule 2.1(l).
(m) TAXES. Except as set forth on Schedule 2.1(m), each
Borrower has filed or caused to be filed all tax returns that are
required to be filed (except for returns that have been appropriately
extended), and has paid, or will pay when due, all taxes shown to be due
and payable on said returns and all other taxes, impositions,
assessments, fees or other charges imposed on it by any governmental
authority, agency or instrumentality, prior to any delinquency with
respect thereto (other than taxes, impositions, assessments, fees and
SirromAgmts Page 6
<PAGE>
charges currently being contested in good faith by appropriate
proceedings, for which appropriate amounts have been reserved). Except
as set forth on Schedule 2.1(m), no tax liens have been filed against any
Borrower or any of its property.
(n) CERTAIN TRANSACTIONS. Except as set forth on Schedule
2.1(n) hereto, no Borrower is indebted, directly or indirectly, to any of
its shareholders, officers or directors or to their respective spouses or
children, in any amount whatsoever, and none of said shareholders,
officers or directors or any members of their immediate families, are
indebted to any Borrower or have any direct or indirect ownership
interest in any firm or corporation with which any Borrower has a
business relationship, or any firm or corporation which competes with any
Borrower, except that shareholders, officers and/or directors of each
Borrower may own no more than 4.9% of outstanding stock of publicly
traded companies which may compete with any Borrower. No shareholder,
officer or director or any member of their immediate families, is,
directly or indirectly, interested in any material contract with
Borrower. No Borrower is a guarantor or indemnitor of any indebtedness
of any other person, firm, corporation or other legal entity.
(o) SMALL BUSINESS CONCERN. Dreams, Inc., together with its
"affiliates" (as that term is defined in Title 13, Code of Federal
Regulations, Section 121.103), is a "small business concern" within the
meaning of the Small Business Investment Act of 1958, as amended, and the
regulations promulgated thereunder. The information set forth in the
Small Business Administration Forms 480, 652 and Parts A and B of Form
1031 regarding Dreams, Inc. upon delivery, pursuant to Section 4.1
hereof, will be accurate and complete. Dreams, Inc. does not presently
engage in, and it will not hereafter engage in, any activities, and
Dreams, Inc. will not use directly or indirectly, the proceeds from the
Loan, for any purpose for which a Small Business Investment Company is
prohibited from providing funds by the Small Business Investment Act and
the regulations thereunder, including Title 13, Code of Federal
Regulations Section 107.720.
(p) STATEMENTS NOT FALSE OR MISLEADING. No representation or
warranty given as of the date hereof by any Borrower contained in this
Agreement or any schedule attached hereto or any statement in any
document, certificate or other instrument furnished or to be furnished by
any Borrower to Lender pursuant hereto, taken as a whole, contains or
will (as of the time so furnished) contain any untrue statement of a
material fact, or omits or will (as of the time so furnished) omit to
state any material fact which is necessary in order to make the
statements contained therein not misleading in any material respect.
(q) MARGIN REGULATIONS. No Borrower is engaged in the business
of extending credit for the purpose of purchasing or carrying margin
stock. No proceeds received pursuant to this Agreement will be used to
purchase or carry any equity security of a class which is registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended.
SirromAgmts Page 7
<PAGE>
(r) SIGNIFICANT CONTRACTS. Schedule 2.1(r) is a complete and
correct list of all contracts, agreements and other documents pursuant to
which any Borrower receives revenues in excess of $25,000 per fiscal year
or has committed to make expenditures in excess of $25,000 per fiscal
year. Each such contract, agreement and other document is in full force
and effect as of the date hereof and no Borrower knows of any reason why
such contracts, agreements and other documents would not remain in full
force and effect pursuant to the terms thereof.
(s) ENVIRONMENT. Each Borrower has duly complied with, and
its business, operations, assets, equipment, property, leaseholds or
other facilities are in compliance with, the provisions of all
federal, state and local environmental, health, and safety laws, codes
and ordinances, and all rules and regulations promulgated thereunder.
Each Borrower has been issued and will maintain all required federal,
state and local permits, licenses, certificates and approvals relating
to (i) air emissions; (ii) discharges to surface water or groundwater;
(iii) noise emissions; (iv) solid or liquid waste disposal; (v) the
use, generation, storage, transportation or disposal of toxic or
hazardous substances or wastes (which shall include any and all such
materials listed in any federal, state or local law, code or ordinance
and all rules and regulations promulgated thereunder as hazardous or
potentially hazardous); or (vi) other environmental, health or safety
matters. No Borrower has received notice of, or knows of, or suspects
facts which might constitute any violations of any federal, state or
local environmental, health or safety laws, codes or ordinances, and
any rules or regulations promulgated thereunder with respect to its
businesses, operations, assets, equipment, property, leaseholds, or
other facilities. Except in accordance with a valid governmental
permit, license, certificate or approval, there has been no emission,
spill, release or discharge into or upon (i) the air; (ii) soils, or
any improvements located thereon; (iii) surface water or groundwater;
or (iv) the sewer, septic system or waste treatment, storage or
disposal system servicing the premises, of any toxic or hazardous
substances or wastes at or from the premises; and accordingly the
premises of each Borrower are free of all such toxic or hazardous
substances or wastes. There has been no complaint, order, directive,
claim, citation or notice by any governmental authority or any person
or entity with respect to (i) air emissions; (ii) spills, releases or
discharges to soils or improvements located thereon, surface water,
groundwater or the sewer, septic system or waste treatment, storage or
disposal systems servicing the premises; (iii) noise emissions; (iv)
solid or liquid waste disposal; (v) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or waste;
or (vi) other environmental, health or safety matters affecting each
Borrower or its business, operations, assets, equipment, property,
leaseholds or other facilities. No Borrower has any indebtedness,
obligation or liability (absolute or contingent, matured or not
matured), with respect to the storage, treatment, cleanup or disposal
of any solid wastes, hazardous wastes or other toxic or hazardous
substances (including without limitation any such indebtedness,
obligation, or liability with respect to any current regulation, law
or statute regarding such storage, treatment, cleanup or disposal).
(t) FEES/COMMISSIONS. No Borrower has agreed to pay any
finder's fee, commission, origination fee (except for the processing and
commitment fees due pursuant
SirromAgmts Page 8
<PAGE>
to Section 1.2 hereof and a commission payable to Brent Knudsen in the
amount of $75,000) or other fee or charge to any person or entity with
respect to the Loan and investment transactions contemplated hereunder.
(u) ERISA. Each Borrower is in compliance in all material
respects with all applicable provisions of Title IV of the Employee
Retirement Income Security Act of 1974, Pub. L. No. 93-406, September 2,
1974, 88 Stat. 829, 29 U.S.C.A. Section 1001 et seq. (1975), as amended
from time to time ("ERISA"). Neither a reportable event nor a prohibited
transaction (as defined in ERISA) has occurred and is continuing with
respect to any pension plan that is subject to the requirements of ERISA
(a "Plan"); no notice of intent to terminate a Plan has been filed nor
has any Plan been terminated; no circumstances exist which constitute
grounds entitling the Pension Benefit Guaranty Corporation (together with
any entity succeeding to or all of its functions, the "PBGC") to
institute proceedings to terminate, or appoint a trustee to administer, a
Plan, nor has the PBGC instituted any such proceedings; no Borrower nor
any commonly controlled entity (as defined in ERISA) has completely or
partially withdrawn from a multiemployer plan (as defined in ERISA); each
Borrower and each commonly controlled entity has met its minimum funding
requirements under ERISA with respect to all of its Plans and the present
fair market value of all Plan property exceeds the present value of all
vested benefits under each Plan, as determined on the most recent
valuation date of the Plan and in accordance with the provisions of ERISA
and the regulations thereunder for calculating the potential liability of
any Borrower or any commonly controlled entity to the PBGC or the Plan
under Title IV or ERISA; and no Borrower nor any commonly controlled
entity has incurred any liability to the PBGC under ERISA.
(v) TITLE TO PROPERTIES. Each Borrower has good, indefeasible
and insurable title to, or valid leasehold interests in, all its real
properties and good title to its other assets, free and clear of all
liens other than Permitted Liens (as defined in Section 3.15 hereof).
(w) LIMITED OFFERING OF NOTE AND WARRANT. No Borrower nor
anyone acting on its behalf has offered the Note, the Warrant or any
similar securities for sale to, or solicited any offer to buy any of the
same from, or otherwise approached or negotiated in respect thereof,
with, any person other than Lender and not more than 35 other
institutional investors. No Borrower nor anyone acting on its behalf has
taken, or will take, any action which would subject the issuance or sale
of the Note and Warrant to Section 5 of the Securities Act of 1933, as
amended, or the registration or qualification provisions of the blue sky
laws of any state.
(x) REGISTRATION RIGHTS. Except as described in the Warrant
and as set forth on Schedule 2.1(x), Borrower is not under any obligation
to register under the Securities Act of 1933, as amended, or the Trust
Indenture Act of 1939, as amended, any of its presently outstanding
securities or any of its securities that may subsequently be issued.
SirromAgmts Page 9
<PAGE>
(y) EMPLOYEES. No Borrower has current labor problems or
disputes which have resulted or any Borrower reasonably believes could be
expected to have a material adverse effect on the operations, properties
or financial condition of such Borrower, or such Borrower's ability to
perform its obligations hereunder.
(z) ISSUANCE TAXES. All taxes imposed on any Borrower in
connection with the issuance, sale and delivery of the Note, the Warrant
and the capital stock issuable upon exercise of the Warrant have been or
will be fully paid, and all laws imposing such taxes have been or will be
fully satisfied by Borrowers.
(aa) SOLVENCY. As of the date hereof and giving
effect to the making of the Loan, each Borrower (i) has capital
sufficient to carry on its business and transactions and all business
and transactions in which it is about to engage and is able to pay
its debts as they mature, (ii) owns property having a value, both at
fair valuation and at present fair saleable value, greater than the
amount required to pay its probable liabilities (including
contingencies), and (iii) does not believe that it will incur debts
or liabilities beyond its ability to pay such debts or liabilities as
they mature.
(bb) LOCATION OF PROPERTIES, PLACES OF BUSINESS. The
only jurisdictions in which each Borrower maintains any tangible personal
property or carries on business are as listed in Schedule 2.1(ab) hereto.
All billings for the supply of goods and services by each Borrower are
made from, and require payment to be made to, the chief executive office
of the such Borrower. No Borrower has, during the five (5) years
preceding the date of this Agreement, been known as or used any other
corporate, trade or fictitious name, or acquired all or substantially all
of the assets, capital stock or operating units of any person. No
Borrower has, during the five (5) years preceding the date of this
Agreement, had a business location at any address other than addresses
set forth on Schedule 2.1(ab).
(cc) YEAR 2000 COMPATIBILITY. Each Borrower has reviewed
its financial accounting systems and other computer systems for year
2000 compatibility and has not identified any issues that could have
a material adverse effect on such Borrower's business, operations,
property or financial condition.
(dd) INTERRELATEDNESS OF BORROWERS. The business operations of
each Borrower are interrelated and complement one another, and such
entities have a common business purpose, with intercompany
bookkeeping and accounting adjustments used to separate their
respective properties, liabilities and transactions. To permit their
uninterrupted and continuous operations, such entities now require
and will from time to time hereafter require funds and credit
accommodations for general business purposes. The proceeds of the
Loan will directly or indirectly benefit each Borrower hereunder,
severally and jointly, regardless of which Borrower requests or
receives part or all of the proceeds of such advances.
SirromAgmts Page 10
<PAGE>
ARTICLE 3
COVENANTS AND AGREEMENTS
Borrowers covenant and agree, jointly and severally, that during the term
of this Agreement:
3.1 PAYMENT OF OBLIGATIONS. Borrowers shall pay the indebtedness
evidenced by the Note according to the terms thereof, and shall timely pay or
perform, as the case may be, all of the other obligations of Borrowers to
Lender, direct or contingent, however evidenced or denominated, and however and
whenever incurred, including but not limited to indebtedness incurred pursuant
to any present or future commitment of Lender to Borrowers, together with
interest thereon, and any extensions, modifications, consolidations and/or
renewals thereof and any notes given in payment thereof.
3.2 FINANCIAL STATEMENTS AND REPORTS. Dreams, Inc. shall furnish to
Lender (a) as soon as practicable and in any event within one hundred twenty
(120) days after the end of each fiscal year of Dreams, Inc., an audited
consolidated and consolidating balance sheet of Borrowers as of the close of
such fiscal year, an audited consolidated and consolidating statement of
operations of Borrowers as of the close of such fiscal year and an audited
consolidated and consolidating statement of cash flows for Borrowers for such
fiscal year, prepared in accordance with generally accepted accounting
principles consistently applied and accompanied by an unqualified audit report
prepared by an independent certified public accountant acceptable to Lender
showing the financial condition of Borrowers at the close of such fiscal year
and the results of its operations during such fiscal year and accompanied by a
certificate of the President of Dreams, Inc., stating that to the best of the
knowledge of such officer, Borrowers have kept, observed, performed and
fulfilled each covenant, term and condition of this Agreement and the other Loan
Documents during the preceding fiscal year and that no Event of Default has
occurred and is continuing (or if an Event of Default has occurred and is
continuing, specifying the nature of same, the period of existence of same and
the action Borrower proposes to take in connection therewith), (b) within thirty
(30) days of the end of each calendar month, a status report indicating the
financial performance of each Borrower during such month and the financial
position of each Borrower as of the end of such month in the format required by
Lender (which format will be delivered to Borrowers on a diskette), (c) within
thirty (30) days of the end of each quarter, a consolidated and consolidating
balance sheet of Borrowers as of the close of such quarter and a consolidated
and consolidating statement of operations of Borrower as of the close of such
quarter, all in reasonable detail, and prepared substantially in accordance with
generally accepted accounting principles consistently applied (except for the
absence of footnotes and subject to year-end adjustments), and (d) with
reasonable promptness, such other financial data, including without limitation,
accounts receivable agings, as Lender may reasonably request. Without Lender's
prior written consent, no Borrower shall modify or change any accounting
policies or procedures, including such Borrower's fiscal year, in effect on the
date hereof.
3.3 MAINTENANCE OF BOOKS AND RECORDS; INSPECTION. Each Borrower
shall maintain its books, accounts and records in accordance with generally
accepted accounting principles consistently applied, and after reasonable notice
from Lender permit Lender, its officers and employees and any professionals
designated by Lender in writing, at such Borrower's expense, to
SirromAgmts Page 11
<PAGE>
visit and inspect any of its properties, corporate books and financial
records, and to discuss its accounts, affairs and finances with such Borrower
or the principal officers of such Borrower during reasonable business hours,
all at such times as Lender may reasonably request; provided that no such
inspection shall materially interfere with the conduct of such Borrower's
business.
3.4 INSURANCE. Without limiting any of the requirements of any of the
other Loan Documents, Borrowers shall maintain, in amounts customary for
entities engaged in comparable business activities, (a) to the extent required
by applicable law, worker's compensation insurance (or maintain a legally
sufficient amount of self insurance against worker's compensation liabilities,
with adequate reserves, under a plan approved by Lender, such approval not to be
unreasonably withheld or delayed), and (b) fire and "all risk" casualty
insurance on its properties against such hazards and in at least such amounts as
are customary in Borrowers' business. Borrowers will make reasonable efforts to
obtain and maintain public liability insurance in an amount, and at a cost,
deemed reasonable to the Borrowers' Board of Directors. At the request of
Lender, Borrowers will deliver forthwith a certificate specifying the details of
such insurance in effect.
3.5 TAXES AND ASSESSMENTS. Each Borrower shall (a) file all tax
returns and appropriate schedules thereto that are required to be filed under
applicable law, prior to the date of delinquency, (b) pay and discharge all
taxes, assessments and governmental charges or levies imposed upon such Borrower
upon its income and profits or upon any properties belonging to it, prior to the
date on which penalties attach thereto, and (c) pay all taxes, assessments and
governmental charges or levies that, if unpaid, might become a lien or charge
upon any of its properties; provided, however, that any Borrower in good faith
may contest any such tax, assessment, governmental charge or levy described in
the foregoing clauses (b) and (c) so long as appropriate reserves in accordance
with generally accepted accounting principles are maintained with respect
thereto.
3.6 CORPORATE EXISTENCE. Each Borrower shall maintain its corporate
existence and good standing in the state of its incorporation, and its
qualification and good standing as a foreign corporation in each jurisdiction in
which such qualification is necessary pursuant to applicable law.
3.7 COMPLIANCE WITH LAW AND OTHER AGREEMENTS. Except where the
failure to do so would not materially adversely affect any Borrower's
operations, properties, financial condition or its ability to fulfill its
obligations under the Loan Documents, each Borrower shall maintain its business
operations and property owned or used in connection therewith in compliance with
(a) all applicable federal, state and local laws, regulations and ordinances
governing such business operations and the use and ownership of such property,
and (b) all agreements, licenses, franchises, indentures and mortgages to which
each Borrower is a party or by which each Borrower or any of its properties is
bound. Without limiting the foregoing, each Borrower shall pay all of its
indebtedness promptly in accordance with the terms thereof.
3.8 NOTICE OF DEFAULT; PERCEIVED BREACH. Borrowers shall give written
notice to Lender of the occurrence of any default, event of default or Event of
Default under this Agreement or any other Loan Document promptly upon the
occurrence thereof. Borrowers agree to give Lender prompt written notice of any
action or inaction by or on behalf of Lender in connection with this
SirromAgmts Page 12
<PAGE>
Agreement or the Obligations that Borrowers believe may be actionable against
Lender or a defense to payment of any or all Obligations for any reason,
including, but not limited to, commission of a tort or violation of any
contractual duty or duty implied by law.
3.9 NOTICE OF LITIGATION. Borrowers shall give notice, in writing, to
Lender of (a) any actions, suits or proceedings, instituted by any persons
whomsoever against Borrowers or affecting any of the assets of Borrowers wherein
the amount at issue is in excess of Fifty Thousand and No/100ths Dollars
($50,000.00) and (b) any dispute, not resolved within ninety (90) days of the
commencement thereof, between any Borrower on the one hand and any governmental
regulatory body on the other hand, which dispute might materially interfere with
the normal operations of any Borrower.
3.10 CONDUCT OF BUSINESS. Each Borrower will continue to engage in
a business of the same general type and manner as conducted by it on the date
of this Agreement. Without ten (10) days' prior written notice to Lender, no
Borrower shall change its name or location of doing business. In the event
any Borrower makes a change of its name or location of doing business, such
Borrower shall promptly execute any and all financing statements and
amendments or continuations thereof and any other documents that Lender may
reasonably request to evidence, continue, and/or perfect any security
interest in or pledge of collateral securing the Loan.
3.11 ERISA PLAN. If any Borrower has in effect, or hereafter
institutes, a Plan that is subject to the requirements of ERISA, then the
following warranty and covenants shall be applicable during such period as
any such Plan shall be in effect: (a) such Borrower hereby warrants that no
fact that might constitute grounds for the involuntary termination of the
Plan, or for the appointment by the appropriate United States District Court
of a trustee to administer the Plan, exists at the time of execution of this
Agreement; (b) such Borrower hereby covenants that throughout the existence
of the Plan, such Borrower's contributions under the Plan will meet the
minimum funding standards required by ERISA and Borrower will not institute a
distress termination of the Plan; and (c) such Borrower covenants that it
will send to Lender a copy of any notice of a reportable event (as defined in
ERISA) required by ERISA to be filed with the Labor Department or the Pension
Benefit Guaranty Corporation, at the time that such notice is so filed.
3.12 DIVIDENDS, DISTRIBUTIONS, STOCK RIGHTS, ETC. Without the prior
written consent of Lender, no Borrower shall declare or pay any dividend of
any kind (other than stock dividends payable to all holders of any class of
capital stock), in cash or in property, on any class of the capital stock of
any Borrower, or purchase, redeem, retire or otherwise acquire for value any
shares of such stock, nor make any distribution of any kind in cash or
property in respect thereof, nor make any return of capital of shareholders,
nor make any payments in cash or property in respect of any stock options,
stock bonus or similar plan nor grant any preemptive rights with respect to
the capital stock of any Borrower; provided however that Borrower may pay
when due the tax liability of the shareholders of Mounted Memories, Inc.
attributable to the operations of Mounted Memories, Inc. for the time period
January 1, 1998 until the date hereof in accordance with the Escrow Agreement
of even date herewith.
SirromAgmts Page 13
<PAGE>
3.13 GUARANTIES; LOANS; PAYMENT OF DEBT. Without the prior written
consent of Lender, no Borrower shall guarantee nor be liable in any manner,
whether directly or indirectly, or become contingently liable after the date
of this Agreement in connection with the obligations or indebtedness of any
person or entity whatsoever other than Borrowers, except for the endorsement
of negotiable instruments payable to any Borrower for deposit or collection
in the ordinary course of business. Without the prior written consent of
Lender, no Borrower shall (a) make any loan, advance or extension of credit
to any person other than in the normal course of its business, or (b) make
any payment on any subordinated debt other than trade payables incurred in
the ordinary course of such Borrower's business.
3.14 DEBT. Without the prior written consent of Lender, no Borrower
shall create, incur, assume or suffer to exist indebtedness of any
description whatsoever, excluding:
(a) the indebtedness evidenced by the Note;
(b) the endorsement of negotiable instruments payable to
any Borrower for deposit or collection in the ordinary course of
business;
(c) trade payables incurred in the ordinary course of
business of any Borrower (each of which, individually, does not exceed
$50,000); and
(d) the indebtedness listed on Schedule 2.1(l) hereto.
3.15 NO LIENS. Without the prior written consent of Lender, no
Borrower shall create, incur, assume or suffer to exist any lien, security
interest, security title, mortgage, deed of trust or other encumbrance upon
or with respect to any of its assets, now owned or hereafter acquired, except
the following permitted liens (the "Permitted Liens"):
(a) liens in favor of Lender;
(b) liens for taxes or assessments or other governmental
charges or levies if not yet due and payable;
(c) liens on leased equipment granted in connection with
the leasing of such equipment in favor of the lessor of such equipment;
(d) liens described on Schedule 2.1(l) hereto.
3.16 MERGERS, CONSOLIDATIONS, ACQUISITIONS AND SALES. Without the
prior written consent of Lender, no Borrower shall (a) be a party to any
merger, consolidation or corporate reorganization, nor (b) purchase or
otherwise acquire all or substantially all of the assets or stock of, or any
partnership or joint venture interest in, any other person, firm or entity,
nor (c) sell, transfer, convey, or lease all or any substantial part of its
assets, nor (d) create any Subsidiaries nor convey any of its assets to any
Subsidiary. Lender consents to the acquisition by any Borrower of all or
substantially
SirromAgmts Page 14
<PAGE>
all of the assets or stock of Mounted Memories, Inc. which acquisition shall
occur contemporaneously with the closing of the Loan.
3.17 TRANSACTIONS WITH AFFILIATES. No Borrower shall enter into any
transaction, including, without limitation, the purchase, sale or exchange of
property or the rendering of any service, with any affiliate (except another
Borrower), except in the ordinary course of and pursuant to the reasonable
requirements of a Borrower's business and upon fair and reasonable terms no
less favorable to such Borrower than such Borrower would obtain in a
comparable arm's length transaction with a person not an affiliate. For the
purposes of this Section 3.17, "affiliate" shall mean a person, corporation,
partnership or other entity controlling, controlled by or under common
control with such Borrower.
3.18 EMPLOYMENT CONTRACTS. Without the prior written consent of
Lender, no Borrower shall (i) enter into any employment agreement or other
written compensation agreement that has a term of greater than one year with
any of such Borrower's executive officers or (ii) increase total compensation
paid to the executive officers of Borrowers by more than ten percent (10%)
per year. Notwithstanding the foregoing, Lender acknowledges and agrees that
Borrower may pay the compensation set forth on Schedule 3.18.
3.19 ENVIRONMENT. Each Borrower shall be and remain in compliance
with the provisions of all federal, state and local environmental, health,
and safety laws, codes and ordinances, and all rules and regulations issued
thereunder; notify Lender immediately of any notice of a hazardous discharge
or environmental complaint received from any governmental agency or any other
party; notify Lender immediately of any hazardous discharge from or affecting
its premises; immediately contain and remove the same, in compliance with all
applicable laws; promptly pay any fine or penalty assessed in connection
therewith; permit Lender to inspect the premises, to conduct tests thereon,
and to inspect all books, correspondence, and records pertaining thereto; and
at Lender's request, and at such Borrower's expense, provide a report of a
qualified environmental engineer, satisfactory in scope, form, and content to
Lender, and such other and further assurances reasonably satisfactory to
Lender that the condition has been corrected.
3.20 LANDLORD CONSENTS. Each Borrower shall use its best efforts to
obtain a Landlord Consent and Subordination of Lien, in a form reasonably
satisfactory to Lender, from each landlord from whom such Borrower now or
hereafter may lease space.
3.21 ISSUANCE OF CAPITAL STOCK. Without the prior written consent
of Lender, no Borrower shall issue any shares of capital stock of such
Borrower or securities convertible into or exercisable for shares of capital
stock of such Borrower; provided, however that Dreams, Inc. may issue capital
stock (and, if necessary, file the related Form S-8) in connection with an
employee benefit plan so long as the amount of capital stock issued under
such plan does not in the aggregate exceed 5% of the issued and outstanding
stock of Dreams, Inc.
SirromAgmts Page 15
<PAGE>
ARTICLE 4
CONDITIONS TO CLOSING
4.1 CLOSING OF THE LOAN. The obligation of Lender to fund the Loan on
the date hereof (the "Closing Date") is subject to the fulfillment, on or prior
to the Closing Date, of each of the following conditions:
Borrowers shall have performed and complied in all material respects with
all of the covenants, agreements, obligations and conditions
required by this Agreement.
Lender shall have received an opinion of the Borrowers' counsel, Hunter &
Brown, dated the Closing Date, in form and substance satisfactory
to Lender's counsel, Chambliss, Bahner & Stophel, P.C.
Borrowers shall have delivered to Lender a Note executed by Borrowers, in
form and substance satisfactory to Lender.
Borrowers shall have delivered to Lender a Stock Purchase Warrant
executed by Dreams, Inc., in form and substance satisfactory to
Lender, and the related Warrant Valuation Letter executed by
Dreams, Inc.
Borrowers shall have delivered to Lender a Security Agreement and related
UCC-1 Financing Statement(s), executed by Borrowers, each of which
is in form and substance satisfactory to Lender.
Borrowers shall have delivered to Lender a Pledge and Security Agreement
and related stock certificates, stock powers and voting proxies,
executed by Dreams, Inc., in form and substance satisfactory to
Lender.
Borrowers shall have delivered to Lender a Pledge and Security Agreement
and related stock certificate, stock power and voting proxy,
executed by Dreams Franchise Corporation, in form and substance to
Lender.
Borrowers shall have delivered to Lender an Intellectual Property
Security Agreement executed by Borrowers, in form and substance
satisfactory to Lender.
Borrowers shall have delivered to Lender an Authorization Agreement for
Pre-Authorized Payments (Debit) executed by Borrowers, in form and
substance satisfactory to Lender.
Borrowers shall have delivered to Lender Pledge and Security Agreements
and related stock certificates, stock powers and voting proxies
executed by Invest West Sports, Inc., Stonehil Financial, Mark
Battistone, Cynthia Hill, Justin Battistone, Kelly Battistone,
Dann Battistone, Brian Battistone, Roger Battistone, Dreamstar,
Sam D. Battistone, Joseph Casey, Dale Larsson, Ross Tannenbaum,
and Mark Viner, in form and substance satisfactory to
SirromAgmts Page 16
<PAGE>
Lender and related UCC-1 Financing Statement(s) executed by
Joseph Casey and Mark Viner, each of which is in form and
substance satisfactory to Lender.
Borrowers shall have delivered to Lender the Small Business
Administration Forms 480, 652 and 1031 (Parts A and B) completed
by Dreams, Inc.
Borrowers shall have delivered to Lender the Small Business
Administration Economic Impact Assessment completed by Dreams,
Inc., in form and substance satisfactory to Lender.
Borrowers shall have delivered to Lender copies of the corporate charter
and other publicly filed organizational documents of each
Borrower, certified by the Secretary of State or other appropriate
public official in the jurisdiction in which each Borrower is
incorporated.
Borrowers shall have delivered to Lender certified (as of the date of
this Agreement) copies of all corporate action taken by each
Borrower, including resolutions of the Board of Directors,
authorizing the execution, delivery and performance of the Loan
Documents.
Borrowers shall have delivered to Lender a certificate as to the legal
existence and good standing of each Borrower, issued by the
Secretary of State or other appropriate public official in the
jurisdiction in which each Borrower is incorporated.
Borrowers shall have delivered to Lender certificates of the Secretaries
of State or other appropriate public officials as to each
Borrower's qualification to do business and good standing in each
jurisdiction in which a failure to be so qualified would have a
material adverse effect on the financial condition or the ability
to conduct the business in the manner now conducted and as
hereafter intended to be conducted.
Borrowers shall have delivered to Lender a copy of the executed
Shareholder Indemnification Agreement between Dreams Products,
Inc. and Mitch Adelstein, Ross Tannenbaum and Scott Widelitz (the
"Employees"), respectively, which Shareholder Indemnification
Agreement includes noncompetition covenants relating to the
Employees, executed by Employees and Dreams, Inc. in form and
substance satisfactory to Lender.
Borrowers shall have delivered to Lender copies of life insurance
policies on the lives of Ross Tannenbaum and Sam Battistone,
respectively, naming Lender as beneficiary each in the amount of
$3,000,000 within sixty (60) days of closing.
Borrowers shall have delivered to Lender copies of the executed Asset
Purchase Agreement relating to Mounted Memories, Inc., in form and
substance satisfactory to Lender.
Borrowers shall have delivered to Lender a Subordination Agreement
executed by Borrowers and Robert L. Hild, in form and substance
satisfactory to Lender.
Borrowers shall have delivered to Lender a payoff letter executed by
First Bank, N.A.
SirromAgmts Page 17
<PAGE>
Borrowers shall have delivered to Lender Release of Obligations and Stock
Purchase Agreements executed by Signature, Inc., Robert Kester,
Riley Robinson, Dayton Wittke, Dino Satallante, Roger Battistone,
and Dale Larsson, respectively, all in form and substance
satisfactory to Lender.
Borrowers shall have delivered to Lender a Letter Agreement executed by
NBA Properties, Inc., NBA Legends Foundation, Dreams Franchise
Corporation and Dreamstar Corporation in form and substance
satisfactory to Lender.
Borrowers shall have delivered a consent and letter agreement regarding
Universal Studios Licensing Agreement executed by Universal
Studios Licensing, Inc., in form and substance satisfactory to
Lender.
Borrowers shall have delivered to Lender a letter agreement regarding
conversion of the note payable to Dreamstar.
Borrowers shall have delivered to Lender a copy of the executed Agreement
between Borrower and the Tablers, in form and substance
satisfactory to Lender.
Borrowers shall have delivered to Lender a Consent to Pledge of Options
executed by Dreams, Inc., in form and substance satisfactory to
Lender.
Borrowers shall have delivered to Lender an opinion regarding contingent
liabilities in form and substance satisfactory to Lender.
Borrowers shall have delivered to Lender copies of Employment Agreements
executed by Ross Tannenbaum, Mark Viner, Joseph Casey, Scott
Widelitz and Mitch Adelstein, respectively.
Borrowers shall have delivered to Lender an Escrow Agreement executed by
Borrowers, in form and substance satisfactory to Lender.
Borrowers shall have delivered to Lender certified copies of the Articles
of Amendment to the Articles of Incorporation of Dreams, Inc.
changing the par value to $.01 per share and increasing the number
of authorized shares, together with corporate resolutions within
forty-five (45) days of closing.
SirromAgmts Page 18
<PAGE>
ARTICLE 5
DEFAULT AND REMEDIES
5.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Default in the payment of the principal of or interest on
the indebtedness evidenced by the Note in accordance with the terms of
the Note, which default is not cured within five (5) days;
(b) Any misrepresentation by Borrowers, or any Affiliates as to
any material matter hereunder or under any of the other Loan Documents,
or delivery by Borrowers of any schedule, statement, resolution, report,
certificate, notice or writing to Lender that is untrue in any material
respect on the date as of which the facts set forth therein are stated or
certified;
(c) Failure of Borrowers or any Affiliates to perform any of
their obligations, covenants or agreements under this Agreement, the Note
or any of the other Loan Documents;
(d) Any Borrower (i) shall generally not pay or shall be unable
to pay its debts as such debts become due, or (ii) shall make an
assignment for the benefit of creditors or petition or apply to any
tribunal for the appointment of a custodian, receiver or trustee for it
or a substantial part of its assets, or (iii) shall commence any
proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect, or (iv) shall have had
any such petition or application filed or any such proceeding commenced
against it that is not dismissed within sixty (60) days, or (v) shall
indicate, by any act or intentional and purposeful omission, its consent
to, approval of or acquiescence in any such petition, application,
proceeding or order for relief or the appointment of a custodian,
receiver or trustee for it or a substantial part of its assets, or (vi)
shall suffer any such custodianship, receivership or trusteeship to
continue undischarged for a period of sixty (60) days or more;
(e) Any Borrower shall be liquidated, dissolved, partitioned or
terminated, or the charter thereof shall expire or be revoked;
(f) A default or event of default shall occur under any of the
other Loan Documents and, if subject to a cure right, such default or
event of default shall not be cured within the applicable cure period;
(g) Any Borrower shall default in the timely payment or
performance of any obligation now or hereafter owed to Lender in
connection with any other indebtedness of Borrower now or hereafter owed
to Lender;
SirromAgmts Page 19
<PAGE>
(h) Any Borrower shall have defaulted and continue to be in
default in the timely payment of or performance of any covenant relating
to any other indebtedness or obligation, which in the aggregate exceeds
Twenty Five Thousand and No/100ths Dollars ($25,000.00) or materially
adversely affects such Borrower's operations, properties or financial
condition (except for amounts subject to bona fide disputes which are
resolved within sixty (60) days or which Borrower is continuing
diligently to pursue);
(i) Ross Tannenbaum or Sam Battistone shall no longer be
significantly involved in the management of Borrower.
With respect to any Event of Default described above that is capable
of being cured and that does not already provide its own cure procedure (a
"Curable Default"), the occurrence of such Curable Default shall not
constitute an Event of Default hereunder if such Curable Default is fully
cured and/or corrected within thirty (30) days (ten (10) days, if such
Curable Default may be cured by payment of a sum of money) of written notice
thereof to Borrowers given in accordance with the provisions hereof.
5.2 ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of
any Event of Default described in subsection 5.1(d), the indebtedness
evidenced by the Note as well as any and all other indebtedness of any
Borrower to Lender shall be immediately due and payable in full; and upon the
occurrence of any other Event of Default described above, Lender at any time
thereafter may at its option accelerate the maturity of the indebtedness
evidenced by the Note as well as any and all other indebtedness of any
Borrower to Lender; all without notice of any kind. Upon the occurrence of
any such Event of Default and the acceleration of the maturity of the
indebtedness evidenced by the Note:
(a) Lender shall be immediately entitled to exercise any and
all rights and remedies possessed by Lender pursuant to the terms of the
Note and all of the other Loan Documents; and
(b) Lender shall have any and all other rights and remedies
that Lender may now or hereafter possess at law, in equity or by statute.
5.3 REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy
conferred upon or reserved to Lender by this Agreement or any of the other
Loan Documents is intended to be exclusive of any other right, power or
remedy, but each and every such right, power and remedy shall be cumulative
and concurrent and shall be in addition to any other right, power and remedy
given hereunder, under any of the other Loan Documents or now or hereafter
existing at law, in equity or by statute. No delay or omission by Lender to
exercise any right, power or remedy accruing upon the occurrence of any Event
of Default shall exhaust or impair any such right, power or remedy or shall
be construed to be a waiver of any such Event of Default or an acquiescence
therein, and every right, power and remedy given by this Agreement and the
other Loan Documents to Lender may be exercised from time to time and as
often as may be deemed expedient by Lender.
SirromAgmts Page 20
<PAGE>
5.4 PROCEEDS OF REMEDIES. Any or all proceeds resulting from the
exercise of any or all of the foregoing remedies shall be applied as set forth
in the Loan Document(s) providing the remedy or remedies exercised, if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including without limitation
reasonable attorneys' fees and disbursements, incurred by Lender in
connection with the exercise of its remedies;
Second, to the expenses of curing the default that has occurred,
in the event that Lender elects, in its sole discretion, to cure the
default that has occurred;
Third, to the payment of the Obligations of Borrowers, including
but not limited to the payment of the principal of and interest on the
indebtedness evidenced by the Note, in such order of priority as Lender
shall determine in its sole discretion; and
Fourth, the remainder, if any, to Borrowers or to any other person
lawfully thereunto entitled.
ARTICLE 6
TERMINATION
6.1 TERMINATION OF THIS AGREEMENT. This Agreement shall remain in
full force and effect until the payment in full by Borrowers of the Obligations,
at which time Lender shall cancel the Note and deliver it to Borrowers;
provided, however, that the indemnities provided in Section 7.15 shall survive
the termination of this Agreement.
ARTICLE 7
MISCELLANEOUS
7.1 PERFORMANCE BY LENDER. If Borrowers shall default in the payment,
performance or observance of any covenant, term or condition of this Agreement,
which default is not cured within the applicable cure period, then Lender may,
at its option, pay, perform or observe the same, and all payments made or costs
or expenses incurred by Lender in connection therewith (including but not
limited to reasonable attorneys' fees), with interest thereon at the highest
default rate provided in the Note, shall be immediately repaid to Lender by
Borrowers and shall constitute a part of the Obligations. Lender shall be the
sole judge of the necessity for any such actions and of the amounts to be paid.
7.2 SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Whenever in this
Agreement one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this
SirromAgmts Page 21
<PAGE>
Agreement by or on behalf of Borrowers or by or on behalf of Lender shall
bind and inure to the benefit of their respective heirs, legal
representatives, successors-in-title and assigns, whether so expressed or not.
7.3 COSTS AND EXPENSES. Borrowers agree to pay all reasonable costs
and expenses incurred by Lender in connection with the making of the Loan,
including but not limited to filing fees, recording taxes and reasonable
attorneys' fees, promptly upon demand of Lender. Borrowers further agree to pay
all premiums for insurance required to be maintained by Borrowers pursuant to
the terms of the Loan Documents and all of the out-of-pocket costs and expenses
incurred by Lender in connection with the collection of the Loan, amendment to
the Loan Documents, or prepayment of the Loan, including but not limited to
reasonable attorneys' fees, promptly upon demand of Lender.
7.4 ASSIGNMENT. The Note, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole or in part by Lender, and
any such holder and/or assignee of the same shall succeed to and be possessed of
the rights and powers of Lender under all of the same to the extent transferred
and assigned. Lender may grant participations in all or any portion of its
interest in the indebtedness evidenced by the Note, and in such event Borrowers
shall continue to make payments due under the Loan Documents to Lender and
Lender shall have the sole responsibility of allocating and forwarding such
payments in the appropriate manner and amounts. Borrowers shall not assign any
of their rights nor delegate any of their duties hereunder or under any of the
other Loan Documents without the prior written consent of Lender.
7.5 TIME OF THE ESSENCE. Time is of the essence with respect to each
and every covenant, agreement and obligation of Borrowers hereunder and under
all of the other Loan Documents.
7.6 SEVERABILITY. If any provision(s) of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
7.7 INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM ALLOWED BY LAW.
Anything in this Agreement, the Note or any of the other Loan Documents to the
contrary notwithstanding, in no event whatsoever, whether by reason of
advancement of proceeds of the Loan, acceleration of the maturity of the unpaid
balance of the Loan or otherwise, shall the interest and other charges agreed to
be paid to Lender for the use of the money advanced or to be advanced hereunder
exceed the maximum amounts collectible under applicable laws in effect from time
to time. It is understood and agreed by the parties that, if for any reason
whatsoever the interest or loan charges paid or contracted to be paid by
Borrowers in respect of the indebtedness evidenced by the Note shall exceed the
maximum amounts collectible under applicable laws in effect from time to time,
then IPSO FACTO, the obligation to pay such interest and/or loan charges shall
be reduced to the maximum amounts collectible under applicable laws in effect
from time to time, and any amounts collected by Lender that exceed such maximum
amounts shall be applied to the reduction of the principal balance of the
SirromAgmts Page 22
<PAGE>
indebtedness evidenced by the Note and/or refunded to Borrowers so that at no
time shall the interest or loan charges paid or payable in respect of the
indebtedness evidenced by the Note exceed the maximum amounts permitted from
time to time by applicable law.
7.8 ARTICLE AND SECTION HEADINGS; DEFINED TERMS. Numbered and
titled article and section headings and defined terms are for convenience
only and shall not be construed as amplifying or limiting any of the
provisions of this Agreement.
7.9 NOTICES. Any and all notices, elections or demands permitted
or required to be made under this Agreement shall be in writing, signed by
the party giving such notice, election or demand and shall be delivered
personally, telecopied, or sent by certified mail or overnight via nationally
recognized courier service (such as Federal Express), to the other party at
the address set forth below, or at such other address as may be supplied in
writing and of which receipt has been acknowledged in writing. The date of
personal delivery or telecopy or two (2) business days after the date of
mailing (or the next business day after delivery to such courier service), as
the case may be, shall be the date of such notice, election or demand. For
the purposes of this Agreement:
The Address of Lender is: Sirrom Investments, Inc.
Suite 200
500 Church Street
Nashville, TN 37219
Attention: John Kirks
Telecopy No.: 615/726-1208
with a copy to: Chambliss, Bahner & Stophel, P.C.
1000 Tallan Building
Two Union Square
Chattanooga, TN 37402
Attention: J. Patrick Murphy, Esq.
Telecopy No.: 423/265-9574
The Address of Borrower is: Dreams, Inc.
Dreams Franchise Corporation
Dreams Entertainment, Inc.
Dreams Products, Inc.
42-620 Caroline Court
Palm Desert, CA 92211
Attention: Sam D. Battistone
Telecopy No.: 760/779-0217
SirromAgmts Page 23
<PAGE>
with a copy to: Hunter & Brown
One Utah Center
201 South Main Street, Suite 1300
Salt Lake City, UT 84111-2215
Attention: J. Scott Hunter
Telecopy No.: 801/532-8736
and to: Navon, Kopelman, O'Donnell & Lavin P.A.
2699 Stirling Road, Suite B-100
Ft. Lauderdale, FL 33312
Attention: Sam Navon
Telecopy No.: 954/983-7021
7.10 ENTIRE AGREEMENT. This Agreement and the other written
agreements between Borrowers and Lender represent the entire agreement
between the parties concerning the subject matter hereof, and all oral
discussions and prior agreements are merged herein; provided, if there is a
conflict between this Agreement and any other document executed
contemporaneously herewith with respect to the Obligations, the provision of
this Agreement shall control. The execution and delivery of this Agreement
and the other Loan Documents by Borrowers were not based upon any fact or
material provided by Lender, nor were Borrowers induced or influenced to
enter into this Agreement or the other Loan Documents by any representation,
statement, analysis or promise by Lender.
7.11 GOVERNING LAW AND AMENDMENTS. This Agreement shall be
construed and enforced under the laws of the State of Tennessee applicable to
contracts to be wholly performed in such State. No amendment or modification
hereof shall be effective except in a writing executed by each of the parties
hereto.
7.12 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein or in any of the Loan
Documents or made by or furnished on behalf of Borrowers in connection
herewith or in any Loan Documents shall survive the execution and delivery of
this Agreement and the other Loan Documents.
7.13 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
Agreement.
7.14 CONSTRUCTION AND INTERPRETATION. Should any provision of this
Agreement require judicial interpretation, the parties hereto agree that the
court interpreting or construing the same shall not apply a presumption that
the terms hereof shall be more strictly construed against one party by reason
of the rule of construction that a document is to be more strictly construed
against the party that itself or through its agent prepared the same, it
being agreed that Borrowers, Lender and their respective agents have
participated in the preparation hereof.
SirromAgmts Page 24
<PAGE>
7.15 GENERAL INDEMNIFICATION. Borrowers agree, jointly and
severally, to indemnify Lender, its officers, directors, employees and agents
(individually, an "Indemnified Party" and collectively, the "Indemnified
Parties") and each of them and agrees to hold each of them harmless from and
against any and all losses, liabilities, damages, costs, expenses and claims
of any and every kind whatsoever (except those arising solely by reason of
the gross negligence or wilful misconduct of an Indemnified Party) which may
be imposed on, incurred by, or asserted against the Indemnified Parties or
any of them arising by reason of any action or inaction or omission to any
act legally required of Borrowers (including as required pursuant hereto or
pursuant to any other Loan Document).
7.16 STANDARD OF CARE; LIMITATION OF DAMAGES. Lender shall be
liable to Borrowers only for matters arising from this Agreement or otherwise
related to the Obligations resulting from Lender's gross negligence or wilful
misconduct, and liability for all other matters is hereby waived. Lender
shall not in any event be liable to Borrowers for special or consequential
damages arising from this Agreement or otherwise related to the Obligations.
7.17 CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Borrowers hereby
irrevocably consent to the jurisdiction of the United States District Court
for the Middle District of Tennessee and of all Tennessee state courts
sitting in Davidson County, Tennessee, for the purpose of any litigation to
which Lender may be a party and which concerns this Agreement or the
Obligations without waiving any requirement of service of process as required
under the Rules of Civil Procedure. It is further agreed that venue for any
such action shall lie exclusively with courts sitting in Davidson County,
Tennessee, unless Lender agrees to the contrary in writing.
7.18 WAIVER OF TRIAL BY JURY. LENDER AND BORROWERS HEREBY KNOWINGLY
AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS,
PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE,
AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR
THE LOAN DOCUMENTS.
SirromAgmts Page 25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers,
as of the day and year first above written.
LENDER:
SIRROM INVESTMENTS, INC.,
a Tennessee corporation
By:
------------------------------
Title:
---------------------------
BORROWER:
DREAMS, INC.
a Utah corporation
By:
------------------------------
Title:
---------------------------
DREAMS FRANCHISE CORPORATION, a California
corporation
By:
------------------------------
Title:
---------------------------
DREAMS ENTERTAINMENT, INC., a Utah
corporation
By:
------------------------------
Title:
---------------------------
DREAMS PRODUCTS, INC., a Utah corporation
By:
------------------------------
Title:
---------------------------
SirromAgmts Page 26
<PAGE>
INDEX OF SCHEDULES
Schedule 2.1(b) - Subsidiaries
Schedule 2.1(e) - Capitalization Table
Schedule 2.1(f) - Intellectual Property
Schedule 2.1(h) - Litigation
Schedule 2.1(i)(A) and (B) - Financial Statements
Schedule 2.1(l) - Debt and Liens
Schedule 2.1(m) - Taxes
Schedule 2.1(n) - Shareholder Loans
Schedule 2.1(r) - Significant Contracts
Schedule 2.1(x) - Registration Rights
Schedule 2.1(ab) - Location of Properties and Place of Business
Schedule 3.18 - Employment Contracts
SirromAgmts Page 27
<PAGE>
Schedule 3.18
With regard to Sam D. Battistone, Borrower may make the following payments:
for the fiscal year ending March 31, 1999, no salary payments or bonus
payments may be made to Sam D. Battistone; and
for the fiscal years ending March 31, 2000, March 31, 2001, March 31,
2002 and March 31, 2003, to Borrower may make: (A) a bonus payment
to Sam D. Battistone in the amount of $90,000 if Borrower's
audited EBITDA (as hereinafter defined) exceeds $1,500,000 for
such fiscal year and (B) an additional bonus payment to Sam D.
Battistone in the amount of $90,000 if Borrower's audited EBITDA
exceeds $2,000,000 for such fiscal year.
For purposes of this Agreement, the term "EBITDA" shall mean net income
PLUS income taxes PLUS depreciation expenses PLUS amortization expenses
plus interest expense, all determined in accordance with generally
accepted accounting principles.
With regard to Ross Tannenbaum, Borrower may make the payments as set
forth in the employment agreement dated November __, 1998, which has been
reviewed and approved by Lender and a copy of which is attached hereto.
Without the prior written consent of Lender, Borrower shall not
increase the compensation for any of the following persons except as
permitted under their respective current employment agreement, if any,
(copies of which have been provided to Borrower): Mitch Adelstein, Scott
Widelitz, Joseph Casey, John Walrod, Mark Viner, and Dale Larsson.
SirromAgmts Page 28
<PAGE>
SECURED PROMISSORY NOTE
$3,000,000.00 November ___, 1998
FOR VALUE RECEIVED, the undersigned, DREAMS, INC., a Utah
corporation, DREAMS FRANCHISE CORPORATION, a California corporation, DREAMS
ENTERTAINMENT, INC., a Utah corporation and DREAMS PRODUCTS, INC., a Utah
corporation (individually and collectively, "Maker"), jointly and severally
promise to pay to the order of SIRROM INVESTMENTS, INC., a Tennessee
corporation ("Payee"; Payee and any subsequent holder[s] hereof are
hereinafter referred to collectively as "Holder"), at the office of Payee at
Sirrom Investments, Inc., P.O. Box 30443, Nashville, TN 37241-0443, or at
such other place as Holder may designate to Maker in writing from time to
time, the principal sum of THREE MILLION AND NO/100THS DOLLARS
($3,000,000.00), together with interest on the outstanding principal balance
hereof from the date hereof at the rate of fourteen percent (14.0%) per annum
(computed on the basis of a 360-day year).
Interest only on the outstanding principal balance hereof shall be due
and payable monthly, in arrears, with the first installment being payable on
the first (1st) day of January, 1999, and subsequent installments being
payable on the first (1st) day of each succeeding month thereafter until
November ___, 2003 (the "Maturity Date"), at which time the entire
outstanding principal balance, together with all accrued and unpaid interest,
shall be immediately due and payable in full.
The indebtedness evidenced hereby may be prepaid in whole or in part,
at any time and from time to time, without premium or penalty. Any such
prepayments shall be credited first to any accrued and unpaid interest and
then to the outstanding principal balance hereof.
Time is of the essence of this Note. It is hereby expressly agreed
that in the event that any Event of Default shall occur under and as defined
in that certain Loan Agreement of even date herewith, between Maker and Payee
(the "Loan Agreement"), which Event of Default is not cured following the
giving of any applicable notice and within any applicable cure period set
forth in the Loan Agreement, then, and in such event, the entire outstanding
principal balance of the indebtedness evidenced hereby, together with any
other sums advanced hereunder, under the Loan Agreement and/or under any
other instrument or document now or hereafter evidencing, securing or in any
way relating to the indebtedness evidenced hereby, together with all unpaid
interest accrued thereon, shall, at the option of Holder and without notice
to Maker, at once become due and payable and may be collected forthwith,
regardless of the stipulated date of maturity. Upon the occurrence of any
Event of Default as set forth herein, at the option of Holder and without
notice to Maker, all accrued and unpaid interest, if any, shall be added to
the outstanding principal balance hereof, and the entire outstanding
principal balance, as so adjusted, shall bear interest thereafter until paid
at an annual rate (the "Default Rate") equal to the lesser of (i) the rate
that is seven percentage points (7.0%) in excess of the above-specified
interest rate, or (ii) the maximum rate of interest allowed to be charged
under applicable law (the "Maximum Rate"), regardless of whether or not there
has been an acceleration of the payment of principal as set forth herein.
All such interest shall be paid at the time of and as a condition precedent
to the curing of any such Event of Default.
SirromAgmts Page 29
<PAGE>
In the event this Note is placed in the hands of an attorney for
collection, or if Holder incurs any costs incident to the collection of the
indebtedness evidenced hereby, Maker and any endorsers hereof agree to pay to
Holder an amount equal to all such costs, including without limitation all
reasonable attorneys' fees and all court costs.
Presentment for payment, demand, protest and notice of demand, protest
and nonpayment are hereby waived by Maker and all other parties hereto. No
failure to accelerate the indebtedness evidenced hereby by reason of an Event
of Default hereunder, acceptance of a past-due installment or other
indulgences granted from time to time, shall be construed as a novation of
this Note or as a waiver of such right of acceleration or of the right of
Holder thereafter to insist upon strict compliance with the terms of this
Note or to prevent the exercise of such right of acceleration or any other
right granted hereunder or by applicable law. No extension of the time for
payment of the indebtedness evidenced hereby or any installment due
hereunder, made by agreement with any person now or hereafter liable for
payment of the indebtedness evidenced hereby, shall operate to release,
discharge, modify, change or affect the original liability of Maker hereunder
or that of any other person now or hereafter liable for payment of the
indebtedness evidenced hereby, either in whole or in part, unless Holder
agrees otherwise in writing. This Note may not be changed orally, but only
by an agreement in writing signed by the party against whom enforcement of
any waiver, change, modification or discharge is sought.
The indebtedness and other obligations evidenced by this Note are
further evidenced by (i) the Loan Agreement and (ii) certain other
instruments and documents, as may be required to protect and preserve the
rights of Maker and Payee, as more specifically described in the Loan
Agreement.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds hereof, acceleration
of maturity of the unpaid balance hereof or otherwise, shall the amount paid
or agreed to be paid to Holder for the use of the money advanced or to be
advanced hereunder exceed the Maximum Rate. If, from any circumstances
whatsoever, the fulfillment of any provision of this Note or any other
agreement or instrument now or hereafter evidencing, securing or in any way
relating to the indebtedness evidenced hereby shall involve the payment of
interest in excess of the Maximum Rate, then, IPSO FACTO, the obligation to
pay interest hereunder shall be reduced to the Maximum Rate; and if from any
circumstance whatsoever, Holder shall ever receive interest, the amount of
which would exceed the amount collectible at the Maximum Rate, such amount as
would be excessive interest shall be applied to the reduction of the
principal balance remaining unpaid hereunder and not to the payment of
interest. This provision shall control every other provision in any and all
other agreements and instruments existing or hereafter arising between Maker
and Holder with respect to the indebtedness evidenced hereby.
This Note is intended as a contract under and shall be construed and
enforceable in accordance with the laws of the State of Tennessee, except to
the extent that federal law may be applicable to the determination of the
Maximum Rate.
Maker hereby irrevocably consents to the jurisdiction of the United
States District Court for the Middle District of Tennessee and of all
Tennessee state courts sitting in Davidson County,
SirromAgmts Page 30
<PAGE>
Tennessee, for the purpose of any litigation to which Lender may be a party
and which concerns this Note or the indebtedness evidenced hereby without
waiving any requirement of service of process as required under the rules of
civil procedure. It is further agreed that venue for any such action shall
lie exclusively with courts sitting in Davidson County, Tennessee, unless
Holder agrees to the contrary in writing.
HOLDER AND MAKER HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF
COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR
COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN
EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN
DOCUMENTS.
As used herein, the terms "Maker" and "Holder" shall be deemed to
include their respective successors, legal representatives and assigns,
whether by voluntary action of the parties or by operation of law.
MAKER:
DREAMS, INC., a Utah corporation
By:
----------------------------
Title:
-------------------------
DREAMS FRANCHISE CORPORATION, a California
corporation
By:
----------------------------
Title:
-------------------------
DREAMS ENTERTAINMENT, INC., a Utah
corporation
By:
----------------------------
Title:
-------------------------
DREAMS PRODUCTS, INC., a Utah corporation
By:
----------------------------
Title:
-------------------------
SirromAgmts Page 31
<PAGE>
STOCK PURCHASE WARRANT
This STOCK PURCHASE WARRANT ("Warrant") is issued this ____ day of
November, 1998, by DREAMS, INC., a Utah corporation (the "Company"), to
SIRROM INVESTMENTS, INC., a Tennessee corporation (SIRROM INVESTMENTS, INC.,
and any subsequent assignee or transferee hereof are hereinafter referred to
collectively as "Holder" or "Holders").
AGREEMENT:
1. ISSUANCE OF WARRANT; TERM.
(a) For and in consideration of SIRROM INVESTMENTS, INC. making a loan
to the Company in an amount of Three Million and no/100ths Dollars
($3,000,000) pursuant to the terms of a secured promissory note of even
date herewith (the "Note") and related loan agreement of even date
herewith (the "Loan Agreement"), and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company hereby grants to Holder the right to purchase
6,657,895 shares ("Base Amount") of the Company's common stock (the
"Common Stock"), which the Company represents to equal 14% of the shares
of capital stock outstanding on the date hereof, calculated on a fully
diluted basis and assuming exercise of this Warrant, provided that in the
event that any portion of the indebtedness evidenced by the Note is
outstanding on the following dates, the Base Amount shall be increased to
the corresponding number set forth below (the "Outstanding Debt
Ratchets"):
<TABLE>
<CAPTION>
DATE BASE AMOUNT
---------------------------- -------------------------------------
<S> <C>
November ___, 2001 7,502,092 shares, which the
Company represents to equal 15.5% of
the shares of the Company's capital
stock outstanding on the date hereof
calculated on a fully diluted basis
after exercise of this Warrant
November ___, 2002 8,376,801 shares, which the
Company represents to equal 17.0% of
the shares of the Company's capital
stock outstanding on the date hereof
calculated on a fully diluted basis
after exercise of this Warrant
November ___, 2003 9,283,709 shares, which the
Company represents to equal 18.5% of
the shares of the Company's capital
stock outstanding on the date hereof
calculated on a fully diluted basis
after exercise of this Warrant
</TABLE>
(b) further provided that in the event that the Company's
EBITDA (as hereinafter defined) for the fiscal year ending March 31, 1999
is less than $1,200,000, the initial Base
SirromAgmts Page 32
<PAGE>
Amount shall be increased to 8,977,720 shares, which the Company
represents to equal 18% of the Company's capital stock outstanding on the
date hereof calculated on a fully diluted basis after exercise of this
Warrant (the "EBITDA Ratchet"). If the initial Base Amount is increased
to 18% as set forth above because the Company's EBITDA for the fiscal
year ending March 31, 1999 is less than $1,200,000 then the Outstanding
Debt Ratchets shall be adjusted to increase the adjusted Base Amount by
1.5% per year if any portion of the indebtedness evidenced by the Note is
outstanding beyond November ___, 2001, November ___, 2002 or
November ___, 2003. By way of illustration, if the initial Base Amount
is increased to 18% because the Company's EBITDA for the fiscal year
ending March 31,1999 is less than $1,200,000 than the Outstanding Debt
Ratchets for November ___, 2001, November ___, 2002 and November ___,2003
shall be 19.5%, 21.0% and 22.5%, respectively.
(c) If the Company repays all or part of the principal portion
of the indebtedness evidenced by the Note prior to the maturity date of
the Note, any subsequent adjustments to the Base Amount then in effect
for Outstanding Debt Ratchets shall be reduced in proportion to the
percentage of the principal portion of the indebtedness that is repaid.
By way of illustration, if Holder is entitled to have the initial Base
Amount increased by 1.5% on November ___, 2001 because all or part of the
principal portion of the indebtedness evidenced by the Note is
outstanding and the Company repays $1,500,000 of principal due under the
Note prior to November ___, 2001, the Base Amount then in effect would
only increase by .75% as the result of an Outstanding Debt Ratchet
adjustments and future Outstanding Debt Ratchets adjustments would be
decreased proportionately.
(d) For purposes of this Agreement, the term "EBITDA" shall
mean net income PLUS income taxes PLUS interest expense PLUS depreciation
expenses PLUS amortization expenses, all determined in accordance with
generally accepted accounting principles, all as set forth in the
Company's audited financial statements.
(e) The shares of Common Stock issuable upon exercise of this
Warrant are hereinafter referred to as the "Shares." This Warrant shall
be exercisable at any time and from time to time from the date hereof
until January ___, 2004 (the "Expiration Date").
2. EXERCISE PRICE. The exercise price (the "Exercise Price") per share for
which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be One Cent ($.01).
3. EXERCISE. This Warrant may be exercised by the Holder hereof (but only
on the conditions hereinafter set forth) in whole or in part, upon
delivery of written notice of intent to exercise to the Company in the
manner at the address of the Company set forth in Section 14 hereof,
together with this Warrant and payment to the Company of the aggregate
Exercise Price of the Shares so purchased. The Exercise Price shall be
payable, at the option of the Holder, (i) by certified or bank check,
(ii) by the surrender of the Note or portion thereof having an
outstanding principal balance equal to the aggregate Exercise Price or
(iii) by the surrender of a portion of this Warrant where the Shares
subject to the portion of this Warrant that is surrendered have a fair
market value equal to the aggregate Exercise Price. In the absence of an
established public market for the Common Stock, fair market value shall
be established
SirromAgmts Page 33
<PAGE>
by the Company's board of directors in a commercially reasonable manner.
Upon exercise of this Warrant as aforesaid, the Company shall as promptly
as practicable, and in any event within fifteen (15) days thereafter,
execute and deliver to the Holder of this Warrant a certificate or
certificates for the total number of whole Shares for which this Warrant
is being exercised in such names and denominations as are requested by
such Holder. If this Warrant shall be exercised with respect to less
than all of the Shares, the Holder shall be entitled to receive a new
Warrant covering the number of Shares in respect of which this Warrant
shall not have been exercised, which new Warrant shall in all other
respects be identical to this Warrant. The Company covenants and agrees
that it will pay when due any and all state and federal issue taxes which
may be payable in respect of the issuance of this Warrant or the issuance
of any Shares upon exercise of this Warrant.
4. COVENANTS AND CONDITIONS. The above provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended ("Securities Act"), or any
state securities laws ("Blue Sky Laws"). This Warrant has been
acquired for investment purposes and not with a view to
distribution or resale and may not be sold or otherwise
transferred without (i) an effective registration statement for
such Warrant under the Securities Act and such applicable Blue Sky
Laws, or (ii) an opinion of counsel, which opinion and counsel
shall be reasonably satisfactory to the Company and its counsel,
that registration is not required under the Securities Act or
under any applicable Blue Sky Laws (the Company hereby
acknowledges that Chambliss, Bahner & Stophel, P.C. is acceptable
counsel). Transfer of the Shares shall be restricted in the same
manner and to the same extent as the Warrant and the certificates
representing such Shares shall bear substantially the following
legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT AND
SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE
WITH REGARD THERETO, OR (II) IN THE OPINION OF COUNSEL ACCEPTABLE
TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES ACTS AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION
WITH SUCH PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such
other documents and instruments as counsel for the Company reasonably
deems necessary to effect the compliance of the issuance of this Warrant
and any shares of Common Stock issued upon exercise hereof with
applicable federal and state securities laws.
The Company covenants and agrees that all Shares which may be issued upon
exercise of this Warrant will, upon issuance and payment therefor, be legally
and validly issued and outstanding, fully paid and nonassessable, free from all
taxes, liens, charges and preemptive rights, if any, with
SirromAgmts Page 34
<PAGE>
respect thereto or to the issuance thereof. The Company shall at all times
reserve and keep available for issuance upon the exercise of this Warrant
such number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of this Warrant.
(b) The Company covenants and agrees that it shall not sell any shares
of the Company's capital stock at a price per share below the fair
market value of such shares, without the prior written consent of
the Holder hereof. In the event that the Company sells shares of
Common Stock at a price per share below the fair market value of
such shares (a "Below Market Transaction"), without the prior
written consent of the Holder hereof, the Company covenants and
agrees that the number of shares issuable upon exercise of this
Warrant shall be equal to the product obtained by multiplying the
number of shares issuable pursuant to this Warrant prior to the
Below Market Transaction by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding
immediately prior to consummation of the Below Market Transaction
plus the number of shares of Common Stock issued in the Below
Market Transaction, and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to
the Below Market Transaction plus the number of shares of Common
Stock that the aggregate consideration received by the Company in
the Below Market Transaction would purchase at fair market value.
For purposes of this subsection, Common Stock shall be deemed to
include that number of shares of Common Stock that would be
obtained assuming (i) the conversion of any securities of the
Company which, by their terms, are convertible into or
exchangeable for Common Stock, and (ii) the exercise of all
options to purchase or rights to subscribe for Common Stock or
securities which, by their terms, are convertible into or
exchangeable for Common Stock. In the absence of an established
public market for the securities sold by the Company in a Below
Market Transaction, fair market value shall be established by the
Company's board of directors in a commercially reasonable manner.
5. TRANSFER OF WARRANT. Subject to the provisions of Section 4 hereof, this
Warrant may be transferred, in whole or in part, to any person or
business entity, by presentation of the Warrant to the Company with
written instructions for such transfer. Upon such presentation for
transfer, the Company shall promptly execute and deliver a new Warrant or
Warrants in the form hereof in the name of the assignee or assignees and
in the denominations specified in such instructions. The Company shall
pay all expenses incurred by it in connection with the preparation,
issuance and delivery of Warrants under this Section.
6. WARRANT HOLDER NOT SHAREHOLDER; RIGHTS OFFERING; PREEMPTIVE RIGHTS.
Except as otherwise provided herein, this Warrant does not confer upon
the Holder, as such, any right whatsoever as a shareholder of the
Company. Notwithstanding the foregoing, if the Company should offer to
all of the Company's shareholders the right to purchase any securities of
the Company, then all shares of Common Stock that are subject to this
Warrant shall be deemed to be outstanding and owned by the Holder and the
Holder shall be entitled to participate in such rights offering. The
Company shall not grant any preemptive rights with respect to any of its
capital stock without the prior written consent of the Holder.
SirromAgmts Page 35
<PAGE>
7. OBSERVATION RIGHTS. The Holder of this Warrant shall receive notice of
and be entitled to attend or may send a representative to attend all
meetings of the Company's Board of Directors in a non-voting observation
capacity and shall receive a copy of all correspondence and information
delivered to the Company's Board of Directors, from the date hereof until
such time as the indebtedness evidenced by the Note has been paid in
full.
8. ADJUSTMENT UPON CHANGES IN STOCK.
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other similar event,
occurring after the date hereof, then the Holder exercising this
Warrant shall receive, for the aggregate Exercise Price, the
aggregate number and class of shares which such Holder would have
received if this Warrant had been exercised immediately prior to
such stock split, stock dividend, recapitalization, combination of
shares, or other similar event. If any adjustment under this
Section 8(a), would create a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares
subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be an
adjustment pursuant to this Section 8(a), the Company shall
forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring
the adjustment and the method by which such adjustment was
calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares,
separation, reorganization or liquidation of the Company, or other
similar event, occurring after the date hereof, as a result of
which shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes
of securities of the Company or another entity, or the holders of
Common Stock are entitled to receive cash or other property, then
the Holder exercising this Warrant shall receive, for the
aggregate Exercise Price, the aggregate number and class of
shares, cash or other property which such Holder would have
received if this Warrant had been exercised immediately prior to
such merger, consolidation, exchange of shares, separation,
reorganization or liquidation, or other similar event. If any
adjustment under this Section 8(b) would create a fractional share
of Common Stock or a right to acquire a fractional share of Common
Stock, such fractional share shall be disregarded and the number
of shares subject to this Warrant shall be the next higher number
of shares, rounding all fractions upward. Whenever there shall be
an adjustment pursuant to this Section 8(b), the Company shall
forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring
the adjustment and the method by which such adjustment was
calculated.
SirromAgmts Page 36
<PAGE>
9. PUT AGREEMENT.
(a) The Company hereby irrevocably grants and issues to Holder the
right and option to sell to the Company (the "Put") this Warrant
not any shares acquired pursuant to the exercise of this Warrant
for a period of thirty (30) days immediately prior to the
Expiration Date, at a purchase price (the "Put Price") equal to
the Fair Market Value (as hereinafter defined) of the shares of
Common Stock issuable to Holder upon exercise of this Warrant less
the Exercise Price.
(b) Holder may exercise the Put by delivery of written notice (the
"Put Notice") of such exercise to the Company in the manner and at
the address of the Company set forth in Section 14 hereof. Except
as provided in Section 21 hereof, the Company shall pay to Holder,
in cash or by wire transfer of immediately available funds, the
Put Price within thirty (30) days of the receipt of the Put
Notice.
(c) For purposes of this Section 9, the Fair Market Value of the
shares of Common Stock of the Company issuable pursuant to this
Warrant shall be determined as follows:
(i) The Company and the Holder shall each appoint an
independent, experienced appraiser who is a member of a recognized
professional association of business appraisers. The two
appraisers shall determine the value of the shares of Common Stock
which would be issued upon the exercise of the Warrant, assuming
that the sale would be between a willing buyer and a willing
seller, both of whom have full knowledge of the financial and
other affairs of the Company, and neither of whom is under any
compulsion to sell or to buy.
(ii) If the higher of the two appraisals is not ten percent
(10%) greater than the lower of the appraisals, the Fair Market
Value shall be the average of the two appraisals. If the higher
of the two appraisals is equal to or greater than ten percent
(10%) more than the lower of the two appraisals, then a third
appraiser shall be appointed by the two appraisers, and if they
cannot agree on a third appraiser, the American Arbitration
Association shall appoint the third appraiser. The third
appraiser, regardless of who appoints him or her, shall have the
same qualifications as the first two appraisers.
(iii) The Fair Market Value after the appointment of the third
appraiser shall be the mean of the three appraisals.
(iv) The fees and expenses of the appraisers shall be paid
one-half by the Company and one-half by the Holder.
SirromAgmts Page 37
<PAGE>
(d) At the Company's request, Holder shall provide the Company with an
affidavit in the form attached hereto as Exhibit A stating that
Holder is the holder of the Warrant on the date the Put is
exercised. Simultaneously with the payment of the Put Price,
Holder will deliver the original of the Warrant to the Company at
the time the payment of the Put Price is made.
10. REGISTRATION.
(a) The Company and the Holder of the Warrant and the Shares agree
that if at any time after the date hereof the Company shall
propose to file a registration statement with respect to any of
its Common Stock on a form suitable for a secondary offering
(including its initial public offering), it will give notice in
writing to such effect to the Holder(s) at least thirty (30) days
prior to such filing, and, at the written request of any such
registered holder, made within ten (10) days after the receipt of
such notice, will include therein at the Company's cost and
expense (including the fees and expenses of counsel to such
Holder(s), but excluding underwriting discounts, commissions and
filing fees attributable to the Shares included therein) such of
the Shares as such Holder(s) shall request; provided, however,
that if the offering being registered by the Company is
underwritten and if the representative of the underwriters
certifies in writing that the inclusion therein of the Shares
would materially and adversely affect the sale of the securities
to be sold by the Company thereunder, then the Company shall be
required to include in the offering only that number of
securities, including the Shares, which the underwriters determine
in their sole discretion will not jeopardize the success of the
offering (the securities so included to be apportioned pro rata
among all selling shareholders according to the total amount of
securities entitled to be included therein owned by each selling
shareholder, but in no event shall the total amount of Shares
included in the offering be less than the number of securities
included in the offering by any other single selling shareholder
unless all of the Shares are included in the offering). Holder
agrees to take action reasonably requested by the underwriter if
such action is customarily required in connection with a public
offering.
(b) Whenever the Company undertakes to effect the registration of any
of the Shares, the Company shall, as expeditiously as reasonably
possible:
(i) Prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement
covering such Shares and use its best efforts to cause such
registration statement to be declared effective by the
Commission as expeditiously as possible and to keep such
registration effective until the earlier of (A) the date
when all Shares covered by the registration statement have
been sold or (B) one hundred eighty (180) days from the
effective date of the registration statement; provided,
that before filing a registration statement or prospectus
or any amendment or supplements thereto, the Company will
furnish to each Holder of Shares covered by such
registration statement and the underwriters, if any, copies
of all such documents proposed to be filed (excluding
exhibits, unless any such person shall specifically request
exhibits), which documents will be subject to the review of
SirromAgmts Page 38
<PAGE>
such Holders and underwriters, and the Company will not
file such registration statement or any amendment thereto
or any prospectus or any supplement thereto (including any
documents incorporated by reference therein) with the
Commission if (A) the underwriters, if any, shall
reasonably object to such filing or (B) if information in
such registration statement or prospectus concerning a
particular selling Holder has changed and such Holder or
the underwriters, if any, shall reasonably object.
(ii) Prepare and file with the Commission such amendments
and post-effective amendments to such registration
statement as may be necessary to keep such registration
statement effective during the period referred to in
Section 10(b)(i) and to comply with the provisions of the
Securities Act with respect to the disposition of all
securities covered by such registration statement, and
cause the prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be filed
with the Commission pursuant to Rule 424 under the
Securities Act.
(iii) Furnish to the selling Holder(s) such numbers of
copies of such registration statement, each amendment
thereto, the prospectus included in such registration
statement (including each preliminary prospectus), each
supplement thereto and such other documents as they may
reasonably request in order to facilitate the disposition
of the Shares owned by them.
(iv) Use its best efforts to register and qualify under
such other securities laws of such jurisdictions as shall
be reasonably requested by any selling Holder and do any
and all other acts and things which may be reasonably
necessary or advisable to enable such selling Holder to
consummate the disposition of the Shares owned by such
Holder, in such jurisdictions; provided, however, that the
Company shall not be required in connection therewith or as
a condition thereto to qualify to transact business or to
file a general consent to service of process in any such
states or jurisdictions.
(v) Promptly notify each selling Holder of the happening
of any event as a result of which the prospectus included
in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the
statements therein not misleading and, at the request of
any such Holder, the Company will prepare a supplement or
amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Shares, such prospectus
will not contain an untrue statement of a material fact or
omit to state any fact necessary to make the statements
therein not misleading.
(vi) Provide a transfer agent and registrar for all such
Shares not later than the effective date of such
registration statement.
SirromAgmts Page 39
<PAGE>
(vii) Enter into such customary agreements (including
underwriting agreements in customary form for a primary
offering) and take all such other actions as the
underwriters, if any, reasonably request in order to
expedite or facilitate the disposition of such Shares
(including, without limitation, effecting a stock split or
a combination of shares).
(viii) Make available for inspection by any selling Holder
or any underwriter participating in any disposition
pursuant to such registration statement and any attorney,
accountant or other agent retained by any such selling
Holder or underwriter, all financial and other records,
pertinent corporate documents and properties of the
Company, and cause the officers, directors, employees and
independent accountants of the Company to supply all
information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection
with such registration statement.
(ix) Promptly notify the selling Holder(s) and the
underwriters, if any, of the following events and (if
requested by any such person) confirm such notification in
writing: (A) the filing of the prospectus or any
prospectus supplement and the registration statement and
any amendment or post-effective amendment thereto and, with
respect to the registration statement or any post-effective
amendment thereto, the declaration of the effectiveness of
such documents, (B) any requests by the Commission for
amendments or supplements to the registration statement or
the prospectus or for additional information, (C) the
issuance or threat of issuance by the Commission of any
stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that
purpose and (D) the receipt by the Company of any
notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or
the initiation or threat of initiation of any proceeding
for such purposes.
(x) Make every reasonable effort to prevent the entry of
any order suspending the effectiveness of the registration
statement and obtain at the earliest possible moment the
withdrawal of any such order, if entered.
(xi) Cooperate with the selling Holder(s) and the
underwriters, if any, to facilitate the timely preparation
and delivery of certificates representing the Shares to be
sold and not bearing any restrictive legends, and enable
such Shares to be in such lots and registered in such names
as the underwriters may request at least two (2) business
days prior to any delivery of the Shares to the
underwriters.
(xii) Provide a CUSIP number for all the Shares not later
than the effective date of the registration statement.
(xiii) Prior to the effectiveness of the registration
statement and any post-effective amendment thereto and at
each closing of an underwritten offering, (A) make such
representations and warranties to the selling Holder(s) and
the underwriters, if any,
SirromAgmts Page 40
<PAGE>
with respect to the Shares and the registration
statement as are customarily made by issuers in primary
underwritten offerings; (B) use its best efforts to
obtain "cold comfort" letters and updates thereof from
the Company's independent certified public accountants
addressed to the selling Holders and the underwriters,
if any, such letters to be in customary form and
covering matters of the type customarily covered in
"cold comfort" letters by underwriters in connection
with primary underwritten offerings; (C) deliver such
documents and certificates as may be reasonably
requested (1) by the holders of a majority of the Shares
being sold, and (2) by the underwriters, if any, to
evidence compliance with clause (A) above and with any
customary conditions contained in the underwriting
agreement or other agreement entered into by the
Company; and (D) obtain opinions of counsel to the
Company and updates thereof (which counsel and which
opinions shall be reasonably satisfactory to the
underwriters, if any), covering the matters customarily
covered in opinions requested in underwritten offerings
and such other matters as may be reasonably requested by
the selling Holders and underwriters or their counsel.
Such counsel shall also state that no facts have come to
the attention of such counsel which cause them to
believe that such registration statement, the prospectus
contained therein, or any amendment or supplement
thereto, as of their respective effective or issue
dates, contains any untrue statement of any material
fact or omits to state any material fact necessary to
make the statements therein not misleading (except that
no statement need be made with respect to any financial
statements, notes thereto or other financial data or
other expertized material contained therein). If for
any reason the Company's counsel is unable to give such
opinion, the Company shall so notify the Holders of the
Shares and shall use its best efforts to remove
expeditiously all impediments to the rendering of such
opinion.
(xiv) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and
make generally available to its security holders earnings
statements satisfying the provisions of Section 11(a) of
the Securities Act, no later than forty-five (45) days
after the end of any twelve-month period (or ninety (90)
days, if such period is a fiscal year) (A) commencing at
the end of any fiscal quarter in which the Shares are sold
to underwriters in a firm or best efforts underwritten
offering, or (B) if not sold to underwriters in such an
offering, beginning with the first month of the first
fiscal quarter of the Company commencing after the
effective date of the registration statement, which
statements shall cover such twelve-month periods.
(c) After the date hereof, the Company shall not grant to any holder
of securities of the Company any registration rights which have a
priority greater than or equal to those granted to Holders
pursuant to this Warrant without the prior written consent of the
Holder(s).
(d) The Company's obligations under Section 10(a) above with respect
to each Holder of Shares are expressly conditioned upon such
Holder's furnishing to the Company in writing such information
concerning such holder and the terms of such holder's proposed
SirromAgmts Page 41
<PAGE>
offering as the Company shall reasonably request for inclusion in
the registration statement. If any registration statement
including any of the Shares is filed, then the Company shall
indemnify each Holder thereof (and each underwriter for such
holder and each person, if any, who controls such underwriter
within the meaning of the Securities Act) from any loss, claim,
damage or liability arising out of, based upon or in any way
relating to any untrue statement of a material fact contained in
such registration statement or any omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, except for any such
statement or omission based on information furnished in writing by
such Holder of the Shares expressly for use in connection with
such registration statement; and such holder shall indemnify the
Company (and each of its officers and directors who has signed
such registration statement, each director, each person, if any,
who controls the Company within the meaning of the Securities Act,
each underwriter for the Company and each person, if any, who
controls such underwriter within the meaning of the Securities
Act) and each other such Holder against any loss, claim, damage or
liability arising from any such statement or omission which was
made in reliance upon information furnished in writing to the
Company by such holder of the Shares expressly for use in
connection with such registration statement.
(e) For purposes of this Section 10, all of the Shares shall be deemed
to be issued and outstanding.
(f) The sale of any securities to employees registered on Form S-8 or
its replacement shall be exempt from this Section 10.
(g) The registration rights granted pursuant to this Section 10 shall
terminate on the Expiration Date.
11. CERTAIN NOTICES. In case at any time the Company shall propose to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock or
make any special dividend or other distribution to the holders of
its Common Stock;
(c) offer for subscription to the holders of any of its Common Stock
any additional shares of stock in any class or other rights;
(d) reorganize, or reclassify the capital stock of the Company, or
consolidate, merge or otherwise combine with, or sell of all or
substantially all of its assets to, another corporation;
(e) voluntarily or involuntarily dissolve, liquidate or wind up of the
affairs of the Company; or
SirromAgmts Page 42
<PAGE>
(f) redeem or purchase any shares of its capital stock or securities
convertible into its capital stock;
then, in any one or more of said cases, the Company shall give to the Holder of
the Warrant, by certified or registered mail, (i) at least twenty (20) days'
prior written notice of the date on which the books of the Company shall close
or a record shall be taken for such dividend, distribution or subscription
rights or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
twenty (20) days' prior written notice of the date when the same shall take
place. Any notice required by clause (i) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and any notice required by
clause (ii) shall specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
12. RIGHTS OF CO-SALE.
(a) The shareholders listed on the signature page hereof (the
"Management Shareholders") shall not enter into any transaction
that would result in the sale by him or it of any capital common
stock of the Company now or hereafter owned by him or it, unless
prior to such sale such Management Shareholder shall give written
notice (the "Co-Sale Notice") to Holder addressed and delivered as
set forth in Section 14 hereof, of his or its intention to effect
such sale in order that Holder may exercise its rights under this
Section 12 as hereinafter described. Such notice shall set forth
(i) the number of shares to be sold by such Management
Shareholder, (ii) the principal terms of the sale, including the
price at which the shares are intended to be sold, and (iii) an
offer by such Management Shareholder to use his or its best
efforts to cause to be included with the shares to be sold by him
or it in the sale, on a share-by-share basis and on the same terms
and conditions, the Shares issuable or issued to Holder pursuant
this Warrant.
(b) If Holder has not accepted such offer in writing within a
period of ten (10) days from the date of receipt of the Co-Sale
Notice, then such Management Shareholder shall thereafter be
free for a period of ninety (90) days to sell the number of
shares specified in the Co-Sale Notice, at a price no greater
than the price set forth in the Co-Sale Notice and on otherwise
no more favorable terms to such Management Shareholder than as
set forth in the Co-Sale Notice, without any further obligation
to Holder in connection with such sale. In the event that such
Management Shareholder fails to consummate such sale within
such ninety-day period, the shares specified in Co-Sale Notice
shall continue to be subject to this Section 12.
(c) If Holder accepts such offer in writing within ten-day period,
then such acceptance shall be irrevocable unless such Management
Shareholder shall be unable to cause to be included in the sale
the number of Shares of stock held by Holder and set forth in the
SirromAgmts Page 43
<PAGE>
written acceptance. In that event, such Management Shareholder
and Holder shall participate in the sale equally, with such
Management Shareholder and Holder each selling half the total
number of such shares to be sold in the sale.
(d) The co-sale rights granted pursuant to this Section 12 shall
expire on the Expiration Date.
(e) Notwithstanding anything contained in this Warrant or any other
Loan Document (as defined in the Loan Agreement) to the contrary,
in the event Holder accepts such offer in accordance with the
terms and provisions of Paragraph 12(c) above, then Ross
Tannenbaum shall participate in the sale with such Management
Shareholder and Holder to the extent of twenty-five percent (25%)
of the total number of such shares to be sold in the sale (i.e.,
in the event the Management Shareholder other than Ross Tannenbaum
receives an offer to sell $1,000,000 shares, and Holder accepts
such offer, then the Holder shall have the right to sell 500,000
shares, Ross Tannenbaum shall have the right to sell 250,000
shares, and the Management Shareholder in question shall have the
right to sell 250,000 shares). In the event Ross Tannenbaum is
the Management Shareholder who receives the offer to sell shares,
then if Holder elects to accept such offer, then Holder and Ross
Tannenbaum shall have equally in the sale, each selling half of
the total number of shares to be sold in the sale.)
13. ARTICLE AND SECTION HEADINGS. Numbered and titled article and section
headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Warrant.
14. NOTICE. Any and all notices, elections or demands permitted or required
to be made under this Warrant shall be in writing, signed by the party
giving such notice, election or demand and shall be delivered personally,
telecopied, or sent by certified mail or overnight via nationally
recognized courier service (such as Federal Express), to the other party
at the address set forth below, or at such other address as may be
supplied in writing and of which receipt has been acknowledged in
writing. The date of personal delivery or telecopy or two (2) business
days after the date of mailing (or the next business day after delivery
to such courier service), as the case may be, shall be the date of such
notice, election or demand. For the purposes of this Warrant:
The Address of Holder is: Sirrom Investments, Inc.
Suite 200
500 Church Street
Nashville, TN 37219
Attention: John Kirks
Telecopy No. 615/726-1208
SirromAgmts Page 44
<PAGE>
with a copy to: Chambliss, Bahner & Stophel, P.C.
1000 Tallan Building
Two Union Square
Chattanooga, TN 37402
Attention: J. Patrick Murphy, Esq.
Telecopy No. 423/265-9574
The Address of Company is: Dreams, Inc.
42-620 Caroline Drive
Palm Desert, CA 92211
Attention: Sam D. Battistone
Telecopy No. 760/779-0217
with a copy to: Hunter & Brown
One Utah Center
201 South Main Street, Suite 1300
Salt Lake City, UT 84111-2215
Attention: J. Scott Hunter
Telecopy No. 801/532-8736
and to: Navon, Kopelman, O'Donnell & Lavin P.A.
2699 Stirling Road, Suite B-100
Ft. Lauderdale, FL 33312
Attention: Sam Navon
Telecopy No.: 954/983-7021
15. SEVERABILITY. If any provisions(s) of this Warrant or the application
thereof to any person or circumstances shall be invalid or unenforceable
to any extent, the remainder of this Warrant and the application of such
provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
16. ENTIRE AGREEMENT. This Warrant between the Company and Holder represents
the entire agreement between the parties concerning the subject matter
hereof, and all oral discussions and prior agreement are merged herein.
17. GOVERNING LAW AND AMENDMENTS. This Warrant shall be construed and
enforced under the laws of the State of Tennessee applicable to contracts
to be wholly performed in such State. No amendment or modification
hereof shall be effective except in a writing executed by each of the
parties hereto.
18. COUNTERPARTS. This Warrant may be executed in any number of counterparts
and be different parties to this Warrant in separate counterparts, each
of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
SirromAgmts Page 45
<PAGE>
19. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. The Company hereby irrevocably
consents to the jurisdiction of the United States District Court for the
Middle District of Tennessee and of all Tennessee state courts sitting in
Davidson County, Tennessee, for the purpose of any litigation to which
Holder may be a party and which concerns this Warrant. It is further
agreed that venue for any such action shall lie exclusively with courts
sitting in Davidson County, Tennessee, unless Holder agrees to the
contrary in writing.
20. WAIVER OF TRIAL BY JURY. HOLDER AND THE COMPANY HEREBY KNOWINGLY AND
VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY
ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR
TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY
RELATING TO THIS WARRANT.
21. PAYMENT OF PUT PRICE. Notwithstanding any other provision contained
herein to the contrary, the Holder will accept in payment of the Put
Price a promissory note with interest at 10% per annum and monthly
payments of principal and interest amortizing principal and interest over
twenty four (24) months in which all interest and principal is due not
less than twenty four (24) months after the Put is exercised with the
right to prepay; in whole or in part, without penalty.
22. STOCK OPTION PLAN. Notwithstanding any provision contained herein to the
contrary, the Company may establish a stock incentive plan for (i) the
following existing employees: Lee Barney, Joseph Casey, Leah Jones, Dale
Larsson, Mark Morse, Bethanie Mueller, Jolaine Saxton, John Walrod, Mark
Viner, Monica Wall and Richard Watt and (ii) employees whose employment
begins after the date of the closing of the Loan pursuant to which stock
options to purchase a number of shares of capital stock of the Company
not exceeding in the aggregate 5% of the fully diluted capital stock of
the Company on the date hereof may be granted; provided that if Joseph
Casey, Dale Larsson or Mark Viner ("Pledgors") receive any additional
shares of stock pursuant to the plan, then Pledgors shall be required to
take any action requested by Holder to reflect the pledge of such shares
to Holder. Any stock issued pursuant to the stock incentive plan
described in this Section 22 shall not trigger the anti-dilution
provisions of Section 4(c) hereof (provided that such issuance complies
with the terms of Section 22).
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
COMPANY:
DREAMS, INC.
a Utah corporation
By:
----------------------------
Title:
-------------------------
SirromAgmts Page 46
<PAGE>
HOLDER:
SIRROM INVESTMENTS, INC.,
a Tennessee corporation
By:
----------------------------
Title:
-------------------------
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Warrant to be executed as of the date first above written for the purpose of
agreeing to the terms and conditions of Section 12 hereof.
MANAGEMENT SHAREHOLDERS:
--------------------------------
Sam D. Battistone
--------------------------------
Joseph Casey
--------------------------------
Dale Larsson
--------------------------------
Ross Tannenbaum
--------------------------------
Mark Viner
SirromAgmts Page 47
<PAGE>
EXHIBIT A
FORM OF AFFIDAVIT
STATE OF ___________________:
:
COUNTY OF ___________________:
The undersigned, being first duly sworn, states that he or she is
an officer of ___________________ and in his or her capacity states that:
1. Affiant is the _________________ of __________________________, a
_____________________ corporation("Holder"), and as such officer, has full
knowledge of the business and affairs of Holder and all matters hereinafter set
forth.
2. Affiant covenants and agrees, represents and warrants that Holder
is the owner and holder of that certain stock purchase warrant ("Warrant") dated
November ___, 1998, executed by Dreams, Inc., a Utah corporation, in favor of
Sirrom Investments, Inc.
3. Affiant covenants and agrees, represents and warrants that Holder
has good right, power and authority to exercise the right to the "Put" under
Section 9 of the Warrant.
HOLDER:
By:
------------------------------
Title:
---------------------------
STATE OF ____________________:
:
COUNTY OF ___________________:
Before me, a Notary Public of the state and county aforesaid,
personally appeared (name) _____________________, with whom I am personally
acquainted (or proved to me on the basis of satisfactory evidence), and who,
upon oath, acknowledged ____self to be (title) ______________________ of
______________________________ the within named bargainor, a corporation, and
that ___he as such (title) __________________, executed the foregoing instrument
for the purposes therein contained, by signing the name of the corporation by
_______self as (title) _____________________.
WITNESS my hand and seal, at office in (county, state)
__________________
__________________, this _____ day of _________________________, 19____.
--------------------------------
Notary Public
My Commission Expires:
----------
SirromAgmts Page 48
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") is made as of the _______ day of
____________, 1998, by and between DREAMS, INC., a Utah corporation, DREAMS
FRANCHISE CORPORATION, a California corporation, DREAMS ENTERTAINMENT, INC., a
Utah corporation, and DREAMS PRODUCTS, INC., a Utah corporation (collectively
"Borrower"), and SIRROM INVESTMENTS, INC., a Tennessee corporation ("Lender").
RECITALS:
WHEREAS, Lender is making a loan (the "Loan") in the amount of $3,000,000
to Borrower, pursuant to that certain Loan Agreement of even date herewith by
and between Borrower and Lender, as it may be amended, modified or extended from
time to time (the "Loan Agreement"); and
WHEREAS, in connection with the making of the Loan, Lender desires to
obtain from Borrower and Borrower desires to grant to Lender a security interest
in certain collateral more particularly described below.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. Borrower hereby grants to Lender a
security interest in the following described property excluding any rights in
the Agreement between Universal Studios Licensing, Inc. and Dreams Franchise
Corporation pursuant to which Dreams Franchise Corporation licenses certain
rights to use the property "Field of Dreams" (collectively, the "Collateral"):
(a) presently existing and hereafter arising accounts, contract
rights, and all other forms of obligations owing to Borrower arising out
of the sale or lease of goods or the rendition of services by Borrower,
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any
of the foregoing (collectively, "Accounts");
(b) present and future general intangibles and other personal
property (including choses or things in action, goodwill, patents, trade
names, trademarks, servicemarks, copyrights, blueprints, drawings,
purchase orders, customer lists, monies due or recoverable from pension
funds, route lists, monies due under any royalty or licensing agreements,
SirromAgmts Page 49
<PAGE>
infringement claims, computer programs, computer discs, computer tapes,
literature, reports, catalogs deposit accounts, insurance premium
rebates, tax refunds, and tax refund claims) other than goods and
Accounts, and Borrower's Books relating to any of the foregoing
(collectively, "General Intangibles");
(c) present and future letters of credit, notes, drafts,
instruments, certificated and uncertificated securities, documents,
leases, and chattel paper, and Borrower's Books relating to any of the
foregoing (collectively, "Negotiable Collateral");
(d) present and future inventory in which Borrower has any
interest, including goods held for sale or lease or to be furnished under
a contract of service and all of Borrower's present and future raw
materials, work in process, finished goods, and packing and shipping
materials, wherever located, and any documents of title representing any
of the above, and Borrower's Books relating to any of the foregoing
(collectively, "Inventory");
(e) present and hereafter acquired machinery, machine tools,
motors, equipment, furniture, furnishings, fixtures, vehicles (including
motor vehicles and trailers), tools, parts, dies, jigs, goods (other than
consumer goods or farm products), and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing,
wherever located (collectively, "Equipment");
(f) present and hereafter acquired books and records including:
ledgers; records indicating, summarizing, or evidencing Borrower's assets
or liabilities, or the collateral; all information relating to Borrower's
business operations or financial condition; and all computer programs,
disc or tape files, printouts, funds or other computer prepared
information, and the equipment containing such information (collectively,
"Borrower's Books");
(g) substitutions, replacements, additions, accessions,
proceeds, products to or of any of the foregoing, including, but not
limited to, proceeds of insurance covering any of the foregoing, or any
portion thereof, and any and all Accounts, General Intangibles,
Negotiables, Collateral, Inventory, Equipment, money, deposits, accounts,
or other tangible or intangible property resulting from the sale or other
disposition of the accounts, general Intangibles, Negotiable Collateral,
Inventory, Equipment, or any portion thereof or interest therein and the
proceeds thereof.
SirromAgmts Page 50
<PAGE>
2. SECURED INDEBTEDNESS. The security interest granted hereby shall
secure the prompt payment of the Obligations (as defined in the Loan Agreement)
and the prompt performance of each of the covenants and duties under the Loan
Documents (as defined in the Loan Agreement).
3. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents,
warrants and agrees as follows:
(a) Except as set forth on Schedule 3(a) hereto (the "Permitted
Encumbrances"), Borrower is the owner of the Collateral free and clear of
any liens and security interests. Borrower will defend the Collateral
against the claims and demands of all persons other than the holders of
the Permitted Encumbrances.
(b) The address set forth on Schedule 3(b) hereto is Borrower's
principal place(s) of business and the location of all tangible
Collateral and the place where the records concerning all intangible
Collateral are kept and/or maintained.
(c) Borrower will pay all costs of filing of financing,
continuation and termination statements with respect to the security
interests created hereby, and Lender is authorized to do all things that
it deems necessary to perfect and continue perfection of the security
interests created hereby and to protect the Collateral.
4. AGREEMENTS WITH RESPECT TO THE COLLATERAL. Borrower covenants and
agrees with Lender as follows:
(a) Borrower will not permit any of the Collateral to be
removed from the location specified herein, except for temporary periods
in the normal and customary use thereof and in the ordinary course of
business, without the prior written consent of Lender.
(b) Borrower shall notify Lender in writing of any change in
the location of Borrower's principal place of business (or residence) or
the location of any tangible Collateral or the place(s) where the records
concerning all intangible Collateral are kept or maintained.
SirromAgmts Page 51
<PAGE>
(c) Borrower will keep the Collateral in good condition and
repair and will pay and discharge all taxes, levies and other impositions
levied thereon as well as the cost of repairs to or maintenance of same,
and will not permit anything to be done that may impair the value of any
of the Collateral. If Borrower fails to pay such sums, Lender may do so
for Borrower's account and add the amount thereof to the Obligations.
(d) Until the occurrence of an Event of Default (as defined in
the Loan Agreement), Borrower shall be entitled to possession of the
Collateral and to use the same in any lawful manner, provided that such
use does not cause excessive wear and tear to the Collateral, cause it to
decline in value at an excessive rate, or violate the terms of any policy
of insurance thereon.
(e) Borrower will not sell, exchange, lease or otherwise
dispose of any of the Collateral or any interest therein without the
prior written consent of Lender. Notwithstanding the foregoing, so long
as an Event of Default has not occurred, Borrower shall have the right to
process and sell Borrower's inventory in the regular course of business.
Lender's security interest hereunder shall attach to all proceeds of all
sales or other dispositions of the Collateral. If at any time any such
proceeds shall be represented by any instruments, chattel paper or
documents of title, then such instruments, chattel paper or documents of
title shall be promptly delivered to Lender and subject to the security
interest granted hereby. If at any time any of Borrower's inventory is
represented by any document of title, such document of title will be
delivered promptly to Lender and subject to the security interest granted
hereby.
(f) Borrower will not allow the Collateral to be attached to
real estate in such manner as to become a fixture or a part of any real
estate.
(g) Borrower will at all times keep the Collateral insured
against all insurable hazards in amounts equal to the full cash value of
the Collateral. Such insurance shall be in such companies as may be
acceptable to Lender, with provisions satisfactory to Lender for payment
of all losses thereunder to Lender as its interests may appear. If
required by Lender, Borrower shall deposit the policies with Lender. Any
money received by Lender under said policies may be applied to the
payment of the Obligations, whether or not due and payable, or at
Lender's option may be delivered by Lender to Borrower for the purpose of
repairing or restoring the Collateral. Borrower assigns to Lender all
right to receive proceeds of insurance not exceeding the amounts secured
hereby, directs any insurer to pay all proceeds directly to Lender, and
appoints Lender Borrower's attorney-in-fact to endorse any draft or
SirromAgmts Page 52
<PAGE>
check made payable to Borrower in order to collect the benefits of such
insurance. If Borrower fails to keep the Collateral insured as required
by Lender, Lender shall have the right to obtain such insurance at
Borrower's expense and add the cost thereof to the Obligations.
(h) Borrower will not permit any liens or security interests
other than those created by this Agreement and the Permitted Encumbrances
to attach to any of the Collateral, nor permit any of the Collateral to
be levied upon under any legal process, nor permit anything to be done
that may impair the security intended to be afforded by this Agreement,
nor permit any tangible Collateral to become attached to or commingled
with other goods without the prior written consent of Lender.
5. REMEDIES UPON DEFAULT. Upon an Event of Default under and as
defined in the Loan Agreement, Lender may pursue any or all of the following
remedies, without any notice to Borrower except as required below:
(a) Lender may take possession of any or all of the Collateral.
Borrower hereby consents to Lender's entry into any of Borrower's
premises to repossess Collateral, and specifically consents to Lender's
forcible entry thereto as long as Lender causes no significant damage to
the premises in the process of entry (drilling of locks, cutting of
chains and the like do not in themselves cause "significant" damage for
the purposes hereof) and provided that Lender accomplishes such entry
without a breach of the peace.
(b) Lender may dispose of the Collateral at private or public
sale. Any required notice of sale shall be deemed commercially
reasonable if given at least five (5) days prior to sale. Lender may
adjourn any public or private sale to a different time or place without
notice or publication of such adjournment, and may adjourn any sale
either before or after offers are received. The Collateral may be sold
in such lots as Lender may elect, in its sole discretion. Lender may
take such action as it may deem necessary to repair, protect, or maintain
the Collateral pending its disposition.
(c) Lender may recover any or all proceeds of accounts from any
bank or other custodian who may have possession thereof. Borrower hereby
authorizes and directs all custodians of Borrower's assets to comply with
any demand for payment made by Lender pursuant to this Agreement, without
the need of confirmation from Borrower and without making any inquiry as
to the existence of an Event of Default or any other matter. Lender may
engage a collection agent to collect accounts for a reasonable percentage
commission or for any other reasonable compensation arrangement.
SirromAgmts Page 53
<PAGE>
(d) Lender may notify any or all account debtors that
subsequent payments must be made directly to Lender or its designated
agent. Such notice may be made over Lender's signature or over
Borrower's name with no signature or both, in Lender's discretion.
Borrower hereby authorizes and directs all existing or future account
debtors to comply with any such notice given by Lender, without the need
of confirmation from Borrower and without making any inquiry as to the
existence of an Event of Default or as to any other matter.
(e) Lender may, but shall not be obligated to, take such
measures as Lender may deem necessary in order to collect any or all of
the accounts. Without limiting the foregoing, Lender may institute any
administrative or judicial action that it may deem necessary in the
course of collecting and enforcing any or all of the accounts. Any
administrative or judicial action or other action taken by Lender in the
course of collecting the accounts may be taken by Lender in its own name
or in Borrower's name. Lender may compromise any disputed claims and may
otherwise enter into settlements with account debtors or obligors under
the accounts, which compromises or settlements shall be binding upon
Borrower. Lender shall have no duty to pursue collection of any account,
and may abandon efforts to collect any account after such efforts are
initiated.
(f) Lender may, with respect to any account involving
uncompleted performance by Borrower, and with respect to any general
intangible or other Collateral whose value may be preserved by additional
performance on Borrower's part, take such action as Lender may deem
appropriate including, but not limited, to performing or causing the
performance of any obligation of Borrower thereunder, the making of
payments to prevent defaults thereunder, and the granting of adequate
assurances to other parties thereto with respect to future performance.
Lender's action with respect to any such accounts or general intangibles
shall not render Lender liable for further performance thereunder unless
Lender so agrees in writing.
(g) Lender may exercise its lien upon and right of setoff
against any monies, items, credits, deposits or instruments that Lender
may have in its possession and that belong to Borrower or to any other
person or entity liable for the payment of any or all of the Obligations.
(h) Lender may exercise any right that it may have under any
other document evidencing or securing the Obligations or otherwise
available to Lender at law or equity.
SirromAgmts Page 54
<PAGE>
6. AUDITS AND EXAMINATIONS. Lender shall have the right, at any
time, by its own auditors, accountants or other agents, to examine or audit any
of the books and records of Borrower, or the Collateral, all of which will be
made available upon request. Such accountants or other representatives of
Lender will be permitted to make any verification of the existence of the
Collateral or accuracy of the records that Lender deems necessary or proper.
Any reasonable expenses incurred by Lender in making such examination,
inspection, verification or audit shall be paid by Borrower promptly on demand
and shall constitute part of the Obligations; provided, however that prior to an
Event of Default, Borrower shall only be required to pay for one (1) such
examination, inspection, verification or audit which shall not exceed $15,000
per examination, inspection, verification or audit.
7. TERMINATION STATEMENT. Upon receipt of proper written demand
following the payment in full of the Obligations and termination of any
commitment of Lender to make any future advances to Borrower, Lender at its
option, shall send a termination statement with respect to any financing
statement filed to perfect Lender's security interests in any of the Collateral
to Borrower or cause such termination statement to be filed with the appropriate
filing officer(s).
8. POWER OF ATTORNEY. Borrower hereby constitutes Lender or its
designee, as Borrower's attorney-in-fact with power, upon the occurrence and
during the continuance of an Event of Default, to endorse Borrower's name upon
any notes, acceptances, checks, drafts, money orders, or other evidences of
payment or Collateral that may come into either its or Lender's possession; to
sign the name of Borrower on any invoice or bill of lading relating to any of
the accounts receivable, drafts against customers, assignments and verifications
of accounts receivable and notices to customers; to send verifications of
accounts receivable; to notify the Post Office authorities to change the address
for delivery of mail addressed to Borrower to such address as Lender may
designate; to execute any of the documents referred to in Section 3(c) hereof in
order to perfect and/or maintain the security interests and liens granted herein
by Borrower to Lender; to do all other acts and things necessary to carry out
the purposes of and remedies provided under this Agreement. All acts of said
attorney or designee are hereby ratified and approved, and said attorney or
designee shall not be liable for any acts of commission or omission (other than
acts of gross negligence or willful misconduct), nor for any error of judgment
or mistake of fact or law. This power being coupled with an interest is
irrevocable until all of the Obligations are paid in full and any and all
promissory notes executed in connection therewith are terminated and satisfied.
9. BINDING EFFECT. This Agreement shall inure to the benefit of
Lender's successors and assigns and shall bind Borrower's heirs,
representatives, successors and assigns.
10. SEVERABILITY. If any provision of this Agreement is held invalid,
such invalidity shall not affect the validity or enforceability of the remaining
provisions of this Agreement.
SirromAgmts Page 55
<PAGE>
11. GOVERNING LAW AND AMENDMENTS. This Agreement shall be
construed and enforced under the laws of the State of Tennessee applicable to
contracts to be wholly performed in such State. No amendment or modification
hereof shall be effective except in a writing executed by each of the parties
hereto.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein or made by or furnished on
behalf of Borrower in connection herewith shall survive the execution and
delivery of this Agreement.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
Agreement.
14. CONSTRUCTION AND INTERPRETATION. Should any provision of this
Agreement require judicial interpretation, the parties hereto agree that the
court interpreting or construing the same shall not apply a presumption that
the terms hereof shall be more strictly construed against one party by reason
of the rule of construction that a document is to be more strictly construed
against the party that itself or through its agent prepared the same, it
being agreed that Borrower, Lender and their respective agents have
participated in the preparation hereof.
15. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Borrower hereby
irrevocably consents to the Jurisdiction of the United States District Court for
the Middle District of Tennessee and of all Tennessee state courts sitting in
Davidson County, Tennessee, for the purpose of any litigation to which Lender
may be a party and which concerns this Agreement or the Obligations. It is
further agreed that venue for any such action shall lie exclusively with courts
sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in
writing.
16. WAIVER OF TRIAL BY JURY. LENDER AND BORROWER HEREBY KNOWINGLY AND
VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS,
PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE,
AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR
THE LOAN DOCUMENTS.
SirromAgmts Page 56
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement, or
have caused this Agreement to be executed as of the date first above written.
BORROWER:
DREAMS, INC., a Utah corporation
By:
----------------------------
Title:
-------------------------
DREAMS FRANCHISE CORPORATION, a California
corporation
By:
----------------------------
Title:
-------------------------
DREAMS ENTERTAINMENT, INC., a Utah
corporation
By:
----------------------------
Title:
-------------------------
DREAMS PRODUCTS, INC., a Utah corporation
By:
----------------------------
Title:
-------------------------
SirromAgmts Page 57
<PAGE>
LENDER:
SIRROM INVESTMENTS, INC.,
a Tennessee corporation
By:
----------------------------
Title:
-------------------------
SirromAgmts Page 58
<PAGE>
SCHEDULE 3(a)
PERMITTED ENCUMBRANCES
Tax lien filed by the State of California in connection with franchise taxes
which Borrower is in the process of settling.
SirromAgmts Page 59
<PAGE>
SCHEDULE 3(b)
PRINCIPAL PLACE(S) OF BUSINESS
AND LOCATION(S) OF COLLATERAL
Principal place of business:
42-620 Caroline Court
Palm Desert CA 92211
Other Locations of Tangible Collateral/Records Concerning Intangible Collateral:
1776 N. State Street, Suite 130
Orem, UT 84057
17744 Skypark Circle, Suite 225
Irvine, CA 92614
5009 Hiatus Road
Sunrise, FL 33351
(Mounted Memories, Inc.)
8201 East Pacific Place
Unit 604
Denver, CO 80231
(Mounted Memories, Inc.)
SirromAgmts Page 60
<PAGE>
INTELLECTUAL PROPERTY SECURITY AGREEMENT
THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT ("Security Agreement"),
is made as of November 17, 1998, by DREAMS, INC., a Utah corporation, DREAMS
FRANCHISE CORPORATION, a California corporation, DREAMS ENTERTAINMENT, INC.,
a Utah corporation, and DREAMS PRODUCTS, INC., a Utah corporation
(collectively the "Grantor"), in favor of SIRROM INVESTMENTS, INC., a
Tennessee corporation (the "Lender").
RECITALS:
WHEREAS, pursuant to that certain Loan Agreement of even date herewith, (as
amended, extended, modified, restructured or renewed from time to time, the
"Loan Agreement") by and among Grantor and Lender, Lender has agreed to make a
loan in the aggregate principal amount of $3,000,000 (the "Loan") to Grantor
evidenced by a Secured Promissory Note of even date herewith in the original
principal amount of the Loan and executed by Grantor payable to the order of
Lender (together with any amendments, extensions, modifications and/or renewals
thereof and/or any promissory notes given in payment thereof, the "Note");
WHEREAS, Grantor owns certain Intellectual Property listed on SCHEDULE A
hereto;
WHEREAS, Grantor desires to mortgage, pledge and grant to Lender, for the
benefit of Lender, a security interest in all of its right, title and interest
in, to and under the Collateral, including without limitation, the property
listed on the attached SCHEDULE A, together with any renewal or extension
thereof, and all Proceeds (as hereinafter defined) thereof, to secure the
payment of the Obligations (as hereinafter defined); and
WHEREAS, it is a condition precedent to the obligation of the Lender to
make the Loan to Grantor under the Loan Agreement, that Grantor execute this
Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and to induce Lender to
enter into the Loan Agreement and to induce Lender to make the Loan to Grantor
under the Loan Agreement, Grantor hereby agrees with Lender, as follows:
1. DEFINED TERMS. Unless otherwise defined herein, terms which are
defined in the Loan Agreement and used herein are so used as so
defined, and the following terms shall have the following
meanings:
"COLLATERAL" has the meaning assigned to it in Section 2 of this Security
Agreement.
SirromAgmts Page 61
<PAGE>
"COPYRIGHTS" means all types of protective rights granted (or
applications therefor) for any work that constitutes copyrightable subject
matter, including without limitation, literary works, musical works, dramatic
works, pictorial, graphic and sculptural works, motion pictures and other
audiovisual works, sound recordings, architectural works, in any country of
the world and including, without limitation, any works referred to in
SCHEDULE A hereto.
"COPYRIGHT LICENSE" means any agreement material to the operation of
Grantor's businesses, whether written or oral, providing for the grant by or
to Grantor of any right to reproduce a copyrighted work, to prepare
derivative works based on a copyrighted work, to distribute copies of a
copyrighted work, to perform a copyrighted work or to display a copyrighted
work, or to engage in any other legally protected activity with respect to a
copyrighted work including, without limitation, any thereof referred to in
SCHEDULE A hereto.
"INTELLECTUAL PROPERTY" means all Patent Applications, Patents, Patent
Licenses, Trademark Applications, Trademarks, Trademark Licenses, Copyrights,
Copyright Licenses, Trade Secrets, Inventions, Know-how and other proprietary
property or technology, and agreements relating thereto, including, without
limitation, any and all improvements and future developments material to the
operation of Grantor's businesses, as defined herein and/or referred to in
SCHEDULE A hereto.
"INVENTION" means any new and useful process, machine, manufacture, or
composition of matter, or any new and useful improvement thereof that is
material to the operation of Grantor's businesses and developed by Grantor,
its employees or agents, whether or not the subject of Patent(s) or Patent
Application(s).
"KNOW-HOW" means any knowledge or information that is material to
Grantor's business and that enables Grantor to operate its business with the
accuracy, efficiency or precision necessary for commercial success,
including, without limitation, any such knowledge or information referred to
in SCHEDULE B hereto.
"OBLIGATIONS" means (a) loans to be made concurrently or in connection
with this Agreement or the Loan Agreement as evidenced by one or more promissory
notes payable to the order of Lender that shall be due and payable as set forth
in such promissory notes, and any renewals or extensions thereof, (b) the full
and prompt payment and performance of any and all other indebtedness and other
obligations of Grantor to Lender, direct or contingent (including but not
limited to obligations incurred as endorser, guarantor or surety), however
evidenced or denominated, and however and whenever incurred, including but not
limited to indebtedness incurred pursuant to any present or future commitment of
Lender to Grantor and (c) all future advances made by Lender for taxes, levies,
insurance and preservation of the Collateral and all attorney's fees, court
costs and expenses of whatever kind incident to the collection of any of said
indebtedness or other obligations and the enforcement and protection of the
security interest created under this Security Agreement.
SirromAgmts Page 62
<PAGE>
"OTHER PROPRIETARY PROPERTY" means all types of protectable intangible
property rights other than Patents, Trademarks and Copyrights, including without
limitation, Trade Secrets, Know-how, computer software and the like, including,
without limitation, all such rights referred to in SCHEDULE B hereto.
"PATENTS" means all types of exclusionary or protective rights granted
(or applications therefor) for inventions in any country of the world
(including, without limitation, letters patent, plant patents, utility
models, breeders' right certificates, inventor's certificates and the like),
and all reissues and extensions thereof and all provisionals, divisions,
continuations and continuations-in-part thereof, including, without
limitation, all such rights referred to in SCHEDULE A hereto.
"PATENT LICENSE" means any agreement material to the operation of
Grantor's business, whether written or oral, providing for the grant by or to
Grantor of any right to manufacture, use or sell any Invention covered by a
Patent, including, without limitation, any thereof referred to in SCHEDULE A
hereto.
"PROCEEDS" means "proceeds," as such term is defined in Section
9-306(1) of the UCC and, to the extent not included in such definition, shall
include, without limitation, (a) any and all proceeds of any insurance,
indemnity, warranty, guaranty or letter of credit payable to Grantor, from
time to time with respect to any of the Collateral, (b) all payments (in any
form whatsoever) paid or payable to Grantor from time to time in connection
with any taking of all or any part of the Collateral by any governmental
authority or any Person acting under color of governmental authority), (c)
all judgments in favor of Grantor in respect of the Collateral and (d) all
other amounts from time to time paid or payable or received or receivable
under or in connection with any of the Collateral.
"SECURITY AGREEMENT" means this Intellectual Property Security
Agreement, as amended, supplemented or otherwise modified from time to time.
"TRADE SECRET" means any scientific or technical information, design,
process, pattern, procedure, formula or improvement which is secret and of
value including, without limitation, any such information referred to in
SCHEDULE B hereto.
"TRADEMARKS" means (a) all trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles,
service marks, logos and other sources of business identifiers used in any
country in the world, whether registered or unregistered, and the goodwill
associated therewith, now existing and material to the businesses of Grantor
or hereafter
SirromAgmts Page 63
<PAGE>
acquired, and (b) all registrations, recordings and renewals thereof, and all
applications in connection therewith, issued by or filed in a national, state
or local governmental authority of any country, including, without
limitation, all such rights referred to in SCHEDULE A hereto.
"TRADEMARK LICENSE" means any agreement, material to the businesses of
Grantor, written or oral, providing for the grant by or to Grantor of any
right to use any Trademark, including, without limitation, any thereof
referred to in SCHEDULE A hereto.
"UCC" means the Uniform Commercial Code as from time to time in effect
in the State of Tennessee.
2. GRANT OF SECURITY INTEREST. As collateral security for the prompt
and complete payment and performance when due (whether at the
stated maturity, by acceleration or otherwise) of the Obligations,
Grantor hereby assigns and grants to Lender for the benefit of
Lender a security interest in all of Grantor's right, title and
interest in and to the Intellectual Property now owned or at any
time hereafter acquired by Grantor or in which Grantor now has or
at any time in the future may acquire any right, title or interest
(collectively, the "Collateral"), that are material to the
business of Grantor, including all Proceeds and products of any
and all of the Intellectual Property, whether or not included in
SCHEDULE A or SCHEDULE B and excluding any rights in the Agreement
between Universal Studios Licensing, Inc. and Dreams Franchise
Corporation pursuant to which Dreams Franchise Corporation
licenses certain rights to use the property "Field of Dreams".
3. Representations and Warranties Concerning the Intellectual
Property. Grantor represents and warrants that:
(a) SCHEDULE A and SCHEDULE B hereto include all Intellectual
Property and Other Proprietary Property owned by Grantor in
its own name or as to which Grantor has any colorable claim
of ownership that are material to the business of Grantor
as of the date hereof.
(b) Grantor is the sole legal and beneficial owner of the
entire right, title and interest in and to the Intellectual
Property and the Other Proprietary Property, and/or has the
unrestricted right to use all such Intellectual Property
and Other Proprietary Property pursuant to a valid license
or other agreement.
(c) Grantor's rights in and to the Intellectual Property are
valid, subsisting, unexpired, enforceable and have not been
abandoned.
SirromAgmts Page 64
<PAGE>
(d) All licenses, franchise agreements and other agreements
conveying rights in and to the Intellectual Property and
Other Proprietary Property are identified on SCHEDULE A and
SCHEDULE B hereto and are in full force and effect. To the
best knowledge of Grantor, Grantor is not in default under
any such agreement, and no event has occurred which might
constitute a default by Grantor under any such agreement.
(e) Except as set forth in SCHEDULE A and except for
sublicenses granted by Grantor to franchisees in the
ordinary course of business, all of the Intellectual
Property is free and clear of any and all liens, security
interests, options, licenses, pledges, assignments,
encumbrances and/or agreements of any kind, and Grantor has
not granted any release, covenant not to sue, or non-
assertion assurance to any third party with respect to any
of the Intellectual Property.
(f) All prior transfers and assignments of the interests of any
and all predecessors in the Intellectual Property of
Grantor were duly and validly authorized, executed,
delivered, recorded and filed as required to vest Grantor
with complete, unrestricted ownership rights therein.
(g) Except for sublicenses granted by Grantor to franchisees in
the ordinary course of business, Grantor has not, within
the three (3) months prior to the date of execution of this
Agreement, executed and/or delivered any assignment,
transfer or conveyance of any of the Intellectual Property,
recorded or unrecorded.
(h) No proceedings have been instituted or are pending or, to
Grantor's knowledge, threatened that challenge Grantor's
rights to use the Intellectual Property or Other
Proprietary Property, or to register or maintain the
registration of the Intellectual Property. No holding,
decision or judgment has been rendered by any governmental
authority which would limit, cancel or question the
validity of any of the Intellectual Property. No action or
proceeding is pending (i) seeking to limit, cancel or
question the validity of any of the Intellectual Property
or Grantor's ownership thereof or (ii) which, if adversely
determined, would reasonably be likely to have a material
adverse effect on the value of any of the Intellectual
Property.
(i) To the best of Grantor's knowledge, the current conduct of
Grantor's business and Grantor's rights in and to all of
the Intellectual Property and Other Proprietary Property do
not conflict with or infringe any proprietary right of any
third party in any way which adversely affects the
business, financial condition or business prospects of
Grantor. Further, except as set forth in SCHEDULE A and
SCHEDULE B, Grantor is not aware of any claim by any third
party that such conduct or such rights conflict with or
infringe any
SirromAgmts Page 65
<PAGE>
valid proprietary right of any third party in any way which
affects the business, financial condition or business
prospects of Grantor. Grantor is not making and has not
made use of any confidential information of any third party
except pursuant to express agreement of such third party.
(j) Except for infringing for uses of "Field of Dreams",
Grantor is unaware of any infringement by any other party
upon its Intellectual Property rights. Grantor has
heretofore exerted, continues and affirmatively covenants
that it will hereafter continue to exert commercially
reasonable efforts to prevent any infringement by third
parties of Grantor's Intellectual Property rights or any
theft of Grantor's Other Proprietary Property at Grantor's
sole cost.
(k) All past and present employees of Grantor and/or parties
with whom Grantor (including any predecessor-in-interest of
Grantor) had any contractual relationship ("contractors"),
whose employment (or contractual) functions included or
affected research and development or other material aspects
of Intellectual Property have executed agreements requiring
them to disclose to Grantor any and all inventions created
or developed during and within the scope of their
employment by or contractual relationship with Grantor and
obligating them to assign all of their respective right,
title and interest in and to all such inventions to
Grantor.
4. COVENANTS. Grantor covenants and agrees with Lender that, from and
after the date of this Security Agreement until the Obligations are paid
in full:
(a) From time to time, upon the written request of Lender, and
at the sole expense of Grantor, Grantor will promptly and
duly execute and deliver such further instruments and
documents and take such further action as Lender may
reasonably request for the purpose of obtaining or
preserving the full benefits of this Security Agreement and
of the rights and powers herein granted, including, without
limitation, the filing of any financing or continuation
statements under the UCC in effect in any jurisdiction with
respect to the liens created hereby. Grantor also hereby
authorizes Lender to file any such financing or
continuation statement without the signature of Grantor to
the extent permitted by applicable law. A carbon,
photographic or other reproduction of this Security
Agreement shall be sufficient as a financing statement for
filing in any jurisdiction.
(b) Grantor will not create, incur or permit to exist, will
take all commercially reasonable actions to defend the
Collateral against, and will take such other commercially
reasonable action as is necessary to remove, any lien or
claim on or to the Collateral, other than the liens created
hereby, and other than as permitted pursuant to the Loan
Agreement, and will take all commercially
SirromAgmts Page 66
<PAGE>
reasonable actions to defend the right, title and interest
of Lender in and to any of the Collateral against the
claims and demands of all persons whomsoever.
(c) Grantor will not sell, transfer, license or sub-license or
otherwise dispose of any of the Collateral, or attempt,
offer or contract to so do.
(d) Grantor will advise Lender promptly, in reasonable detail,
at its address set forth in the Loan Agreement, (i) of any
lien (other than liens created hereby or permitted under
the Loan Agreement) on, or claim asserted against,
Collateral and (ii) of the occurrence of any other event
which could reasonably be expected to have a material
adverse effect on the aggregate value of the Collateral or
on the liens created hereunder.
(e) (i) Grantor (either itself or through licensees) will,
except with respect to any Trademark that Grantor shall
reasonably determine is of immaterial economic value to it
or otherwise reasonably determines not to so do, (A)
continue to use each Trademark on each and every trademark
class of goods applicable to its current line as reflected
in its current catalogs, brochures and price lists in order
to maintain such Trademark in full force free from any
claim of abandonment for non-use, (B) maintain as in the
past the quality of products and services offered under
such Trademark, (C) use reasonable efforts to employ such
Trademark with the appropriate notice of registration, (D)
not adopt or use any mark which is confusingly similar or a
colorable imitation of such Trademark unless within thirty
(30) days after such use or adoption Lender, for its
benefit, shall obtain a perfected security interest in such
mark pursuant to this Security Agreement, and (E) not (and
not permit any licensee or sublicensee thereof to) do any
act or knowingly omit to do any act whereby any Trademark
may become invalidated.
(ii) Grantor will not, except with respect to any
Patent that Grantor shall reasonably determine is of
immaterial economic value to it or otherwise reasonably
determine so to do, do any act, or omit to do any act,
whereby any Patent may become abandoned or dedicated.
Without the prior written consent of Lender, Grantor shall
not abandon any right to file a patent application, or
abandon any pending patent application or patent if such
abandonment would have a material adverse effect on the
business of Grantor.
(iii) Grantor will promptly notify Lender if it knows, or
has reason to know, that any application relating to any
Patent, Trademark or Copyright may become abandoned or
dedicated, or of any adverse determination or material
development (including, without limitation, the institution
of, or any
SirromAgmts Page 67
<PAGE>
such determination or development in, any proceeding in the
United States Patent and Trademark office or any court or
tribunal in any country) regarding Grantor's ownership of
any Patent, Trademark or Copyright, or its right to
register the same or to keep and maintain the same.
(iv) Whenever Grantor, either by itself or through any
agent, employee, licensee or designee, shall file an
application for any Patent or for the registration of any
Trademark or Copyright with the United States Patent and
Trademark Office, the United States Copyright Office, or
any similar office or agency in any other country or any
political subdivision thereof, Grantor shall report such
filing to Lender within five (5) business days after the
last day of the fiscal quarter in which such filing occurs.
Upon request of Lender, Grantor shall execute and deliver
any and all reasonably necessary agreements, instruments,
documents, and papers as Lender may request to evidence
Lender's security interest in any newly filed Patent,
Copyright or Trademark and the goodwill and general
intangibles of Grantor relating thereto or represented
thereby, and Grantor hereby constitutes Lender its
attorney-in-fact to execute and file all such writings for
the foregoing purposes, all acts of such attorney being
hereby ratified and confirmed; such power being coupled
with an interest is irrevocable until the Obligations are
paid in full.
(v) Grantor, except with respect to any Patent,
Trademark or Copyright Grantor shall reasonably determine
is of immaterial economic value to it or it otherwise
reasonably determines not to so do, will take all
reasonable and necessary steps, including, without
limitation, in any proceedings before any tribunal, office
or agency in any other country or any political subdivision
thereof, to maintain and pursue each application (and to
obtain the relevant registration or Patent) and to maintain
each Patent and each registration of Trademarks and
Copyrights, including, without limitation, filing of
applications, applications for reissue, renewal or
extensions, the payment of maintenance fees, participation
in reexamination, opposition and infringement proceedings,
and the filing of renewal applications, affidavits of use
and affidavits of incontestability, when appropriate. Any
expenses incurred in connection with such activities shall
be paid by Grantor.
(vi) In the event Grantor knows or has reason to know
that any Patent, Trademark or Copyright included in the
Collateral is infringed, misappropriated or diluted by a
third party, Grantor shall promptly notify Lender after it
learns thereof and shall, unless Grantor shall reasonably
determine that such Patent, Trademark or Copyright is of
immaterial economic value to Grantor which determination
Grantor shall promptly report to Lender, promptly sue for
infringement, misappropriation or dilution, or take such
other actions as Grantor shall reasonably deem appropriate
under the circumstances to protect such Patent, Trademark
or Copyright.
SirromAgmts Page 68
<PAGE>
(vii) Grantor will furnish to Lender each year upon
request, on the anniversary date of the execution of this
Agreement, statements, schedules and an inventory
identifying and describing the Collateral, including
without limitation, all Intellectual Property acquired
subsequent to the date of this agreement and not identified
on SCHEDULE A and SCHEDULE B, all transfers, assignments,
licenses or sub-licenses of the Collateral by Grantor, and
such other information in connection with the Collateral as
Lender may reasonably request, all in reasonable detail.
Any such Intellectual Property shall automatically become
part of the Collateral.
5. Lender's Appointment as Attorney-in-Fact.
(a) Grantor hereby irrevocably constitutes and appoints Lender
and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead
of Grantor and in the name of Grantor or in its own name,
from time to time after the occurrence, and during the
continuation of, an Event of Default (as defined in the
Loan Agreement) in Lender's discretion, for the purpose of
carrying out the terms of this Security Agreement, to take
any and all appropriate action and to execute any and all
documents and instruments which may be necessary or
desirable to accomplish the purposes of this Security
Agreement, and, without limiting the generality of the
foregoing, Grantor hereby grants Lender the power and
right, on behalf of Grantor without notice to or assent by
Grantor, to do the following:
(i) at any time when any Event of Default shall have
occurred and is continuing in the name of Grantor or its
own name, or otherwise, to take possession of and endorse
and collect any checks, drafts, notes, acceptances or other
instruments for the payment of moneys due under, or with
respect to, any Collateral and to file any claim or to take
any other action or proceeding in any court of law or
equity or otherwise deemed appropriate by Lender for the
purpose of collecting any and all such moneys due with
respect to such Collateral whenever payable;
(ii) to pay or discharge taxes and liens levied or placed
on or threatened against the Collateral, to effect any
repairs or any insurance called for by the terms of this
Security Agreement and to pay all or part of the premiums
therefor and the costs thereof; and
(iii) (A) to direct any party liable for any payment under
any of the Collateral to make payment of any and all moneys
due or to become due thereunder directly to Lender or as
Lender shall direct, (B) to ask or demand for, collect,
receive payment of and receipt for, any and all moneys,
claims and other amounts due or to become due at any time
in respect of or arising
SirromAgmts Page 69
<PAGE>
out of any Collateral, (C) to sign and endorse any
invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against debtors,
assignments, verifications, notices and other documents in
connection with any of the Collateral, (D) to commence and
prosecute any suits, actions or proceedings at law or in
equity in any court of competent jurisdiction to collect
the Collateral or any portion thereof and to enforce any
other right in respect of any Collateral, (E) to defend any
suit, action or proceeding brought against Grantor with
respect to any Collateral, (F) to settle, compromise or
adjust any suit, action or proceeding described in the
preceding clause and, in connection therewith, to give such
discharges or releases as Lender may deem appropriate, (G)
to assign any Trademark or Copyright (along with goodwill
of the business to which such Trademark or Copyright
pertains), throughout the world for such term or terms, on
such conditions, and in such manner, as Lender shall in its
sole discretion determine, and (H) generally, to sell,
transfer, pledge and make any agreement with respect to or
otherwise deal with any of the Collateral as fully and
completely as though Lender were the absolute owner thereof
for all purposes, and to do, at Lender's option and
Grantor's expense, at any time, or from time to time, all
acts and things which Lender deems necessary to protect,
preserve or realize upon the Collateral and the liens of
Lender thereon and to effect the intent of this Security
Agreement, all as fully and effectively as Grantor might
do. Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. This
power of attorney is a power coupled with an interest and
shall be irrevocable.
(b) Grantor also authorizes Lender, at any time and from time
to time, to execute, in connection with the sale provided
for in Section 8 hereof, any endorsements, assignments or
other instruments of conveyance or transfer with respect to
the Collateral.
(c) The powers conferred on Lender hereunder are solely to
protect the interests of Lender in the Collateral and shall
not impose any duty upon Lender to exercise any such
powers. Lender shall be accountable only for amounts that
it actually receives as a result of the exercise of such
powers, and neither it nor any of its partners, officers,
directors, employees or agents shall be responsible to
Grantor for any act or failure to act hereunder, except for
their own gross negligence or willful misconduct or failure
to comply with mandatory provisions of applicable law.
6. PERFORMANCE BY LENDER OF GRANTOR'S OBLIGATIONS. If Grantor fails
to perform or comply with any of its agreements contained herein
and Lender, as provided for by the terms of this Security
Agreement, shall itself perform or comply, or otherwise cause
performance or compliance, with such agreement, then the expenses
of Lender incurred in connection with such performance or
compliance, together with interest
SirromAgmts Page 70
<PAGE>
thereon at the highest default rate provided in the Note, shall be
payable by Grantor to Lender on demand and shall constitute
Obligations secured hereby.
7. PROCEEDS. It is agreed that if an Event of Default shall occur and
be continuing, then (a) all Proceeds received by Grantor
consisting of cash, checks and other cash equivalents shall be
held by Grantor in trust for Lender, segregated from other funds
of Grantor, and shall, forthwith upon receipt by Grantor, be
turned over to Lender in the exact form received by Grantor (duly
endorsed by Grantor to Lender, if required), and (b) any and all
such Proceeds received by Lender (whether from Grantor or
otherwise) shall promptly be applied by Lender against, the
Obligations (whether matured or unmatured), such application to be
in such order as set forth in the Loan Agreement.
8. REMEDIES UPON DEFAULT. Upon an Event of Default under and as
defined in the Loan Agreement, Lender may pursue any or all of the
following remedies, without any notice to Grantor except as
required below:
Lender may give written notice of default to Grantor, following which
Grantor shall not dispose of, conceal, transfer, sell or encumber any of
the Collateral (including, but not limited to, cash proceeds) without
Lender's prior written consent, even if such disposition is otherwise
permitted hereunder in the ordinary course of business. Any such
disposition, concealment, transfer or sale after the giving of such
notice shall constitute a wrongful conversion of the Collateral. Lender
may obtain a temporary restraining order or other equitable relief to
enforce Grantor's obligation to refrain from so impairing Lender's
Collateral.
Lender may take possession of any or all of the Collateral. Grantor
hereby consents to Lender's entry into any of Grantor's premises to
repossess Collateral, and specifically consents to Lender's forcible
entry thereto as long as Lender causes no significant damage to the
premises in the process of entry (drilling of locks, cutting of chains
and the like do not in themselves cause "significant" damage for the
purposes hereof) and provided that Lender accomplishes such entry without
a breach of the peace.
Lender may dispose of the Collateral at private or public sale. Any
required notice of sale shall be deemed commercially reasonable if given
at least five (5) days prior to sale. Lender may adjourn any public or
private sale to a different time or place without notice or publication
of such adjournment, and may adjourn any sale either before or after
offers are received. The Collateral may be sold in such lots as Lender
may elect, in its sole discretion. Lender may take such action as it may
deem necessary to repair, protect, or maintain the Collateral pending its
disposition.
SirromAgmts Page 71
<PAGE>
Lender may exercise its lien upon and right of setoff against any monies,
items, credits, deposits or instruments that Lender may have in its
possession and that belong to Grantor or to any other person or entity
liable for the payment of any or all of the Obligations.
Lender may exercise any right that it may have under any other document
evidencing or securing the Obligations or otherwise available to Lender
at law or equity.
9. LIMITATION ON DUTIES REGARDING PRESERVATION OF COLLATERAL.
Lender's sole duty with respect to the custody, safekeeping and
physical preservation of the Collateral in its possession, under
Section 9-207 of the UCC or otherwise, shall be to deal with it in
the same manner as Lender would deal with similar property for its
own account. Neither Lender nor any of its partners, directors,
officers, employees or agents shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral
or for any delay in doing so or shall be under any obligation to
sell or otherwise dispose of any Collateral upon the request of
Grantor or otherwise.
10. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies
herein contained with respect to the Collateral are irrevocable
and powers coupled with an interest.
11. SEVERABILITY. Any provision of this Security Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such
provision in any other jurisdiction.
12. SECTION HEADINGS. The section headings used in this Security
Agreement are for convenience of reference only and are not to
affect the construction hereof or be taken into consideration in
the interpretation hereof.
13. NO WAIVER: CUMULATIVE REMEDIES. Lender shall not by any act
(except by a written instrument pursuant to Section 14 hereof),
delay, indulgence, omission or otherwise be deemed to have waived
any right or remedy hereunder or to have acquiesced in any default
or Event of Default or in any breach of any of the terms and
conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of Lender, any right, power or privilege
hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude
any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by Lender of any right or
remedy hereunder on any occasion shall not be construed as a bar
to any right or remedy which Lender would otherwise have on any
future occasion. The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not
exclusive of any rights or remedies provided by law.
SirromAgmts Page 72
<PAGE>
14. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS. None of the terms
or provisions of this Security Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument
executed by Grantor and Lender, provided that any provision of
this Security Agreement may be waived by Lender in a written
letter or agreement executed by Lender or by facsimile
transmission from Lender. This Security Agreement shall be binding
upon the successors and assigns of Grantor and shall inure to the
benefit of Lender and its successors and assigns.
15. NOTICES. Any and all notices, elections or demands permitted or
required to be made under this Security Agreement shall be in
writing, signed by the party giving such notice, election or
demand and shall be delivered personally, telecopied, or sent by
certified mail or overnight via nationally recognized courier
service (such as Federal Express), to the other party at the
address set forth below, or at such other address as may be
supplied in writing and of which receipt has been acknowledged in
writing. The date of personal delivery or telecopy or two (2)
business days after the date of mailing (or the next business day
after delivery to such courier service), as the case may be, shall
be the date of such notice, election or demand. For the purposes
of this Security Agreement:
The Address of Lender is: Sirrom Investments, Inc.
Suite 200
500 Church Street
Nashville, TN 37219
Attention: John Kirks
Telecopy No.: 615/726-1208
with a copy to: Chambliss, Bahner & Stophel, P.C.
1000 Tallan Building
Two Union Square
Chattanooga, TN 37402
Attention: J. Patrick Murphy, Esq.
Telecopy No.: 423/265-9574
The Address of Grantor is: Dreams, Inc.
Dreams Franchise Corporation
Dreams Entertainment, Inc.
Dreams Products, Inc.
42-620 Caroline Court
Palm Desert, CA 92211
Attention: Sam D. Battistone
Telecopy No.: 760/779-0217
SirromAgmts Page 73
<PAGE>
with a copy to: Hunter & Brown
One Utah Center
201 South Main Street, Suite 1300
Salt Lake City, UT 84111-2215
Attention: J. Scott Hunter
Telecopy No.: 801/532-8736
and to: Navon, Kopelman, O'Donnell & Lavin, P.A.
2699 Stirling Road, Suite B-100
Ft. Lauderdale, FL 33312
Attention: Sam D. Navon
Telecopy No.: 954/983-7021
16. GOVERNING LAW. This Security Agreement shall be governed by, and
construed and interpreted in accordance with, the laws of the
State of Tennessee applicable to contracts to be wholly performed
in such State, or to the extent required, by federal law.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in
separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall
constitute one and the same Agreement.
18. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Grantor hereby
irrevocably consents to the Jurisdiction of the United States
District Court for the Middle District of Tennessee and of all
Tennessee state courts sitting in Davidson County, Tennessee, for
the purpose of any litigation to which Lender may be a party and
which concerns this Security Agreement or the Obligation. It
is further agreed that venue for any such action shall lie
exclusively with courts sitting in Davidson County, Tennessee,
unless Lender agrees to the contrary in writing.
19. WAIVER OF TRIAL BY JURY. LENDER AND GRANTOR HEREBY KNOWINGLY AND
VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY
ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN
CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF
OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN DOCUMENTS.
SirromAgmts Page 74
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed and delivered as of the date first above
written.
GRANTOR:
DREAMS, INC., a Utah corporation
By:
--------------------------------
Title:
-----------------------------
DREAMS FRANCHISE CORPORATION, a California
corporation
By:
--------------------------------
Title:
-----------------------------
DREAMS ENTERTAINMENT, INC., a Utah corporation
By:
--------------------------------
Title:
-----------------------------
DREAMS PRODUCTS, INC., a Utah corporation
By:
--------------------------------
Title:
-----------------------------
LENDER:
SIRROM INVESTMENTS, INC.,
a Tennessee corporation
By:
--------------------------------
Title:
-----------------------------
SirromAgmts Page 75
<PAGE>
SCHEDULE A
SirromAgmts Page 76
<PAGE>
SCHEDULE B
SirromAgmts Page 77
<PAGE>
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT ("Agreement"), dated ____________, 1998,
is made by and between DREAMS, INC., a Utah corporation ("Borrower") and SIRROM
INVESTMENTS, INC., Tennessee corporation with its principal office and place of
business in Nashville, Tennessee ("Lender").
RECITALS:
WHEREAS, pursuant to that certain Loan Agreement of even date herewith,
by and between Borrower and Lender, as amended, modified or extended from time
to time (the "Loan Agreement"), Lender has made a loan to Borrower in the
original principal amount of $3,000,000 (the "Loan"). The Loan is evidenced by
a Secured Promissory Note of even date herewith, in the amount of the Loan, made
and executed by Borrower, payable to the order of Lender (herein referred to,
together with any extensions, modifications, renewals and/or replacements
thereof, as the "Note"); and
WHEREAS, it is a condition of Lender's agreement to make the Loan to
Borrower that Borrower execute and deliver this Agreement to Lender.
AGREEMENT:
NOW THEREFORE, in consideration of the foregoing, and to enable Borrower
to obtain the Loan and to induce Lender to make the Loan and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender hereby agree as follows:
1. PLEDGE. As collateral security for the payment and performance in
full of the Obligations (as defined in the Loan Agreement), Borrower hereby
pledges, hypothecates, assigns, transfers, sets over and delivers unto Lender,
and hereby grants to Lender a security interest in, the collateral described in
SCHEDULE 1 hereto, together with (i) all other shares of stock of the issuer(s)
of such pledged securities of any class or category, which are now or hereafter
owned by Borrower and (ii) the proceeds thereof and all cash, additional
securities or other property at any time and from time to time receivable or
otherwise distributable in respect of, in exchange for, or in substitution for
any and all such pledged securities (all such pledged securities, the proceeds
thereof, cash, dividends, additional securities and other property now or
hereafter pledged hereunder are hereinafter collectively referred to as the
"Pledged Securities");
SirromAgmts Page 78
<PAGE>
TO HAVE AND TO HOLD the Pledged Securities, together with all rights,
titles, interests, powers, privileges and preferences pertaining or incidental
thereto, unto Lender, its successors and assigns, subject to the terms,
covenants and conditions hereinafter set forth.
Upon delivery to Lender, the Pledged Securities shall be accompanied by
executed stock powers in blank and by such other instruments or documents as
Lender or its counsel may reasonably request. Each delivery of certificates for
such Pledged Securities shall be accompanied by a schedule showing the number of
shares and the numbers of the certificates theretofore and then pledged
hereunder, which schedule shall be attached hereto as SCHEDULE 1 and made a part
hereof. Each schedule so delivered shall supersede any prior schedule so
delivered. In the event that additional securities of the issuers listed on
SCHEDULE 1 are issued to Pledgor, Pledgor agrees to promptly deliver the
certificates representing such securities together with stock powers endorsed in
blank, to Lender as part of the collateral pledged hereunder and such securities
shall constitute part of the Pledged Securities.
2. OBLIGATIONS SECURED. This Agreement is made, and the security
interest created hereby is granted to Lender, to secure prompt payment of the
Obligations (as defined in the Loan Agreement) and the prompt performance of
each of the covenants and duties of Borrower under the Loan Documents (as
defined in the Loan Agreement).
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Lender (a) that Borrower is the legal and equitable owner of the
Pledged Securities, (b) that Borrower has the complete and unconditional
authority to pledge the Pledged Securities being pledged by it, and holds the
same free and clear of all liens, charges, encumbrances and security interests
of every kind and nature, (c) that any consent or approval of any governmental
body or regulatory authority, or of any other party, that was or is necessary to
the validity of this pledge, has been obtained, and (d) that the Pledged
Securities are not subject to any limitations, restrictions, or obligations
pursuant to any shareholder agreement, voting trust agreement or similar
instrument.
4. REGISTRATION IN NOMINEE NAME; DENOMINATIONS. Lender shall have
the right (in its sole and absolute discretion) to hold the certificates
representing the Pledged Securities in its own name or in the name of the
Borrower, endorsed or assigned in blank or in favor of Lender. Upon request and
delivery of certificates representing the Pledged Securities to the issuer of
the Pledged Securities, Lender may have such Pledged Securities registered in
the name of Lender or any nominee or nominees of Lender. Lender shall at all
times have the right to exchange the certificates representing Pledged
Securities for certificates of smaller or larger denominations for any purpose
consistent with this Agreement.
SirromAgmts Page 79
<PAGE>
5. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default
under and as defined in the Loan Agreement, then, and in any such event, Lender
shall have all of the rights, privileges and remedies of a secured party under
the Uniform Commercial Code as in effect in the State of Tennessee, and without
limiting the foregoing, Lender may (a) collect any and all amounts payable in
respect of the Pledged Securities and exercise any and all rights, privileges,
options and remedies of the holder and owner thereof, and (b) sell, transfer
and/or negotiate the Pledged Securities, or any part thereof, at public or
private sale, for cash, upon credit or for future delivery, as Lender shall deem
appropriate, including without limitation, at Lender's option, the purchase of
all or any part of the Pledged Securities at any public sale by Lender. Upon
consummation of any sale, Lender shall have the right to assign, transfer and
deliver to the purchaser or purchasers thereof the Pledged Securities so sold.
Each such purchaser at any such sale shall hold the property sold absolutely,
free from any claim or right on the part of the Borrower, and the Borrower
hereby waives (to the extent permitted by law) all rights of redemption, stay or
appraisal that Borrower now has or may at any time in the future have under any
rule of law or statute now existing or hereinafter enacted. Borrower hereby
expressly waives notice to redeem and notice of the time, place and manner of
such sale.
6. APPLICATION OF PROCEEDS. The proceeds of the sale of Pledged
Securities sold pursuant to Section 5 hereof, and the proceeds of the exercise
of any of Lender's other remedies hereunder, shall be applied by Lender in the
manner set forth in the Loan Agreement.
7. REIMBURSEMENT OF LENDER. Borrower agrees to reimburse Lender,
upon demand, for all expenses, including without limitation reasonable
attorneys' fees, incurred by it in connection with the administration and
enforcement of this Agreement, and agrees to indemnify Lender and hold it
harmless from and against any and all liability incurred by it hereunder or in
connection herewith, unless such liability shall be due to willful misconduct or
gross negligence on the part of Lender.
8. NO WAIVER. No failure on the part of Lender to exercise, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy by Lender preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. All remedies are cumulative and
are not exclusive of any other remedies provided by law.
9. LIMITATION OF LENDER LIABILITY. Except in the case of their
wilful misconduct or gross negligence, neither Lender nor its officers,
employees, agents, representatives or nominees shall be liable for any loss
incurred by Borrower arising out of any act or omission of Lender, its officers,
employees, agents, representatives or nominees, with respect to the care,
custody or preservation of the Pledged Securities.
SirromAgmts Page 80
<PAGE>
10. BINDING AGREEMENT. This Agreement and the terms, covenants and
conditions hereof shall be binding upon and inure to the benefit of the parties
hereto and to all holders of the Obligations and their respective successors and
assigns.
11. GOVERNING LAW; AMENDMENTS. This Agreement shall in all respects
be construed in accordance with and governed by the laws of the State of
Tennessee applicable to contracts to be wholly performed in such state. This
Agreement may not be amended or modified, nor may any of the Pledged Securities
be released except in a writing signed by the parties hereto. Time is of the
essence with respect to the obligations of Borrower pursuant to this Agreement.
12. FURTHER ASSURANCES. Borrower agrees to do such further acts and
things, and to execute and deliver such additional conveyances, assignments,
agreements and instruments, as Lender may at any time request in connection with
the administration and enforcement of this Agreement or relative to the Pledged
Securities or any part thereof or in order to better assure and confirm unto
Lender its rights and remedies hereunder.
13. HEADINGS. Section numbers and headings used herein are for
convenience only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
15. VOTING. As long as no Event of Default shall have occurred and be
continuing, Borrower shall be entitled to exercise all voting and consensual
powers with respect to the Pledged Securities. Immediately and without further
notice to Borrower, upon the occurrence of any Event of Default, Lender shall
have the right, at its election, to exercise all voting and consensual rights
with respect to the Pledged Securities, and Borrower shall exercise and deliver
to Lender such proxies as shall be necessary to permit Lender's exercise of such
voting and consensual rights.
16. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Borrower hereby
irrevocably consents to the Jurisdiction of the United States District Court for
the Middle District of Tennessee and of all Tennessee state courts sitting in
Davidson County, Tennessee, for the purpose of any litigation to which Lender
may be a party and which concerns this Agreement or the Obligations. It is
further agreed that venue for any such action shall lie exclusively with courts
sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in
writing.
SirromAgmts Page 81
<PAGE>
17. WAIVER OF TRIAL BY JURY. LENDER AND BORROWER HEREBY KNOWINGLY AND
VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS,
PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE,
AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR
THE LOAN DOCUMENTS.
IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement, or
have caused this Agreement to be duly executed by a duly authorized officer, all
as of the day first above written.
BORROWER:
DREAMS, INC.,
a Utah corporation
By:
----------------------------
Title:
-------------------------
LENDER:
SIRROM INVESTMENTS, INC.,
a Tennessee corporation
By:
----------------------------
Title:
-------------------------
SirromAgmts Page 82
<PAGE>
The undersigned hereby acknowledges and confirms that the necessary changes
and registrations on the books of the undersigned have been made to reflect the
pledge of the Pledged Securities under the Pledge Agreement. In particular, the
undersigned acknowledges and confirms that Lender has been designated as the
only registered pledgee of the Pledged Securities.
DREAMS FRANCHISE CORPORATION
By:
----------------------------
Title:
-------------------------
The undersigned hereby acknowledges and confirms that the necessary changes
and registrations on the books of the undersigned have been made to reflect the
pledge of the Pledged Securities under the Pledge Agreement. In particular, the
undersigned acknowledges and confirms that Lender has been designated as the
only registered pledgee of the Pledged Securities.
DREAMS ENTERTAINMENT, INC.
By:
----------------------------
Title:
-------------------------
SiiromAgmts Page 83
<PAGE>
SCHEDULE 1
PLEDGED SECURITIES
<TABLE>
<CAPTION>
No. of Certificate Nos.
Issuer Shares Class
- ----------------------- --------------- ---------- --------------------
<S> <C> <C> <C>
1. Dreams
Franchise
Corporation
2. Dreams
Entertainment,
Inc.
</TABLE>
SirromAgmts Page 84
<PAGE>
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT ("Agreement"), dated ____________,
1998, is made by and between DREAMS FRANCHISE CORPORATION, a California
corporation ("Borrower") and SIRROM INVESTMENTS, INC., Tennessee corporation
with its principal office and place of business in Nashville, Tennessee
("Lender").
RECITALS:
WHEREAS, pursuant to that certain Loan Agreement of even date herewith,
by and between Borrower and Lender, as amended, modified or extended from time
to time (the "Loan Agreement"), Lender has made a loan to Borrower in the
original principal amount of $3,000,000 (the "Loan"). The Loan is evidenced by
a Secured Promissory Note of even date herewith, in the amount of the Loan, made
and executed by Borrower, payable to the order of Lender (herein referred to,
together with any extensions, modifications, renewals and/or replacements
thereof, as the "Note"); and
WHEREAS, it is a condition of Lender's agreement to make the Loan to
Borrower that Borrower execute and deliver this Agreement to Lender.
AGREEMENT:
NOW THEREFORE, in consideration of the foregoing, and to enable Borrower
to obtain the Loan and to induce Lender to make the Loan and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender hereby agree as follows:
1. PLEDGE. As collateral security for the payment and performance in
full of the Obligations (as defined in the Loan Agreement), Borrower hereby
pledges, hypothecates, assigns, transfers, sets over and delivers unto Lender,
and hereby grants to Lender a security interest in, the collateral described in
SCHEDULE 1 hereto, together with (i) all other shares of stock of the issuer(s)
of such pledged securities of any class or category, which are now or hereafter
owned by Borrower and (ii) the proceeds thereof and all cash, additional
securities or other property at any time and from time to time receivable or
otherwise distributable in respect of, in exchange for, or in substitution for
any and all such pledged securities (all such pledged securities, the proceeds
thereof, cash, dividends, additional securities and other property now or
hereafter pledged hereunder are hereinafter collectively referred to as the
"Pledged Securities");
SirromAgmts Page 85
<PAGE>
TO HAVE AND TO HOLD the Pledged Securities, together with all rights,
titles, interests, powers, privileges and preferences pertaining or incidental
thereto, unto Lender, its successors and assigns, subject to the terms,
covenants and conditions hereinafter set forth.
Upon delivery to Lender, the Pledged Securities shall be accompanied by
executed stock powers in blank and by such other instruments or documents as
Lender or its counsel may reasonably request. Each delivery of certificates for
such Pledged Securities shall be accompanied by a schedule showing the number of
shares and the numbers of the certificates theretofore and then pledged
hereunder, which schedule shall be attached hereto as SCHEDULE 1 and made a part
hereof. Each schedule so delivered shall supersede any prior schedule so
delivered. In the event that additional securities of the issuers listed on
SCHEDULE 1 are issued to Pledgor, Pledgor agrees to promptly deliver the
certificates representing such securities together with stock powers endorsed in
blank, to Lender as part of the collateral pledged hereunder and such securities
shall constitute part of the Pledged Securities.
2. OBLIGATIONS SECURED. This Agreement is made, and the security
interest created hereby is granted to Lender, to secure prompt payment of the
Obligations (as defined in the Loan Agreement) and the prompt performance of
each of the covenants and duties of Borrower under the Loan Documents (as
defined in the Loan Agreement).
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Lender (a) that Borrower is the legal and equitable owner of the
Pledged Securities, (b) that Borrower has the complete and unconditional
authority to pledge the Pledged Securities being pledged by it, and holds the
same free and clear of all liens, charges, encumbrances and security interests
of every kind and nature, (c) that any consent or approval of any governmental
body or regulatory authority, or of any other party, that was or is necessary to
the validity of this pledge, has been obtained, and (d) that the Pledged
Securities are not subject to any limitations, restrictions, or obligations
pursuant to any shareholder agreement, voting trust agreement or similar
instrument.
4. REGISTRATION IN NOMINEE NAME; DENOMINATIONS. Lender shall have
the right (in its sole and absolute discretion) to hold the certificates
representing the Pledged Securities in its own name or in the name of the
Borrower, endorsed or assigned in blank or in favor of Lender. Upon request and
delivery of certificates representing the Pledged Securities to the issuer of
the Pledged Securities, Lender may have such Pledged Securities registered in
the name of Lender or any nominee or nominees of Lender. Lender shall at all
times have the right to exchange the certificates representing Pledged
Securities for certificates of smaller or larger denominations for any purpose
consistent with this Agreement.
5. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default
under and as defined in the Loan Agreement, then, and in any such event, Lender
shall have all of the rights, privileges and remedies of a secured party under
the Uniform Commercial Code as in effect in the
SirromAgmts Page 86
<PAGE>
State of Tennessee, and without limiting the foregoing, Lender may (a)
collect any and all amounts payable in respect of the Pledged Securities and
exercise any and all rights, privileges, options and remedies of the holder
and owner thereof, and (b) sell, transfer and/or negotiate the Pledged
Securities, or any part thereof, at public or private sale, for cash, upon
credit or for future delivery, as Lender shall deem appropriate, including
without limitation, at Lender's option, the purchase of all or any part of
the Pledged Securities at any public sale by Lender. Upon consummation of
any sale, Lender shall have the right to assign, transfer and deliver to the
purchaser or purchasers thereof the Pledged Securities so sold. Each such
purchaser at any such sale shall hold the property sold absolutely, free from
any claim or right on the part of the Borrower, and the Borrower hereby
waives (to the extent permitted by law) all rights of redemption, stay or
appraisal that Borrower now has or may at any time in the future have under
any rule of law or statute now existing or hereinafter enacted. Borrower
hereby expressly waives notice to redeem and notice of the time, place and
manner of such sale.
6. APPLICATION OF PROCEEDS. The proceeds of the sale of Pledged
Securities sold pursuant to Section 5 hereof, and the proceeds of the exercise
of any of Lender's other remedies hereunder, shall be applied by Lender in the
manner set forth in the Loan Agreement.
7. REIMBURSEMENT OF LENDER. Borrower agrees to reimburse Lender,
upon demand, for all expenses, including without limitation reasonable
attorneys' fees, incurred by it in connection with the administration and
enforcement of this Agreement, and agrees to indemnify Lender and hold it
harmless from and against any and all liability incurred by it hereunder or in
connection herewith, unless such liability shall be due to willful misconduct or
gross negligence on the part of Lender.
8. NO WAIVER. No failure on the part of Lender to exercise, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy by Lender preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. All remedies are cumulative and
are not exclusive of any other remedies provided by law.
9. LIMITATION OF LENDER LIABILITY. Except in the case of their
wilful misconduct or gross negligence, neither Lender nor its officers,
employees, agents, representatives or nominees shall be liable for any loss
incurred by Borrower arising out of any act or omission of Lender, its officers,
employees, agents, representatives or nominees, with respect to the care,
custody or preservation of the Pledged Securities.
10. BINDING AGREEMENT. This Agreement and the terms, covenants and
conditions hereof shall be binding upon and inure to the benefit of the parties
hereto and to all holders of the Obligations and their respective successors and
assigns.
SirromAgmts Page 87
<PAGE>
11. GOVERNING LAW; AMENDMENTS. This Agreement shall in all respects
be construed in accordance with and governed by the laws of the State of
Tennessee applicable to contracts to be wholly performed in such state. This
Agreement may not be amended or modified, nor may any of the Pledged Securities
be released except in a writing signed by the parties hereto. Time is of the
essence with respect to the obligations of Borrower pursuant to this Agreement.
12. FURTHER ASSURANCES. Borrower agrees to do such further acts and
things, and to execute and deliver such additional conveyances, assignments,
agreements and instruments, as Lender may at any time request in connection with
the administration and enforcement of this Agreement or relative to the Pledged
Securities or any part thereof or in order to better assure and confirm unto
Lender its rights and remedies hereunder.
13. HEADINGS. Section numbers and headings used herein are for
convenience only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
15. VOTING. As long as no Event of Default shall have occurred and be
continuing, Borrower shall be entitled to exercise all voting and consensual
powers with respect to the Pledged Securities. Immediately and without further
notice to Borrower, upon the occurrence of any Event of Default, Lender shall
have the right, at its election, to exercise all voting and consensual rights
with respect to the Pledged Securities, and Borrower shall exercise and deliver
to Lender such proxies as shall be necessary to permit Lender's exercise of such
voting and consensual rights.
16. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Borrower hereby
irrevocably consents to the Jurisdiction of the United States District Court for
the Middle District of Tennessee and of all Tennessee state courts sitting in
Davidson County, Tennessee, for the purpose of any litigation to which Lender
may be a party and which concerns this Agreement or the Obligations. It is
further agreed that venue for any such action shall lie exclusively with courts
sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in
writing.
17. WAIVER OF TRIAL BY JURY. LENDER AND BORROWER HEREBY KNOWINGLY AND
VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS,
PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE,
AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR
THE LOAN DOCUMENTS.
SirromAgmts Page 88
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement, or
have caused this Agreement to be duly executed by a duly authorized officer, all
as of the day first above written.
BORROWER:
DREAMS FRANCHISE CORPORATION, INC.,
a California corporation
By:
----------------------------
Title:
-------------------------
LENDER:
SIRROM INVESTMENTS, INC.,
a Tennessee corporation
By:
----------------------------
Title:
-------------------------
SirromAgmts Page 89
<PAGE>
The undersigned hereby acknowledges and confirms that the necessary changes
and registrations on the books of the undersigned have been made to reflect the
pledge of the Pledged Securities under the Pledge Agreement. In particular, the
undersigned acknowledges and confirms that Lender has been designated as the
only registered pledgee of the Pledged Securities.
DREAMS PRODUCTS, INC.
By:
----------------------------
Title:
-------------------------
SirromAgmts Page 90
<PAGE>
SCHEDULE 1
PLEDGED SECURITIES
<TABLE>
<CAPTION>
No. of Certificate Nos.
Issuer Shares Class
- ------------------------- ------------ ----------- -------------------
<S> <C> <C> <C>
1. Dreams
Products, Inc.
</TABLE>
SirromAgmts Page 91
<PAGE>
EXHIBIT 6(ii)
Ross Tannenbaum Employment Agreement
Employment Agreement
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (THE "Agreement"), dated as of the 10th day of
November, 1998, is between Dreams, Inc., a Utah corporation (the "Company") and
Ross Tannenbaum (the "Employee").
In consideration of the foregoing and the mutual promises and covenants
set forth herein, Company and Employee agree:
1. EMPLOYMENT.
1.1 EMPLOYMENT AND TERM. The company hereby employs the
Employee, and Employee shall serve the company, upon the terms and
conditions herein set forth, for a term commencing on the date of this
Agreement and expiring on the last day of the 60th calendar month
following the date first written above (the "Term of Employment"), unless
earlier terminated pursuant to Section 4 below.
1.2 POSITION AND DUTIES. The Employee is engaged as Vice-
President to exercise and faithfully perform to the best of his
ability on behalf of Company such duties as shall be determined by
the Board of Directors of the Company, and as same may be modified
from time to time.
1.3 OTHER ACTIVITIES. Nothing in this Agreement shall be
construed to prevent Employee from devoting a portion of his time to
community or charitable activities, from investing his assets in any form
or manner he deems appropriate or from serving as a director of any
corporation, provided such activities do not unreasonably interfere with
the performance of duties under this Agreement and do not violate the
provisions of Section 3.1.
2. COMPENSATION.
2.1 BASE SALARY. Company shall pay Employee Two Hundred Fifty
Thousand and No/100 Dollars ($250,000) per calendar year, payable semi-
monthly, subject, however, to the "EBITA" (as hereinafter defined)
adjustment. Notwithstanding the foregoing, commencing as of April 1,
2000, and on April 1st of each and every calendar year thereafter during
the Term of Employment, in the event that the Company's EBITA for the
immediately preceding fiscal year is: (a) less than One Million Two
Hundred Thousand and No/100 Dollars ($1,200,000.00), then for the fiscal
year then in question (commencing April 1, 2000 through March 31, 2001),
the base salary shall be Two Hundred Thousand and No/100 Dollars
($200,000.00), payable semi-monthly; or (b) equal to or greater than One
Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00), then for
the fiscal year then in question (commencing April 1, 2000 through March
31, 2001), the base salary shall
Employment Agmt Page 1
<PAGE>
be Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00),
payable semi-monthly. For purposes of this Agreement, the term
"EBITA" shall mean net income plus interest expense, plus income tax,
plus depreciation expenses, plus amortization expenses, all
determined in accordance with generally accepted accounting
principles, all as set forth in the Company's audited financial
statements.
2.2 HEALTH INSURANCE. The Company shall provide health,
medical and dental care insurance coverage for Employee and his
dependents in amounts and coverage equivalent to the greater of the
amount and coverage previously provided to Employee by his previous
employer, Mounted Memories, Inc., or the insurance benefits and coverage
provided by the Company in its health insurance coverage provided for
other Company officers.
2.3 AUTOMOBILE ALLOWANCE. Company shall reimburse Employee or
otherwise provide Employee an automobile allowance in the amount of Eight
Hundred and No/100 dollars ($800.00) per month and a reimbursement for
all insurance, fuel, maintenance, cellular and mobile telephones, repairs
and upkeep therefor. The automobile allowance shall increase effective
immediately preceding the adjustment then in question by a ratio of the
"Index" (as hereinafter defined) for the month of November preceding the
year of the date of adjustment then in question divided by the Index for
the month of November of 1997. The "Index" shall mean the index numbers
of retail commodity prices designated "Revised Consumer Price Index for
all Urban Consumers - U.S. City Average - All Items (1982-1984=100)
Prepared by the Bureau of Labor Statistics of the United States
Department of Labor". In the event such Index is not published, then an
index most comparable to the commodity index published shall be utilized.
2.4 DISABILITY AND LIFE INSURANCE.
(a) Company shall pay for or reimburse Employee the cost
of a disability insurance policy which shall provide the highest
rate of compensation then available, but in no event less than Two
Hundred Thousand and No/100 Dollars ($200,000.00) per year, a
ninety (90) day waiting period, and benefits payable through the
age of seventy-five (75).
(b) Company shall pay for or reimburse Employee for a
life insurance policy which will provide a death benefit in the
amount of Two Million and No/100 Dollars ($2,000,000.00), which
shall contain a cost of living adjustment endorsement for each
calendar year during the term of this Agreement.
Employment Agmt Page 2
<PAGE>
(c) Provided, however, that the total annual cost of
such disability and life insurance coverage for Employee to be
paid by the Company shall not exceed Two Thousand Dollars ($2,000)
per year. Any cost of such insurance in excess of $2,000 per year
shall be paid by Employee.
2.5 DIRECTORS' AND OFFICERS' INSURANCE. At such time as it
becomes available and economically feasible, Company will maintain
director's and officers' insurance in sufficient amounts to insure
against the personal liability of the Employee as a director of the
Company for certain losses resulting from claims brought against
directors and officers because of their alleged wrongful acts.
2.6 VACATION. The Employee shall be entitled to a four (4)
week vacation each calendar year during the term of this Agreement.
2.7 BENEFITS. In addition to the other provisions of Section 2
set forth above, Company shall provide to Employee all other standard
benefits and perquisites as are provided for other Company officers,
directors and employees.
2.8 WITHHOLDING. Employee agrees that the Company shall deduct
and withhold from his salary and from all other amounts paid to Employee,
all state and federal tax and other withholdings.
2.9 EXPENSES. Employee is authorized to incur reasonable
expenses for the business of company which are necessary for the
promotion of Company's business and similar expenses that assist Employee
in the performance of his duties hereunder.
2.10 TERMINATION. Without in any way limiting the other
provisions of this Agreement, upon termination of Employee's employment,
whether by expiration of the term of this Agreement or as provided for in
Section 4, Employee shall cease to receive or have any right to receive
salary or any other compensation provided for above or otherwise,
provided, however, that nay previously earned compensation shall be paid
by Company to Employee in accordance with the terms and provisions of
this Agreement.
3. DISCLOSURE OF INFORMATION.
3.1 DISCLOSURE OF INFORMATION. The Employee recognizes and
acknowledges that the confidential, proprietary information of the
Company, and other intellectual property of this Company including
contacts made prior to the commencement of this Agreement and those made
within the scope of Employee's duties hereunder and such trade secrets or
information as may exist from time to time, including without limitation,
technical
Employment Agmt Page 3
<PAGE>
information regarding the Company's business, information as to the
identity of employees, customers and potential or existing suppliers
of the Company or its affiliates, information as to the marketing or
other plans of the Company and other similar items, are valuable,
special and unique assets of the Company's business, access to and
knowledge of which are essential to the performance of the duties of
Employee hereunder. Such property and information shall remain the
exclusive property of the Company at all times during and subsequent
to the Term of Employment. Employee will not, during or after the
Term of Employment, in whole or in part, remove Company's records
either in original, duplicated or copied form, from the premises of
the Company, nor disclose such secrets or confidential or proprietary
information to any person, firm, corporation, association or other
entity (except the Company or its affiliates) under any
circumstances, during or after the Term of Employment.
3.2 INJUNCTIVE RELIEF. If there is a breach or threatened
breach of the provisions of Section 3.1 of this Agreement by Employee,
the Company shall be entitled to an injunction restraining the Employee
from breaching or violating the provisions of this Section 3, it being
agreed that the loss and damages suffered by virtue of any breach are
incapable of being made certain.
3.3 EVENTS OF DEFAULT BY COMPANY. In the event of a breach or
default by the Company hereunder, which results in Employee not receiving
base salary (as set forth in Paragraph 2.1 above), for any reason and for
a period of ninety (90) consecutive days, which reasons include, but are
not limited to, the failure of the Company to pay to Employee the base
salary while Employee remains in the employ of the Company or Employee
ceases to be employed by the Company directly as a result of such breach
or default by the Company, then the provisions of this Section 3 shall be
void and of no further force or effect.
4. EARLY TERMINATION OF AGREEMENT.
4.1 EARLY TERMINATION OF AGREEMENT. This Agreement shall
terminate earlier than expiration of the Term of Employment ("Early
Termination") upon the occurrence of any of the following events:
(a) Immediately upon notice from the Company to the
Employee for cause. The term "cause" shall refer and be limited
to: (i) any act of embezzlement or conversion of assets of the
Company; (ii) the employee's breach of any material covenant of
this Agreement; (iii) habitual or repeated non-performance of
material duties. However, with regard to (ii) and (iii) above,
"cause" shall not have occurred until Company notifies Employee of
such event, in writing, and Employee shall not have cured such
event within a period of fifteen (15) days after receipt of such
Employment Agmt Page 4
<PAGE>
written notice, provided however, in the event such cure cannot be
reasonably completed within said fifteen (15) day period, Employee
shall have the right to commence to cure such event and diligently
pursue such cure to completion.
(b) Upon mutual agreement of Company and Employee.
4.2 OBLIGATIONS SURVIVING EARLY TERMINATION. Notwithstanding
the Early Termination of this Agreement as contemplated in Section 4.1
above or expiration of the term if this Agreement, the provisions of this
Agreement relating to the Employee's covenant not to compete, and
Employee's obligation to maintain and protect trade secrets and
confidential, proprietary rights and information of the Company shall
maintain in force and effect pursuant to the terms of this Agreement.
5. GENERAL PROVISIONS.
(a) BINDING AGREEMENT. This Agreement shall be binding upon and
shall inure to the benefit of the heirs, legal representatives,
successors and assigns, as applicable, of the respective parties hereto,
and any entities resulting from the reorganization, consolidation or
merger of any party hereto.
(b) HEADINGS. The headings used in this Agreement are inserted
for reference purposes only and shall not be deemed to limit or affect in
any way the meaning or interpretation of any of the terms or provisions
of this Agreement.
(c) COUNTERPARTS. This Agreement may be signed upon any number
of counterparts with the same effect as if the signature to any
counterpart were upon the same instrument.
(d) SEVERABILITY. The provisions of this Agreement are
severable, and should any provision hereof be found to be void, voidable
or unenforceable, such void, voidable or unenforceable provision shall
not affect any other portion or provision of this Agreement. without
limiting the generality of the above, should any provision be
unenforceable as a result of a time period or geographic area, the time
period and/or geographic area shall be reduced to the longest period
and/or largest area which would render the provision enforceable.
(e) WAIVER. Any waiver by any party hereto of any breach of any
kind or character whatsoever by any other party, whether such waiver be
direct or implied, shall not be construed as a continuing waiver or
consent to any subsequent breach of this Agreement on the part of the
other party.
Employment Agmt Page 5
<PAGE>
(f) MODIFICATION. This Agreement may not be modified except by
an instrument in writing signed by the parties hereto.
(g) GOVERNING LAW. This Agreement shall be interpreted,
construed and enforced according to the laws of the State of Florida.
Venue with respect to any litigation regarding this Agreement shall only
be permitted in the Seventeenth Judicial Circuit in and for Broward
County, Florida.
(h) ATTORNEYS' FEES. In the event any action or proceeding is
brought by either party against the other under this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees
and costs through all trial and appellate levels.
(i) NOTICE. Any notice, consent, request, objection or
communication to be given by either party to this Agreement shall be in
writing and shall be either delivered personally or by Airborne, Federal
Express or other commercial overnight delivery service addressed as
follows:
Company: Dreams, Inc.
42620 Caroline Court
Palm Desert, CA 92211
Employee: Ross Tannenbaum
10520 Paris Street
Cooper City, FL 33026
(j) ASSIGNMENT. Employee may not assign his rights and
obligations pursuant to this Agreement to a third party without the
written consent of the Company.
(k) SECURITIES DOCUMENTS. It shall be a condition to the
issuance of any securities by Company to Employee, including shares of
the Company's common stock, that Employee shall execute and deliver to
Company all documents deemed necessary by the Company's counsel in order
to comply with the securities laws of the United States and the states
thereof.
Employment Agmt Page 6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first set forth above.
COMPANY:
DREAMS, INC., a Utah corporation
By:
----------------------------
Its: Secretary
EMPLOYEE:
-------------------------------
Ross Tannenbaum
Employment Agmt Page 7
<PAGE>
EXHIBIT 6(iii)
Merchandise License Agreement
Merchandise License Agreement
<PAGE>
MERCHANDISING LICENSE AGREEMENT
PRINCIPAL TERMS
This Merchandising License agreement, consisting of (i) these Principal
Terms (of which Schedule I attached hereto and incorporated herein is a part)
and (ii) the Standard Terms and Conditions attached hereto and incorporated
herein by this reference ("Standard Terms") (collectively the "Agreement"),
dated May 22, 1991 ("Agreement Date"), is entered into between MERCHANDISING
CORPORATION OF AMERICA, INC., 100 Universal City Plaza, Universal City,
California 91608 ("Licensor") and SPORTS ARCHIVES, INC. 73-199 El Paseo, Suite
A, Palm Desert, California 90060, ("Licensee").
WHEREAS, Licensor owns, controls or is authorized by the owner of the
Licensed Elements (as herein defined) (the "Property Owner") to grant to third
parties the right to use and exploit the Licensed Elements in connection with
merchandising activities in accordance with the terms of this Agreement; and
WHEREAS, Licensor desires to license to Licensee, and Licensee desires to
license from Licensor, certain rights in and to the Licensed Elements in
accordance with the terms of this Agreement;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
it is agreed as follows:
I. DEFINITIONS. Capitalized terms not defined herein are as defined
on Schedule I or in the Standard Terms.
II. GRANT OF LICENSE.
(a) Subject to and in accordance with the provisions of this
Agreement, including without limitation Schedule I hereto and the
Standard Terms, Licensor hereby grants to Licensee:
(i) the exclusive right to use and display the "Field of
Dreams" service mark, during the Term described on Schedule I, to
identify Licensee-owned retail stores in the Territory which offer
and sell sports-related or celebrity-oriented merchandise and
collectibles;
License Agmt Page 1
<PAGE>
(ii) the exclusive right to sublicense to franchisees the
right to use and display the "Field of Dreams" service mark,
during the Term, to identify franchised retail stores in the
Territory which offer and sell sports-related or
celebrity-oriented merchandise and collectibles;
(iii) the non-exclusive right to affix the "Field of
Dreams" trademark to Licensed Articles manufactured by Licensee or
third party manufacturers which have been approved by Licensor,
during the Term, which Licensed Articles shall be sold by Licensee
only in Licensee-owned and franchised "Field of Dreams" retail
stores or through mail order catalogs distributed by Licensee or
its franchisees solely within the Territory;
(iv) the exclusive right to use and display the "Field of
Dreams" marks, during the Term, to advertise and promote
franchises for "Field of Dreams" retail stores; and
(v) the exclusive right to use and display, and
sublicense franchisees to use and display, during the Term, the
"Field of Dreams" marks in connection with the operation of
Licensee-owned and franchisee-owned "Field of Dreams" retail
stores, and advertising and promotional activities pertaining
thereto, and on mail order catalogs distributed solely within the
Territory.
(b) The parties agree that Licensor has not prescribed and
shall not provide Licensee with any marketing plan or system relating to
the retail stores or catalog sales business to be conducted by the
Licensee or its franchisees, nor shall Licensor provide any services or
assistance to Licensee, or any franchisee, in connection therewith.
Licensee shall be free to operate and license others to operate such
retail stores and catalog sales businesses in accordance with Licensee's
own advertising, marketing and operational systems, techniques, methods
and plans, subject only to the limited controls set forth herein, which
the parties acknowledge are necessary in order for Licensor to protect
its interests in its trademarks, service marks, and copyrights. All
offers and sales of franchises by Licensee, and all marketing conducted
in connection therewith, shall be conducted by Licensee in its own name
and on its own behalf, and in no event shall Licensee offer or sell, or
purport to offer or sell, franchises in the name or on behalf of
Licensor. Licensor in no event shall be obligated participate in any way
with Licensee in connection with any franchising activities that Licensee
may undertake or be characterized as a "franchisor" or "master
franchisor" in any agreement or disclosure document used by Licensee.
Without limiting the generality of the foregoing, Licensor shall not be
obligated to submit to any state or federal agency, or provide to
Licensee for its submission to any state or federal agency, any
registration application or other filing, financial statements,
biographical or other information concerning Licensor's officers,
directors or other personnel, or otherwise assist Licensee in any way in
connection with its submission or prosecution of franchise registration
applications, and in
License Agmt Page 2
<PAGE>
no event shall Licensor be required to assume or undertake any obligation
or liability to any franchisee or take any action which would expose
Licensor to any obligation or liability to any of Licensee's franchisees.
Licensee shall be solely responsible for ,and shall bear all costs and
expenses associated with, compliance with all applicable franchise laws,
rules and regulations, and shall reimburse Licensor for any costs or
expenses it may incur in connection therewith.
III. OPERATION OF AGREEMENT. This Agreement and the License herein
granted shall become effective upon Licensor receiving a signed copy of these
Principal Terms from Licensee and Licensor countersigning same, and the
satisfaction of any other conditions precedent set forth herein or in the
Standard Terms. In the event of any inconsistency between these Principal Terms
and the Standard Terms, the Principal Terms shall control. In the case of any
inconsistency between these Principal Terms and Schedule I, Schedule I shall
control.
IV. SPECIAL PROVISIONS.
A. Nothing herein grants Licensee, or any franchisee, any
right to use the names or likenesses of any actor or celebrity, including
any actor or celebrity who appeared in the "Field of Dreams" motion
picture.
B. Neither Licensee, nor any franchisee, shall have the right
to use the Property in whole or in part as its business name.
C. Licensee and its franchisees may sell Licensed Articles on
a "return" basis provided that such returns shall not reduce the Royalty
payable to Licensor.
D. Notwithstanding the Standard Terms, Licensor hereby
consents (i) to the transfer of the outstanding shares of Licensee to
Stratamerica Corporation and (ii) to the merger of Licensee, within six
(6) months following the date on which this Agreement is executed, with a
newly incorporated Utah or Delaware corporation, wholly owned by
Stratamerica Corporation; provided that such surviving newly incorporated
corporation shall thereupon assume and become responsible for all
obligations of Licensee to Licensor.
V. RIGHT OF FIRST REFUSAL. Provided that Licensee fully complies
with its obligations under this Agreement, Licensor shall not open or sublicense
any third party to open "Field of Dreams" retail locations in any geographic
area outside the Territory unless Licensor shall have allowed Licensee a right
of first refusal, exercisable strictly in the following manner:
License Agmt Page 3
<PAGE>
(a) If Licensor shall decide to license any third party to open
"Field of Dreams" retail locations in any geographic area outside the
Territory (the "Additional Territory"), Licensor first shall deliver to
Licensee a written notice (the "Notice") setting forth the following
information:
(i) A description of the proposed Additional Territory;
(ii) The amount of the initial license fee required to be
paid to Licensor, and the amount or method of calculating any
required continuing royalty to Licensor; and
(iii) The minimum number of stores that the licensee must
commit to open and the period of time during which such total
number of stores must be opened.
(b) If Licensee desires to undertake to develop the Additional
Territory, it must within ten (10) days after Licensor's delivery of the
Notice, notify Licensor in writing that it desires to undertake such
development upon the terms set forth in the Notice (the "Exercise
Notice"), and shall deliver to Licensor a non-refundable advance against
the initial license fee equal to ten thousand United States dollars (U.S.
$10,000.00) ("Exercise Fee");
(c) If Licensee timely delivers its Exercise Notice and
Exercise Fee to Licensor in the manner described in paragraph (b), then
the Licensor and Licensee shall negotiate in good faith for a period of
ninety (90) days following Licensor's receipt of the Exercise Notice and
Fee (the "Negotiation Period") in an effort to agree upon and execute a
formal written license agreement for the Additional Territory;
(e) If Licensee fails to timely and properly deliver the
Exercise Notice and Exercise Fee, or if Licensor and Licensee fail to
enter into an agreement pursuant to paragraph (c) within the Negotiation
Period, Licensor shall thereafter be free to enter into an agreement with
a third party to open "Field of Dreams" stores within the Additional
Territory upon terms and conditions no more favorable to the Licensee
than specified in the Notice. Notwithstanding the foregoing, if Licensee
timely and properly delivers the Exercise Notice and Exercise Fee and the
parties fail to enter into an agreement pursuant to paragraph (c) within
the Negotiation Period by reason of Licensee's rejection of one or more
specific, material terms offered by Licensor which Licensee has
identified in writing prior to the
License Agmt Page 4
<PAGE>
expiration of the Negotiation Period as the basis for the parties'
inability to reach an agreement, Licensor may not enter into a license
agreement with any third party unless the third party accepts the
identified terms rejected by the Licensee.
"LICENSEE" "LICENSOR"
MERCHANDISING CORPORATION OF
AMERICA, INC.
By: /s/ By: /s/
--------------------------- ----------------------------
Name: Sam D. Battistone Name: Sidney A. Kaufman
Title: President Title: President
Date: May 21, 1991 Date: 5/22/91
License Agmt Page 5
<PAGE>
MERCHANDISING LICENSE AGREEMENT
SCHEDULE I TO PRINCIPAL TERMS
LICENSEE: Sports Archives, Inc.
AGREEMENT DATE: June 1, 1990
PROPERTY: "Field of Dreams" trademark and service mark
LICENSED ARTICLES: Licensor-approved memorabilia bearing
the "Field of Dreams" trademark, to be
sold in Licensee's company-owned and
franchised "Field of Dreams" retail
stores, upon the terms and conditions
set forth herein.
TERRITORY: United States [subject to Section 4(b)
of the Standard Terms]
TERM: INITIAL TERM EXPIRATION DATE:
December 31, 1995
OPTION TO EXTEND? Yes
OPTION TERMS: Successive five (5)
year terms
ADVANCE: INITIAL TERM ADVANCE:
(a) $22,500, $2,500 of which was
previously paid and the balance of
which shall be paid upon execution
hereof;
(b) $2,500 payable upon the opening
of each Licensee-owned store (as an
advance against royalties); and
(c) $5,000 payable upon the opening
of each franchised store (not an
advance against royalties).
GUARANTEES: INITIAL TERM GUARANTEE: $2,500 per
contract year
OPTION TERM GUARANTEE: $2,500 per
contract year
License Agmt Page 6
<PAGE>
ROYALTY RATE: 1% of Gross Sales of each and every store (licensee-owned and
franchised), and of all mail order catalogue sales, payable semi-annually.
MARKETING DATE: N/A
INITIAL SHIPMENT DATE: N/A
COPYRIGHT AND TRADEMARK NOTICE (except as may otherwise be approved by Licensor
in writing on a case by case basis):
[R] & [c] 1989 Universal City Studios, Inc. All rights reserved.
Licensed by Merchandising Corporation of America, Inc.
License Agmt Page 7
<PAGE>
MERCHANDISING LICENSE AGREEMENT
STANDARD TERMS AND CONDITIONS
These Standard Terms and Conditions ("Standard Terms"), together with the
Principal Terms to which they are attached, and any other schedules or exhibits
attached hereto or thereto, constitute the Merchandising License Agreement
("Agreement") between the Licensor and Licensee. All capitalized terms not
defined herein are as defined in the Principal Terms. In the event of any
inconsistency between these Standard Terms and the Principal Terms, the
Principal Terms shall control.
1. LICENSE. Upon the terms and conditions set forth in this
Agreement, by this Agreement Licensor hereby grants to Licensee a
non-transferable, non-assignable license to utilize (a) that artwork
which is pre-approved in writing by Licensor relating to the
Property, and (b) the name, title and logo of the Property
(collectively the "Licensed Elements") solely in connection with the
advertisement, manufacture, sale and distribution of the Licensed
Articles in the Licensed Territory during the Term (the "License").
2. RIGHTS IN LICENSE ELEMENTS. No action, omission or
statement by Licensor or Licensee shall in any way extend or grant to
Licensee: (a) any rights of ownership with respect to the Licensed
Elements, or any physical materials, including without limitation artwork
supplied to Licensee in connection with this Agreement ("Materials"); or
(b) any other rights in the Licensed Elements or such Materials other
than the License expressly created by this Agreement. Licensee shall
have no rights whatsoever, other than the limited License herein granted,
in either the Licensed Elements, any Materials supplied by Licensor, any
modification or additions to the Licensed Elements or any copyrights,
trademarks, trade names, or service marks which are in whole or in part
derivative of the Licensed Elements or Materials, whether created by
Licensee, Licensor or otherwise, all of which shall be the sole and
exclusive property of Property Owner. Licensee hereby assigns and
transfers to Property Owner all of Licensee's right, title and interest,
throughout the universe in perpetuity, in: (a) all copyrights and
goodwill in and to the Licensed Articles, artwork, literary text,
instructions, cartons, containers, packing and wrapping material, tags,
labels, devices, and advertising and display materials created in
connection with the Licensed Articles now in existence or hereafter
created by Licensee; and (b) all trademarks, trade names and/or service
marks created by or through or arising out of Licensee's use of the
Licensed Elements. Upon the request of Licensor, Licensee shall sign and
deliver to Licensor or Property Owner documentation in form and substance
satisfactory to Licensor confirming and effecting the foregoing. Nothing
in this paragraph 2 is intended to convey to Licensor ownership of the
tangible goods to which the Licensed Elements are affixed, or of any
copyrights, trademarks, trade names, or service marks which are not in
whole or in part derivative of the Licensed Elements or Materials,
subject however, to Licensee's obligations upon expiration or termination
as set forth in Section 10 below.
License Agmt Page 8
<PAGE>
3. TERM; OPTION TO EXTEND. Unless terminated earlier in
accordance with the terms of this Agreement, the License herein granted
shall commence upon the Agreement Date and shall continue until the
Initial Term Expiration Date (the "Initial Term"); provided, however,
that if the Principal Terms provide for an Option to Extend for one or
more additional Option Terms, then Licensee may extend the Term at the
end of the Initial Term, and each Option Term, for an additional Option
Term provided that the Term shall not exceed in the aggregate, the
Initial Term plus all Option Terms provided in the Principal Terms,
provided that it shall be a condition to each such extension that during
the Initial Term or then current Option Term, as applicable: (a)
Licensee has fully performed all, and is not in default of any, of its
material obligations under this Agreement; (b) Licensor has received in
U.S. dollars in the United States, royalty payments from Licensee,
inclusive of all advances, at least equal to the Option Term Guarantee;
and (c) Licensee provides Licensor with at least 30 days written notice
prior to the Initial Term Expiration Date of Licensee's exercise of such
Option to Extend. As used herein, "Term" shall refer to the aggregate of
the Initial Term and, if applicable, the Option Terms.
4. LICENSED TERRITORY.
(a) The Licensed Territory shall be as set forth in the
Principal Terms. If the Licensed Territory is comprised of individual
countries expressly set forth in the Principal Terms, then such countries
are herein referred to individually as a "Country". Licensee agrees
that: (a) Licensee will not market, advertise, distribute or sell, nor
permit any marketing, advertising, distribution or sales, directly or
indirectly, of the Licensed Articles or the Licensed Elements or any
likeness, characterization or representation thereof in any geographic
area other than the Licensed Territory; (b) Licensee will not ship,
deliver or otherwise transfer, or to the extent legally controllable by
Licensee, permit the shipping, delivery or other transfer for resale of
any Licensed Articles across or outside of the boundaries of the Licensed
Territory; and (c) Licensee will not sell or permit the sale of Licensed
Articles to persons or entities who Licensee knows or should know
(through Licensee's own operations or by notice from Licensor) intend to,
or are likely to resell the Licensed Articles in any geographic area
other than the Licensed Territory.
(b) If the offer or sale, or proposed offer or sale, of
franchises by Licensee in the states of Hawaii, South Dakota, Minnesota
or Washington, would in the opinion of the applicable state franchise law
administrator or of Licensor's counsel, cause Licensor to be deemed to be
a "franchisor' under the laws of any such state, thereby requiring
Licensor to register or provide disclosure to prospective franchisees, or
imposing any other duty, liability or obligation to any franchisee,
Licensee shall not offer or sell any franchise in such state unless and
until Licensee shall provide to Licensor a no-action letter, opinion or
comparable determination by such state administrator, or other assurance
satisfactory to Licensor, confirming that Licensor shall not be subject
to any such obligation and liability. Licensee shall not file any
application to register to sell franchises in any said state unless first
it shall have notified Licensor in writing of its intent to do so.
Licensee shall promptly reimburse
License Agmt Page 9
<PAGE>
Licensor for all costs and expenses (including attorney's fees) that
it may incur in connection with any such application and/or in
determining Licensor's legal rights and obligations associated with
Licensee's proposed offer and sale of franchisees in such state(s).
5. CONSIDERATION. In consideration of the License herein
granted, Licensee agrees to pay Licensor the following amounts:
(a) ROYALTY.
(i) Licensee shall pay to Licensor a royalty in an
amount equal to one percent (1%) of all Gross Sales during the
Term, payable semi-annually, on or before July 15 with respect to
Gross Sales during the first six (6) months of that calendar year,
and January 15 with respect to Gross Sales during the last six (6)
months of the preceding calendar year.
(ii) The term "Gross Sales" as used herein shall mean the
aggregate amount of all sums received or receivable by Licensee
and its sublicensees and franchisees, directly or indirectly, from
or in connection with the operation of "Field of Dreams" stores
and from or in connection with sales by means of catalogs, mail
order and other media and methods of distribution connected with
the use of the Licensed Elements, including revenues generated
from any and all sources on account of the sale of goods and
products, and from the rendering of services of any kind or
nature, at or from such stores, or under, or connected with the
use of, the Licensed Elements, whether for cash, credit, or
barter. There shall be deducted from Gross Sales for purposes of
said computation (but only to the extent that they have been
included) the amount of all sales tax receipts or similar tax
receipts which, by law, are chargeable to customers, if such taxes
are separately stated when the customer is charged, and the amount
of any actual refunds, rebates, overrings, and allowances given to
customers in good faith.
(b) ADVANCES.
The Initial Term Advance, in the amount set forth in the Principal
Terms, shall be due and payable to Licensor concurrently with delivery by
Licensee to Licensor of a signed copy of the Principal Terms. The
Initial Term Advance shall be a non-returnable, non-refundable advance
against royalties payable to Licensor during the Initial Term.
License Agmt Page 10
<PAGE>
(c) ROYALTY GUARANTEES.
(i) Licensee agrees that the aggregate amount of
royalties paid to Licensor pursuant to Paragraph 5(a) during the
Initial Term together with the Initial Term Advance paid to
Licensor pursuant to Paragraph 5(b)(i) shall not be less than the
amount of the Initial Term Guarantee set forth in the Principal
Terms. Concurrently with the rendering of the statement due from
Licensee, in accordance with Paragraph 6 hereof, after the
expiration or earlier termination of the Initial Term, Licensee
shall pay to Licensor an amount equal to that portion of the
Initial Term Guarantee not previously paid to Licensor pursuant to
Paragraphs 5(a) and 5(b)(i) above.
(ii) If Licensee is granted and exercises an Option to
Extend in accordance with Paragraph 3 hereof, Licensee agrees that
the aggregate amount of royalties paid to Licensor pursuant to
Paragraph 5(a) during the Option Term together with the Option
Term Advance paid to Licensor pursuant to Paragraph 5(b)(ii) shall
not be less than the amount of the Option Term Guarantee set forth
on the Principal Terms. Concurrently with the rendering of the
statement due from License, in accordance with Paragraph 6 hereof,
after the expiration or earlier termination of the Option Term,
Licensee shall pay to Licensor an amount equal to that portion of
the Option Term Guarantee not previously paid to Licensor pursuant
to Paragraphs 5(a) and 5(b)(ii) above.
6. PAYMENTS; ACCOUNTING. Not later than twenty-one (21) days
following the end of: (a) each semi-annual reporting period (ending June
30, and December 31) during the Term of this Agreement, including each
Option Term, if any, Licensee shall furnish to Licensor a full, complete
and accurate statement on the form prescribed by Licensor from time to
time, upon reasonable prior notice, specifying, for the applicable
period:
(i) the aggregate amount of all Gross Sales;
(ii) the amount of Gross Sales of each store (whether Licensee-
owned or franchised), and the address and owner of such store;
(iii) the amount, by category, of Gross Sales from mail order
sales, catalog sales, and other media and methods of distribution; and
(iv) such other information as Licensor may reasonably require.
License Agmt Page 11
<PAGE>
Sales billed in other than U.S. dollars shall be computed and
reported in U.S. dollars using the conversion rate in effect on the last
day of the period to which the statement relates. Each statement shall
be accompanied by payment of the amounts due Licensor under this
Agreement, as shown on the statement. Licensor shall have the right to
require that the statements rendered hereunder be certified as complete,
true and accurate by a certified public accountant, to the best of his
knowledge, and/or by Licensee's chief financial officer, with any expense
of such certification borne by Licensee. Statements shall be provided
for each period described in this Paragraph regardless of whether there
are any Gross Sales during such period. The receipt or acceptance by
Licensor of any royalty statement furnished pursuant to this Agreement,
or the receipt or acceptance of any royalty payment made hereunder, shall
not prevent Licensor from later contesting the validity or accuracy of
such statement.
7. BOOKS, RECORD AND AUDIT.
(a) MAINTENANCE AND ACCESS. Licensee shall keep and cause its
sublicensees and franchisees to keep full, complete and accurate books of
account and records covering all of its transactions relating to the
subject matter of this Agreement, and Licensor shall have the right to
examine or audit any or all such books of account and records as provided
herein, and to make copies and extracts thereof. Licensee shall cause
Licensor or its designated agent or agents to have reasonable access
thereto for such purposes during normal business hours or at such other
times as may be mutually agreeable to the parties hereto. Licensee shall
maintain and cause its sublicensees and franchisees to maintain all such
books and records for a period of at least three (3) years or such longer
period as may be required by law, except that if a dispute arises between
Licensee and Licensor prior to the end of any such three (3) year period
with respect to any payment or the information contained in such books
and records, then Licensee will maintain and cause its sublicensees and
franchisees to maintain such books and records until the resolution of
the dispute or six (6) years from the date of termination, whichever last
occurs.
(b) COSTS OF AUDIT. Examinations and audits requested by
Licensor shall be conducted at the expense of Licensor, and Licensee
shall provide in advance (at no cost to Licensor except for copying and
mailing costs) copies of all other audits conducted by or for Licensee
bearing on the subject of any such requested audit, and related auditor's
work papers. Licensee shall provide to Licensor, at no charge, copies of
each annual audited financial statement prepared by Licensee's auditors,
and upon request, copies of each unaudited financials prepared by or for
Licensee. If any audit discloses an underpayment by Licensee of five
percent (5%) or more of the amount which should have been paid, Licensee
shall immediately pay the additional amount with interest at a rate of
four percent (4%) above the prime rate charged by Licensor's primary
lending bank (or the maximum rate permissible under law, if less than
such rate), and shall reimburse Licensor all costs incurred in connection
with such audit.
License Agmt Page 12
<PAGE>
8. QUALITY STANDARDS.
(a) HIGH QUALITY OPERATING STANDARDS. Licensee agrees that all
retail stores operated by Licensee and its franchisees under the "Field
of Dreams" name, and all advertising, promotion and merchandising
activities relating thereto, including but not limited to sales through
catalogs and mail order, and all sales and promotion of franchises by
Licensee: (i) at all times shall be of high standard and of such style,
appearance and quality as to protect and enhance the Property, the
Licensed Elements and the goodwill pertaining thereto; (ii) shall meet
Property Owner's and Licensor's quality standards and specifications; and
(iii) shall comply with all applicable Federal, State and local laws.
(b) HIGH QUALITY STANDARDS FOR LICENSED ARTICLES. Licensee
agrees that the Licensed Articles covered by this Agreement: (i) at all
times shall be of high standard and of such style, appearance and quality
as to protect and enhance the Property, the Licensed Elements and the
goodwill pertaining thereto; (ii) shall meet Property Owner's and
Licensor's quality standards and specifications; and (iii) shall be
manufactured, sold, distributed and marketed in accordance with all
applicable Federal, State and local laws. Licensee shall not
manufacture, authorize any third party to manufacture, offer, sell,
market or distribute, or permit any franchisee or sublicensee to offer,
sell, market or distribute, any Licensed Article which has not been
approved first by Licensor in writing in its sole discretion. Licensee
further agrees not to cause, suffer or permit the manufacture, sale,
distribution or marketing of any damaged or defective Licensed Articles.
(c) MANUFACTURING.
(i) If Licensee desires to use any third party to
manufacture or supply any Licensed Article or any advertisement,
product packaging, carton, tag, promotional material, display for
retail or wholesale sales, or other item related to any Licensed
Articles or Licensee's exploitation thereof (collectively herein
"Collateral Materials"), it shall first obtain Licensor's prior
written approval of such manufacturer which shall not be
unreasonably withheld. Licensor may impose reasonable conditions
to such approval, including without limitation that such supplier
(x) demonstrate to Licensor's reasonable satisfaction that it
possesses the resources, facilities and capacity to manufacture a
product which shall consistently meet the Licensor's high quality
standards, and all applicable governmental standards and
regulations, and (y) enter into a trademark license agreement in
form prescribed by Licensor which may require the manufacturer,
among other things, to permit Licensor to make periodic
inspections and/or provide free product samples upon Licensor's
request, and to manufacture products only for sale to Licensee and
its franchisees during the term thereof.
License Agmt Page 13
<PAGE>
(ii) Prior to the regular manufacture of any Licensed
Article, Licensee shall furnish to Licensor for approval one (1)
representative sample or prototype of each design of each and
every Licensed Article (herein 'Preproduction Samples"). Licensor
in its sole discretion may approve or disapprove the use of such
Licensed Article as represented by the sample. In addition, once
regular manufacture has begun, and prior to shipment, Licensee
shall furnish to Licensor at no charge to Licensor, twenty-five
(25) samples of each design of each Licensed Article manufactured
by Licensee ("Manufactured Samples"); provided, that if the per
unit cost to Licensee of the Licensed Articles exceeds $250,
Licensee shall furnish to Licensor at no charge to Licensor, five
(5) samples of each such Manufactured Sample, and such additional
evidence and assurance of consistent quality as Licensor may
reasonably request.
(iii) Licensed Articles shall not differ in any material
respect from the approved Preproduction Samples without Licensor's
prior written consent. No Licensed Articles shall be offered or
sold until Licensor shall have approved the Manufactured Samples
in writing. Sale of any Licensed Article by Licensee or any
franchisee, the quality of which has not been specifically
approved by Licensor as provided herein, shall be a material
breach of this Agreement. Licensee agrees that Licensor shall
have the right to take samples at random from production runs from
time to time as Licensor may determine, in order to assure that
proper quality control has been established. Licensor shall also
have the right to have its representatives visit Licensee's plant
or plants where the Licensed Articles or any element thereof are
made, and where the containers, packaging material and the like
are printed or produced in order to determine whether or not
proper quality controls are being exercised.
(iv) Prior to the institution of any changes in the
method of production, form of production, materials used in
production, or any other changes in engineering, design, or other
criteria which could have a material effect on a Licensed Article
previously approved for production or manufacture, Licensee shall
furnish to Licensor for approval, one (1) Preproduction Sample in
accordance with the provisions of Paragraph 8(b)(i), as well as
twenty-five (25) Manufactured Samples manufactured in accordance
with such new method.
(v) In the event Licensor does not disapprove, in whole
or in part, of samples submitted under this Paragraph within 14
days after receipt, such failure automatically constitutes
disapproval by Licensor. Licensee may not manufacture or sell or
offer for sale any Licensed Article without express written
approval from Licensor as required herein.
License Agmt Page 14
<PAGE>
(d) APPROVAL OF COLLATERAL MATERIALS. Prior to regular
manufacture or production of any Collateral Materials, Licensee shall
submit a sample or, in Licensor's discretion, other representation of
such item of Collateral Material to Licensor for approval. In the event
Licensor does not disapprove of same, in whole or in part, within 14 days
after receipt, such failure automatically constitutes disapproval by
Licensor. Any alteration in any Collateral Material must be approved in
advance by Licensor. Licensee shall provide Licensor, at no charge to
Licensor, twenty-five (25) samples of each Collateral Material created by
or at the request of Licensee.
(e) QUALITY STANDARDS FOR OTHER GOODS AND SERVICES. Licensee
agrees that with respect to all products and services other than Licensed
Articles which are offered, sold, marketed or distributed by Licensee or
its franchisees or sublicensees at "Field of Dreams" stores or by mail
order or catalogs ("Non-Licensed Goods and Services"), such Non-Licensed
Goods and Services: (i) at all times shall be of high standard and of
such style, appearance and quality as to protect and enhance the
Property, the Licensed Elements and the goodwill pertaining thereto;
(ii) shall satisfy Property Owner's and Licensor's quality standards and
specifications; and (iii) shall be manufactured, sold, distributed and
marketed in accordance with all applicable Federal, State and local laws.
Without limiting the generality of the foregoing, neither Licensee nor
any of its franchisees or sublicensees shall offer, sell, market or
distribute any Non-Licensed Goods or Services at any "Field of Dreams"
store or through any related mail order or catalog sales activities if in
Licensor's reasonable judgment the offer or sale of such goods or
services might tend to injure, or diminish the value of, the name and
reputation of the Licensor, or the Property or Licensed Elements or the
goodwill pertaining thereto, and Licensee shall cease and cause its
franchisees to cease to offer and sell any such product or service within
fourteen (14) days after delivery of written notice by Licensor.
(f) COMPLIANCE WITH LAW. Licensee shall comply in all respects
with the Federal Trade Commission Rule on Franchising (the "FTC Rule")
and all applicable state laws, rules and regulations pertaining to
franchising; Licensee shall prepare its own Uniform Franchise Offering
Circular, shall register and maintain proper registrations in all states
and jurisdictions where such registration is or shall be required, and
shall at all times comply with all of the provisions of all other
applicable federal, state or local statutes, rules or ordinances.
Licensee shall not file or use any offering circulars, prospectuses or
other disclosure documents without first having (i) fully disclosed the
terms of this License Agreement and its effects upon its franchisees,
including without limitation the effect of Licensor's termination rights,
(ii) fully disclosed in such offering circulars, prospectuses and
disclosure documents, and provided in all agreements with franchisees,
that Licensor shall have no obligation, liability or responsibility to
any franchisee under any circumstances, and (iii) obtained the Licensor's
prior written approval as to the form and content of such disclosures and
provisions, which it may grant or withhold in its sole discretion. Such
License Agmt Page 15
<PAGE>
approval shall not constitute a warranty or representation by Licensor
that any said document complies with any applicable law or that the
disclosures therein made by Licensee are truthful or accurate, and such
approval shall in no way limit, curtail or otherwise affect Licensee's
indemnity obligations to Licensor pursuant to Section 13(a).
9. MARKETING DATE; SHIPMENT DEADLINES.
(a) If the Principal Terms provide for a Marketing Date, then
Licensee shall not: (i) sell or permit any third party to sell any
Licensed Article to the public prior to the Marketing Date; (ii)
advertise or market, or permit any third party to advertise or market,
the Licensed Articles to the public earlier than the date which is thirty
(30) days following such termination execute a trademark license
agreement with Licensor upon the form prescribed by Licensor, which shall
be terminable by the franchisee upon thirty (30) days prior to the
Marketing Date; nor (iii) make any presentations to the trade, or permit
any third party to make any presentations to the trade, with respect to
the Licensed Articles, earlier than the date which is one hundred twenty
(120) days prior to the Marketing Date.
(b) If the Principal Terms provide for a Marketing Date, then
in addition to Licensor's right to seek damages or any other remedies
available under law or equity, Licensor reserves the right to terminate
this Agreement, or to terminate the License as to all or any Licensed
Articles throughout the Licensed Territory and/or as to any Country, by
written notice to Licensee at any time if Licensee has not: (i) made
available to Licensor complete Preproduction Samples of each Licensed
Article for approval within three (3) months after the Agreement Date; or
(ii) begun the regular distribution, sale and shipment of each and every
Licensed Article throughout the Licensed Territory in commercially
reasonable amounts by the Initial Shipment Date set forth on the
Principal Terms; or (iii) for a period of three (3) or more consecutive
months after initial shipment, continued the regular distribution, sale
and shipment of each and every Licensed Article throughout the Licensed
Territory in commercially reasonable amounts. As used herein,
"commercially reasonable amounts" shall mean quantities and assortments
sufficient to meet the public demand for the Licensed Articles. In the
event of such termination, any and all rights herein terminated relative
to any Licensed Article(s) and/or Country(ies*) shall forthwith
automatically revert to Licensor and Property Owner. Termination of
Licensee's rights with respect to any Licensed Article or Country under
this Paragraph shall not relieve Licensee of its obligations to account
to and pay Licensor royalties for all shipment of Licensed Articles, and
to pay the applicable guarantee amounts in accordance with Paragraphs
5(a), 5(b) and 6 of these Standard Terms.
License Agmt Page 16
<PAGE>
10. EFFECT OF EXPIRATION OR EARLY TERMINATION.
(a) Subject to paragraph 10(b) through 10(e) below, upon the
expiration or early termination of the Term, Licensee and all of its
franchisees shall (i) forthwith discontinue the use of the License
Elements, including without limitation use of the Licensed Elements to
identify the stores operated by Licensee and its franchisees and in
connection with any catalogs or mail order materials, and otherwise; and
(ii) not thereafter operate or do business under any name or in any
manner that might tend to give the general public the impression that he
is a Licensee of Licensor and shall promptly take such action as Licensor
may direct to prevent any possible confusion in the mind of the public
that Licensee or such franchisees are affiliated with or licensed by
Licensor, including but not limited to, removal of signage, advertising,
and other fixtures and furnishings that might tend to cause the public to
associate Licensee or its franchisees with Licensor.
(b) Except if in the opinion of Licensor's counsel to do so
would constitute the unlawful offer or sale of a franchise to such
franchisee, upon the early termination of this Agreement, Licensor shall
permit each of Licensee's franchisees, but not Licensee, to continue to
use the Licensed Elements to identify the stores operated by such
franchisee for a period of up to six (6) months following the termination
hereof, provided that (i) such franchisee's store is then operating in
conformity with Licensor's and Property Owner's high standards for style,
appearance and quality as to protect and enhance the Property, the
Licensed Elements and the goodwill pertaining thereto, and with all
applicable Federal, State and local laws, and (ii) such franchisee shall
within thirty (30) days prior written notice and shall provide among
other things for the payment by such franchisee of a royalty equal to
four percent (4%) of such franchisee's Gross Sales during the term of
such license agreement. Such royalty shall be payable solely for the
continued right during the term thereof to use the Licensed Elements to
identify the stores. Licensor shall have no obligation to provide any
services or assistance whatsoever to the franchisee in connection with
its operation of such store.
(c) If at the end of the Initial Term or any Option Term, this
Agreement expires without being extended pursuant to Section 3, and if
Licensee shall have satisfied each of the conditions precedent set forth
in paragraph (d) below, Licensee shall have the right, for a period not
to exceed sixty (60) days following expiration hereof, to sell such
inventory of Licensed Articles then on hand to (i) its franchisees who
have ceased to conduct business under the name "Field of Dreams" for
resale at their franchised locations to the general public in the
ordinary course of business and not through "going-out-of-business",
close-out, consignment, liquidation or auction sales, or similar methods;
(ii) to the general public in the ordinary course of business and not
through "going-out-of-business", close-out, consignment, liquidation or
auction sales, or similar methods, at Company-owned stores which have
ceased to conduct business under the name "Field of Dreams", and (iii) to
customers placing orders through catalogs which were distributed at least
ninety (90) days prior to the expiration of the Term. At the expiration
of such sixty (60) day sell-off period, or
License Agmt Page 17
<PAGE>
immediately upon the expiration of this Agreement if Licensee fails
to satisfy the conditions set forth in paragraph (d), Licensee shall,
at Licensor's option and at Licensee's sole cost, immediately either
(i) obliterate or remove the Licensed Elements from all Licensed
Articles, or (ii) offer to sell to Licensor all inventory of Licensed
Articles then on hand which is in good, resalable condition, at a
price equal to fifty percent (50%) of Licensee's lowest wholesale
price charged for such products to its franchisees during the
preceding twelve (12) months, provided that Licensor may offset
against such purchase price any sums payable by Licensee, or its
affiliates, to Licensor.
(d) Licensee's sixty (60) day sell of right as described in
Section 10(c) shall be subject to Licensee's satisfaction of all of the
following conditions precedent:
(i) during the Term, Licensee shall have performed all
of the material terms and conditions hereof on its part to be
performed;
(ii) at least thirty (30) days prior to the expiration of
the Initial Term, or then current Option Term, Licensee shall have
delivered to Licensor written notice of Licensee's intention not
to extend the Term ("Non-Renewal Notice"), together with a written
statement of Licensee's inventory of all of the Licensed Articles
on hand, and of all orders for such inventory which have been
received but not filled, as of the date of such notice;
(iii) during the period from six (6) months prior to the
date of Licensee's Non-Renewal Notice through the date of
Licensee's notice of intent not to renew, Licensee shall not have
caused to be manufactured more Licensed Articles than reasonably
necessary to meet anticipated demand and during the period
following delivery of Licensee's Non-Renewal Notice it shall not
have manufactured products in excess of those required to satisfy
orders on hand at the date of its Non-Renewal Notice;
(iv) within seven (7) days after the expiration hereof,
Licensee shall have delivered to Licensor a written statement of
inventory of all of the Licensed Articles on hand at the time of
such expiration or termination; provided, however, that Licensor
shall have the right to take a physical inventory to ascertain or
verify such inventory and statement, and refusal by Licensee to
submit to such physical inventory by Licensor shall cause a
forfeiture of Licensee's right to dispose of such inventory, with
Licensor retaining all other legal and equitable rights Licensor
may have in the circumstances; and
License Agmt Page 18
<PAGE>
(v) within seven (7) days after the expiration or
termination hereof, Licensee shall pay Licensor, in addition to
the royalty provided for in Paragraph 5(a) of these Standard Terms
for the last six (6) months of the Term, an amount equal to one-
third (1/3) of such amount in consideration for such sixty (60)
day sell-off right, plus the full amount of any and all other sums
then due to Licensor.
(e) In the event of the termination of this Agreement for any
reason prior to the expiration of the Term, unless Licensor shall agree
otherwise, Licensee shall have no right to continue to sell Licensed
Articles and shall, at Licensor's option and at Licensee's sole cost,
immediately either (i) obliterate or remove the Licensed Elements from
all Licensed Articles, and furnish Licensor with a Certificate evidencing
such obliteration or removal, or (ii) offer to sell to Licensor all
inventory of Licensed Articles then on hand, which is in good, resaleable
condition, at a price equal to fifty percent (50%) of Licensee's lowest
wholesale price charged for such products to its franchisees during the
preceding twelve (12) months, provided that Licensor may offset against
such purchase price any sums payable by Licensee, or its affiliates, to
Licensor.
(f) In no event shall Licensee have the right to manufacture or
cause or permit any third party to manufacture any Licensed Articles
after the expiration or earlier termination of the Term. Upon expiration
or earlier termination of the Term, Licensee shall, at Licensor's option
and at Licensee's sole cost, immediately either (i) destroy all stamps
and devises used to imprint or affix the Licensed Elements on Licensed
Articles, and with respect to any Licensed Articles as to which Licensee
or Property Owner own the copyrights or trademarks destroy all molds,
casts, modules and like equipment used to manufacture (collectively
"molds") and provide Licensor with a Certificate of Destruction upon the
completion of said destruction or (ii) deliver all such stamps, devices
and, if applicable, molds to Licensor, and Licensor shall have the right
to use all or any of such stamps, devices and molds without obligation to
Licensee.
(g) In the event of the termination of this Agreement for any
reason prior to the expiration of the Term, all monies owed Licensor from
Licensee, including without limitation any unpaid guarantee provided for
in Paragraph 5(c) for the period of the Term in which the termination, if
any, shall occur, shall be immediately due and payable, and shall be
accounted for in accordance with Paragraph 6.
(h) The expiration or termination of this Agreement shall be
without prejudice to the rights of Licensor against Licensee and such
expiration or termination shall not relieve Licensee of any of its
obligations to Licensor existing at the time of expiration or termination
or terminate those obligations of Licensee which, by their nature,
survive the expiration or termination of this Agreement. It is expressly
understood and agreed that the promises and agreements of Licensee
contained in this Agreement, are also for the benefit of Licensor's
parent company, and either of them may, in its own name, exercise all
rights and remedies
License Agmt Page 19
<PAGE>
necessary or desirable to protect or enforce its respective
interests, including, without limitation, obtaining injunctive relief
to enforce the obligations of Licensee set forth in this Agreement.
11. LICENSEE'S BREACH; RIGHT TO CURE.
(a) If Licensee breaches any of the terms and provisions of
this Agreement, then Licensor, in addition to any other rights or
remedies it may have under this Agreement or at law or in equity, shall
have the right, if it so elects, to serve upon Licensee written notice of
such breach. Except for the incurable breaches described in Paragraph 12
below, Licensee shall thereupon have a period of thirty (30) calendar
days from the date of delivery of such notice within which to remedy such
breach; except that with respect to breaches involving nonpayment the
cure period shall be ten (10) calendar days. If, because of the nature
of any breach other than one involving nonpayment, Licensee shall be
unable to cure the same within said thirty (30) day period but
demonstrates to Licensor's subjective satisfaction that it is making a
good faith, diligent effort to remedy such breach, Licensee shall be
given such additional time as Licensor deems reasonably necessary to cure
said breach, upon the condition that Licensee shall continue diligently
to do so.
(b) Without limiting the generality of the foregoing, the
following events shall constitute grounds for termination subject to the
Licensee's right to cure, as set forth in paragraph (a):
(i) If Licensee should make, sell, offer for sale, use
distribute, broadcast, display or exhibit any Licensed Article or
any Collateral Material which has not been approved by Licensor;
(ii) If Licensee should sell, offer for sale, use
distribute broadcast, display or exhibit any Licensed Articles or
any Collateral Material which does not contain the appropriate
legal notices; or
(iii) If any of the Licensed Articles should be the
subject of any government recall because of safety, health or
other hazards or risks to the public (it being expressly
understood that Licensee is obligated to comply with all
governmental regulations relating to the Licensed Articles at its
sole expense).
(iv) If during the Term there shall cease to be at least
one (1) Licensee-owned or franchised "Field of Dreams" retail
store open and in operation within the Territory, and Licensee
shall fail to demonstrate to Licensor's sole subjective
satisfaction that Licensee is actively and diligently engaged in
bona fide efforts to
License Agmt Page 20
<PAGE>
open additional "Field of Dreams" retail stores within thirty (30)
days following written notice of Licensor's intent to terminate
this Agreement on account of such absence of operating stores;
(c) If Licensee fails to remedy such breach to Licensor's
reasonable satisfaction within the applicable time period described
above, then Licensor shall, in addition to any other rights or remedies,
have the right to terminate this Agreement and the License herein granted
as of the expiration of such applicable cure period, and shall have the
right to sue for damages caused by such breach, including without
limitation the right to receive unpaid royalties or guarantees.
12. LICENSOR'S ADDITIONAL RIGHTS TO TERMINATE. Notwithstanding
Paragraph 11, Licensor shall, in addition to any other rights, have the
right to terminate this Agreement immediately and without notice or
opportunity to cure, upon the occurrence of any of the following events:
(a) If Licensee should fail to deliver to Licensor evidence of
insurance required by Paragraph 14 hereof, within fifteen (15) days
following written request;
(b) If, without Licensor's prior written consent, Licensee
should sell substantially all of its assets to a single purchaser or to a
group of purchasers, or if there should be a change of control of
Licensee. As used herein, "control" shall mean 50% or more of the voting
control of Licensee;
(c) If Licensee should make an assignment for the benefit of
creditors;
(d) If Licensee should file a voluntary petition under Chapter
7 of the United States Bankruptcy Code (the "Code") or the involuntary
adjudication of the Licensee as a debtor under either Chapter 7 or
Chapter 11 of the Code, or the appointment of a trustee under the Code to
operate or manage the affairs of the Licensee;
(e) If more than six (6) months shall pass during which there
is not open and in operation at least one (1) Licensee-owned or
franchised "Field of Dreams" retail store, notwithstanding any
demonstration of Licensee's best efforts to open additional stores; or
(f) If Licensee shall default in any material obligation as to
which Franchisee has previously received a notice of default from
Licensor within the preceding twelve (12) months.
License Agmt Page 21
<PAGE>
(g) If Licensee, on four (4) or more occasions within any
eighteen (18) month period, fails to comply with one (1) or more material
requirements of this Agreement whether or not corrected after notice.
13. INDEMNITY.
(a) Licensee hereby agrees to defend, indemnify and hold
harmless Licensor and its affiliated companies, shareholders, directors,
officers, employees, attorneys and agents (collectively the "indemnified
parties") from and against the losses, damages, costs and expenses
associated with any and all claims, demands, suits, proceedings or
judgments arising out of (i) any alleged unauthorized use of or
infringement upon any patent, copyright, design, mark, process, idea,
method, device, right of privacy, publicity, or other property right by
Licensee or any of its franchisees in connection with the Licensed
Articles covered by this Agreement (except all claims that the use of
Licensed Elements by Licensee in accordance with this Agreement infringes
any such rights); (ii) any alleged defects in the Licensed Articles, or
any alleged failure by Licensee or any of its franchisees to adequately
perform any agreement or render any service, or any injury resulting from
the sale or use of Licensed Articles, or the rendering of services by
Licensee or any of its franchisees; (iii) any alleged violation of any
law, rule or regulation governing the offer or sale of franchises or the
relationship between franchisors and franchisees; any alleged breach of
any agreement or contract between Licensee and any franchisee, whether
oral, written express or implied; any alleged unfair acts or practices,
fraud, misrepresentation, failure to disclose or other act or omission by
Licensee in connection with its promotion, offer or sale of franchises or
its continuing relationship with any of its franchisees; and (iv) any
other alleged acts or omissions by Licensee. With respect to the
foregoing indemnity, Licensee shall defend and hold harmless all of the
indemnified parties and each of them, at no cost or expenses to them
whatsoever, including but not limited to attorneys' fees and court costs.
Licensor shall have the right, but not the obligation, to control the
defense and resolution of any such action with attorneys of its own
selection, and to be promptly reimbursed upon demand for all costs and
expenses incurred in defending and resolving any such claims.
(b) Licensor hereby indemnifies Licensee and undertakes to hold
it harmless against any claims or suits arising solely out of the use by
Licensee of the Licensed Elements as authorized in this Agreement,
provided that prompt notice is given to Licensor of any claim or suit and
provided further, that Licensor shall have the option to undertake and
control the defense or resolution of any claim so made or suit so brought
with attorneys of its own selection at Licensor's cost and expense. If
Licensor elects to so control the defense and/or resolution, any costs,
including without limitation attorneys' fees, incurred by Licensee in
connection therewith without Licensor's express prior written consent
shall be borne by Licensee.
License Agmt Page 22
<PAGE>
14. INSURANCE. Licensee agrees to maintain, at its sole
expense, a Comprehensive General Liability insurance policy for the
entire Term of this Agreement, as well as any sell-off period, including
the coverage parts for contractual liability (applying to the terms and
conditions of this Agreement), Products Liability and Personal Injury
Liability, with a minimum combined single limit of liability of not less
than U.S. $3,000,000.00 per occurrence, with a maximum deductible of
$10,000.00. Licensee shall provide Certificates of Insurance evidencing
same to Licensor from time to time upon request. License shall provide
Licensor with a policy endorsement to Licensee's Product Liability
insurance coverage, or an acceptable certificate of insurance naming
Property Owner, Licensor, and any other parent or affiliated company of
Licensor which Licensor may request to be named, as additional insureds.
Such insurance policy shall provide that Licensor and any additional
insureds shall receive at least thirty (30) days written notice before
any cancellation or modification of such policy.
15. PROTECTION OF PROPERTY OWNER'S AND LICENSOR'S RIGHTS.
(a) TRADEMARK AND COPYRIGHT NOTICE. Licensee shall cause to
appear on or within each Licensed Article manufactured by or for Licensee
under this License and within all Collateral Material proper legal
copyright and/or trademark notices in the form set forth in the Principal
Terms or otherwise requested in writing by Licensor. In no event shall
Licensee manufacture any Licensed Articles or Collateral Material
depicting the copyright and/or trademark notices to be contained thereon
without written approval from Licensor. Each and every tag, label,
carton, container, wrapping and packaging containing such notice and all
advertising, promotional or display material bearing the Licensed
Elements with such notice shall be submitted by Licensee to Licensor for
its written approval prior to use by Licensee. Approval by Licensor
shall not constitute a waiver of Licensor's rights or Licensee's duties
under any provision of this Agreement. In the event that Licensee
manufactures or distributes Licensed Articles or Collateral Material
without the appropriate trademark and copyright notices, Licensor shall,
in addition to all other rights and remedies under this Agreement, have
the right to require Licensee, at its sole cost and expense, to recall
said Licensed Articles or Collateral Material and correct the notice or
destroy the Licensed Articles or Collateral Material.
(b) VALUE AND SECONDARY MEANING. Licensee recognizes the great
value of the Licensed Elements and of the goodwill associated therewith
and acknowledges that the Licensed Elements and all rights therein
(including copyright and trademark) and goodwill pertaining thereto and
to all derivative works belong exclusively to Property Owner, that the
Licensed Elements has a secondary meaning in the mind of the public (so
that use by anyone of the foregoing without Property Owner's or
Licensor's authorization would be unlawful); and that all use of the
Licensed Elements pursuant to this Agreement will inure to the benefit of
Property Owner.
License Agmt Page 23
<PAGE>
(c) PROPERTY OWNER'S AND LICENSOR'S RIGHTS, TITLE AND INTEREST.
(i) All rights in and to the Licensed Elements,
including any modifications or additions to said Licensed Elements
whether created by or under the authority of Licensor or Licensee,
shall be the sole and exclusive property of Property Owner, and
Property Owner shall own all copyrights and other rights therein,
without obligation to Licensee.
(ii) Licensee hereby agrees that its every use of the
Licensed Elements shall inure to the benefit of Property Owner and
that Licensee shall not at any time acquire any rights in the
Licensed Elements by virtue of any use it may make of the Licensed
Elements. Furthermore, Licensee agrees that to the extent that
creation of the Licensed Articles, or any modifications of or
additions or contributions to the Licensed Articles or the
Licensed Elements by Licensee create any copyright, trademark or
other rights, such rights shall be and are hereby assigned to
Property Owner. The Licensee, its employees, successors and/or
assignees shall not register the Licensed Articles for copyright
or trademark.
(iii) Licensee, in acknowledging the rights, title and
interest of Property Owner and Licensor in the Licensed Elements,
agrees that it will not during the Term hereof or thereafter
attack the rights of Property Owner or Licensor in the Licensed
Elements, regardless of the basis of such attack and regardless of
whether the same relates to title or validity. Licensee further
agrees that it shall not during the Term hereof, or any time
thereafter, dispute or contest, directly or indirectly, the
validity of any of Property Owner's copyrights or trademarks in
the Licensed Articles or Property subject to this Agreement.
(iv) Licensee agrees to cooperate with Licensor to the
extent necessary to acquire for Property Owner property rights in
the Licensed Elements and to protect and enforce Property Owner's
and Licensor's rights to the Licensed Elements. Licensor or
Property Owner may commence or prosecute any claims or suits
regarding the Licensed Articles in their own name or in the name
of Licensee or join Licensee as a party thereto. Licensee shall
notify Licensor in writing of any infringements or imitations of
the Licensed Elements on articles similar to those covered by this
Agreement which may come to Licensee's attention, and Licensor
shall have the sole right to determine whether or not any action
shall be taken on account of any such infringements or imitations.
Licensee shall not institute any suite or take any actions on
account of any such infringements or imitations without first
obtaining the written consent of Licensor to do so, which may be
given or withheld in Licensor's sole discretion.
License Agmt Page 24
<PAGE>
(v) Licensee will cooperate fully and in good faith with
Property Owner and Licensor for the purpose of securing and
preserving the rights of Property Owner and Licensor in and to the
Licensed Elements. In the event there has been no previous
registration of the Licensed Elements, Licensed Articles, or any
material relating thereto, Licensee shall cooperate fully and in
good faith with Property Owner and Licensor so as to enable
Property Owner and Licensor to file, prosecute and register the
same for purposes of copyright or trademark protection in
appropriate classes in the name of Property Owner and/or Licensor,
as Property Owner may determine. Upon request by Licensor,
Licensee shall furnish at least six (6) photographs and/or
specimens, as well as invoices or other proper evidence
satisfactory to Licensor duly showing the first commercial
shipment in interstate commerce, and such other things and
documents as Licensor may require in the obtaining or preserving
of a trademark, and thereafter, on a regular basis, representative
samples of each Licensed Article and of any or all materials
bearing trademarks.
16. REMEDIES.
(a) Licensee acknowledges that its breach of this Agreement or
its failure (except as otherwise provided herein) to cease the
manufacture, marketing, sale and distribution of Licensed Articles at the
termination or expiration of this Agreement or otherwise in violation of
any terms hereof will result in immediate and irreparable damage to
Licensor and to the rights of any subsequent licensee. Licensee
acknowledges and admits that there is no adequate remedy at law for such
breach of this Agreement or for such failure to cease manufacture,
marketing, sale or distribution and Licensee agrees that in the event of
such breach or such failure, Licensor shall be entitled to equitable
relief by way of temporary and permanent injunctions and such other and
further relief as any court of competent jurisdiction may deem just and
proper.
(b) Any and all payments due hereunder and not made to Licensor
on a timely basis shall bear interest at a rate of two percent (2%) above
the prime rate charged by Licensor's primary lending bank, but in no
event higher than the maximum interest permissible by law.
(c) Under no circumstances will Licensee have the right to
offset from amounts otherwise payable from Licensee to Licensor hereunder
or under any other agreements between Licensor and Licensee, any amounts,
whether or not fixed, owing or allegedly owing from Licensor to Licensee
under this Agreement or any other agreement between Licensor and
Licensee.
License Agmt Page 25
<PAGE>
(d) Resort to any remedies referred to herein shall not be
construed as a waiver of any other rights and remedies to which Licensor
is entitled under this Agreement or otherwise, nor shall an election to
terminate be deemed an election of remedies or a waiver of any claim for
damage or otherwise.
17. NO PREMIUMS/PROMOTIONS/CLOSE-OUTS/CONSIGNMENTS.
Licensee shall not sell or give away any Licensed Article in
connection with any premium, giveaway or promotional arrangement, which
rights are expressly reserved by Licensor. Licensee agrees to sell to
Licensor, at favorable prices, such quantities of Licensed Articles
requested by Licensor to sell or otherwise use in connection with any
premium or promotional arrangement. The term "premium arrangement" shall
refer to any arrangement whereby a Licensed Article is given away or sold
in conjunction with another product or service.
18. RESERVATION OF RIGHTS.
(a) If according to the Principal Terms the License hereby
granted is exclusive then, subject to any other provision of these
Standard Terms or the Principal Terms, Licensee's rights hereunder shall
be exclusive during the Term and Licensor shall grant no conflicting
rights. If according to the Principal Terms the Licensee herein granted
is non-exclusive, then Licensee's rights hereunder shall be non-exclusive
and nothing shall prevent Licensor from granting, or shall impair or
limit Licensor's rights to grant, the same, similar or competing rights
to one or more third parties.
(b) All rights not expressly granted to Licensee are reserved
to Licensor, and the exercise by Licensor of any reserved rights is
hereby consented to by Licensee, without regard to the extent to which
the exercise of any such rights by Licensor may be competitive with
Licensee or the rights granted to Licensee hereunder. Without limiting
the generality of the preceding sentence or of Paragraph 17 above, and
notwithstanding anything to the contrary contained in this Agreement,
Licensor expressly reserves the right to manufacture, market, distribute
and sell any products, services or articles utilizing all or any of the
Licensed Elements, which are similar or identical to the Licensed
Articles (a) in connection with the promotion of exhibition of the
Property, or (b) for any reason, if the sale of such products, services
or articles occurs on the grounds, or within ten (10) miles, of any
studio tour/theme park owned or operated by Licensor or any affiliate of
Licensor.
19. NO REPRESENTATION BY LICENSOR. Licensor makes no warranty
or representation as to the amount of gross sales, Net Sales or profits
Licensee will derive hereunder from the Licensed Articles, or as to the
performance or continued exploitation of, or marketing and advertising
budget with respect to, any other product or products, including without
limitation any television or theatrical motion pictures, based upon the
Property.
License Agmt Page 26
<PAGE>
20. NOTICES. Whenever notice is required to be given under
this Agreement, a writing signed by an officer of the party serving such
notice by personal delivery, by telecopy or facsimile transmission, or by
registered or certified mail, return receipt requested, to the other
party shall be deemed good and sufficient notice delivered on the date of
(i) receipt in the case of personal delivery or facsimile or telecopy
transmission, or (ii) three (3) days after posting if sent by registered
or certified mail. Such notice shall be addressed to Licensor and
Licensee at their respective addresses set forth on page 1 of the
Principal Terms, or such other address of which either party may notify
the other in accordance with this Paragraph, or if by facsimile, to the
following telephone numbers:
If to Licensor: (818) 777-6271
If to Licensee: ( )
21. NO ASSIGNMENT OR SUBLICENSE. This Agreement shall not be
assigned or sublicensed by Licensee except with the prior written consent
of Licensor and shall not be assigned by operation of law. Any
assignment or sublicense in violation of the preceding sentence shall be
null and void. This Agreement may be assigned by Licensor without any
consent. Subject to such restriction and to the restriction against
assignment by operation of law provided above, this Agreement shall be
binding upon and inure to the benefit of the parties, their successors
and assigns.
22. ENTIRE AGREEMENT. This Agreement is intended by the
parties as a final and complete expression of their agreement, and
supersedes any and all prior and contemporaneous agreements and
understandings relating to the subject matter hereof.
23. MODIFICATION AND WAIVER. This Agreement may not be
modified and none of its terms may be waived, except in writing signed by
both parties. A waiver by either party of any default shall not be
deemed a waiver of a prior or subsequent default of the same or other
provisions of this Agreement. The failure of either party to enforce, or
the delay by either party in enforcing, any of its rights shall not be
deemed a continuing waiver or a modification of this Agreement.
24. SEPARABILITY. If any part of this Agreement shall be
declared invalid or unenforceable by a court of competent jurisdiction,
it shall not affect the validity of the balance of this Agreement,
provided, however, that if any provision of this Agreement pertaining to
the payment of royalties by Licensee to Licensor shall be declared
invalid or unenforceable by court of competent jurisdiction, Licensor
shall have the right, at its option, to terminate this Agreement upon
giving not less than ten (10) days' written notice to Licensee.
License Agmt Page 27
<PAGE>
25. PARAGRAPH HEADINGS. The headings of the Paragraphs are for
convenience only and in no way limit or affect the provisions hereof.
26. GOVERNING LAW. This agreement shall be governed by and
interpreted in accordance with the laws of the State of California
applicable to agreements entered into and to be performed wholly in
California.
27. CONSENT TO JURISDICTION. Licensee hereby consents to the
exclusive jurisdiction of any State or Federal court empowered to enforce
this Agreement in the State of California, Los Angeles County, and waives
any objection thereto on the basis of personal jurisdiction or venue.
* * END OF STANDARD TERMS * *
License Agmt Page 28
<PAGE>
EXHIBIT 7
Letter on Change In Certifying Accountant
Change In Certifying Accountant
<PAGE>
PRITCHETT, SILER & HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
430 EAST 400 SOUTH
SALT LAKE CITY, UTAH 84111
(801) 328-2727 - FAX (801) 328-1123
August 31, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read the statements of Dreams, Inc. pertaining to our firm included
under Item 3 of Form 10-SB and agree with such statements as they pertain to our
firm. We have no basis to agree or disagree with other statements of the
registrant contained therein.
PRITCHETT, SILER & HARDY, P.C.
Change in Certifying Accountant
