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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 5(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission file number 0-15399
DREAMS, INC.
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(Exact name of small business issuer as specified in its charter)
UTAH 87-0368170
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5009 HIATUS ROAD, SUNRISE FL 33351
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(Address of principal executive offices)
( 954 ) 742 - 8544
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
40,148,500
- ------------------
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ x ]
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DREAMS, INC.
TABLE OF CONTENTS
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements. 1
Condensed Consolidated Balance Sheet at September 30, 1999 1
Condensed Consolidated Statements of Income for the three and six
month periods ended September 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the six
month periods ended September 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 11
EXHIBIT INDEX 12
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DREAMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
AS OF SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 251
Restricted cash 36
Accounts receivable, net 1,070
Inventories 3,205
Prepaid expenses and deposits 144
-----------
Total current assets 4,706
PROPERTY AND EQUIPMENT, NET 178
INTANGIBLE ASSETS, NET 2,705
OTHER ASSETS, NET 644
-----------
TOTAL ASSETS $ 8,233
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 604
Accrued liabilities 678
Deferred franchise fees 75
-----------
Total current liabilities 1,357
LONG-TERM DEBT, LESS CURRENT PORTION 3,443
DETACHABLE STOCK WARRANTS 300
-----------
TOTAL LIABILITIES 5,100
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COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Common stock, $0.00 par value; authorized 100,000,000
shares; 40,148,500 shares issued and outstanding 18,084
Additional paid-in-capital -
Accumulated deficit (14,951)
-----------
Total stockholders' equity 3,133
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,233
===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
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DREAMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the three months ended: For the six months ended:
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 2,639 $ 234 $ 5,515 $ 460
---------- ---------- ---------- ----------
EXPENSES:
Cost of sales 1,604 2 3,168 7
Operating expenses 136 106 365 235
General and administrative expenses 561 291 1,110 521
Depreciation and amortization 69 (1) 135 1
---------- ---------- ---------- ----------
Total expenses 2,370 398 4,778 764
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES 269 (164) 737 (304)
---------- ---------- ---------- ----------
Interest, net 132 22 273 74
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME
TAXES 137 (186) 464 (378)
Current tax expense 25 -- 50 --
Deferred tax expense -- -- -- --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 112 $ (186) $ 414 $ (378)
========== ========== ========== ==========
EARNINGS PER SHARE:
BASIC: Income from continuing operations $ 0.00 $ (0.01) $ 0.01 $ (0.02)
========== ========== ========== ==========
Net income $ 0.00 $ (0.01) $ 0.01 $ (0.02)
========== ========== ========== ==========
Weighted average shares outstanding 40,148,500 16,500,000 40,148,500 16,500,000
========== ========== ========== ==========
DILUTED: Income from continuing operations $ 0.00 $ (0.01) $ 0.01 $ (0.02)
========== ========== ========== ==========
Net income $ 0.00 $ (0.01) $ 0.01 $ (0.02)
========== ========== ========== ==========
Weighted average shares outstanding 40,148,500 15,398,630 40,148,500 15,398,630
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
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DREAMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1999 1998
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<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (149) $ (262)
------- --------
Cash flows from investing activities:
Release of restricted cash as part of Mounted Memories purchase (325) -
Purchase of property and equipment (79) (1)
------- --------
NET CASH USED IN INVESTING ACTIVITIES (404) (1)
------- --------
Cash flows from financing activities:
Proceeds from notes payable - 274
Payments on notes payable - (2)
Financing costs capitalized - (95)
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NET CASH PROVIDED BY FINANCING ACTIVITIES - 177
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NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (553) (86)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD 840 89
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $ 287 $ 3
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
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DREAMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1. MANAGEMENT'S REPRESENTATIONS
The condensed consolidated interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The condensed
consolidated interim financial statements and notes thereto should be read
in conjunction with the financial statements and the notes thereto,
included in the Company's Registration Statement filed with the SEC on Form
10-SB, for the fiscal year ended March 31, 1999.
The accompanying condensed consolidated interim financial statements have
been prepared, in all material respects, in conformity with the standards
of accounting measurements set forth in Accounting Principles Board Opinion
No. 28 and reflect, in the opinion of management, all adjustments, which
are of normal recurring nature, necessary to summarize fairly the financial
position and results of operations for such periods. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
2. 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-Registered
Trademark- retail store franchises and generates revenues through the
sale of those franchises and continuing royalties. DEI was incorporated
in fiscal 1999 and has been inactive since inception. 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 condensed consolidated interim financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany transactions and accounts have been eliminated in
consolidation.
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.
4
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DREAMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
3. 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 September 30, 1999 of approximately $188. The Company
believes any credit risk beyond this amount would be negligible.
4. INVENTORIES
The components of inventories as of September 30, 1999 are as follows:
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Memorabilia products $ 2,574
Licensed products 416
Acrylic cases and raw materials 290
-------
3,280
Less reserve for obsolescence (75)
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$ 3,205
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</TABLE>
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Dreams, Inc. operates through its wholly-owned subsidiary, Dreams
Franchise Corporation ("DFC") and through Dreams Products, Inc. ("DPI") and
Dreams Entertainment, Inc. ("DEI"), wholly-owned subsidiaries of DFC. DFC is
a franchisor of Field of Dreams-Registered Trademark- retail units which sell
sports and celebrity memorabilia products. DFC licenses the right to use the
proprietary name Field of Dreams-Registered Trademark- from Universal Studios
Licensing, Inc. ("USL"), formerly known as Universal Merchandising, Inc. As
of September 30, 1999, there were 36 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-.
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.
The Company 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 and Universal Studios,
and with certain well-known athletes, as those relationships and agreements
will allow. The Company 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
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
REVENUES. Total revenues increased $2.4 million from $234 in second
quarter of fiscal 1999 to $2.6 million in the second quarter of fiscal 2000.
The increase relates directly to the November 1988 acquisition of Mounted
Memories, Inc. ("MMI") ($2.3 million of the increase).
COSTS AND EXPENSES. The Company's fiscal 2000 second quarter cost of
sales of $1.6 million represent MMI's cost of sales. Fiscal 1999 second
quarter cost of sales represent costs associated with the sale of
miscellaneous retail items sold by the Company, which were phased
6
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out during fiscal 1999. Operating expenses increased 28.3% from $106 in the
second three months of fiscal 1999 to $136 in the second three months of
fiscal 2000, due primarily to the acquisition of MMI ($106 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 92.8% from $291 in the
second three months of fiscal 1999 to $561 in the second three months of
fiscal 2000, due primarily to the acquisition of MMI ($389 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 $(1) in second quarter of fiscal 1999 to $69
in second quarter of fiscal 2000 due to amortization of goodwill and debt
issuance costs associated with the November 1998 acquisition of MMI ($59 of
the increase).
INTEREST EXPENSE, NET. Net interest expense increased from $22 in
the second quarter of fiscal 1999 to $132 in the second quarter of fiscal
2000, due primarily to interest charges associated with the $3.0 million note
issued by the Company in November 1998 offset by elimination of debt after
the second quarter of fiscal 1999.
PROVISION FOR INCOME TAXES. At September 30, 1999, the Company 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 fiscal 1999. However, a provision for state income taxes was
provided for in the second quarter of fiscal 2000 for applicable taxes.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER
30, 1998
REVENUES. Total revenues increased $5.1 million from $460 in the
first six months of fiscal 1999 to $5.5 million in the first six months of
fiscal 2000. The increase relates directly to the November 1988 acquisition
of Mounted Memories, Inc. ("MMI") ($4.9 million of the increase).
COSTS AND EXPENSES. The Company's cost of sales for the first six
months of fiscal 2000 of $3.2 million represent MMI's cost of sales. Cost of
sales for the same period in the prior year represent costs associated with
the sale of miscellaneous retail items sold by the Company, which were phased
out during fiscal 1999. Operating expenses increased 55.3% from $235 in the
first six months of fiscal 1999 to $365 in the first six months of fiscal
2000, due primarily to the acquisition of MMI ($251 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 113.1% from $521 in
the first six months of fiscal 1999 to $1.1 million in the first six months
of fiscal 2000, due primarily to the acquisition of MMI ($797 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.
7
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Depreciation and amortization increased from $1 in first six months of fiscal
1999 to $135 in the first six months of fiscal 2000 due to amortization of
goodwill and debt issuance costs associated with the November 1998
acquisition of MMI ($115 of the increase).
INTEREST EXPENSE, NET. Net interest expense increased from $74 in
the first six months of fiscal 1999 to $273 in the first six months of fiscal
2000, due primarily to interest charges associated with the $3.0 million note
issued by the Company in November 1998 offset by elimination of debt after
the second quarter of fiscal 1999.
PROVISION FOR INCOME TAXES. At September 30, 1999, the Company 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 fiscal 1999. However, a provision for state income taxes was
provided for in the second quarter of fiscal 2000 for applicable taxes.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's cash are net cash flows from
operating activities and short-term vendor financing. Currently, the Company
does not have available any established lines of credit with banking
facilities.
The Company's cash and cash equivalents were $251 as of September
30, 1999 compared with $3 as of September 30, 1998. During the three months
ended September 30, 1999, consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA") increased $502 to $337 from a loss
of ($165) for the three months ended September 30, 1998. The increase
directly relates to DPI's acquisition of MMI in November 1998, which provided
$256, or 75.9%, of the Company's second quarter fiscal 2000 EBITDA.
The Company presently does not operate or own any Field of
Dreams-Registered Trademark- units, 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.
The Company 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
has a strong working capital ratio and its long-term debt obligations require
interest-only payments totaling $39 per month. The Company's management is
not aware of any known trends or demands, commitments, events, or
uncertainties, as they relate to liquidity which could negatively affect the
Company's ability to operate and grow as planned.
8
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YEAR 2000 READINESS
The year 2000 issue pertains to computer programs that were written
using two digits rather that four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize the year
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations.
During fiscal years 1998 and 1999, Registrant replaced its
accounting software package with the latest available version that purported
to be "Y2K compliant". Registrant uses only the modules within its accounting
software package to run its operations. The only other software utilized are
modules within the most current version of Microsoft Office, which proclaims
that all of its software is "Y2K compliant". Registrant's server operates
using Microsoft NT software which proclaims to be "Y2K compliant". All
hardware utilized for Registrant's local area network has been purchased
during fiscal 1998 and 1999. The total cost for all hardware and software
programs purchased to help ensure year 2000 readiness approximated $35,000.
Registrant is not aware of any difficulties that will arise from customers or
vendors who have not updated their software to be year 2000 compliant.
However, there can be no guarantee that the Company will not encounter
unexpected year 2000 compliance problems that will adversely affect its
operations.
9
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 attached.
10
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DREAMS, INC.
Date November 10,1999 /s/
-------------------- -----------------------------------
Mark Viner, Chief Financial Officer
11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLDIATED FINANCIAL STATEMENTS OF DREAMS, INC. FOR THE SIX MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 287 3
<SECURITIES> 0 0
<RECEIVABLES> 1,070 39
<ALLOWANCES> 188 0
<INVENTORY> 3,205 133
<CURRENT-ASSETS> 4,706 246
<PP&E> 410 22
<DEPRECIATION> 232 22
<TOTAL-ASSETS> 8,233 341
<CURRENT-LIABILITIES> 1,357 2,570
<BONDS> 0 0
0 0
0 0
<COMMON> 18,084 907
<OTHER-SE> 0 12,810
<TOTAL-LIABILITY-AND-EQUITY> 8,233 341
<SALES> 5,499 426
<TOTAL-REVENUES> 5,515 460
<CGS> 3,168 7
<TOTAL-COSTS> 4,779 764
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (23) 0
<INTEREST-EXPENSE> 273 74
<INCOME-PRETAX> 463 (378)
<INCOME-TAX> 50 0
<INCOME-CONTINUING> 413 (378)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 413 (378)
<EPS-BASIC> 0.01 (0.02)
<EPS-DILUTED> 0.01 (0.02)
</TABLE>