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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, 2000
[ ] 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
incorporation or organization) Identification No.)
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)
Check whether issuer (1) Filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [x]
No [ ]
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:
54,702,835
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, 2000
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 2000 3
Condensed Consolidated Statements of Income for the three and
six month periods ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
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DREAMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
AS OF SEPTEMBER 30, 2000
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 315
Restricted cash 20
Accounts receivable, net 1,410
Inventories 4,375
Prepaid expenses and deposits 118
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Total current assets 6,238
PROPERTY AND EQUIPMENT, NET 211
INTANGIBLE ASSETS, NET 2,565
OTHER ASSETS, NET 489
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TOTAL ASSETS $ 9,503
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,120
Accrued liabilities 779
Deferred franchise fees 40
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Total current liabilities 1,939
LONG-TERM DEBT, LESS CURRENT PORTION 3,443
DETACHABLE STOCK WARRANTS 300
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TOTAL LIABILITIES 5,682
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COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized 100,000,000
shares; 40,148,500 shares issued and outstanding 18,084
Additional paid-in-capital --
Accumulated deficit (14,263)
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Total stockholders' equity 3,821
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,503
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DREAMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
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<CAPTION>
For the six months ended: For the three months ended:
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Sept., 30 Sept., 30 Sept., 30 Sept., 30
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
REVENUE $ 6,096 $ 5,515 $ 3,090 $ 2,639
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EXPENSES:
Cost of sales 3,517 3,168 1,824 1,604
Operating expenses 655 365 259 136
General and administrative expenses 1,326 1,110 662 561
Depreciation and amortization 144 135 74 69
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Total expenses 5,642 4,778 2,819 2,370
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INCOME BEFORE INTEREST AND TAXES 454 737 271 269
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Interest, net 264 273 132 132
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INCOME BEFORE PROVISION FOR INCOME TAXES 190 464 139 137
Current tax expense 24 50 20 25
Deferred tax expense -- -- -- --
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NET INCOME $ 166 $ 414 $ 119 $ 112
=========== =========== =========== ===========
EARNINGS PER SHARE:
BASIC: Income from continuing
operations $ 0.00 $ 0.01 $ 0.00 $ 0.00
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Net income $ 0.00 $ 0.01 $ 0.00 $ 0.00
=========== =========== =========== ===========
Weighted average shares
outstanding 40,148,500 40,148,500 40,148,500 40,148,500
=========== =========== =========== ===========
DILUTED: Income from continuing
operations $ 0.00 $ 0.01 $ 0.00 $ 0.00
=========== =========== =========== ===========
Net income $ 0.00 $ 0.01 $ 0.00 $ 0.00
=========== =========== =========== ===========
Weighted average shares
outstanding 49,543,467 47,111,314 49,543,467 47,111,314
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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DREAMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW - UNAUDITED
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
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<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
2000 1999
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 140 $(149)
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Cash flows from investing activities:
Purchase of property and equipment (41) (79)
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NET CASH USED IN INVESTING ACTIVITIES (41) (79)
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NET CASH PROVIDED BY FINANCING ACTIVITIES -- --
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NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 99 (228)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD 236 840
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $ 335 $ 612
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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
10K-SB, for the fiscal year ended March 31, 2000.
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 was inactive throughout fiscal 1999 and as of December 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 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.
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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, 2000 of approximately $108. The Company
believes any credit risk beyond this amount would be negligible.
4. INVENTORIES
The components of inventories as of September 30, 2000 are as follows:
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Memorabilia products $ 3,216
Licensed products 857
Acrylic cases and raw materials 352
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4,425
Less reserve for obsolescence (50)
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$ 4,375
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</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Registrant cautions readers that certain important factors may affect
actual results and could cause such results to differ materially from any
forward-looking statements that may have been made in this Form 10-QSB or that
are otherwise made by or on behalf of Registrant. For this purpose, any
statements contained in the Form 10-QSB that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may," "expect," "believe,"
"anticipate," "intend," "could," "estimate," "plan," or "continue" or the
negative other variations thereof or comparable terminology are intended to
identify forward-looking statements.
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 that 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, 2000, 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, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999.
REVENUE. Total revenue increased $451, or 17.1%, from $2.6 million in the
second quarter of fiscal 1999 to $3.1 million in the second quarter of fiscal
2000. The increase was partly the result of the Company realizing in August 2000
approximately $250 in revenue
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generated during a two-hour collectible show on QVC, a television home shopping
channel, where the Company sold exclusive products commemorating the Pro
Football Hall of Fame induction of Joe Montana.
COSTS AND EXPENSES. Cost of sales increased $220, or 14%, over the same
quarter in the prior year; however, as a percentage of wholesale revenue, cost
of sales improved 2.3 percentage points from 67.6% in the second quarter of 2000
to 65.3% in the second quarter of fiscal 2001. The improvement relates to a
slight change in the sales mix. Operating expenses increased 90.1% from $136 in
the second three months of fiscal 2000 to $259 in the second three months of
fiscal 2001, due primarily to timing of franchise promotional expenses
(approximately $48 of increase) and increased travel and other expenses
associated with the Company's efforts to raise funds through a private equity
offering during the second quarter of fiscal 2001 (approximately $35 of the
increase).
General and administrative expenses increased 18.1% from $561 in the second
three months of fiscal 2000 to $662 in the second three months of fiscal 2001.
As a percentage of total revenue, general and administrative expenses were
comparable in both quarters, at 21.4% and 21.3% for the second quarter of fiscal
2001 and 2000, respectively. Depreciation and amortization increased from $69 in
second quarter of fiscal 2000 to $74 in second quarter of fiscal 2001 due to
depreciation associated with assets purchased since September 1999.
INTEREST EXPENSE, NET. Net interest expense was $132 for both the second
quarter of 2000 and the second quarter of 2001.
PROVISION FOR INCOME TAXES. At September 30, 2000, 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 2000. However, a provision for state income taxes was provided for in the
second quarter of fiscal 2001 and fiscal 2000 for applicable taxes.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 1999.
REVENUE. Total revenue increased $581, or 10.5%, from $5.5 million in the
first six months of fiscal 2000 to $6.1 million in the first six months of
fiscal 2001. The increase was partly the result of the Company realizing in
August 2000 approximately $250 in revenue generated during a two-hour
collectible show on QVC, a television home shopping channel, where the Company
sold exclusive products commemorating the Pro Football Hall of Fame induction of
Joe Montana.
COSTS AND EXPENSES. Cost of sales increased $349, or 11%, over the same six
months in the prior year; however, as a percentage of wholesale revenue, cost of
sales improved slightly from 64.0% in the first six months of fiscal 2000 to
63.7% in the first six months of fiscal 2001. The improvement relates to a
slight change in the sales mix. Operating expenses increased 79.4% from $365 in
the first six months of fiscal 2000 to $655 in the first six months of fiscal
2001, due primarily to the timing of franchise promotional expenses. Promotional
expenses increased approximately $141 over the same period in the prior year as
a result of current year
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promotions with Major League Baseball, one of our key strategic partners added
since June 1999.
General and administrative expenses increased 19.5% from $1.1 million in
the first six months of fiscal 2000 to $1.3 million in the first six months of
fiscal 2001. As a percentage of total revenue, general and administrative
expenses were 21.8% and 20.1% for the first half of fiscal 2001 and 2000,
respectively. The slight increase relates to public and investor relations
strategies implemented since June 1999. Depreciation and amortization increased
from $135 in first six months of fiscal 2000 to $144 in first six months of
fiscal 2001 due to depreciation associated with assets purchased since June
1999.
INTEREST EXPENSE, NET. Net interest expense decreased slightly from $273 in
the first six months of fiscal 1999 to $264 in the first six months of fiscal
2000.
PROVISION FOR INCOME TAXES. At September 30, 2000, 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
first half of fiscal 2001 and fiscal 2000 for applicable taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's cash and cash equivalents were $315,
compared to $229 at June 30, 2000 and $251 as of September 30, 1999. Accounts
receivable at September 30, 2000 were $1.4 million compared to $1.4 million at
June 30, 2000 and $1.1 million at September 30, 1999.
Cash provided by operations amounted to $140 in the first six months of
fiscal 2001, compared to cash used of $149 in the first six months of fiscal
2000. The change in cash provided by operating activities is primarily
attributed to fiscal 2000 payments for accounts payable and accrued liabilities
associated with the consolidation of DFC's and DPI's infrastructure during
fiscal 2000.
Investing activities, comprised of only capital expenditures, used $41 in
the first six months of fiscal 2001, compared to $79 in same period of fiscal
2000. The capital expenditures in both periods relate to upgrades and purchases
of computer equipment utilized in the Company's operations.
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, beginning in November 2000 its long-term debt
obligations require interest-only payments totaling $4 per
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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.
Subsequent to the end of the second quarter of fiscal 2001, during October
2000 the Company filed a Form 8-K announcing that it raised $4.3 million in a
private equity financing. The proceeds of the financing were used to retire $3.0
million of long-term debt and repurchase warrants owned by the lender. The
retirement of that debt and termination of the warrant rights significantly
improves the Company's financial condition and will allow for more aggressive
growth. Elimination of the $3.0 million note also eliminates $420 of annual
interest expense for the Company.
Also subsequent to the end of the second quarter of fiscal 2001, the
Company announced in November 2000 that it has established a formula-based
revolving Line of Credit with Merrill Lynch Business Financial Services, Inc.
for up to $3.5 million. The Line of Credit will be used for working capital
purposes.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 attached.
(b) On October 23, 2000, Registrant Filed Form 8-K reporting in Item 5
completion of a private financing and retirement of long-term debt and warrants.
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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 11/9/00 /s/ Mark Viner
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Mark Viner, Chief Financial Officer
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EXHIBIT INDEX
Exhibit 27 - Financial Data Schedule
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