<PAGE>
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 December 31, 1999
/ / 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
- ------------------------------- ---------------------------------
(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/
<PAGE>
DREAMS, INC.
TABLE OF CONTENTS
Form 10-QSB
For the Quarter Ended December 31, 1999
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<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet at December 31, 1999
Condensed Consolidated Statements of Income for the three and
nine month periods ended December 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended December 31, 1999 and 1998
Notes to Condensed ConsolidatedFinancial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
</TABLE>
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT EARNING PER SHARE AMOUNTS)
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<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 696
Restricted cash 36
Accounts receivable, net 1,413
Inventories 3,747
Prepaid expenses and deposits 106
--------
Total current assets 5,998
PROPERTY AND EQUIPMENT, NET 186
INTANGIBLE ASSETS, NET 2,670
OTHER ASSETS, NET 604
--------
TOTAL ASSETS $ 9,458
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,060
Accrued liabilities 1,003
Deferred franchise fees 85
--------
Total current liabilities 2,148
LONG-TERM DEBT, LESS CURRENT PORTION 3,443
DETACHABLE STOCK WARRANTS 300
--------
TOTAL LIABILITIES 5,891
--------
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 (14,517)
--------
Total stockholders' equity 3,567
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,458
========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
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 nine months ended:
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 4,051 $ 2,776 $ 9,566 $ 3,236
EXPENSES:
Cost of sales 2,276 1,187 5,444 1,194
Operating expenses 404 395 769 630
General and administrative expenses 635 715 1,745 1,236
Depreciation and amortization 69 53 204 54
------------ ------------ ------------ ------------
Total expenses 3,384 2,350 8,162 3,114
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES 667 426 1,404 122
------------ ------------ ------------ ------------
Interest, net 133 112 406 186
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION
FOR INCOME TAXES 534 314 998 (64)
Current tax expense 100 - 150 -
Deferred tax expense - - - -
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 434 314 848 (64)
DISCONTINUED OPERATIONS:
Gain on disposal of restaurant segment - 268 - 268
------------ ------------ ------------ ------------
INCOME FROM DISCONTINUED OPERATIONS - 268 - 268
------------ ------------ ------------ ------------
NET INCOME $ 434 $ 582 $ 848 $ 204
------------ ------------ ------------ ------------
EARNINGS PER SHARE:
BASIC: Income from continuing operations $ 0.01 $ 0.01 $ 0.02 $ 0.00
============ ============ ============ ============
Net income $ 0.01 $ 0.01 $ 0.02 $ 0.00
============ ============ ============ ============
Weighted average shares outstanding 40,148,500 32,179,984 40,148,500 21,803,524
============ ============ ============ ============
DILUTED: Income from continuing operations $ 0.01 $ 0.01 $ 0.02 $ 0.00
============ ============ ============ ============
Net income $ 0.01 $ 0.01 $ 0.02 $ 0.00
============ ============ ============ ============
Weighted average shares outstanding 40,148,500 32,179,984 40,148,500 21,803,524
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1999 1998
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<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 314 $ 13
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Cash flows from investing activities:
Purchase of Mounted Memories, Inc., net of cash acquired - (2,218)
Release of restricted cash as part of Mounted
Memories purchase (325) -
Purchase of property and equipment (97) (13)
------ -------
NET CASH USED IN INVESTING ACTIVITIES (422) (2,231)
------ -------
Cash flows from financing activities:
Proceeds from notes payable - 591
Proceeds from long-term debt - 3,000
Payments on notes payable - (450)
Financing costs capitalized - (437)
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NET CASH PROVIDED BY FINANCING ACTIVITIES - 2,704
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NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH (108) 486
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 $ 732 $ 575
====== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
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 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.
<PAGE>
DREAMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
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.
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 December 31, 1999 of
approximately $188. The Company believes any credit risk beyond this
amount would be negligible.
4. INVENTORIES
The components of inventories as of December 31, 1999 are as follows:
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Memorabilia products $ 2,876
Licensed products 602
Acrylic cases and raw materials 394
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3,872
Less reserve for obsolescence (125)
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$ 3,747
=======
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-QSB 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; and other factors
particular to Registrant.
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 December 31, 1999, there were 34 Field of Dreams-Registered Trademark-
franchises operating in 19 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.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1998.
REVENUES. Total revenues increased $1.3 million from $2.8 million in the
third quarter of fiscal 1999 to $4.1 million in the third quarter of fiscal
2000. The increase relates directly to the November 1988 acquisition of
Mounted Memories, Inc. ("MMI").
COSTS AND EXPENSES. The Company's fiscal 2000 third quarter cost of
sales of $2.3 million represent MMI's cost of sales for a full quarter.
Fiscal 1999 third quarter cost of sales represent MMI's cost of sales for
only two months, due to MMI being acquired by the Company in November 1998.
As a percentage of sales, cost of sales of wholesale products in the third
quarter of fiscal 2000 increased to 61.9% from 56.6% in the same quarter in
the prior year due to a slight change in the wholesale sales mix. Operating
expenses increased 2.3% from $395 in the third three months of fiscal 1999 to
$404 in the third three months of fiscal 2000, due primarily to the
acquisition of MMI 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 decreased 11.2% from $715 in the
third three months of fiscal 1999 to $635 in the third three months of fiscal
2000, due to the Company recognizing a one-time preferential distribution to
the Company's Chairman of $409 in the third quarter of fiscal 1999 offset by
one additional month of MMI expenses in the third quarter of fiscal 2000 than
in the comparable quarter of fiscal 1999. Depreciation and amortization
increased from $53 in third quarter of fiscal 1999 to $69 in third quarter of
fiscal 2000 due to a full quarter of amortization of goodwill and debt
issuance costs associated with the November 1998 acquisition of MMI versus
only two months of amortization in the comparable quarter of the prior year.
INTEREST EXPENSE, NET. Net interest expense increased from $112 in the
third quarter of fiscal 1999 to $133 in the third quarter of fiscal 2000, due
to a full quarter of interest charges associated with the $3.0 million note
issued by the Company in November 1998 versus only two months of interest in
the comparable quarter of the prior year.
PROVISION FOR INCOME TAXES. At December 31, 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 third quarter of fiscal 2000 for applicable taxes.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 1998
REVENUES. Total revenues increased $6.3 million from $3.2 million in the
first nine months of fiscal 1999 to $9.5 million in the first nine months of
fiscal 2000. The increase relates directly to the November 1988 acquisition
of Mounted Memories, Inc.
<PAGE>
COSTS AND EXPENSES. The Company's cost of sales for the first nine
months of fiscal 2000 of $5.4 million represent MMI's cost of sales. Cost of
sales for the same period in the prior year consist primarily of MMI's cost
of sales for only two months. Operating expenses increased 22.1% from $630 in
the first nine months of fiscal 1999 to $769 in the first nine months of
fiscal 2000, due primarily to the acquisition of MMI 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 41.2% from $1.2 million in
the first nine months of fiscal 1999 to $1.7 million in the first nine months
of fiscal 2000, due primarily to the acquisition of MMI 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 $54 in first nine months of fiscal 1999 to $204 in the first
nine months of fiscal 2000 due to amortization of goodwill and debt issuance
costs associated with the November 1998 acquisition of MMI.
INTEREST EXPENSE, NET. Net interest expense increased from $186 in the
first nine months of fiscal 1999 to $406 in the first nine 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 December 31, 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 first nine months 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 $696 as of December 31, 1999
compared with $160 as of December 31, 1998. During the three months ended
December 31, 1999, consolidated earnings before interest, taxes, depreciation
and amortization ("EBITDA") increased $257 to $736 from $479 for the three
months ended December 31, 1998. The increase directly relates to DPI's
acquisition of MMI in November 1998, which provided $650, or 88.3%, of the
Company's third 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.
<PAGE>
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.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 attached.
<PAGE>
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 February 10, 2000 /s/ Mark Viner
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Mark Viner, Chief Financial Officer
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DREAMS, INC. FOR THE NINE MONTHS
ENDED DECEMBER 31, 1999 AND 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 732 575
<SECURITIES> 0 0
<RECEIVABLES> 1,413 1,315
<ALLOWANCES> 188 0
<INVENTORY> 3,747 2,624
<CURRENT-ASSETS> 5,998 4,575
<PP&E> 428 34
<DEPRECIATION> 242 39
<TOTAL-ASSETS> 9,458 7,930
<CURRENT-LIABILITIES> 2,148 1,867
<BONDS> 0 0
0 0
0 0
<COMMON> 18,084 18,084
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 9,458 7,930
<SALES> 9,547 3,128
<TOTAL-REVENUES> 9,566 3,236
<CGS> 5,444 1,194
<TOTAL-COSTS> 8,162 3,114
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (23) 0
<INTEREST-EXPENSE> 406 186
<INCOME-PRETAX> 998 (64)
<INCOME-TAX> 150 0
<INCOME-CONTINUING> 848 (64)
<DISCONTINUED> 0 268
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 848 204
<EPS-BASIC> 0.02 0.00
<EPS-DILUTED> 0.02 0.00
</TABLE>
