10QSB 1 d10qsb.txt FORM 10-QSB FORM 10-QSB SECURITY AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001. ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______________________ to _____________________. Commission file number: 0-15399 DREAMS, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Utah 87-0368170 -------------------------------------------------------------------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 2 South University Drive, Suite. 325, Plantation, Florida 33324 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (954) 377-0002 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------------- ------------- APPLICABLE ONLY TO CORPORATE ISSUERS As of November 12, 2001, there were 57,352,835 shares of Common Stock, no par value per share outstanding. Transitional Small Business Disclosure Format: Yes No X -------------- ------------- DREAMS, INC. INDEX
PAGE ---- Part I. Financial Information........................................... 1 Item 1. Financial Statements (unaudited)................................ 1 Condensed Consolidated Balance Sheet............................ 1 Condensed Consolidated Statements of Income..................... 2 Condensed Consolidated Statements of Cash Flows................. 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 11 Part II. Other Information............................................... 16 Item 1. Legal proceedings............................................... 16 Item 2. Changes in Securities and Use of Proceeds....................... 16 Item 6. Exhibits and Reports on Form 8-K................................ 16
Part I. Financial Information Item 1. Financial Statements (unaudited) Dreams, Inc. and Subsidiaries Condensed Consolidated Balance Sheet - Unaudited As of September 30, 2001 (Dollars in Thousands, except share amounts) ASSETS ------ Current assets: Cash and cash equivalents $ 103 Accounts receivable, net 2,052 Notes receivable 10 Inventories 7,152 Prepaid expenses and deposits 194 -------- Total current assets 9,511 Property and equipment, net 558 Intangible assets, net 3,897 -------- Total assets $ 13,966 ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 1,137 Accrued liabilities 252 Current portion of long-term debt 46 Borrowings under line of credit 2,765 Deferred credits 35 -------- Total current liabilities 4,235 Long-term debt, less current portion 359 -------- Total liabilities 4,594 -------- Commitments and contingencies - Stockholders' equity: Common stock and paid-in capital, no par value; authorized 100,000,000 shares; 57,352,835 shares issued and outstanding 22,848 Accumulated deficit (13,432) -------- 9,416 Less: deferred compensation (44) -------- Total stockholders' equity 9,372 -------- Total liabilities and stockholders' equity $ 13,966 ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Dreams, Inc. and Subsidiaries Condensed Consolidated Statements of Income - Unaudited (Dollars in Thousands, except earnings per share and share amounts)
For the six months ended: For the three months ended: Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues $ 8,092 $ 6,096 $ 4,494 $ 3,090 ----------- ----------- ----------- ----------- Expenses: Cost of sales 4,816 3,517 2,757 1,824 Selling, general and administrative expenses 2,628 1,981 1,405 921 Depreciation and amortization 35 144 20 74 ----------- ----------- ----------- ----------- Total expenses 7,479 5,642 4,182 2,819 ----------- ----------- ----------- ----------- Income before interest and taxes 613 454 312 271 Interest, net 119 264 57 132 ----------- ----------- ----------- ----------- Income before provision for income taxes 494 190 255 139 Current tax expense 26 24 12 20 Deferred tax expense - - - - ----------- ----------- ----------- ----------- Net income $ 468 $ 166 $ 243 $ 119 =========== =========== =========== =========== Earnings per share: Basic: Earnings per share $ 0.01 $ 0.00 $ 0.00 $ 0.00 =========== =========== =========== =========== Weighted average shares outstanding 55,876,879 40,148,500 56,252,835 40,148,500 =========== =========== =========== =========== Diluted: Earnings per share $ 0.01 $ 0.00 $ 0.00 $ 0.00 =========== =========== =========== =========== Weighted average shares outstanding 57,146,369 47,110,730 57,522,325 47,110,730 =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Dreams, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows - Unaudited (Dollars in Thousands)
Six Months Ended September 30, 2001 2000 ----- ---- Net cash (used in) provided by operating activities $(603) $140 ----- ---- Cash flows from investing activities: Cash paid for investments (174) - Deferred acquisition costs (56) - Purchase of property and equipment (15) (41) ----- ---- Net cash used in investing activities (245) (41) ----- ---- Cash flows from financing activities: Net proceeds from line of credit 783 - Repayment on notes payable (22) - ----- ---- Net cash provided by financing activities 761 - ----- ---- Net (decrease) increase in cash and cash equivalents (87) 99 Cash and cash equivalents at beginning of period 190 236 ----- ---- Cash and cash equivalents at end of period $ 103 $335 ===== ==== Supplemental Disclosure of Cash Flow Information: Cash paid during the six month periods ended September 30: Interest $ 120 $235 Income taxes 2 34 ----- ---- $ 122 $269 ===== ====
Effective June 30, 2001, the Company reclassified $316,000 of costs from notes receivable to property and equipment. In August 2001, the Company issued 2,200,000 shares of its common stock in connection with an acquisition. The entire purchase price of approximately $1.4 million was recorded as an intangible asset. The accompanying notes are an integral part of these condensed consolidated financial statements. 3 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 accounting principles generally accepted in the United States of America 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 Annual Report on Form 10K- SB, for the fiscal year ended March 31, 2001. 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 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. Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation. New Accounting Pronouncements The Company has adopted as of April 1, 2001 the provisions of SFAS Nos. 141 and 142. Therefore, annual and quarterly amortization of goodwill and trademark of $140 and $35, respectively, is no longer recognized. The Company will perform a transitional fair value based impairment test and if the fair value is less than the recorded value, the Company will record an impairment loss in the June 30, 2001 quarter as a cumulative effect of a change in accounting principle. 4 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts Earnings Per Share For the six months ended September 30, 2001, weighted average shares outstanding for basic earnings per share purposes and diluted earnings per share purposes were 55,876,879 and 57,146,369, respectively. Included in diluted shares is the diluted effect of common stock equivalents relating to stock options of 1,269,490. For the three months ended September 30, 2001, weighted average shares outstanding for basic earnings per share purposes and diluted earnings per share purposes were 56,252,835 and 57,522,325, respectively. Included in diluted shares is the diluted effect of common stock equivalents relating to stock options of 1,269,490. Stock options to purchase up to 225,000 shares of the Company's common stock at an exercise price of $0.75 per share were not considered in the calculation of diluted earnings per share for the three and six month periods ended September 30, 2001 due to their antidilutive effect. Acquisition Effective August 15, 2001, the Company purchased The Greene Organization for 2,200,000 restricted shares of the Company's common stock and $300,000 of cash. Of the $300,000 in cash, $150,000 had already been paid on deposit prior to April 1, 2001 and the remaining $150,000 was paid in the first quarter of fiscal 2002. The Greene Organization is a ten-year old corporate sports marketing firm that provides all "off-field" activities for its clients through exclusive and non-exclusive representation. In connection with the acquisition, the Company also entered into an employment agreement with Warren H. Greene. In accordance with the Agreement, the Company will pay Warren H. Greene $250,000 and an annual bonus in an amount, as determined by the Agreement. The term of the employment agreement is five years. Warren H. Greene is the brother-in-law of the Company's Chief Executive Officer. The operations of The Greene Organization have been included in the Company's Consolidated Statement of Earnings since the date of acquisition. No pro forma operations have been presented as they are immaterial to the Company's consolidated operations. Employment Agreement On July 1, 2001, the Company signed an exclusive agreement with the renowned sports and celebrity artist, Malcolm Farley. The long-term agreement provides for the Company to develop, market, sell, distribute, book events and promote Malcolm Farley's works through their existing distribution channels and seeks to target and open up additional national markets. The Company has agreed to pay Malcolm Farley $100,000 per year, plus a bonus based on 35% of revenues less expenses, to create a minimum of 100 original pieces. 5 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts 3. Business Segment Information The Company has two reportable segments: the Manufacturing/Distribution segment and the Franchise Operations segment. The Manufacturing/Distribution segment represents the manufacturing and wholesaling of sports memorabilia products, custom artwork and acrylic cases. Sales are handled primarily through in-house salespersons that sell to specialty retailers and other distributors in the United States. The Company's manufacturing and distributing facilities are located in the United States. The majority of the Company's products are manufactured in these facilities. The Franchise Operations segment represents the results of the Company's franchise program. The Company is in the business of selling Field of Dreams(R) retail store franchises in the United States and generates revenues through the sale of those franchises, continuing royalties and sales of certain merchandise to franchises. Summarized financial information concerning the Company's reportable segments is shown in the following tables. Corporate related items, results of insignificant operations and income and expenses not allocated to reportable segments are included in the reconciliations to consolidated results table. Segment information for the six and three months periods ended September 30, 2001 and 2000 was as follows:
Manufacturing/ Franchise Six Months Ended: Distribution Operations Total ----------------------------- -------------- ----------- ------- September 30, 2001 Net sales $7,346 $580 $7,926 Intersegment net sales - - - Operating earnings 907 176 1,083 Total assets 9,469 335 9,804 September 30, 2000 Net sales $5,458 $638 $6,096 Intersegment net sales - - - Operating earnings/(loss) 580 (8) 572 Total assets 6,047 326 6,373
6 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts Reconciliation to consolidated amounts is as follows:
YTD FY2002 YTD FY2001 ----------- ----------- Revenues: --------- Total revenues for reportable segments $7,926 $6,096 Other revenues 166 - Eliminations of intersegment revenues - - ------ ------ Total consolidated revenues $8,092 $6,096 Operating earnings: ------------------- Total earnings for reportable segments 1,083 872 Other loss (470) (418) Interest expense (119) (264) ------ ------ Total consolidated income before taxes $ 494 $ 190
Manufacturing/ Franchise Three Months Ended: Distribution Operations Total ------------------- -------------- ---------- ----- September 30, 2001 Net sales $4,131 $ 303 $4,434 Intersegment net sales - - - Operating earnings 432 96 528 Total assets 9,469 335 9,804 September 30, 2000 Net sales $2,808 $ 282 $3,090 Intersegment net sales - - - Operating earnings/(loss) 345 (15) 330 Total assets 6,047 326 6,373
Reconciliation to consolidated amounts is as follows:
Q2 FY2002 Q2 FY2001 ---------- ---------- Revenues: --------- Total revenues for reportable segments $4,434 $3,090 Other revenues 60 - Eliminations of intersegment revenues - - ------ ------ Total consolidated revenues $4,494 $3,090
7 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts Operating earnings: ------------------- Total earnings for reportable segments 528 480 Other loss (216) (209) Interest expense (57) (132) ------ ------ Total consolidated income before taxes $ 255 $ 139
4. Inventories The components of inventories as of September 30, 2001 are as follows: Memorabilia products $5,806 Licensed products 872 Acrylic cases and raw materials 607 ------ 7,285 Less reserve for obsolescence (133) ------ $7,152 ------ 5. Capitalized Software In May 2001, the Company issued 400,000 shares of its common stock to an unrelated entity in connection with the design of software. As a result, the Company capitalized $148 to property and equipment based on the fair market value of the Company's common stock on the date of issuance. In addition, in the prior year the Company paid $168 relating to the development of the same software. Accordingly, the Company has total capitalized software cost of $316 as of September 30, 2001. As of the current date, this software has not been placed into service as it was not yet fully functional. The software project requires some additional funding by the Company. Should the software not be placed into service, a write-off will be recorded which could have a impact on the Company's profitability. 8 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts 6. Intangible Assets The following table presents a reconciliation of net income and earnings per share amounts, as reported in the financial statements, to those amounts adjusted for goodwill and intangible asset amortization determined in accordance with the provisions of SFAS No. 142.
YTD FY2002 YTD FY2001 ---------- ----------- Reported net income $ 468 $ 166 Add back: goodwill amortization - 20 Add back: trademarks amortization - 50 Income tax effect - (4) ----- ------- Adjusted net income $ 468 $ 232 ----- ------- Basic and diluted earnings per share: Reported net income $0.01 $ 0.00 Goodwill amortization 0.00 0.00 Trademarks amortization 0.00 0.00 Income tax effect 0.00 0.00 ----- ------- Adjusted net income $0.01 $ 0.01(1) ----- -------
(1) Difference of $0.01 is due to rounding.
Q2 FY2002 Q2 FY2001 --------- --------- Reported net income $ 243 $ 119 Add back: goodwill amortization - 10 Add back: trademarks amortization - 25 Income tax effect - (2) ----- ------- Adjusted net income $ 243 $ 152 ----- ------- Basic and diluted earnings per share: Reported net income $0.00 $ 0.00 Goodwill amortization 0.00 0.00 Trademarks amortization 0.00 0.00 Income tax effect 0.00 0.00 ----- ------- Adjusted net income $0.00 $ 0.00 ----- -------
9 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts As of September 30, 2001, intangible assets consists of the following:
Gross Carrying Accumulated Amount Amortization -------------- ------------ Goodwill $2,190 $ 83 Trademark 2,000 210 ------ ---- $4,190 $293 ------ ----
The trademark of $2.0 million and goodwill of $788 were being amortized over 20 years. Upon the initial adoption of SFAS 142, the Company reassessed the useful lives of the intangible assets and determined the trademark is deemed to have an indefinite useful life because it is expected to generate cash flows indefinitely and the Company intends on continuing to register the trademark. Thus, the Company has ceased amortization of the trademark, as well as the goodwill as of April 1, 2001. No amortization has been recorded on the $1.4 million of goodwill incurred related to the August 2001 acquisition of The Greene Organization. 10 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 under "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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 the Company 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 the Company. NEW ACCOUNTING PRONOUNCEMENTS The Company has adopted as of April 1, 2001 the provisions of SFAS Nos. 141 and 142. Therefore, annual and quarterly amortization of goodwill and trademark of $140,000 and $35,000, respectively, is no longer recognized. The Company will perform a transitional fair value based impairment test and if the fair value is less than the recorded value, the Company will record an impairment loss in the June 30, 2001 quarter as a cumulative effect of a change in accounting principle. GENERAL Dreams, Inc. ("Company") operates through its wholly-owned subsidiary Dreams Franchise Corp. ("DFC") and through Dreams Products, Inc. ("DPI") and Dreams Entertainment, Inc. ("DEI"), wholly-owned subsidiaries of DFC. DFC is the franchisor of Field of Dreams(R) retail units that sell sports and celebrity memorabilia products. As of November 7, 2001, there were 35 Field of Dreams(R) franchises operating in 18 states. DPI is a manufacturer/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(R). Approximately 13 percent of DPI's revenues are generated through sales to Field of Dreams(R) franchises. DPI is licensed by the National Football League and Major League Baseball as a distributor of autographed products. The Company believes that the factors that will drive the future growth of its business will be through acquisitions of synergistic businesses, the opening of new Field of Dreams(R) 11 units and, to some extent, capitalizing on our 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. Consistent with its planned growth, the Company plans to resume opening Field of Dreams(R) stores. There can be no assurance, however, that any additional units will open or that they will be successful. RESULTS OF OPERATIONS Six Months Ended September 30, 2001 Compared to the Six Months Ended September 30, 2000 Revenues. Total revenues increased 32.7% from $6.1 million in the first six months of fiscal 2001 to $8.1 million in the same period of fiscal 2002 due to an increase in the Company's manufacturing/wholesaling operations. Manufacturing and wholesale revenues increased 34.5% from $5.5 million in the first half of fiscal 2001 to $7.4 million in the first half of fiscal 2002, due primarily to increased product offerings, continued development of business from existing customers and an overall increase in the Company's distribution channels. The Company increased its sales staff by 40% in late fiscal 2001 and we plan to expand further in fiscal 2002 in an effort to continue increasing sales. Revenues from franchise operations were comparable in both periods decreasing slightly from $638,000 in the first half of fiscal 2001 to $580,000 in the first half of fiscal 2002. The number of franchises was similar throughout both fiscal periods. The Company realized approximately $166,000 in net revenues generated through athlete representation and marketing fees, a new line of business entered into in January 2001. Costs and expenses. Cost of sales of manufacturing and wholesale products were $4.8 million in the first six months of fiscal 2002 versus $3.5 million in the same period of fiscal 2001. As a percentage of manufacturing and wholesale revenues, cost of sales was 65.3% in the first six months of fiscal 2002 and was slightly greater than 63.7% in the same period of fiscal 2001 due primarily to a shift in the sales mix. Selling, general and operating expenses ("S,G&A") increased from $2.0 million in the first half of fiscal 2001 (32.5% of total revenue) to $2.7 million in the same period of fiscal 2002 (32.5% of total revenue). Depreciation and amortization decreased from $144,000 in the first half of fiscal 2001 to $35,000 in the first six months of fiscal 2002. The decrease is due to the adoption of FAS 142 which no longer requires the amortization of goodwill. Therefore, annual and quarterly amortization of goodwill of $140,000 and $35,000, respectively, is no longer recognized. Interest expense, net. Net interest expense decreased 54.9% from $264,000 in first six months of fiscal 2001 to $119,000 in the same period in fiscal 2002, due primarily to the 12 elimination of a $3.0 million note payable in October 2000 which had monthly interest of $35,000. This decrease was partially offset by additional borrowings on the line of credit. Provision for income taxes. At September 30, 2001, the Company had available federal net operating loss carry-forwards of approximately $2.5 million, which expire in various years beginning in 2009 through 2018. A valuation allowance was provided for the full amount of federal taxes as of the end of both periods ended September 30, 2000 and 2001. However, a provision for state income taxes was provided for in both quarterly periods of fiscal 2001 and fiscal 2002 for applicable taxes. Three Months Ended September 30, 2001 Compared to the Three Months Ended September 30, 2000 Revenues. Total revenues increased 45.4% from $3.1 million in the second three months of fiscal 2001 to $4.5 million in the same period of fiscal 2002 due to an increase in the Company's manufacturing/wholesaling operations. Manufacturing and wholesale revenues increased 48.4% from $2.8 million in the second quarter of fiscal 2001 to $4.1 million in the first quarter of fiscal 2002, due primarily to increased product offerings, continued development of business from existing customers and an overall increase in the Company's distribution channels. The Company increased its sales staff by 40% in late fiscal 2001 and we plan to expand further in fiscal 2002 in an effort to continue increasing sales. Revenues from franchise operations were comparable in both quarterly periods increasing slightly from $282,000 in the second quarter of fiscal 2001 to $303,000 in the first quarter of fiscal 2002. The number of franchises was similar throughout both fiscal quarters. The Company realized approximately $60,000 in net revenues generated through athlete representation and marketing fees, a new line of business entered into in January 2001. Costs and expenses. Cost of sales of manufacturing and wholesale products were $2.7 million in the second three months of fiscal 2002 versus $1.8 million in the same period of fiscal 2001. As a percentage of manufacturing and wholesale revenues, cost of sales was 65.7% in the fiscal 2002 quarter and was comparable to 65.3% in the fiscal 2001 quarter. Selling, general and operating expenses ("S,G&A") increased from $921,000 in the second quarter of fiscal 2001 (29.8% of total revenue) to $1.4 million in the same period of fiscal 2002 (32.0% of total revenue). S,G&A expenses as a percentage of total revenues have increased slightly due to a buildup in infrastructure which was necessary to generate the incremental revenues. Depreciation and amortization decreased from $74,000 in the second quarter of fiscal 2001 to $20,000 in the second three months of fiscal 2002. The decrease is due to the adoption of FAS 142 which no longer requires the amortization of goodwill. Therefore, annual and 13 quarterly amortization of goodwill of $140,000 and $35,000, respectively, is no longer recognized. Interest expense, net. Net interest expense decreased 56.8% from $132,000 in fiscal second quarter 2001 to $57,000 in the same period in fiscal 2002, due primarily to the elimination of a $3.0 million note payable in October 2000 which had monthly interest of $35,000. The increase was partially offset by increased borrowings on the line of credit. Provision for income taxes. At September 30, 2001, the Company had available federal net operating loss carry-forwards of approximately $2.5 million, which expire in various years beginning in 2009 through 2018. A valuation allowance was provided for the full amount of federal taxes as of the end of both second quarter periods of fiscal 2001 and fiscal 2002. However, a provision for state income taxes was provided for in both quarterly periods of fiscal 2001 and fiscal 2002 for applicable taxes. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, the Company's cash and cash equivalents were $103,000 compared to $190,000 at March 31, 2001. Net accounts receivable at September 30, 2001 were $2.1 million compared to $1.9 million at March 31, 2001. Cash used in operations amounted to $603,000 for the first half of fiscal 2002, compared to cash provided by operations of $140,000 in the same period of fiscal 2001. The difference is the result of the Company reducing payables and liabilities during the current year of approximately $500,000 and an approximate $542,000 increase in inventories due to an increase in the Company's operations. The net borrowings against our line of credit, which is classified in the financing section of the Statement of Cash Flows, was $783,000 during the first six months of fiscal 2002. Outstanding borrowings against our line of credit were $2.8 million at September 30, 2001. The line of credit is used for working capital purposes. On November 1, 2001, the Company converted $1.0 million of its line of credit into a four-year term loan. The Company will make equal monthly payments of principal and interest under the term loan. The line of credit and term loan carry a floating annual interest rate based on adding a fixed interest charge of 2.4% to the "30-day Dealer Commercial Paper" rate. As of November 1, 2001, the Company's availability under the line of credit was approximately $1,550,000. The Company presently does not operate or own any Field of Dreams(R) units. We plan to sell franchised units to prospective and current third-party franchisees in fiscal 2002 and beyond. There are no material 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, taking into account the availability under the line of credit is sufficient to meet its cash needs on both a short-term and 14 long-term basis. There are no demands, commitments, events, or uncertainties, as they relate to liquidity which could negatively affect the Company's ability to operate and grow as planned. 15 Part II. Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds Effective August 15, 2001, we acquired by merger, through a wholly- owned subsidiary the Greene Organization, a Florida corporation. In the merger, all outstanding shares of common stock of the Greene Organization were converted to 2,200,000 shares of restricted common stock of Dreams, Inc. and $300,000. The shares were issued to one accredited investor pursuant to an exemption under Regulation 4(2) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K On August 29, 2001 we filed a report on Form 8-K with the Securities and Exchange Commission, under Item 5, concerning the acquisition of The Greene Organization. 16 SIGNATURE In accordance with the Exchange Act, the Registrant has caused this report to be signed on behalf of the Registrant by the undersigned in the capacities indicated, thereunto duly authorized on November 14, 2001. DREAMS, INC. /s/ Mark Viner ------------------------------------ Mark Viner, Chief Financial Officer, Principal Accounting Officer