10QSB

FORM 10-QSB

SECURITY AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

(Mark One)
x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended December 31, 2002
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
	For the transition period from ______________________ to _____________________.

Commission file number: 0-15399

DREAMS, INC.

(Exact name of small business issuer as specified in its charter)

Utah	87-0368170
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)

2 South University Drive, Suite 325, Plantation, Florida 33324

(Address of principal executive offices)

Issuer’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   o

APPLICABLE ONLY TO CORPORATE ISSUERS

As of February 8, 2003, there were 57,241,435 shares of Common Stock, no par value per share outstanding.

Transitional Small Business Disclosure Format:

Yes   o    No   x

TABLE OF CONTENTS

	Condensed Consolidated Balance Sheet – Unaudited
	Condensed Consolidated Statements of Income – Unaudited
	Condensed Consolidated Statements of Cash Flows – Unaudited
	Notes to Condensed Consolidated Financial Statements – Unaudited
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURE
CHIEF EXECUTIVE OFFICER CERTIFICATION
CHIEF FINANCIAL OFFICER CERTIFICATION
CERTIFICATION OF CEO & CFO

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			10
Item 3. Controls and Procedures			16
Part II. Other Information			17
Item 1. Legal proceedings			17
Item 6. Exhibits and Reports on Form 8-K			17

Dreams, Inc. and Subsidiaries

Condensed Consolidated Balance Sheet – Unaudited
As of December 31, 2002
(Dollars in Thousands, except share amounts)

ASSETS
Current assets:
	Cash and cash equivalents		$	420
	Accounts receivable, net			2,539
	Inventories			7,393
	Prepaid expenses and deposits			451
	Deferred tax asset, net			177
		Total current assets		10,980
Property and equipment, net				834
Deferred tax asset, net				388
Other intangible assets, net				1,947
Goodwill, net				1,932
Total assets			$	16,081
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	775
	Accrued liabilities			1,252
	Current portion of long-term debt			299
	Borrowings against line of credit			1,719
	Deferred credits			33
		Total current liabilities		4,078
Long-term debt, less current portion				727
Commitments and contingencies				—
Stockholders’ equity:
	Common stock, no par value; authorized 100,000,000 shares; 57,241,435 shares issued and outstanding			22,902
	Accumulated deficit			(11,455	)
				11,447
	Less: deferred compensation			(171	)
		Total stockholders’ equity		11,276
Total liabilities and stockholders’ equity			$	16,081

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 share amounts and earnings per share amounts)

				For the nine months ended:				For the three months ended:
				Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,
				2002		2001		2002		2001
Revenues				$	14,294	$	13,018	$	6,262	$	4,926
Expenses:
	Cost of sales				7,460		7,498		3,222		2,682
	Operating expenses				5,334		4,107		2,087		1,479
	Depreciation and amortization				93		55		36		20
		Total expenses			12,887		11,660		5,345		4,181
Income before interest and taxes					1,407		1,358		917		745
Interest, net					127		171		43		52
Income before provision for income taxes					1,280		1,187		874		693
Current tax expense					73		60		52		34
Deferred tax expense					437		—		300		—
Net income				$	770	$	1,127	$	522	$	659
Earnings per share:
	Basic:    Earnings per share			$	0.01	$	0.02	$	0.01	$	0.01
			Weighted average shares outstanding		57,823,890		56,390,653		57,408,444		57,412,618
	Diluted: Earnings per share			$	0.01	$	0.02	$	0.01	$	0.01
			Weighted average shares outstanding		57,823,890		57,466,582		57,408,444		58,036,965

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 Cash Flows – Unaudited
(Dollars in Thousands, except share amounts)

			Nine Months Ended
			December 31,
			2002			2001
Net cash provided by (used in) operating activities			$	667		$	(238	)
	Cash flows from investing activities:
		Deferred acquisition costs		—			(56	)
		Purchase of property and equipment		(382	)		(46	)
Net cash used in investing activities				(382	)		(102	)
	Cash flows from financing activities:
		Net change in line of credit		313			(292	)
		Net proceeds from term loan		—			1,000
		Repayments on notes payable and term loan		(403	)		(77	)
Net cash provided by (used in) financing activities				(90	)		631
Net increase in cash, cash equivalents and restricted cash				195			291
Cash, cash equivalents and restricted cash at beginning of period				225			190
Cash, cash equivalents and restricted cash at end of period			$	420		$	481
Supplemental Disclosure of Cash Flow Information:
	Cash paid during the nine month periods ended December 31:
		Interest	$	126		$	171
		Income Taxes		29			6
			$	155		$	177
Non-cash investing and financing activities:
During the nine months ended December 31, 2002, Sam Battistone, the Company’s Chairman, tendered an aggregate of 611,400 shares of the Company’s common stock to the Company to repay $71 of personal expenses (incurred in the ordinary course of business) paid on his behalf by the Company. As additional consideration for the tendered shares, Mr. Battistone received the rights to a prepaid asset valued at $61. These transactions were recorded at the fair market value of the shares at the dates of the agreements The common stock received by the Company from Mr Battistone was retired.

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 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, 2002.

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 management’s opinion, 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 expected for future quarters or the full fiscal year.

2. 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.

Earnings Per Share

For the nine months ended December 31, 2002, weighted average shares outstanding for basic earnings per share purposes and diluted earnings per share purposes was 57,823,890.

For the three months ended December 31, 2002, weighted average shares outstanding for basic earnings per share purposes and diluted earnings per share purposes was 57,408,444.

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Dreams, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements – Unaudited
Dollars in Thousands, Except per Share Amounts

Stock options to purchase up to 3,275,250 shares of the Company’s common stock with an exercise price ranging from $0.25 to $0.75 per share were not considered in the calculation of diluted earnings per share for the three and nine month periods ended December 31, 2002, due to their anti-dilutive effects. Stock options to purchase up to 1,025,000 shares of the Company’s common stock with an exercise price of $0.44 per share were not considered in the calculation of diluted earnings per share for the three and nine month periods ended December 31, 2001, due to their anti-dilutive effects.

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 reproductions 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® 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.

All of the Company’s revenue generated in fiscal 2003 and 2002 was derived in the United States and all of the Company’s assets are located in the United States.

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 nine and three month periods ended December 31, 2002 and 2001 was as follows:

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Dreams, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements – Unaudited
Dollars in Thousands, Except per Share Amounts

	Manufacturing/		Franchise
Nine Months Ended:	Distribution		Operations		Total
December 31, 2002
Net sales	$	11,724	$	963	$	12,687
Intersegment net sales		388		32		420
Operating earnings		1,485		277		1,762
Total assets		10,054		365		10,419
December 31, 2001
Net sales	$	11,591	$	1,094	$	12,685
Intersegment net sales		—		—		—
Operating earnings		1,486		440		1,926
Total assets		9,305		495		9,800

Reconciliation to consolidated amounts is as follows:

		YTD FY2003			YTD FY2002
Revenues:
Total revenues for reportable segments		$	12,687		$	12,685
Other revenues			2,027			333
Eliminations of intersegment revenues			(420	)		—
	Total consolidated revenues	$	14,294		$	13,018
Operating earnings:
Total earnings for reportable segments			1,762			1,926
Other loss			(355	)		(568	)
Interest expense			(127	)		(171	)
	Total consolidated income before taxes	$	1,280		$	1,187

	Manufacturing/		Franchise
Three Months Ended:	Distribution		Operations		Total
December 31, 2002
Net sales	$	4,993	$	478	$	5,471
Intersegment net sales		250		22		272
Operating earnings		700		176		876
Total assets		10,054		365		10,419

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Dreams, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements – Unaudited
Dollars in Thousands, Except per Share Amounts

	Manufacturing/		Franchise
Three Months Ended:	Distribution		Operations		Total
December 31, 2001
Net sales	$	4,245	$	514	$	4,759
Intersegment net sales		—		—		—
Operating earnings		613		263		876
Total assets		9,305		495		9,800

Reconciliation to consolidated amounts is as follows:

		Q3 FY2003			Q3 FY2002
Revenues:
Total revenues for reportable segments		$	5,471		$	4,759
Other revenues			1,063			167
Eliminations of intersegment revenues			(272	)		—
	Total consolidated revenues	$	6,262		$	4,926
Operating earnings:
Total earnings for reportable segments			876			876
Other earnings (loss)			41			(131	)
Interest expense			(43	)		(52	)
	Total consolidated income before taxes	$	874		$	693

4. Inventories

The components of inventories as of December 31, 2002 are as follows:

Memorabilia products	$	5,243
Prepaid autographs		937
Licensed products		862
Acrylic cases and raw materials		351
	$	7,393

5. Related Party Transactions

Ross Tannenbaum, the Company’s Chief Executive Officer and a director, and Sam Battistone, the Company’s Chairman, each have ownership interests in franchised Field of Dreams® stores. Mr. Tannenbaum is a 25% owner in M&S, Inc., a Florida Corporation that owns and operates two Field of Dreams® franchised stores in the state of Florida. Mr. Battistone is a principal in FOD Las Vegas, LLC which owns and operates three Field of Dreams® franchised stores in the state of Nevada. Mr. Tannenbaum and Mr. Battistone, through their partnerships with M&S, Inc. and FOD Las Vegas, LLC, respectively, have

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Dreams, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements – Unaudited
Dollars in Thousands, Except per Share Amounts

entered into the Company’s standard franchise agreements, in an arms length transaction on commercially reasonable terms. For the three months ended December 31, 2002 and the first nine months of fiscal 2003, M&S and FOD Las Vegas, LLC paid the Company $34 and $62 and $66 and $189 in royalties, respectively. For the three months ended December 31, 2001 and the first nine months of fiscal 2002, M&S, Inc. and FOD Las Vegas, LLC paid the Company $27 and $52 and $61 and $181 in royalties, respectively.

During the three months ended December 31, 2002 and the first nine months of fiscal 2003, the Company paid Dan Marino, an officer and director of the Company, $20 and $231, respectively, for his autograph on inventory items and appearance fees. During the three months ended December 31, 2001 and the first nine months of fiscal 2002, the Company paid Mr. Marino $0 and $391, respectively, for his autograph on inventory items and appearance fees. Such payments were based on arms-length negotiations between the parties.

During the second and third quarters of fiscal 2003, Sam Battistone, the Company’s Chairman, tendered an aggregate of 398,000 and 213,400 shares, respectively, of our common stock to the Company to repay $39 and $32 of personal expenses (incurred in the ordinary course of business) paid on his behalf by the Company in the second and third quarters of fiscal 2003, respectively. As additional consideration for the tendered shares in the second quarter of fiscal 2003, Mr. Battistone received the rights to a prepaid asset valued at $61. These transactions were recorded at the fair market value of the shares at the dates of the agreements and no gain or loss was reflected as a result of the transactions. The common stock received by the Company from Mr. Battistone was retired. In May 2002, the Company loaned Mr. Battistone $275 which was repaid in June 2002.

6. Litigation

On May 31, 2002, the Company filed an action in the Circuit Court of Broward County, Florida against an athlete in connection with a certain exclusive services agreement between the athlete and the Company whereby the athlete would provide sports memorabilia and licensed products to the Company for a period of three years. The Company alleges among other things, that the athlete has failed to perform the necessary services under the agreement. The Company has requested that the court award compensatory damages, including loss of profits and a constructive trust over the common stock issued to the athlete and return of amounts prepaid to the athlete for autographs to be provided in the future.

In July 2002, the athlete filed a counterclaim against the Company for breach of contract, unjust enrichment and breach of implied covenant of good faith and fair dealing. The Company subsequently amended its complaint to add claims for recission of the agreement.

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Dreams, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements – Unaudited
Dollars in Thousands, Except per Share Amounts

As of December 31, 2002, the Company has a prepaid autograph balance of $286 related to amounts paid to this athlete for future autographs as well as an unamortized deferred compensation balance of $171 related to a personal services contract entered into with this athlete. As the outcome of litigation is difficult to predict, management is unable to determine at this stage in the litigation the likelihood of a favorable outcome.

7. Commitments

The Company is a party to certain contracts with several athletes which will require the Company to make minimum payments to these athletes over the next three years. The payments are in exchange for autographs on inventory items to be received in the future.

8. Recent Accounting Pronouncements

In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure an amendment of FASB Statement No. 123.” SFAS 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosures about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The amendment to SFAS 123 and the amendment to Opinion 28 in paragraph 3 shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company currently accounts for its stock-based compensation awards to employees and directors under the accounting prescribed by Accounting Principles Board Opinion No. 25 and provides the disclosures required by SFAS No. 123. The Company believes that it will continue to account for its stock-based compensation awards to employees and directors under the accounting prescribed by Accounting Principles Board Opinion No. 25 and will adopt the additional disclosure provisions of SFAS 148 for interim periods during the first quarter ended June 30, 2003.

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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 statements are indicated by words or phrases such as “anticipates,” “projects,” “management believes,” “Dreams believes,” “intends,” “expects,” and similar words or phrases. 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.

     Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements of Dreams may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to Dreams or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Dreams disclaims any intention or obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

GENERAL

     As used in this Form 10-QSB “we”, “our”, “us” and “Dreams” refer to Dreams, Inc. and its subsidiaries unless the context requires otherwise.

     In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure an amendment of FASB Statement No. 123.” SFAS 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosures about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The amendment to SFAS 123 and the amendment to Opinion 28 in paragraph 3 shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company currently accounts for its stock-based

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compensation awards to employees and directors under the accounting prescribed by Accounting Principles Board Opinion No. 25 and provides the disclosures required by SFAS No. 123. The Company believes that it will continue to account for its stock-based compensation awards to employees and directors under the accounting prescribed by Accounting Principles Board Opinion No. 25 and will adopt the additional disclosure provisions of SFAS 148 for interim periods during the first quarter ended June 30, 2003.

RESULTS OF OPERATIONS

Nine Months Ended December 31, 2002 Compared to the Nine Months Ended December 31, 2001

     Revenues. Total revenues increased 10.0% from $13.0 million in the first nine months of fiscal 2002 to $14.3 million in the same period of fiscal 2003.

     Manufacturing/Distribution revenues were comparable in both year-to-date periods and increased slightly from $11.6 million in the first nine months of fiscal 2002 to $11.7 million in the first nine months of fiscal 2003.

     Franchise operations revenues were $1.0 million for the nine months ending December 31, 2002 compared to $1.1 million in the same period last year. The reduction in revenue principally relates to decreased royalties as a result of the Company acquiring five previously franchised stores since March 2002 and converting them into Company-owned stores.

     In March 2002, the Company acquired two previously owned Field of Dreams® franchises which represented our entry into the company owned store business. Additionally, in November 2002, the Company acquired three previously owned Field of Dreams® franchises giving the Company a total of five Company owned stores as of December 31, 2002. For the nine months ended December 31, 2002, the five stores generated $1.3 million in revenues for the Company. In comparison to the prior year when the stores were owned by franchisees, the five stores had sales of $1.0 million from which the Company only received royalty revenues. Excluding the effect of the store acquisitions, the number of franchises during both periods was similar.

     The Company realized $790,000 in net management fee revenues in the nine months ending December 31, 2002 versus $332,000 in the same period last year. The increase relates to timing of events as several certain large events occurred during the current year period.

     Costs and expenses. Cost of sales was $7.5 million in the first nine months of fiscal 2003 versus $7.5 million in the same period of fiscal 2002. As a percentage of revenues, cost of sales was 52.4% in the first nine months of fiscal 2003 and was 57.7% in the same period of fiscal 2002. The primary reason for the improvement was our entering into the Company-owned store business in March 2002 and the commencement of the Farley Art division in July 2001. The gross margins realized in sales of art products and items sold in our Company-owned stores are typically higher than that realized through wholesale sales.

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     Operating expenses increased from $4.1 million in the first nine months of fiscal 2002 to $5.3 million in the same period of fiscal 2003. The increase relates to expenses associated with new products and new divisions created during fiscal 2002 ($548,000 of increase) and an increase in expenses associated with incremental revenues generated by The Greene Organization ($127,000). The balance of the increase relates primarily to the hiring of several new executive, administrative and operational employees throughout calendar 2001 in anticipation of future growth and salary increases of existing employees effected April 1, 2002. We believe we have developed the infrastructure necessary to support our operations without significant increases in the remaining months of fiscal 2003 and fiscal 2004.

     Interest expense, net. Net interest expense decreased from $171,000 in the first nine months of fiscal 2002 to $127,000 in the first nine months of fiscal 2003 due mainly to a decrease in variable interest rates over the past year and timing of the Company’s borrowings from its line of credit throughout the nine month periods for both fiscal years.

     Provision for income taxes. During the fourth quarter of fiscal 2002, the Company determined that it was more likely than not that its deferred tax assets would be realized and accordingly, completely relieved its valuation allowance. This determination was based primarily on the Company’s continued profitability. As a result, in the first nine months of fiscal 2003, the Company had deferred tax expense of $437,000, while there was no related deferred tax expense during the first nine months of fiscal 2002.

Three Months Ended December 31, 2002 Compared to the Three Months Ended December 31, 2001

     Revenues. Total revenues increased 28.6% from $4.9 million in the third quarter of fiscal 2002 to $6.3 million in the same period of fiscal 2003.

     Manufacturing/Distribution revenues increased 19.0% from $4.2 million in the third quarter of fiscal 2002 to $5.0 million in the third quarter of fiscal 2003. The primary reason for the increase relates to incremental sales generated in the current year quarter of approximately $438,000 relating to sales of products designed around the 30th anniversary celebration of the undefeated 1972 Miami Dolphins football team. The design and sales of the products were in unison with a specific memorabilia show celebrating the anniversary held in December 2002.

     Franchise operations revenues were $478,000 for the three months ending December 31, 2002 compared to $514,000 in the same period last year. The reduction in revenue relates to decreased royalties as a result of the Company’s acquisition of five previously franchised stores after March 2002 and converting them into Company-owned stores.

     For the three months ended December 31, 2002, the five Company-owned retail stores generated $886,000 in revenues for the Company. In comparison to the same period in the prior year when the stores were owned by franchisees, the five stores had sales of $781,000 from which the Company only

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received royalty revenues. Excluding the effect of the store acquisitions, the number of franchises during both periods was similar.

     The Company realized $225,000 in net management fee revenues in the third quarter of fiscal 2003 versus $166,000 in the same quarter last year. The increase relates to timing of events as several certain large events occurred during the current year quarter.

     Costs and expenses. Cost of sales was $3.2 million in the third quarter of fiscal 2003 versus $2.7 million in the same period of fiscal 2002. As a percentage of revenues, cost of sales was 50.8% in the third quarter of fiscal 2003 and was 55.1% in the same period of fiscal 2002. The primary reasons for the improvement were our entering into the Company-owned store business in March 2002, the commencement of the Farley Art division in July 2001 and the incremental wholesale revenues of The Greene Organization. The gross margins realized in sales of art products and items sold in our Company-owned stores are typically higher than that realized through wholesale sales.

     Operating expenses increased from $1.5 million in the third quarter of fiscal 2002 to $2.1 million in the same period of fiscal 2003. The increase primarily relates to newly created divisions started after December 31, 2001 ($236,000 of increase).

     Interest expense, net. Net interest expense decreased slightly from $52,000 in the third quarter of fiscal 2002 to $43,000 in the third quarter of fiscal 2003 due mainly to timing of the Company’s borrowings from its line of credit throughout the three month period for both fiscal years and a decrease in the variable interest rates.

     Provision for income taxes. During the fourth quarter of fiscal 2002, the Company determined that it was more likely than not that its deferred tax assets would be realized and accordingly, completely relieved its valuation allowance. This determination was based primarily on the Company’s continued profitability. As a result, in the third quarter of fiscal 2003, the Company had deferred tax expense of $300,000, while there was no related deferred tax expense during the third quarter of fiscal 2002.

LIQUIDITY AND CAPITAL RESOURCES

     The balance sheets as of December 31, 2002 reflects working capital of $6.7 million versus working capital of $6.9 million at December 31, 2001.

     At December 31, 2002, the Company’s cash and cash equivalents were $420,000, compared to $481,000 at December 31, 2001. Net accounts receivable at December 31, 2002 were $2.5 million compared to $2.3 million at December 31, 2001.

     Cash provided by operations amounted to $667,000 for the first nine months of fiscal 2003, compared to cash used in operations of $238,000 in the same period of fiscal 2002. The majority of the change relates to improved operations, the timing of collection of accounts

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receivable and payment of accounts payable and the timing of payments made by the Company associated with certain accrued liabilities.

     The amount outstanding on our line of credit, which is classified in the financing section of the Statement of Cash Flows, increased by approximately $29,000 for the twelve months ending December 31, 2002. Outstanding borrowings against our line of credit were $1.7 million at December 31, 2002. The line of credit is used for working capital purposes. On September 30, 2002, our line of credit was increased from $3.5 million to $4.5 million. As of February 11, 2003, the Company’s availability under the line of credit was approximately $3.3 million. The line of credit is collateralized by the Company’s accounts receivable and inventories. The line of credit bears interest at a floating annual interest rate based on adding a fixed interest charge of 2.4% to the “30-day Dealer Commercial Paper” rate. At December 31, 2002, the line of credit’s annual interest rate was 3.7%.

     On November 1, 2002, the Company acquired an existing Field of Dreams® franchise store in San Diego, California representing our third Company-owned retail store. The purchase price was $53,000 and was treated as an asset purchase, whereby the Company acquired certain inventory items, store fixtures and assumed the operating lease.

     On November 7, 2002, the Company purchased two existing Field of Dreams® stores from an individual franchise owner. The purchase price was $101,000 and was treated as an asset purchase, whereby the Company acquired certain inventory items, store fixtures and assumed the two operating leases.

     We plan to closely analyze the results of these new Company-owned operations and will evaluate other opportunities, as the Company sees necessary. Based on the success of those operations, we may pursue opportunities to purchase other existing franchise locations or find situations where we may open stores in new locations. Our internal staff which manages the franchise operations has extensive experience in operating retail outlets. We believe we can effectively transition into the Company-owned store business and add future revenues and profits to the consolidated entity.

     We will continue to sell franchised units to prospective and current third-party franchisees in fiscal 2003 and beyond. We have dedicated significant internal time and expense towards this effort and believe these efforts will continue and result in franchise opportunities in the next 12 months. On August 6, 2002 we entered into an area development franchise agreement with a franchisee to develop four Field of Dreams® stores and collected $20,000 which will be deferred as revenue until the stores open. In addition to the area development fee, the franchisee will pay the Company an additional $20,000 per store at the time of opening. In November 2002, the first of the four stores opened and the company recognized $25,000 in franchise fee revenue. Additionally, in January 2003 we collected $32,500 representing the franchise fee for a single location from a new franchisee owner. This amount will be deferred with respect to revenue recognition until the time of the store opening.

14

     The Company believes its current available cash position, taking into consideration the current availability under the line of credit, 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 the Company’s long-term debt obligations require payments totaling $24,000 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. The Company has no present material commitments for capital expenditures. The Company does not currently have any off balance sheet financing arrangements.

15

Item 3. Controls and Procedures.

     Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities to allow timely decisions regarding required disclosures.

     Changes in Internal Controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date.

16

Part II. Other Information

Item 1. Legal Proceedings.

See Note 6 to the Condensed Consolidated Financial Statements.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

No.
99.	Certification of Chief Executive Officer and Chief Financial Officer

(b) Reports on Form 8-K

None.

17

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 February 13, 2003.

DREAMS, INC.

/s/ Mark Viner

Mark Viner, Chief Financial Officer,
Principal Accounting Officer

18

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Ross Tannenbaum, Chief Executive Officer of Dreams, Inc., certify that:

1.	I have reviewed this Quarterly Report on Form 10-QSB of Dreams, Inc. (the “Registrant”);
2.	Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report.
3.	Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
4.	The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
b)	evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the “Evaluation Date”); and
c)	presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely effect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and

6. The Registrant’s other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 13, 2003	/s/ Ross Tannenbaum
	Ross Tannenbaum Chief Executive Officer (Principal Executive Officer)

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Mark Viner, Chief Financial Officer of Dreams, Inc., certify that:

1.	I have reviewed this Quarterly Report on Form 10-QSB of Dreams, Inc. (the “Registrant”);
2.	Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report.
3.	Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
4.	The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
b)	evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the “Evaluation Date”); and
c)	presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely effect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and

6. The Registrant’s other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 13, 2003	/s/ Mark Viner
	Mark Viner Chief Financial Officer (Principal Financial and Accounting Officer)

EX-99 3 g80726exv99.htm CERTIFICATION OF CEO & CFO

Exhibit 99

CERTIFICATION OF CHIEF FINANCIAL OFFICER

     Pursuant to Section 906 of the Sarbanes-Oxley Act 2002 (18 U.S.C. 1350), the undersigned, Mark Viner, Chief Financial Officer of Dreams, Inc. (the “Company”) has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2002 (the “Report”).

     The undersigned certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

     IN WITNESS WHEREOF, the undersigned has executed this certification as of the 13th day of February, 2003.

DREAMS, INC.

/s/ Mark Viner

Name: Mark Viner
Title: Chief Financial Officer

Exhibit 99

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

     Pursuant to Section 906 of the Sarbanes-Oxley Act 2002 (18 U.S.C. 1350), the undersigned, Ross Tannenbaum, Chief Executive Officer of Dreams, Inc. (the “Company”) has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2002 (the “Report”).

     The undersigned certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

     IN WITNESS WHEREOF, the undersigned has executed this certification as of the 13th day of February, 2003.

DREAMS, INC.

/s/ Ross Tannenbaum

Name: Ross Tannenbaum
Title: Chief Executive Officer

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EX-99

exv99