-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, URkAnkA+8qzgB8pH0GgnyCYE4x1fCwG68PcjV68l2Bb0q9TVaQeYdntdYp2CD3qo BdkxYXjhNhNqu+eTKWZmQQ== 0001021408-01-502769.txt : 20010629 0001021408-01-502769.hdr.sgml : 20010629 ACCESSION NUMBER: 0001021408-01-502769 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DREAMS INC CENTRAL INDEX KEY: 0000810829 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 870368170 STATE OF INCORPORATION: UT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-30310 FILM NUMBER: 1670165 BUSINESS ADDRESS: STREET 1: 5009 HIATUS ROAD STREET 2: GARDEN STE CITY: SUNRISE STATE: FL ZIP: 33351 BUSINESS PHONE: 8007497529 MAIL ADDRESS: STREET 1: 5009 HIATUS ROAD STREET 2: 5009 HIATUS ROAD CITY: OREM STATE: UT ZIP: 84057 FORMER COMPANY: FORMER CONFORMED NAME: STRATAMERICA CORP DATE OF NAME CHANGE: 19920703 10KSB40 1 d10ksb40.txt FORM 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB ANNUAL REPORT PURSUANT TO Section 13 or 15(d) of the Securities Exchange Act of 1934 For Fiscal Year ended March 31, 2001 Dreams, Inc. ----------------------------------------- (Name of Small Business Issuer in its charter) Utah 87-0368170 --------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 South University Drive, Plantation, Florida 33324 - ---------------------------------------------------- ----------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number ( 954 ) 377 - 0002 --------- --------- -------- Securities registered under Section 12(b) of the Act: Title of each class Name of each exchange on which each class is registered None N/A - ---------------------------------------- -------------------------- Securities registered under Section 12(g) of the Act: Common stock, no par value - ------------------------------------------------------------------------------ (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X ----- State issuer's revenues for its most recent fiscal year: $15,012,000 ----------- State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. Based on the closing price of the common stock quoted on the OTC Bulletin Board as reported on June 22, 2001 the aggregate market value of the 25,498,024 shares of common stock held by persons other than officers, directors and parties known to the Registrant to be the beneficial owner (as that term is defined under the runes of the Securities and Exchange Commission) of more than five percent of the Common Stock on that date was $15,043,834. By the foregoing statement, the Registrant does not intend to imply that any of these officers, directors or beneficial owners are affiliates of the Registrant or that the aggregate market value, as computed pursuant to rules of the Securities and Exchange Commission, is in any way indicative of the amount which could be obtained for such shares of common stock of the Registrant. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 55,652,835. Transitional Small Business Disclosure Format (check one): _____ Y X N ----- FORWARD LOOKING STATEMENTS The Registrant cautions readers that certain important factors may affect actual results and could cause such results to differ materially from any forward- looking statements that may have been made in this Form 10-KSB or that are otherwise made by or on behalf of the Registrant. For this purpose, any statements contained in the Form 10-KSB that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "expect," "believe," "anticipate," "intend," "could," "estimate," "plan," or "continue" or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. TABLE OF CONTENTS FORM 10-KSB
Page ---- Part I ------ Item 1 DESCRIPTION OF BUSINESS............................. 1 Item 2. DESCRIPTION OF PROPERTY............................. 7 Item 3. LEGAL PROCEEDINGS................................... 7 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 7 Part II ------- Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................. 8 Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................................... 9 Item 7. FINANCIAL STATEMENTS................................ 12 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 32 Part III -------- Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................................. 32 Item 10. EXECUTIVE COMPENSATION............................. 34 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................. 37 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 38 Item 13. EXHIBITS AND REPORTS ON FORM 8-K................... 38 SIGNATURES..................................................... 39
i Part I ------ Item 1. Description of Business ----------------------- General. - ------- Dreams, Inc. (the "Company") is a Utah Corporation which was formed in April 1980. During fiscal year ended March 31, 2001, the Company's primary lines of business were the offer and sale of Field of Dreams(R) franchises through its subsidiary Dreams Franchise Corporation ("DFC") and the manufacture and sale of sports and celebrity memorabilia products through DFC's wholly-owned subsidiary Dreams Products, Inc. ("DPI") which employs the trademark "Mounted Memories". There are currently 36 Field of Dreams(R) franchise stores open and operating. Additionally, three Area Development Agreements which are currently effective have been sold to franchisees. Included among the total 36 Field of Dreams(R) franchise stores are five franchised stores which have been opened pursuant to those three agreements. An additional seven franchised stores may be opened under those agreements. DPI has two manufacturing, distribution and warehousing facilities located in Sunrise, Florida and a distribution center in Denver, Colorado. See "Mounted Memories" for information regarding the reorganization of the Company which resulted in the acquisition of the assets and business now employed by DPI. See "Consolidated Financial Statements" for financial information. Field of Dreams(R) Franchising Background. - ----------------------------------------- The Company conducts its Field of Dreams(R) operations through its subsidiary DFC. DFC licenses certain rights from MCA/Universal Merchandising Inc. ("MCA") to use the name "Field of Dreams(R)" in connection with retail operations and catalog sales. Field of Dreams(R) is a copyright and trademark owned by Universal City Studios, Inc. with all rights reserved. Universal has authorized MCA to license the marks. Neither company is in any way related to or an affiliate of the Company. The Company does not own or operate any Field of Dreams(R) stores. The Company does not presently have a Field of Dreams(R) catalog. Merchandising License Agreement. - ------------------------------- DFC has acquired from MCA the exclusive license to use "Field of Dreams(R)" as the name of retail stores in the United States and a non-exclusive right to use the name "Field of Dreams(R)" as a logo on products. DFC has also licensed from MCA the exclusive right to sublicense the "Field of Dreams(R)" name to franchisees for use as a retail store name. The license agreement between DFC and MCA is referred to herein as the "MCA License". Under the terms of the MCA License, DFC is obligated to pay to MCA a 1% royalty based on gross sales of Field of Dreams(R) stores. DFC must pay MCA a $2,500 advance on royalties for each company-owned store which is opened. DFC is obligated to pay $5,000 to MCA upon the opening of each franchised store. The $5,000 fee is not an advance on royalties. DFC guarantees to pay MCA a minimum yearly royalty of $2,500 regardless of the amount of gross sales. The current term of the MCA License expires in 2005. DFC has successive five-year options to renew the MCA License. The MCA License requires DFC to submit all uses of the Field of Dreams(R) mark for approval prior to use. Ownership of the Field of Dreams(R) name 1 remains with MCA and will not become that of DFC or the Company. Should DFC breach the terms of the MCA License, MCA may, in addition to other remedies, terminate DFC's rights to use the "Field of Dreams(R)" name. Such a termination would have a seriously adverse effect on DFC's and the Company's business. If DFC is in compliance with the terms of the MCA License and if MCA wishes to open and operate or license third parties to open and operate Field of Dreams(R) stores outside of the United States, DFC has a right of first refusal to obtain the license for such non-United States territory. The Company may exercise its right of first refusal by notifying MCA of its desire to undertake a proposed new territory and paying to MCA a non-refundable advance license fee of $10,000. Following such notice and payment, the Company and MCA must negotiate in good faith to reach a definitive license agreement for the additional territory. If the Company fails to send notification, make the $10,000 payment or if a definitive license cannot be reached, MCA may offer the new territory to another party. DFC is required to indemnify MCA for certain losses and claims, including those based on defective products, violation of franchise law and other acts and omissions of DFC. DFC is required to maintain insurance coverage of $3,000,000 per single incident. The coverage must name MCA as an insured party. The Company has guaranteed the monetary obligations of DFC pursuant to the MCA License. In September 1997, DFC and MCA settled and released claims in connection with the payment of royalties pursuant to the MCA license. Franchising. - ----------- In June 1991 DFC began offering franchises for the development and operation of Field of Dreams(R) stores in the United States. The laws of each state vary regarding regulation of the sale of franchises. Certain states require compliance with the regulations of the Federal Trade Commission (the "FTC Regulations") prior to commencement of sales activity (the "FTC States"). Other states require compliance with specific additional registration procedures which vary in complexity. DFC is currently offering franchises in FTC States and a limited number of other states. It will offer franchises in other states as compliance with each states' regulation is completed. Compliance with the FTC Regulations and various state regulations requires preparation of an extensive offering circular and the filing of such circular in certain states. Compliance with some state regulations requires significant time in connection with satisfying comments of franchise offering circular examiners. Compliance with FTC Regulations and certain state laws significantly limits the means by which the Company offers and sells franchises. In the future, DFC intends to acquire from MCA the rights to open and franchise stores in Canada and other countries. As summarized below, DFC offers five types of franchises: Individual Standard Store ("Standard"), Individual Kiosk ("Kiosk"), Area Development ("Area Development"), Conversion ("Conversion"), and Seasonal ("Seasonal"). The Company does not depend on any one or a few franchisees for a material portion of its revenues. Royalties from the largest franchisee accounted for only one percent of the Company's consolidated revenues. 2 Standard Franchises: Pursuant to a Standard franchise, a franchisee obtains the right to open and operate a single Field of Dreams(R) store at a single specified location. Franchisees pay DFC $10,000 upon execution of a Standard franchise agreement and an additional $22,500 upon execution by the franchisee of a lease for the franchised store. Standard franchise agreements vary in length. It is DFC's general practice that the term of Standard franchise agreements concur with the term of the franchisee's lease. In addition to sublicensing the right to use the Field of Dreams(R) name for a single franchised store, DFC is required to provide the franchisee certain training, start-up assistance and a system for the operation of the store. Prior to opening a Field of Dreams(R) store, a franchisee or its designated manager is required to attend and successfully complete a 2-week training course. The course is conducted at a DFC designated site. DFC also makes the same training available to a reasonable number of the franchisee's employees. For a period of five days during startup of a franchised store, DFC furnishes to a franchisee a representative to assist in the store opening. DFC loans to each franchisee a copy of its operations manual which sets out the policies and procedures for operating a Field of Dreams(R) store. DFC does not provide an accounting system to franchisees. DFC does provide operational advice to franchisees and will, upon request, assist a franchisee in locating a site for a store. DFC reserves the right to modify at any time the system used in the store. DFC also reserves the right to change the name used in the system from Field of Dreams(R) to any other name and require all franchisees to discontinue any use of any aspect of the system or the name Field of Dreams(R). DFC has reserved this right in its franchise agreements to provide for the event that it determines that another name would be better for its franchise system, that the royalty it pays to MCA in connection with use of the name is excessive or if DFC should breach the terms of the MCA license and lose the right to use the Field of Dreams(R) name. DFC imposes certain controls and requirements on Field of Dreams(R) franchisees in connection with site selection, site development, pre-opening purchases, initial training, opening procedures, payment of fees, compliance with operating manual procedures including purchasing through approved vendors, protection of trademark and other proprietary rights, maintenance and store appearance, insurance, advertising, owner participation in operations, record keeping, audit procedures, autograph authenticity standards and other matters. Franchisees are required to pay DFC 6% of gross revenues as an on-going royalty. Payments must be made weekly. Franchisees are required to comply with certain accounting procedures and use computer systems acceptable to DFC. Franchisees are also required to contribute an additional 1.5% of gross revenues to a marketing and development fund which is administered by DFC for the promotion of the Field of Dreams(R) system. Each franchisee is also required to spend 1% of its gross revenues for its own local advertising and promotion. During its first 90 days of operation, each franchisee is required to spend a minimum of $2,500 for promotion and advertising. Franchisees are required to maintain standards of quality and performance and to maintain the proprietary nature of the Field of Dreams(R) name. Franchisees must commence operation of the franchised stores within 180 days after execution of the Standard franchise agreement. DFC has prepared and amends from time-to-time an 3 approved supplier list from which franchisees may purchase certain inventory and other supplies. Each franchisee is required to maintain specified amounts of liability insurance which names DFC and MCA as insured parties. Franchisee's rights under the Standard franchise are not transferable without the consent of DFC and DFC has a right of first refusal to purchase any franchised store which is proposed to be sold. Kiosk: Pursuant to a Kiosk franchise, a franchisee acquires the same rights as a Standard franchise, except that the franchisee is licensed to open a freestanding Kiosk for an initial franchise fee of $19,000 rather than $32,500. Other fees paid by Kiosk franchisees, including ongoing royalties, and marketing and development fund contributions are the same as under a Standard franchise agreement. Area Development: Under an Area Development agreement, DFC grants rights to develop a minimum of four Field of Dreams(R) stores in a designated area. The stores are required to be open pursuant to a specified time schedule. The Developer must execute separate Standard franchise agreements for each store as it is opened. Upon execution of the Area Development agreement, the Developer is required to pay DFC $5,000 for each store to be opened, with a minimum payment upon execution of $20,000. The Developer must obtain DFC's approval for each store site the Developer proposes to open. Developer then pays DFC an additional $20,000 for each store upon execution by the Developer of a lease for that store. Development Agreements are not transferrable without the consent of DFC. Conversion: DFC offers Conversion franchises to certain operators of businesses which currently sell sport related merchandise, memorabilia, trading cards and similar products. Among other conditions to the granting of a Conversion franchise, an operator must have run such a business for a minimum of three months. Such a business owner will execute a Standard franchise agreement as well as a Conversion franchise addendum. A Conversion franchisee is required to pay DFC $32,500 upon execution of the Standard franchise and the Conversion addendum. The Conversion franchisee is required to pay to DFC all amounts required in the Standard franchise. Conversion franchises are not transferable without the consent of DFC. Seasonal: DFC offers existing franchisees the right to open one or more temporary holiday Seasonal location stores during the period beginning October 15 and ending not later than the Monday following the second full calendar week in January of the following year. 4 Seasonal franchisees must pay the Company an initial fee of $2,500 for each seasonal location. As Seasonal franchises are open for a very limited period of time, DFC offers very limited service to such franchisees. Consequently, Seasonal franchises are available only to existing Field of Dreams(R) Franchisees. DFC has sold only Standard franchises, Area Development rights, and Seasonal franchises. It has sold no Kiosk or Conversion Franchises. It is not anticipated that Kiosk or Conversion Franchises will be a substantial portion of DFC's business in the future. DFC does not actively market Kiosk and Conversion Franchises and there appears to be little interest in those types of franchises from potential purchases. Franchise Broker. - ---------------- DFC does not currently employ a franchise broker. The officers of DFC currently act as sales agents for Field of Dreams(R) franchises. The Company may engage an outside Franchise broker in the future. DFC advertises Field of Dreams(R) franchises in a very limited number of business magazines. Most persons expressing an interest in purchasing a Field of Dreams(R) franchise have visited a Field of Dreams(R) store and have subsequently contacted DFC. Mounted Memories. - ---------------- Mounted Memories ("MMI") is a wholesaler of sports and celebrity memorabilia products and acrylic cases. MMI also organizes, operates and participates in hobby and collectible shows. The Company has non-exclusive informal agreements with numerous well-known athletes who frequently provide autographs at agreed-upon terms. The Company also enters into exclusive agreements with athletes. The Company has entered into an exclusive arrangement with Dan Marino who is also a member of the board of directors and employee of the Company. Through its relationships with athletes, agents and other persons and entities in the sporting industry, MMI is able to arrange for the appearance of popular athletes and celebrities at collectible shows, and at the same time, generate inventory for future sales from the warehouse. The Company negotiates directly with the athlete or with the athlete's agent to determine contract specifics. These contracts are formal in that they stipulate the logistic specifics, payment terms and number of autographs to be received. The Company generally receives a fee when it arranges an athlete for a corporate event. MMI has been in business since 1989 and has achieved its industry leading status partly due to its strict authenticity policies. The only memorabilia products sold by MMI are those produced by MMI through private or public signings organized by MMI or purchased from an authorized agent of MMI and witnessed by an MMI representative. In addition to sports and celebrity memorabilia products, MMI offers a very large selection and supply of acrylic cases, with over 50 combinations of materials, colors and styles. The primary raw material used in the production process is plastic. There are many vendors who sell plastic throughout South Florida and the Company seeks to obtain the best pricing through competitive vendor bidding. The Company does not produce the helmets, footballs, baseballs or other objects which are autographed. Those products are available through numerous suppliers. 5 MMI's customer base varies greatly and includes, for example, internet companies, traditional catalog retailers and retail stores which sell sports and celebrity memorabilia products and cases. Field of Dreams(R) franchise stores purchase products from MMI and have historically provided approximately eleven percent of MMI's revenues. No other customer provides greater than ten percent of MMI's total revenue. The sports memorabilia industry faces several challenges, most notably the assurance of product authenticity. Through its caution in only selling items produced internally or purchased from authorized agents, witnessed by an MMI representative, MMI avoids significant authenticity problems. MMI feels the way it has achieved a competitive advantage over its competitors is through accurate and timely shipping. MMI uses approximately 4,000 square feet of its warehousing facilities for shipping. MMI has achieved a significant positive reputation in its industry for timely and accurate shipments and commits to shipping orders within 72 hours of order receipt. Additionally, through the implementation of advanced and effective fulfillment techniques and processes, and utilization of the most current shipping software, MMI has experienced a very low breakage ratio over the past several years. MMI Background. - -------------- In November 1998, the Company through its wholly-owned subsidiary, DPI, purchased all of the assets of Mounted Memories, Inc., a Florida corporation. The purchase price for the MMI assets was $2,275,000 in cash and 15,000,000 shares of the Company's common stock. MMI since 1989 had engaged in the manufacture and wholesale of sports and celebrity memorabilia products. Upon the acquisition of MMI's assets, the Company, through DPI continued the business of MMI and uses the Mounted Memories trademark. Financing of MMI Acquisition. - ---------------------------- In connection with the purchase of the MMI assets, the Company and all of its subsidiaries borrowed $3.0 million from a lender ("Lender"), and granted to Lender warrants to purchase a number of shares of the Company's common stock. The long term debt was secured by all of the Company's assets. In October 2000, the Company utilized part of the proceeds from a $4.4 million private placement of its Common Stock to repay in full the $3.0 million loan and to repurchase and cancel all warrants issued to Lender. Competition. - ----------- DFC competes with other larger, more well-known and substantially better funded franchisors for the sale of franchises. Field of Dreams(R) stores compete with other retail establishments of all kinds. The Company believes that the principal competitive factors in the sale of franchises are franchise sales price, services rendered, public awareness and acceptance of trademarks and franchise agreement terms. MMI competes with several major companies and numerous individuals in the sports and celebrity memorabilia industry. MMI believes it competes well within the industry because of the reputation it has established in its ten-year existence. MMI focuses on ensuring authenticity 6 and providing the best possible customer service. MMI has concentrated on maintaining and selling memorabilia items of athletes and celebrities that have a broad national appeal. Several of its competitors tend to focus on specific regional markets due to their relationships with sports franchises in their immediate markets. The success of those competitors typically depends on the athletic performance of those specific franchises. Additionally, MMI typically focuses on the two core sports that provide the greatest source of industry revenue, baseball and football. Within the acrylic case line of business, MMI competes with other companies which mass produce cases. MMI does not compete with companies which custom design one-of-a-kind cases. MMI believes that because it is one of the country's largest acrylic case manufacturers, it is very price competitive due to its ability to purchase large quantities of material and pass the savings to customers. Employees. - --------- The Company employs sixty-one (61) full-time employees and six (6) part- time employees. Item 2. Description of Property. ----------------------- The Company leases approximately 30,500 square feet of office, manufacturing and warehouse space between four locations in Sunrise, Florida (approximately 23,000 square feet), Plantation, Florida (approximately 4,500 square feet), and Denver, Colorado (approximately 3,000 square feet). The Company's principal executive offices are located at its Plantation, Florida facility. The Company has two locations in Sunrise, Florida with leases that terminate in April 2003. Combined rent in Sunrise, Florida is approximately $17,700 per month plus certain expenses and escalates to approximately $19,700 in the final year. The Company's Plantation, Florida lease terminates in April 2002. Plantation, Florida rent is approximately $7,500 per month plus common area expenses. The Company's Colorado lease terminates in September 2002. Colorado rent is approximately $3,500 per month and escalates to approximately $3,800 per month in its final year. Item 3. Legal Proceedings. ----------------- None. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- None. 7 Part II ------- Item 5. Market for Common Equity and Related Stockholder Matters. -------------------------------------------------------- The Company's common stock is listed on the OTC Bulletin Board, an electronic screen based market available to brokers on desk-top terminals. The high and low bids of the Company's common stock for each quarter during fiscal years ended March 31, 2000 and 2001 are as follows: Fiscal Year Ended March 31, 2000: High Bid Price Low Bid Price -------------- ------------- First Quarter $ .75 .312 Second Quarter .512 .344 Third Quarter .625 .25 Fourth Quarter 1.031 .25 Fiscal Year Ended March 31, 2001: First Quarter $ 2.25 .781 Second Quarter 1.812 .75 Third Quarter 1.75 .937 Fourth Quarter 1.25 .438 On June 22, 2001, the high bid price was $0.59 and the low bid price was $0.59 for the Company's common stock. Such over-the-counter quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not necessarily represent actual transactions. The records of Fidelity Transfer, the Company's transfer agent, indicate that there are three hundred sixty-six (366) record owners of the Company's common stock. The Company has paid no dividends in the past two fiscal years. The Company has no intention of paying dividends in the future. On October 12, 2000, the Company completed a private placement in which it issued 14,554,335 shares of its common stock for $4.4 million. The investors in the private placement were all accredited investors (within the meaning of Rule 501(a) of Regulation D), and included Roger Shiffman, a Director, John Walrod, the Company's Divisional President of Field of Dreams, and two individual franchise owners. The private placement was made in reliance on the exemption from the registration requirements under the Securities Act of 1933 set forth in Section 4(2) of such Act and Rule 506 of Regulation D promulgated thereunder. 8 Item 6. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. ---------------------- SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-KSB 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. GENERAL The Company's fiscal year ends each March 31, and the fiscal years ended March 31, 2001 and March 31, 2000 are referred to as "fiscal 2001" and "fiscal 2000", respectively. The Company operates through its wholly-owned subsidiary DFC and through 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 June 20, 2001, there were 36 Field of Dreams(R) franchises operating in 18 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(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. 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 through acquisitions of synergistic businesses, the opening of new Field of Dreams(R) 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 stores on an annual basis. There can be no assurance, however, that any such units will open or that they will be successful. 9 RESULTS OF OPERATIONS Fiscal 2001 Compared to Fiscal 2000 - ----------------------------------- Revenues. Total revenues increased 12.0% from $13.4 million in fiscal 2000 to $15.0 million in fiscal 2001. Retail and wholesale revenues increased 7.9% from $12.1 million in fiscal 2000 to $13.1 million in fiscal 2001, due primarily to increased product offerings, continued development of business from existing customers and an overall increase in the Company's distribution channels. DPI 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. Franchise fees and royalty revenues increased 5.2% from $1.2 million in fiscal 2000 to $1.3 million in fiscal 2001. The base number of franchises was similar throughout both fiscal years. The Company realized approximately $600,000 in revenues generated through athlete representation and marketing fees, a new line of business entered into after December 2000. We are experimenting with representation and corporate marketing of athletes to assess whether it can be an on-going business for the Company. We feel that it is a natural extension of our overall business because of our relationships with athletes, corporations and other entities. As a result of the initial success, we anticipate continuing in our efforts in these new revenue-generating areas. Costs and expenses. Cost of sales for wholesale and retail products were $8.6 million in fiscal 2001 versus $8.0 million in fiscal 1999. As a percentage of wholesale and retail revenues, cost of sales was comparable to the prior year (65.8% in fiscal 2001 versus 65.9% in fiscal 2000). Operating expenses increased 39.8% from $1.1 million in fiscal 2000 (8.1% of total revenue) to $1.5 million in fiscal 2001 (10.1% of total revenue). The increase mostly relates to greater promotional expenses associated with new and creative efforts to promote and advertise events throughout the Field of Dreams chain. General and administrative expenses increased 11.2% from $2.5 million in fiscal 2000 to $2.8 million in fiscal 2001. However, as a percentage of total revenue, fiscal 2001 was comparable to prior year (18.5% versus 18.6%). Depreciation and amortization increased slightly from $274,000 in fiscal 2000 to $278,000 in fiscal 2001. Interest expense, net. Net interest expense decreased 37.5% from $538,000 in fiscal 2000 to $336,000 in fiscal 2001, due primarily to the elimination of a $3.0 million note payable in October 2000 which had monthly interest of $35,000 (see Liquidity and Capital Resources). Provision for income taxes. At March 31, 2001, the Company had available net operating loss carry-forwards of approximately $3.0 million, which expire in various years beginning in 2009 through 2018. Accordingly, a valuation allowance was provided for the full amount of federal taxes as of the end of both fiscal 2000 and fiscal 2001. However, a provision 10 for state income taxes was provided for in both fiscal 2000 and fiscal 2001 for applicable taxes. See Note 9 to the Consolidated Financial Statements of the Company. Extraordinary item. The Company recognized a one-time, net extraordinary charge of $465,000 during fiscal 2001 relating to the early extinguishment of debt in October 2000. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company's cash and cash equivalents were $190,000, compared to $203,000 at March 31, 2000. Net accounts receivable at March 31, 2001 were $1.9 million compared to $1.6 million at March 31, 2000. Cash used by operations amounted to $2.1 million for fiscal 2001, compared to $150,000 in fiscal 2000. The net borrowings against our line of credit, which was classified in the financing section of the Statement of Cash Flows, was $2.0 million at March 31, 2001. The line of credit is used for working capital purposes. The net cash used by operations, including line of credit borrowings, was $84,000 in fiscal 2001. During October 2000 the Company filed a Form 8-K announcing that it raised $4.4 million in a private equity financing transaction. The proceeds of the transaction were used to retire $3.0 million of long-term debt and repurchase warrants owned by the lender. The retirement of that debt and termination of the warrant rights significantly improved the Company's financial condition and will allow for more aggressive growth. Elimination of the $3.0 million note also eliminated $420,000 of annual interest expense for the Company. 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 major capital expenditures planned for in the foreseeable future, nor any payments planned for off-balance sheet obligations or other demands or commitments for which payments become due after the next 12 months. The Company believes its current available cash position, coupled with its cash forecast for the year and periods beyond, is sufficient to meet its cash needs on both a short-term and long-term basis. The balance sheet has a strong working capital ratio and its long-term debt obligations require payments totaling approximately $8,000 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. 11 Item 7. Financial Statements. -------------------- DREAMS, INC. Table of Contents Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 13 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets 14 Consolidated Statements of Income 15 Consolidated Statements of Stockholders' Equity 16 Consolidated Statements of Cash Flows 17 Notes to Consolidated Financial Statements 18 12 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Dreams, Inc. We have audited the accompanying consolidated balance sheets of Dreams, Inc. and subsidiaries as of March 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dreams, Inc. and subsidiaries as of March 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Margolies, Fink and Wichrowski Certified Public Accountants Pompano Beach, Florida May 22, 2001 13 Dreams, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands, except earnings per share amounts) March 31, March 31, 2001 2000 ---- ---- ASSETS - ------ Current assets: Cash and cash equivalents $ 190 $ 203 Restricted cash - 33 Accounts receivable, net 1,948 1,577 Notes receivable 188 - Inventories 6,643 4,029 Prepaid expenses and deposits 232 75 -------- -------- Total current assets 9,201 5,917 Property and equipment, net 255 195 Intangible assets, net 2,495 2,635 Deferred loan costs, net - 215 Debt issuance costs, net - 353 -------- -------- $ 11,951 $ 9,315 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 1,567 $ 1,132 Accrued liabilities 316 690 Current portion of long-term debt 44 - Borrowings against line of credit 1,982 - Deferred franchise fees 35 95 -------- -------- Total current liabilities 3,944 1,917 Long-term debt, less current portion 383 3,443 Detachable stock warrants - 300 -------- -------- Total liabilities 4,327 5,660 -------- -------- Commitments and contingencies - - Stockholders' equity : Common stock, no par value; authorized 100,000,000 shares; issued 55,252,835 and 40,148,500 shares, respectively 22,021 18,084 Accumulated deficit (13,900) (14,429) -------- -------- 8,121 3,655 Less: deferred compensation (497) - -------- -------- Total stockholders' equity 7,624 3,655 -------- -------- $ 11,951 $ 9,315 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 14 Dreams, Inc. and Subsidiaries Consolidated Statements of Income For the Years Ended March 31, 2001 and 2000 (Dollars in Thousands, except earnings per share amounts)
Fiscal Fiscal 2001 2000 ----------- ----------- Revenues: Retail / Wholesale $ 13,081 $ 12,128 Management fees 598 - Franchise fees and royalties 1,324 1,258 Other 9 20 ----------- ----------- Total revenues 15,012 13,406 ----------- ----------- Expenses: Cost of sales 8,606 7,995 Cost of sales - athlete appearance costs 421 - Operating expenses 1,521 1,088 General and administrative expenses 2,774 2,495 Depreciation and amortization 278 274 ----------- ----------- Total expenses 13,600 11,852 ----------- ----------- Income from continuing operations before interest, income taxes and extraordinary item 1,412 1,554 Interest, net 336 538 ----------- ----------- Income from continuing operations before income taxes and extraordinary item 1,076 1,016 Income taxes: Current tax expense 473 452 Deferred tax expense (391) (372) ----------- ----------- Income before extraordinary item 994 936 Extraordinary item: Loss on early extinguishment of debt, net of income tax benefit of $ 24 (465) - ----------- ----------- Net income $ 529 $ 936 =========== =========== Earnings per share: Basic:Income from continuing operations $ 0.02 $ 0.02 =========== =========== Extraordinary item $ ( 0.01) $ - =========== =========== Net income $ 0.01 $ 0.02 =========== =========== Weighted average shares outstanding 47,102,723 40,148,500 =========== =========== Diluted: Income from continuing operations $ 0.02 $ 0.02 =========== =========== Extraordinary item $ (0.01) $ - =========== =========== Net income $ 0.01 $ 0.02 =========== =========== Weighted average shares outstanding 53,158,810 47,110,730 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 15 Dreams, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity For the Years Ended March 31, 2001 and 2000 (Dollars in Thousands, except earnings per share amounts)
Total Shares Common Accumulated Deferred Stockholders' Outstanding Stock Deficit Compensation Equity ------------ ----------- ------------ ------------ ------------- Balance at April 1, 1999 40,148,500 $ 18,084 $(15,365) $ - $2,719 Net income for the year ended March 31, 2000 - - 936 - 936 ---------- ---------- ------------ ------------ ------------- Balance at March 31, 2000 40,148,500 18,084 (14,429) - 3,655 Common stock sold 14,554,335 4,356 4,356 Repurchase of redeemable warrants (950) (950) Shares issued for services 550,000 531 (497) 34 Net income for the year ended March 31, 2001 - - 529 - 529 ---------- ---------- ------------- ------------ ----------- Balance at March 31, 2001 55,252,835 $ 22,021 $ (13,900) $ (497) $ 7,624 ========== ========== ============= ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 16 Dreams, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended March 31, 2001 and 2000 (Dollars in Thousands, except earnings per share amounts)
Fiscal Fiscal 2001 2000 ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 529 $ 936 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization: Property and equipment 55 40 Goodwill 140 136 Deferred compensation 34 - Debt issuance and debt discount costs 79 158 Extraordinary item 489 - Provision for losses on accounts and notes receivable (10) (103) Change in assets and liabilities: Increase in accounts receivable (371) (208) Increase in inventories (2,614) (1,205) Increase in prepaid expenses (157) (41) (Increase) decrease in notes receivable (188) 19 Increase in accounts payable 435 249 Decrease in accrued liabilities (374) (175) Decrease in deferred franchise fees (60) (33) Other (53) 77 --------- --------- Net cash used in operating activities (2,066) (150) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Release of restricted cash - (325) Purchase of property and equipment (115) (115) --------- --------- Net cash used in investing activities (115) (440) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from line of credit 1,982 - Proceeds from sale of stock 4,419 - Repurchase of warrants (1,250) - Repayments on notes payable (3,016) - Financing costs capitalized - (14) --------- --------- Net cash provided by (used in) financing activities 2,135 (14) --------- --------- Net decrease in cash, cash equivalents and restricted cash (46) (604) Cash, cash equivalents and restricted cash at beginning of period 236 840 --------- --------- Cash, cash equivalents and restricted cash at end of period $ 190 $ 236 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 17 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 1. 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 retail store franchises and generates revenues through the sale of those franchises and continuing royalties. DEI was incorporated in fiscal 1999 and has been inactive since inception, and as of March 31, 2001. DPI is a wholesaler of sports memorabilia products and acrylic cases. DPI pays annual fees to Major League Baseball and the National Football League which officially licenses DPI's baseball and football memorabilia products. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation. Results of operations of acquired companies accounted for as purchases are included from their respective dates of acquisition. The fiscal years ended March 31, 2001 and March 31, 2000 are herein referred to as "fiscal 2001" and "fiscal 2000", respectively. Cash and Cash Equivalents Cash and cash equivalents are defined as highly liquid investments with original maturities of three months or less and consist of amounts held as bank deposits. Restricted Cash Field of Dreams franchisees pay advertising royalties to DFC to be used for designated franchise advertising and promotional activities. These restricted funds are held by the Company. Restricted cash relating to advertising royalties paid by franchisees was $0 and $33 at March 31, 2001 and 2000, respectively. Accounts Receivable The Company's accounts receivable principally result from uncollected royalties and advertising royalties from Field of Dreams franchisees and from credit sales to third-party customers. Retail and Wholesale Revenues Retail and wholesale revenues are recognized as the products are sold and shipped to customers. DPI had wholesale sales to Field of Dreams franchises of $1.7 million and $1.3 million in fiscal 2001 and 2000, respectively. (Continued) 18 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 1. Nature of Business and Summary of Significant Accounting Policies (Continued) Franchise Fees and Royalty Revenues Revenues from the sale of franchises are deferred until the Company fulfills its obligations under the franchise agreement and the franchised unit opens. The franchise agreements provide for continuing royalty fees based on a percentage of gross receipts. Advertising and Promotional Costs All advertising and promotional costs associated with advertising and promoting the Company's lines of business are expensed in the period incurred. Inventories Inventories, consisting primarily of sports memorabilia products and acrylic cases, are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for both raw materials and finished goods. Property and Equipment Property and equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets ranging from three to ten years. Leasehold improvements are amortized over the lease period or the estimated useful life of the improvements, whichever is less. Maintenance and repairs are charged to expense as incurred and major renewals and betterments are capitalized. Gains and losses are credited or charged to earnings upon disposition. Intangible Assets The excess of cost over the fair value of net assets of purchased companies (goodwill and trademarks) are being amortized by the straight-line method over 20 years. As of March 31, 2001, unamortized intangible assets were $2.5 million, net of accumulated amortization of $328. Goodwill and other intangibles are reassessed annually to determine whether any potential impairment exists. Costs relating to the issuance of debt were capitalized and amortized over the term of the related debt. The unamortized portion of the debt issuance costs comprise a portion of the extraordinary loss on the early debt retirement. Impairment of Long-Lived Assets In the event that facts and circumstances indicate that the carrying value of long-lived assets, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. (Continued) 19 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 1. Nature of Business and Summary of Significant Accounting Policies (Continued) Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated their fair values because of the short maturity of these instruments. The fair value of the Company's notes payable and long-term debt is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At March 31, 2001 and 2000, the aggregate fair value of the Company's notes payable and long-term debt approximated its carrying value. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method with SFAS No. 109, deferred income taxes are required for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Net Income Per Share Prior to fiscal 1999, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires companies to present basic earnings per share ("EPS") and diluted EPS, instead of the primary and fully diluted EPS presentations that were formerly required by the Accounting Principles Board Opinion No. 15, "Earnings Per Share." Basic EPS is computed by dividing net income available to common stockholders by the weighted average of common shares outstanding during the year. Diluted EPS was computed by dividing net income by the sum of the weighted average of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive securities or common stock equivalents had been issued. Stock Based Compensation Statement of Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation," is effective for fiscal years beginning after December 15, 1995. Statement No. 123 provides companies with a choice to follow the provisions of No. 123 in determination of stock based compensation expense or to continue with the provisions of APB 25, "Accounting for Stock Issued to Employees." The Company will continue to follow APB 25 and will provide pro forma disclosure as required by Statement No. 123 in the notes to the consolidated financial statements. (Continued) 20 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 1. Nature of Business and Summary of Significant Accounting Policies (Continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to the financial statements. Estimates are used when accounting for uncollectible 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. Reclassification Certain items previously reported in specific financial statement captions have been reclassified to conform with the fiscal 2001 presentation. 2. 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 uncollectible 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 March 31, 2001 and March 31, 2000 of approximately $86 and $108, respectively. The Company believes any credit risk beyond this amount would be negligible. (Continued) 21 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 3. Inventories The components of inventories are as follows: March 31, March 31, 2001 2000 ---- ---- Memorabilia products $5,404 $3,147 Licensed products 829 572 Acrylic cases and raw materials 510 360 ------ ------ 6,743 4,079 Less reserve for obsolescence (100) (50) ------ ------ $ 6,643 $4,029 ======= ====== 4. Property and Equipment The components of property and equipment as of March 31 are as follows: 2001 2000 ---- ---- Leasehold improvements $ 30 $ 26 Machinery and equipment 95 76 Office and other equipment 432 340 Transportation equipment 47 47 ------ ----- 604 489 Less accumulated depreciation and amortization (349) (294) ------ ----- $ 255 $ 195 ====== ====== 5. Line of Credit The Company entered into a formula-based revolving line of credit during fiscal 2001. The line of credit allows the Company to borrow up to $3.5 million for working capital purposes. The balance outstanding as of March 31, 2001 was approximately $2.0 million. The line of credit carries a floating annual interest rate based on adding a fixed interest charge of 2.4% to the thirty day "Dealer Commercial Paper" rate. The average thirty day rate approximated 6.5% during fiscal 2001. Interest expense on the line of credit approximated $36 during fiscal 2001. The agreement contains certain financial covenants that require the Company to maintain minimum tangible net worth and cash flows. The Company was in compliance with these financial covenants as of March 31, 2001. (Continued) 22 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 6. Accrued Liabilities Accrued liabilities consisted of the following at March 31: 2001 2000 ------ ------ Payroll costs (including commissions) $ 74 $ 164 Interest - 35 Sales taxes 29 19 Income taxes, penalties, and interest (see Note 9) - 313 Royalties 177 30 Other 36 129 ------ ------ $ 316 $ 690 ====== ====== 7. Long-Term Debt Long-term debt consists of the following at March 31: 2001 2000 ---- ---- Note payable to a lending institution at 14% interest, with monthly interest only payments of $35 through November 2003. Principal balance of $3.0 million due November 2003. Secured by all of the assets of the Company and Company stock pledged by the Company's Chairman, President and other key employees, family members and associated persons and entities. The note was repaid on October 12, 2000. $ - $3,000 Note payable to an individual at 12% interest, with principal and interest payments of $8 through November 2007, and is secured through a personal guarantee of the Company's Chairman. 427 443 ------ ------ 427 3,443 Less current portion (44) (-) ------ ------ $ 383 $3,443 ====== ====== (Continued) 23 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 7. Long-Term Debt (Continued) Future maturities of long-term debt are summarized as follows: Fiscal year ----------- 2002 $ 44 2003 49 2004 55 2005 63 2006 70 Thereafter 146 --------- $ 427 ========= 8. Stockholders' Equity Common Stock The Company sold 14,554,335 shares of its common stock during October, 2000, in a private transaction. The stock was sold at an average of $0.30 per share, and provided net proceeds of approximately $4.4 million to the Company. These proceeds were used to retire $3.0 million of long-term debt and repurchase stock warrants owned by the lender. On January 1, 2001, the Company issued 50,000 shares of its common stock in conjunction with a personal services contract, for a term of two years. Deferred compensation in the amount of $63 (fair market value was $1.25 on that date), was recorded and will be amortized over the term of the contract. On January 17, 2001, the Company issued 500,000 shares of its common stock in conjunction with a personal services contract, for a term of three years. Deferred compensation in the amount of $469 (fair market value was $0.94 on that date), was recorded and will be amortized over the term of the contract. Warrants The Company had granted the lending institution which loaned the Company $3.0 million in fiscal 1999 warrants to purchase approximately 6,658,000 shares of the Company's common stock. During fiscal 2001, these warrants were repurchased by the Company for $1.3 million, when the debt was retired. (Continued) 24 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 8. Stockholders' Equity (Continued) Stock Options During fiscal 1999, the Company's Board of Directors adopted a stock option plan for certain employees and franchisees ("Optionees") whereby Optionees are granted the right to purchase shares of the Company's common stock at a price of 100% of the fair market value of the shares at the date of grant, 110% in the case of a holder of more than 10% of the Company's stock. The options generally vest between two and five years. Transactions and other information relating to the plan are summarized as follows: Stock Options ------------- Shares Wtd. Avg. Price ---------- ---------------- Outstanding at April 1, 1999 950,000 $.38 Granted 2,500,250 $.25 Exercised - --------- Outstanding at March 31, 2000 3,450,250 $.29 Granted 225,000 $.75 Exercised - Expired/Canceled (450,000) $.25 --------- Outstanding at March 31, 2001 3,225,250 $.36 ========= The exercise prices of the stock options discussed below were the fair market value of the common stock on the date the options were granted. On August 25, 1998, the Company issued options to purchase 500,000 shares at $.4375 per share to a former employee, officer, and director of the Company. The options expire on September 25, 2003 and 250,000 were exercisable upon issuance. The remaining 250,000 vest ratably over five years beginning on the first anniversary date of the grant. On September 4, 1998, the Company issued options to purchase 250,000 shares at $.4375 per share to an employee and officer of the Company. The options expire on October 1, 2003. The options vest ratably over three years beginning on the first anniversary date of the grant. (Continued) 25 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 8. Stockholders' Equity (Continued) On January 1, 1999, the Company issued options to purchase 200,000 shares at $.1875 per share to an employee of the Company. The options expire on January 1, 2002 and 100,000 were exercisable upon issuance. These options were canceled on October 12, 2000. On January 31, 2000, the Company issued options to purchase 1,800,000 shares at $.25 per share to two employees of the Company, who are also both officers of the Company. The options expire as follows - 1,500,000 on January 31, 2003 and 300,000 on February 28, 2003. The options vest as follows - 750,000 during fiscal 2000, 850,000 during the year ended March 31, 2001, 100,000 during the year ended March 31, 2002 and 100,000 during the year ended March 31, 2003. On January 31, 2000, the Company issued options to purchase 200,250 shares at $.25 per share to various employees of the Company. The options expire on February 28, 2005. The options vest ratably over two years beginning on the first anniversary date of the grant. On January 31, 2000, the Company issued options to purchase 250,000 shares at $.25 per share to a consultant of the Company. The options expire on January 31, 2005 and 125,000 were exercisable upon issuance. The remaining 125,000 vest on the first anniversary date of the grant. On February 1, 2000, the Company granted options to purchase 250,000 shares at $.30 per share to a consultant of the Company. The options expired on March 31, 2001. On September 6, 2000, the Company granted options to purchase 125,000 shares at $.75 per share in conjunction with an exclusive services agreement that was entered into with an outside individual and his agent. The options expire on September 6, 2003. On November 1, 2000, the Company granted options to purchase 100,000 shares at $.75 per share in conjunction with a personal services agreement that was entered into with an outside individual. The options expire on December 31, 2003. (Continued) 26 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 8. Stockholders' Equity (Continued) The following table summarizes information about all of the stock options outstanding at March 31, 2001: Outstanding options Exercisable options ------------------------------------ --------------------- Weighted average Range of remaining Weighted Weighted exercise prices Shares life (years) avg. price Shares avg. price --------------- --------- ------------ ---------- --------- ---------- $ .15 - .25 2,250,250 2.40 $ .25 1,950,125 $ .25 .26 - .75 975,000 1.88 .51 741,666 .53 ------------ --------- ------- ------ --------- ----- $ .15 - .75 3,225,250 2.24 $ .33 2,691,791 $ .33 ============ ========= ======= ====== ========= ===== For purposes of the following pro forma disclosures, the weighted average fair value of each option has been estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in fiscal 2001and 2000: no dividend yield; volatility of .61% and 113%; risk-free interest rate of 6% and 7%; and an expected term of five years. The weighted average Black-Scholes value of options granted during fiscal 2001 and 2000 was $.52 and $.98, respectively, per option. Had compensation cost for the Company's fixed stock-based compensation plan been determined based on the fair value at the grant dates for awards under this plan consistent with the method of SFAS 123, the Company's pro forma net income and pro forma net income per share would have been as indicated below: Fiscal Fiscal 2001 2000 -------- -------- Net income - As reported $ 529 $ 936 ======== ======== Pro forma $ 546 $ 300 ======== ======== Basic income per share - As reported $ .01 $ .02 ======== ======== Pro forma $ .01 $ .01 ======== ======== Diluted income per share - As reported $ .01 $ .02 ======== ======== Pro forma $ .01 $ .01 ======== ======== (Continued) 27 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 9. Income Taxes The provision (benefit) for income taxes consisted of the following: Fiscal Fiscal 2001 2000 -------- ------- Current: Federal tax expense $ 407 $ 387 State tax expense 66 65 Deferred: Federal tax expense (391) (372) State tax expense - - ------- ------- $ 82 $ 80 ======= ======= The Company's deferred tax balances consist of the following at March 31: Fiscal Fiscal 2001 2000 -------- ------- Deferred tax assets: Net operating loss carryforward $ 998 $ 1,247 Accrued liabilities - 89 Deferred revenue 14 37 Inventory capitalization adjustment 62 18 Allowance for doubtful accounts 34 24 ------- ------- 1,108 1,415 Deferred tax liability: Deferred loan costs (82) - Goodwill amortization (10) (8) Accelerated depreciation for tax purposes (9) (9) ------- ------- 1,007 1,398 Valuation allowance (1,007) (1,398) ------- ------- $ - $ - ======== ======= SFAS No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. At March 31, 2001, a valuation allowance for the full amount of the net deferred tax asset was recorded because of pre-2001 losses and uncertainties as to the amount of taxable income that would be generated in future years. The net change in the valuation allowance for the years ended March 31, 2001 and 2000 was $391 and $372, respectively. (Continued) 28 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 9. Income Taxes (Continued) A reconciliation of the Company's effective tax rate compared to the statutory federal tax rate for the years ended March 31, 2001 and 2000 is as follows: 2001 2000 ---- ---- Federal income taxes at statutory rate 34% 34% State taxes, net of federal benefit 6 6 Net operating loss carryforwards (34) (34) Extraordinary item (2) - Other 4 2 ---- ---- 8% 8% ==== ==== The Company at March 31, 2001 and 2000 had $10 and $263, respectively, owing to certain states for income taxes, penalties and fees, and interest. The amount has been accrued by the Company and is included in accrued liabilities (see Note 6). At March 31, 2001, the Company had available net operating loss carryforwards of approximately $3.0 million which expire in various years beginning in 2009 through 2018. The Company closed operations of its B.B. O'Brien's sports bar ("BB's") during July 1995. Since operations have ceased, it is doubtful that these tax benefits will ever be realized. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of carryforwards that could be utilized. BB's had pre-acquisition tax net operating loss carryforwards which arose prior to becoming a member of the consolidated group on November 1, 1990, which were available to offset future taxable income of BB's. The possible benefit to be recognized from the realization of these amounts has not been recorded, as there is no assurance as to their ultimate realization. The tax benefits, which may ultimately be realized, are limited to approximately $100 per year. BB's pre-acquisition tax net operating loss carryforwards total approximately $1.5 million, which expire in various years through 2005. 10. Commitments and Contingencies As of March 31, 2001, the Company leases office and warehouse space under operating leases in Florida (approximately 31,000 square feet) and Colorado (approximately 3,000 square feet). The leases for these four facilities expire at various dates through April 2003. Rent expense charged to operations for fiscal 2001 and fiscal 2000 was approximately $300 and $226, respectively. (Continued) 29 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 10. Commitments and Contingencies (Continued) The aggregate minimum annual lease payments under noncancellable operating leases are as follows: Fiscal ------ 2002 $ 336 2003 344 2004 28 ----- Total minimum lease commitments $ 708 ===== The Company has executed employment agreements with several of its key employees. The most significant agreement is with its President. This employment agreement, which expires in November 2003, calls for a salary of $250 per year and an annual car allowance of $10. 11. Related Party Transactions The Company's Chairman has made advances to the Company in the past, which were non-interest bearing and payable upon demand. These net advances totaled $0 and $52 at March 31, 2001 and 2000, respectively, and have been included in accrued liabilities on the balance sheet for those respective dates. 12. DFC Franchise Information DFC licenses the right to use the proprietary name Field of Dreams from Universal Studios Licensing, Inc. ("USL"), formerly known as Universal Merchandising, Inc. Pursuant to the license agreement, DFC pays USL one percent of each company-owned unit's gross sales, with a minimum annual royalty of $3 per store. DFC pays royalties to USL of $5 for each new franchised unit opened and one percent of each franchised unit's gross sales. This $5 fee is not an advance against royalties. At March 31, 2001, DFC had 37 units owned by franchisees and had no company-owned units. Effective June 1, 1991, DFC has the right to use and display the Field of Dreams service mark in company-owned or franchised retail units located in the United States. It also provides for the non-exclusive right to affix the Field of Dreams trademark to approved licensed articles for resale. DFC also has certain rights of first refusal related to the use of the service mark outside the United States. There is an exception of the right to transfer this licensing agreement to Dreams, Inc. or to a newly incorporated majority-owned subsidiary of Dreams, Inc. within a six-month period; these licensing rights are non-transferable and non-assignable. (Continued) 30 Dreams, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in Thousands, except earnings per share amounts) 12. DFC Franchise Information (Continued) The license agreement expires December 2005. The agreement may be renewed for additional five-year terms, provided that DFC is in compliance with all aspects of the agreement. If DFC fails to comply with the license requirements of the agreement, either during the initial term of during an option term, the agreement may be terminated by USL. Termination of the license agreement would eliminate DFC's right to use the Field of Dreams service mark. DFC may be precluded from offering franchises in certain states where USL may be deemed to be a franchisor under the laws of the applicable states. Accordingly, before offering franchises in said states, DFC shall notify USL of its intent, and USL must conclude that it will not be deemed a franchisor in those states, or the rights to sell franchises may be withheld. DFC is required to indemnify USL from certain losses and claims, including those based on defective products, violation of franchise law and other acts and omissions of DFC. DFC is required to maintain insurance coverage of $3 million per single incident. The coverage must name USL as an insured party. At March 31, 2001, DFC had the required insurance coverage. The Company has entered into a continuing guarantee agreement with USL, whereby the Company has guaranteed the full and prompt payment to USL of all amounts due under this agreement. Royalty expense for the years ended March 31, 2001 and 2000 was $186 and $188, respectively. DFC franchise activity is summarized as follows for the years ended March 31: 2001 2000 ---- ---- In operation at year end 37 35 Opened during the year 4 6 Closed during the year 2 5 Under development at year end - 1 13. Supplemental Cash Flow Information Cash paid for interest during fiscal 2001 and 2000 was $309 and $480, respectively. The Company paid $118 during fiscal 2001 and $104 during fiscal 2000 for income taxes. There were no non-cash items in fiscal 2000. The information for fiscal 2001 is detailed as follows: Issuance of common stock in exchange for services $ 531 ======== 31 Item 8. Changes In and Disagreements With Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. -------------------- None. Part III -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; ------------------------------------------------------------- Compliance With Section 16(a) of the Exchange Act. -------------------------------------------------- Directors and Officers. The Directors and Executive Officers of the ---------------------- Company and the positions held by each of them are as follows. All directors serve until the Company's next annual meeting of shareholders. Serving as Director of Position Held With Name Age the Company Since the Company ------------------------------------------------------------------------- Sam D. Battistone 61 1983 Chairman/Director Ross Tannenbaum 39 1998 President/CEO/Director Dan Marino 39 2000 Director of Business Development/Director Dale Larsson 57 1999 Director Mark Viner 34 - Secretary/Treasurer/ Chief Financial Officer Roger Shiffman 48 2000 Director Biographical Information. ------------------------ Sam D. Battistone. For more than the past five years, Sam D. Battistone ----------------- has been majority shareholder, Chairman, Chief Executive Officer, and a Director of the Company. Mr. Battistone served as president until November, 1998. He was the principal owner, founder and served as Chairman of the Board, President and Governor of the New Orleans Jazz and Utah Jazz of the National Basketball Association (NBA) from 1974 to 1986. In 1983, he was appointed by the Commissioner of the NBA to the Advisory committee of the Board of Governors of the NBA. He held that position until the Company sold its interest in the team. He served as a founding director of Sambo's Restaurants, Inc. and in each of the following capacities, from time to time, from 1967 to 1979: President, Chief Executive Officer, Vice-Chairman and Chairman of the Board of Directors. During that period, Sambo's grew from a 32 regional operation of 59 restaurants to a national chain of more than 1,100 units in 47 states. From 1971 to 1973, he served on the Board of Directors of the National Restaurant Association. Ross Tannenbaum. Mr. Tannenbaum has served as President and a Director of --------------- the Company since November 1998. From August 1994 to November 1998, Mr. Tannenbaum was President, director and one-third owner of MMI. From May 1992 to July 1994, Mr. Tannenbaum was a co-founder of Video Depositions of Florida. From 1986 to 1992, Mr. Tannenbaum served in various capacities in the investment banking division of City National Bank of Florida. Dan Marino. Dan Marino is one of the most recognizable and popular sports ---------- figures in the entire world and has served as the Company's Director of Business Development since January 2000. In April 2000, Mr. Marino announced his retirement from professional football after 17 consecutive seasons with the Miami Dolphins of the National Football League. He holds twenty NFL records and is considered by many as the most prolific passer in NFL history. His ongoing work for the community is centered on the Dan Marino Foundation for children's charities of South Florida. Dale E. Larsson. For more than five years until September 1998, Dale E. --------------- Larsson was the Secretary-Treasurer. Mr. Larsson has been a Director of the Company for over five years. Mr. Larsson was re-elected a director in August 1999. Mr. Larsson graduated from Brigham Young University in 1971 with a degree in business. From 1972 to 1980, Mr. Larsson served as controller of Invest West Financial Corporation, a Santa Barbara, California based real estate company. From 1980 to 1981, he was employed by Invest West Financial Corporation as a real estate representative. From 1981 to 1982, he served as the corporate controller of WMS Famco, a Nevada corporation based in Salt Lake City, Utah, which engaged in the business of investing in land, restaurants and radio stations. Mark Viner. Mr. Viner has been Secretary, Treasurer and Chief Financial ---------- Officer of the Company since September 1998. He is a Certified Public Accountant. From June 1994 to October 1997, Mr. Viner was the Director of Financial Reporting for Planet Hollywood International, Inc. and was instrumental in every phase of that company's 1996 initial public offering. From May 1992 to May 1994, Mr. Viner was a financial manager for the Walt Disney Company, responsible for all financial activities of Pleasure Island, a $75 million nighttime entertainment district. Roger Shiffman. Mr. Shiffman has served as a director since October 2000. -------------- Mr. Shiffman is the Chief Executive Officer and President of Tiger Electronics, Ltd., a wholly owned subsidiary of Hasbro, Inc. (NYSE: HAS), a worldwide leader in children's and family leisure time entertainment products and services. Mr. Shiffman received a bachelor degree in marketing from the University of Illinois. Mr. Shiffman is active in several charitable foundations and currently serves on the International board of Directors of the Starlight Children's Foundation. During fiscal year 2001, the Board of Directors acted by unanimous consent on five occasions. 33 Committees of the Board of Directors. The Board of Directors does not have ------------------------------------ an Audit Committee. Audit Fees. The independent auditors of the Company during the year ended ---------- March 31, 2001 were Margolies, Fink and Wichrowski. The aggregate fees, including expenses, billed by Margolies, Fink and Wichrowski in connection with the audit of the Company's annual financial statements for the most recent fiscal year and for the review of the Company's financial information included in its annual report on Form 10-KSB and its quarterly reports on Form 10-QSB during fiscal year 2001 were $21,600. All Other Fees. The aggregate fees, including expenses, billed for all -------------- other services rendered to the Company by Lundy & Shacter, P.A., our tax accountants, during fiscal year 2001 were approximately $5,000. These non-audit fees relate to corporate compliance, tax and registration filing services performed for the Company. Compliance With Section 16(a) of the Exchange Act. Based solely upon a ------------------------------------------------- review of Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16a-3(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") during the fiscal year ended March 31, 2001 and Forms 5 and amendments thereto furnished to the Company with respect to the fiscal year ended March 31, 2001, as well as any written representation from a reporting person that no Form 5 is required, the Company is not aware of any person that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Exchange Act during the fiscal year ended March 31, 2001. Item 10. Executive Compensation. ---------------------- The following table sets forth information concerning compensation for services in all capacities by the Company and its subsidiaries for fiscal years ended March 31, 1999, 2000 and 2001 of those persons who were, at March 31, 2001, the Chief Executive Officer of the Company and executive officers of the Company whose compensation exceeded $100,000. 34 Summary Compensation Table
Annual Compensation Long-Term Compensation Securities Name and principal Other Annual Underlying Position Year Salary Bonus Compensation/(3)/ Options/SARs - ---------------------------------------------------------------------------------------------- Ross Tannenbaum, 1999 $ 93,750/(1)/ - 4,000 - CEO and Director 2000 250,000 - 9,600 - 2001 250,000 5,000 9,600 - Sam D. Battistone 1999 - - - - Chairman and Director 2000 - 90,000 9,600 - 2001 75,000 90,000 9,600 - Mark Viner, Chief 1999 63,000/(2)/ 16,000 3,500 250,000 Financial Officer, 2000 113,250 5,000 7,500 300,000 Secretary & Treasurer 2001 124,583 5,000 7,500 -
___________________________________ /(1)/ Mr. Tannenbaum's employment commenced on November 10, 1998. /(2)/ Mr. Viner's employment commenced on September 4, 1998. /(3)/ Other annual compensation represents automobile allowances. The Company and Ross Tannenbaum entered into an Employment Agreement on November 10, 1998. Under the terms of that Agreement, Mr. Tannenbaum is employed for a five-year period at a base salary rate of $250,000 per year. Mr. Tannenbaum also receives certain benefits including car allowance and insurance. The Employment Agreement may be terminated for cause prior to expiration of its full term. The Company and Mark Viner entered into an Employment Agreement on September 4, 2000. Under the terms of that Agreement, Mr. Viner is employed for a three year period at a base salary rate of $130,000 per year with minimum ten percent per year increases. Mr. Viner has been issued options to purchase 550,000 shares of the Company's common stock at exercise prices between $0.25 and $0.4375 per share, the closing prices of the common stock at the date of the grants. The options are conditioned upon continued employment by the Company of Mr. Viner and vest throughout his employment term. Mr. Viner also receives certain benefits including car allowance and insurance. The Employment Agreement may be terminated for cause prior to expiration of its full term. Option/SAR Grants in Last Fiscal Year There were no Option/SAR Grants to executive officers in the fiscal year ended March 31, 2001. 35 Aggregated Option/SAR Exercises In Fiscal Year and FY-End Option/SAR Values
Number of Securities Value of Underlying Unexercised Unexercised In-The-Money Options/SARs At Options/SARs FY-End (#) At FY-End ($) Shares Acquired Value Exercisable/ Exercisable/ Name On Exercise (#) Realized ($) Unexercisable Unexercisable - ---- --------------- ------------ ------------- ------------- Ross Tannenbaum 0 N/A 0 0 Mark Viner 0 N/A 266,667/ $18,750/$37,500 283,333 Sam D. Battistone 0 N/A 0
At March 31, 2001, the closing bid price of the Company's common stock was $0.4375, and on June 22, 2001, was $0.59. 36 Item 11. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------- Principal Shareholders. - ---------------------- The following table sets forth as of June 22, 2001, the number of the Company's common stock beneficially owned by persons who own five percent or more of the Company's voting stock, by each director, by each executive officer, and by all executive officers and directors as a group. The table presented below includes shares issued and outstanding, and warrants to purchase shares and options exercisable within 60 days. Name and Address Number of Percent Of Shares Of Beneficial Owner/(1)/ Owned Class --------------------- ----- ----- Sam D. Battistone 11,129,511/(2)/ 20.0% Ross Tannenbaum 12,500,000 22.5% Dale Larsson 425,300 0.8% 3230 North University Ave. Provo, UT 84604 Roger Shiffman 6,100,000/(4)/ 11.0% Dan Marino 1,500,000/(5)/ 2.7% Mark Viner 266,667/(6)/ 0.5% All Executive Officers and 31,921,478 57.1% Directors as a Group (6 persons)/(3)/ (1) Unless otherwise indicated, the address for each person is 2 South University Drive, Plantation, Florida 33324. (2) Excludes 3,100,000 shares owned by the following family members of which Mr. Battistone disclaims beneficial ownership: Name Number of Shares Owned ------------------------------------------------ J. Roger Battistone 1,000,000 Justin Battistone 350,000 Kelly Battistone 350,000 Dann Battistone 350,000 Brian Battistone 350,000 Mark Battistone 350,000 Cynthia Battistone Hill 350,000 37 (3) The directors and officers have sole voting and investment power as to the shares beneficially owned by them. (4) Includes 6,100,000 shares held by DI Partnership, a partnership of which Mr. Shiffman is a principal. (5) Includes 1,500,000 shares which are the subject of stock options. (6) Includes options to purchase 266,667 shares of common stock. Mr. Viner has options to purchase an additional 283,333 shares, which are not presently vested. Item 12. Certain Relationships and Related Transactions. ---------------------------------------------- In January 2000, the Company and Dan Marino entered into an exclusive arrangement pursuant to which Mr. Marino provides autographs and certain services. Ross Tannenbaum, the Chief Executive Officer and a Director, and Sam Battistone, the Chairman and a Director, 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 four 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 entered into the Company's standard franchise agreements, in an arms length transaction on commercially reasonable terms. In fiscal year 2001, M&S, Inc. and FOD Las Vegas, LLC paid the Company $79,828 and $217,565 in royalties, respectively. Item 13. Exhibits and Reports on Form 8-K. -------------------------------- Exhibit Number Exhibit ------ ------- 2.1 Articles of Incorporation(1) 2.2 Bylaws (1) 10.1 Ross Tannenbaum Employment Agreement (1) 10.2 Merchandise License Agreement (1) 10.3 Standard Franchise Documents (1) 10.4 Line of Credit Agreement with Merrill Lynch Business Financial Services, Inc.(2) 10.5 Employment Agreement with Mark Viner (2) (1) Filed with the Company's Form 10-KSB dated September 7, 1999 and incorporated by this reference. (2) Filed herewith. 38 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DREAMS, INC., a Utah corporation By: /s/ Ross Tannenbaum ------------------------------------- Ross Tannenbaum, President Dated: June 28, 2001 ------------------------------- In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. By: /s/ Mark Viner ------------------------------------- Mark Viner, Chief Financial Officer Dated: June 28, 2001 ------------------------------- By: /s/ Sam Battistone ------------------------------------- Sam Battistone, Director Dated: June 28, 2001 ------------------------------- By: /s/ Dale E. Larsson ------------------------------------- Dale E. Larsson, Director Dated: June 28, 2000 ------------------------------- By: /s/ Roger Shiffman ------------------------------------- Roger Shiffman, Director Dated: June 28, 2000 ------------------------------- By: /s/ Dan Marino ------------------------------------- Dan Marino, Director Dated: June 28, 2000 ------------------------------- 39 EX-10.4 2 dex104.txt LINE OF CREDIT AGREEMENT Exhibit 10.4 [LOGO] Merrill Lynch WCMA(R)LOAN AND SECURITY AGREEMENT ================================================================================ WCMA LOAN AND SECURITY AGREEMENT NO. 760-07H76 ("Loan Agreement") dated as of December 20, 2000, between DREAMS PRODUCTS, INC. D/B/A MOUNTED MEMORIES, a corporation organized and existing under the laws of the State of Utah having its principal office at 5009 N. Hiatus Road, Sunrise, FL 33151 ("Customer"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 222 North LaSalle Street, Chicago, IL 60601 ("MLBFS"). In accordance with that certain WORKING CAPITAL MANAGEMENT(R) ACCOUNT AGREEMENT NO. 760-07H76 ("WCMA Agreement") between Customer and MLBFS' affiliate, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"), Customer has subscribed to the WCMA Program described in the WCMA Agreement. The WCMA Agreement is by this reference incorporated as a part hereof. In conjunction therewith and as part of the WCMA Program, Customer has requested that MLBFS provide, and subject to the terms and conditions herein set forth MLBFS has agreed to provide, a commercial line of credit for Customer (the "WCMA Line of Credit"). Accordingly, and in consideration of the premises and of the mutual covenants of the parties hereto, Customer and MLBFS hereby agree as follows: Article I. DEFINITIONS 1.1 Specific Terms. In addition to terms defined elsewhere in this Loan Agreement, when used herein the following terms shall have the following meanings: (a) "Account Debtor" shall mean any party who is or may become obligated with respect to an Account or Chattel Paper. (b) "Activation Date" shall mean the date upon which MLBFS shall cause the WCMA Line of Credit to be fully activated under MLPF&S' computer system as part of the WCMA Program. (c) "Additional Agreements" shall mean all agreements, instruments, documents and opinions other than this Loan Agreement, whether with or from Customer or any other party, which are contemplated hereby or otherwise reasonably required by MLBFS in connection herewith, or which evidence the creation, guaranty or collateralization of any of the Obligations or the granting or perfection of liens or security interests upon the Collateral or any other collateral for the Obligations. (d) "Bankruptcy Event" shall mean any of the following: (i) a proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or receivership law or statute shall be filed or consented to by Customer or any Guarantor; or (ii) any such proceeding shall be filed against Customer or any Guarantor and shall not be dismissed or withdrawn within sixty (60) days after filing; or (iii) Customer or any Guarantor shall make a general assignment for the benefit of creditors; or (iv) Customer or any Guarantor shall generally fail to pay or admit in writing its inability to pay its debts as they become due; or (v) Customer or any Guarantor shall be adjudicated a bankrupt or insolvent. (e) "Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed. (f) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents, Instruments, Investment Property and Financial Assets of Customer, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records) directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 3.6 (b) hereof. (g) "Commitment Expiration Date" shall mean January 19, 2001. (h) "Default" shall mean either an "Event of Default" as defined in Section 3.5 hereof, or an event which with the giving of notice, passage of time, or both, would constitute such an Event of Default. (i) "Default Interest Rate" shall mean a rate equal to the sum of the "Interest Rate", as determined below, plus two percent (2%) per annum. (j) "General Funding Conditions" shall mean each of the following conditions to any WCMA Loan by MLBFS hereunder: (i) no Default shall have occurred and be continuing or would result from the making of any WCMA Loan hereunder by MLBFS; (ii) there shall not have occurred and be continuing any material adverse change in the business or financial condition of Customer or any Guarantor; (iii) all representations and warranties of Customer or any Guarantor herein or in any Additional Agreements shall then be true and correct in all material respects; (iv) MLBFS shall have received this Loan Agreement and all of the Additional Agreements, duly executed and filed or recorded where applicable, all of which shall be in form and substance reasonably satisfactory to MLBFS; (v) MLBFS shall have received evidence reasonably satisfactory to it as to the ownership of the Collateral and the perfection and priority of MLBFS' liens and security interests thereon, as well as the ownership of and the perfection and priority of MLBFS' liens and security interests on any other collateral for the Obligations furnished pursuant to any of the Additional Agreements; (vi) MLBFS shall have received evidence reasonably satisfactory to it of the insurance required hereby or by any of the Additional Agreements; and (vii) any additional conditions specified in the "WCMA Line of Credit Approval" letter executed by MLBFS with respect to the transactions contemplated hereby shall have been met to the reasonable satisfaction of MLBFS. (k) "Guarantor" shall mean a person or entity who has either guaranteed or provided collateral for any or all of the Obligations; and "Business Guarantor" shall mean any such Guarantor that is a corporation, partnership, proprietorship, limited liability company or other entity regularly engaged in a business activity. (l) "Initial Maturity Date" shall mean the first date upon which the WCMA Line of Credit will expire (subject to renewal in accordance with the terms hereof); to wit: November 30, 2001. (m) "Interest Due Date" shall mean the last Business Day of each calendar month during the term hereof (or, if Customer makes special arrangements with MLPF&S, the last Friday of each calendar month during the term hereof). (n) "Interest Rate" shall mean a variable per annum rate of interest equal to the sum of 2.40% and the 30-day Dealer Commercial Paper Rate. The "30-day Dealer Commercial Paper Rate" shall mean, as of the date of any determination, the interest rate from time to time published in the "Money Rates" section of The Wall Street Journal as the "Dealer Commercial Paper" rate for 30-day high-grade unsecured notes sold through dealers by major corporations. The Interest Rate will change as of the date of publication in The Wall Street Journal of a 30-day Dealer Commercial Paper Rate that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fail or cease to publish the 30-day Dealer Commercial Paper Rate, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. Upon the occurrence and during the continuance of a Default, the Interest Rate with respect the WCMA Line of Credit may be increased to the "Default Interest Rate", as herein provided. (o) "Line Fee" shall mean a fee of $17,500.00 payable periodically by Customer to MLBFS in accordance with the provisions of Section 2.2 (k) hereof. (p) "Location of Tangible Collateral" shall mean the address of Customer set forth at the beginning of this Loan Agreement, together with any other address or addresses set forth on an exhibit hereto as being a Location of Tangible Collateral. (q) "Maturity Date" shall mean the date of expiration of the WCMA Line of Credit. (r) "Maximum WCMA Line of Credit" shall mean, as of any date of determination thereof, an amount equal to the lesser of: (A) $3,500,000.00, or (B) 80% of Customer's and Business Guarantors Accounts and Chattel Paper, as shown on its regular books and records (excluding Accounts over 90 days old, or from any shareholder, officer or employee of Customer or any affiliated entity), and 50% of Customer's and Business Guarantors Inventory as shown on its regular books and records. (s) "Obligations" shall mean all liabilities, indebtedness and other obligations of Customer to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary or joint or several, and, without limiting the foregoing, shall include interest accruing after the filing of any petition in bankruptcy, and all present and future liabilities, indebtedness and obligations of Customer under this Loan Agreement. (t) "Permitted Liens" shall mean with respect to the Collateral: (i) liens for current taxes not delinquent, other non-consensual liens arising in the ordinary course of business for sums not due, and, if MLBFS' rights to and interest in the Collateral are not materially and adversely affected thereby, any such liens for taxes or other non-consensual liens arising in the ordinary course of business being contested in good faith by appropriate proceedings; (ii) liens in favor of MLBFS; (iii) liens which will be discharged with the proceeds of the initial WCMA Loan; and (iv) any other liens expressly permitted in writing by MLBFS. (u) "Renewal Year" shall mean and refer to the 12-month period immediately following the Initial Maturity Date and each 12-month period thereafter. (v) "WCMA Account" shall mean and refer to the Working Capital Management Account of Customer with MLPF&S identified as Account No. 760-07H76 and any successor Working Capital Management Account of Customer with MLPF&S. (w) "WCMA Loan" shall mean each advance made by MLBFS pursuant to this Loan Agreement. (x) "WCMA Loan Balance" shall mean an amount equal to the aggregate unpaid principal amount of all WCMA Loans. 1.2 Other Terms. Except as otherwise defined herein: (i) all terms used in this Loan Agreement which are defined in the Uniform Commercial Code of Illinois ("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized terms used herein which are defined in the WCMA Agreement shall have the meanings set forth in the WCMA Agreement. ARTICLE II. THE WCMA LINE OF CREDIT 2.1 WCMA PROMISSORY NOTE. FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at the times and in the manner set forth in this Loan Agreement, or in such other manner and at such place as MLBFS may hereafter designate in writing, the following: (a) on the Maturity Date, or if earlier, on the date of termination of the WCMA Line of Credit, the WCMA Loan Balance; (b) interest at the Interest Rate (or, if applicable, at the Default Interest Rate) on the outstanding WCMA Loan Balance, from and including the date on which the initial WCMA Loan is made until the date of payment of all WCMA Loans in full; and (c) on demand, all other sums payable pursuant to this Loan Agreement, including, but not limited to, the periodic Line Fee. Except as otherwise expressly set forth herein, Customer hereby waives presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and formalities in connection with this WCMA Promissory Note and this Loan Agreement. -2- 2.2 WCMA LOANS (a) Activation Date. Provided that: (i) the Commitment Expiration Date shall not then have occurred, and (ii) Customer shall have subscribed to the WCMA Program and its subscription to the WCMA Program shall then be in effect, the Activation Date shall occur on or promptly after the date, following the acceptance of this Loan Agreement by MLBFS at its office in Chicago, Illinois, upon which each of the General Funding Conditions shall have been met or satisfied to the reasonable satisfaction of MLBFS. No activation by MLBFS of the WCMA Line of Credit for a nominal amount shall be deemed evidence of the satisfaction of any of the conditions herein set forth, or a waiver of any of the terms or conditions hereof. Customer hereby authorizes MLBFS to pay out of and charge to Customer's WCMA Account on the Activation Date any and all amounts necessary to fully pay off any bank or other financial institution having a lien upon any of the Collateral other than a Permitted Lien. (b) WCMA Loans. Subject to the terms and conditions hereof, during the period from and after the Activation Date to the first to occur of the Maturity Date or the date of termination of the WCMA Line of Credit pursuant to the terms hereof, and in addition to WCMA Loans automatically made to pay accrued interest, as hereafter provided: (i) MLBFS will make WCMA Loans to Customer in such amounts as Customer may from time to time request in accordance with the terms hereof, up to an aggregate outstanding amount not to exceed the Maximum WCMA Line of Credit, and (ii) Customer may repay any WCMA Loans in whole or in part at any time, and request a re-borrowing of amounts repaid on a revolving basis. Customer may request such WCMA Loans by use of WCMA Checks, FTS, Visa(R) charges, wire transfers, or such other means of access to the WCMA Line of Credit as may be permitted by MLBFS from time to time; it being understood that so long as the WCMA Line of Credit shall be in effect, any charge or debit to the WCMA Account which but for the WCMA Line of Credit would under the terms of the WCMA Agreement result in an overdraft, shall be deemed a request by Customer for a WCMA Loan. (c) Conditions of WCMA Loans. Notwithstanding the foregoing, MLBFS shall not be obligated to make any WCMA Loan, and may without notice refuse to honor any such request by Customer, if at the time of receipt by MLBFS of Customer's request: (i) the making of such WCMA Loan would cause the Maximum WCMA Line of Credit to be exceeded; or (ii) the Maturity Date shall have occurred, or the WCMA Line of Credit shall have otherwise been terminated in accordance with the terms hereof; or (iii) Customer's subscription to the WCMA Program shall have been terminated; or (iv) an event shall have occurred and be continuing which shall have caused any of the General Funding Conditions to not then be met or satisfied to the reasonable satisfaction of MLBFS. The making by MLBFS of any WCMA Loan at a time when any one or more of said conditions shall not have been met shall not in any event be construed as a waiver of said condition or conditions or of any Default, and shall not prevent MLBFS at any time thereafter while any condition shall not have been met from refusing to honor any request by Customer for a WCMA Loan. (d) Limitation of Liability. MLBFS shall not be responsible, and shall have no liability to Customer or any other party, for any delay or failure of MLBFS to honor any request of Customer for a WCMA Loan or any other act or omission of MLBFS, MLPF&S or any of their affiliates due to or resulting from any system failure, error or delay in posting or other clerical error, loss of power, fire, Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any of their affiliates unless directly arising out of the willful wrongful act or active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer or any other party for any incidental or consequential damages arising from any act or omission by MLBFS, MLPF&S or any of their affiliates in connection with the WCMA Line of Credit or this Loan Agreement. (e) Interest. (i) An amount equal to accrued interest on the WCMA Loan Balance shall be payable by Customer monthly on each Interest Due Date, commencing with the Interest Due Date occurring in the calendar month in which the Activation Date shall occur. Unless otherwise hereafter directed in writing by MLBFS on or after the first to occur of the Maturity Date or the date of termination of the WCMA Line of Credit pursuant to the terms hereof, such interest will be automatically charged to the WCMA Account on the applicable Interest Due Date, and, to the extent not paid with free credit balances or the proceeds of sales of any Money Accounts then in the WCMA Account, as hereafter provided, paid by a WCMA Loan and added to the WCMA Loan Balance. All interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. (ii) Upon the occurrence and during the continuance of any Default, but without limiting the rights and remedies otherwise available to MLBFS hereunder or waiving such Default, the interest payable by Customer hereunder shall at the option of MLBFS accrue and be payable at the Default Interest Rate. The Default Interest Rate, once implemented, shall continue to apply to the Obligations under this Loan Agreement and be payable by Customer until the date such Default is either cured or waived in writing by MLBFS. (iii) Notwithstanding any provision to the contrary in this Agreement or any of the Additional Agreements, no provision of this Agreement or any of the Additional Agreements shall require the payment or permit the collection of any amount in excess of the maximum amount of interest permitted to be charged by law ("Excess Interest"). If any Excess Interest is provided for, or is adjudicated as being provided for, in this Agreement or any of the Additional Agreements, then: (A) Customer shall not be obligated to pay any Excess Interest; and (B) any Excess Interest that MLBFS may have received hereunder or under any of the Additional Agreements shall, at the option of MLBFS, be: (1) applied as a credit against the then unpaid WCMA Loan Balance, (2) refunded to the payer thereof, or (3) any combination of the foregoing. (f) Payments. All payments required or permitted to be made pursuant to this Loan Agreement shall be made in lawful money of the United States. Unless otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be made by the delivery of checks (other than WCMA Checks), or by means of FTS or wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S for credit to Customer's WCMA Account. Notwithstanding anything in the WCMA Agreement to the contrary, Customer hereby irrevocably authorizes and directs MLPF&S to apply available free credit balances in the WCMA Account to the repayment of the WCMA Loan Balance prior to application for any other purpose. Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by Customer upon the same basis and schedule as funds are made available for investment in the Money Accounts in accordance with the terms of the WCMA Agreement. All funds received by MLBFS from MLPF&S pursuant to the aforesaid authorization shall be applied by MLBFS to repayment of the WCMA Loan Balance. The acceptance by or on behalf of MLBFS of a check or other payment for a lesser amount than shall be due from Customer, regardless of any endorsement or statement thereon or transmitted therewith, shall not be deemed an accord and satisfaction or anything other than a payment on account, and MLBFS or anyone acting on behalf of MLBFS may accept such check or other payment -3- without prejudice to the rights of MLBFS to recover the balance actually due or to pursue any other remedy under this Loan Agreement or applicable law for such balance. All checks accepted by or on behalf of MLBFS in connection with the WCMA Line of Credit are subject to final collection. (g) Irrevocable Instructions to MLPF&S. In order to minimize the WCMA Loan Balance, Customer hereby irrevocably authorizes and directs MLPF&S, effective on the Activation Date and continuing thereafter so long as this Agreement shall be in effect: (i) to immediately and prior to application for any other purpose pay to MLBFS to the extent of any WCMA Loan Balance or other amounts payable by Customer hereunder all available free credit balances from time to time in the WCMA Account; and (ii) if such available free credit balances are insufficient to pay the WCMA Loan Balance and such other amounts, and there are in the WCMA Account at any time any investments in Money Accounts (other than any investments constituting any Minimum Money Accounts Balance under the WCMA Directed Reserve Program), to immediately liquidate such investments and pay to MLBFS to the extent of any WCMA Loan Balance and such other amounts the available proceeds from the liquidation of any such Money Accounts. (h) Statements. MLPF&S will include in each monthly statement it issues under the WCMA Program information with respect to WCMA Loans and the WCMA Loan Balance. Any questions that Customer may have with respect to such information should be directed to MLBFS; and any questions with respect to any other matter in such statements or about or affecting the WCMA Program should be directed to MLPF&S. (i) Use of WCMA Loan Proceeds. The proceeds of each WCMA Loan initiated by Customer shall be used by Customer solely for working capital in the ordinary course of its business, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. Customer agrees that under no circumstances will the proceeds of any WCMA Loan be used: (i) for personal, family or household purposes of any person whatsoever, or (ii) to purchase, carry or trade in securities, or repay debt incurred to purchase, carry or trade in securities, whether in or in connection with the WCMA Account, another account of Customer with MLPF&S or an account of Customer at any other broker or dealer in securities, or (iii) unless otherwise consented to in writing by MLBFS, to pay any amount to Merrill Lynch and Co., Inc. or any of its subsidiaries, other than Merrill Lynch Bank USA, Merrill Lynch Bank & Trust Co. or any subsidiary of either of them (including MLBFS and Merrill Lynch Credit Corporation). (j) Renewal at Option of MLBFS; Right of Customer to Terminate. MLBFS may at any time, in its sole discretion and at its sole option, renew the WCMA Line of Credit for one or more Renewal Years; it being understood, however, that no such renewal shall be effective unless set forth in a writing executed by a duly authorized representative of MLBFS and delivered to Customer. Unless any such renewal is accompanied by a proposed change in the terms of the WCMA Line of Credit (other than the extension of the Maturity Date), no such renewal shall require Customer's approval. Customer shall, however, have the right to terminate the WCMA Line of Credit at any time upon written notice to MLBFS. (k) Line Fees. (i) In consideration of the extension of the WCMA Line of Credit by MLBFS to Customer during the period from the Activation Date to the Initial Maturity Date, Customer has paid or shall pay the Line Fee to MLBFS. If the Line Fee has not heretofore been paid by Customer, Customer hereby authorizes MLBFS, at its option, to either cause the Line Fee to be paid on the Activation Date with a WCMA Loan, or invoice Customer for such Line Fee (in which event Customer shall pay said fee within 5 Business Days after receipt of such invoice). No delay in the Activation Date, howsoever caused, shall entitle Customer to any rebate or reduction in the Line Fee or to any extension of the Initial Maturity Date. (ii) Customer shall pay an additional Line Fee for each Renewal Year. In connection therewith, Customer hereby authorizes MLBFS, at its option, to either cause each such additional Line Fee to be paid with a WCMA Loan on or at any time after the first Business Day of such Renewal Year or invoiced to Customer at such time (in which event Customer shall pay such Line Fee within 5 Business Days after receipt of such invoice). Each Line Fee shall be deemed fully earned by MLBFS on the date payable by Customer, and no termination of the WCMA Line of Credit, howsoever caused, shall entitle Customer to any rebate or refund of any portion of such Line Fee; provided, however, that if Customer shall terminate the WCMA Line of Credit not later than 5 Business Days after the receipt by Customer of notice from MLBFS of a renewal of the WCMA Line of Credit, Customer shall be entitled to a refund of any Line Fee charged by MLBFS for the ensuing Renewal Year. Article III. GENERAL PROVISIONS 3.1 REPRESENTATIONS AND WARRANTIES Customer represents and warrants to MLBFS that: (a) Organization and Existence. Customer is a corporation, duly organized and validly existing in good standing under the laws of the State of Utah and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary; and, where applicable, each Business Guarantor is duly organized, validly existing and in good standing under the laws of the state of its formation and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary. (b) Execution, Delivery and Performance. The execution, delivery and performance by Customer of this Loan Agreement and by Customer and each Guarantor of such of the Additional Agreements to which it is a party: (i) have been duly authorized by all requisite action, (ii) do not and will not violate or conflict with any law or other governmental requirement, or any of the agreements, instruments or documents which formed or govern Customer or any such Guarantor, and (iii) do not and will not breach or violate any of the provisions of, and will not result in a default by Customer or any such Guarantor under, any other agreement, instrument or document to which it is a party or by which it or its properties are bound. (c) Notices and Approvals. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by Customer or any Guarantor of such of this Loan Agreement and the Additional Agreements to which it is a party. -4- (d) Enforceability. This Loan Agreement and such of the Additional Agreements to which Customer or any Guarantor is a party are the respective legal, valid and binding obligations of Customer and such Guarantor, enforceable against it or them, as the case may be, in accordance with their respective terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally or by general principles of equity. (e) Collateral. Except for any Permitted Liens: (i) Customer has good and marketable title to the Collateral, (ii) none of the Collateral is subject to any lien, encumbrance or security interest, and (iii) upon the filing of all Uniform Commercial Code financing statements executed by Customer with respect to the Collateral in the appropriate jurisdiction(s) and/or the completion of any other action required by applicable law to perfect its liens and security interests, MLBFS will have valid and perfected first liens and security interests upon all of the Collateral. (f) Financial Statements. Except as expressly set forth in Customer's or any Business Guarantor's financial statements, all financial statements of Customer and each Business Guarantor furnished to MLBFS have been prepared in conformity with generally accepted accounting principles, consistently applied, are true and correct in all material respects, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended (subject, in the case of interim unaudited financial statements, to normal year-end adjustments); and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. All financial statements furnished to MLBFS of any Guarantor other than a Business Guarantor are true and correct in all material respects and fairly represent such Guarantor's financial condition as of the date of such financial statements, and since the most recent date of such financial statements, there has been no material adverse change in such financial condition. (g) Litigation. No litigation, arbitration, administrative or governmental proceedings are pending or, to the knowledge of Customer, threatened against Customer or any Guarantor, which would, if adversely determined, materially and adversely affect the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any such Guarantor or the continued operations of Customer or any Business Guarantor. (h) Tax Returns. All federal, state and local tax returns, reports and statements required to be filed by Customer and each Guarantor have been filed with the appropriate governmental agencies and all taxes due and payable by Customer and each Guarantor have been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer or any Business Guarantor). (i) Collateral Location. All of the tangible Collateral is located at a Location of Tangible Collateral. (j) No Outside Broker. Except for employees of MLBFS, MLPF&S or one of their affiliates, Customer has not in connection with the transactions contemplated hereby directly or indirectly engaged or dealt with, and was not introduced or referred to MLBFS by, any broker or other loan arranger. Each of the foregoing representations and warranties: (i) has been and will be relied upon as an inducement to MLBFS to provide the WCMA Line of Credit, and (ii) is continuing and shall be deemed remade by Customer concurrently with each request for a WCMA Loan. 3.2 FINANCIAL AND OTHER INFORMATION (a) Customer shall furnish or cause to be furnished to MLBFS during the term of this Loan Agreement all of the following: (i) Annual Financial Statements. Within 120 days after the close of each fiscal year of Customer, a copy of the annual audited consolidated financial statements of Customer and each Business Guarantor, including, in each case, in reasonable detail, a balance sheet and statement of retained earnings as at the close of such fiscal year and statements of profit and loss and cash flow for such fiscal year; (ii) Interim Financial Statements. Within 45 days after the close of each fiscal of Customer, a copy of the interim consolidated financial statements of Customer and each Business Guarantor for such fiscal (including in reasonable detail both a balance sheet as of the close of such fiscal period, and statement of profit and loss for the applicable fiscal period); (iii)A/R Agings. Within 15 days after the close of each fiscal month of Customer, a copy of the Accounts Receivable Aging of Customer and each Business Guarantor as of the end of such fiscal month; (iv) Inventory Reports. Within 15 days after the close of each fiscal month of Customer, a copy of the Inventory Report (as and to the extent applicable, breaking out Inventory by location, and separately reporting any work in process) of Customer and each Business Guarantor as of the end of such fiscal month; and (v) Other Information. Such other information as MLBFS may from time to time reasonably request relating to Customer, any Guarantor or the Collateral. (b) General Agreements With Respect to Financial Information. Customer agrees that except as otherwise specified herein or otherwise agreed to in writing by MLBFS: (i) all annual financial statements required to be furnished by Customer to MLBFS hereunder will be prepared by either the current independent accountants for Customer or other independent accountants reasonably acceptable to MLBFS, and (ii) all other financial information required to be furnished by Customer to MLBFS hereunder will be certified as correct in all material respects by the party who has prepared such information, and, in the case of internally prepared information with respect to Customer or any Business Guarantor, certified as correct by their respective chief financial officer. -5- 3.3 OTHER COVENANTS Customer further covenants and agrees during the term of this Loan Agreement that: (a) Financial Records; Inspection. Customer and each Business Guarantor will: (i) maintain at its principal place of business complete and accurate books and records, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives, upon reasonable notice and at reasonable times, to inspect its properties (both real and personal), operations, books and records. (b) Taxes. Customer and each Guarantor will pay when due all taxes, assessments and other governmental charges, howsoever designated, and all other liabilities and obligations, except to the extent that any such failure to pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor or the continued operations of Customer or any Business Guarantor. (c) Compliance With Laws and Agreements. Neither Customer nor any Guarantor will violate any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority, or any agreement, instrument or document to which it is a party or by which it is bound, if any such violation will materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer or any Business Guarantor. (d) No Use of Merrill Lynch Name. Neither Customer nor any Guarantor will directly or indirectly publish, disclose or otherwise use in any advertising or promotional material, or press release or interview, the name, logo or any trademark of MLBFS, MLPF&S, Merrill Lynch and Co., Incorporated or any of their affiliates. (e) Notification By Customer. Customer shall provide MLBFS with prompt written notification of: (i) any Default; (ii) any materially adverse change in the business, financial condition or operations of Customer or any Business Guarantor; (iii) any information which indicates that any financial statements of Customer or any Guarantor fail in any material respect to present fairly the financial condition and results of operations purported to be presented in such statements; and (iv) any change in Customer's outside accountants. Each notification by Customer pursuant hereto shall specify the event or information causing such notification, and, to the extent applicable, shall specify the steps being taken to rectify or remedy such event or information. (f) Notice of Change. Customer shall give MLBFS not less than 30 days prior written notice of any change in the name (including any fictitious name) or principal place of business or residence of Customer or any Guarantor. (g) Continuity. Except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld: (i) neither Customer nor any Business Guarantor shall be a party to any merger or consolidation with, or purchase or otherwise acquire all or substantially all of the assets of, or any material stock, partnership, joint venture or other equity interest in, any person or entity, or sell, transfer or lease all or any substantial part of its assets, if any such action would result in either: (A) a material change in the principal business, ownership or control of Customer or such Business Guarantor, or (B) a material adverse change in the financial condition or operations of Customer or such Business Guarantor; (ii) Customer and each Business Guarantor shall preserve their respective existence and good standing in the jurisdiction(s) of establishment and operation; (iii) neither Customer nor any Business Guarantor shall engage in any material business substantially different from their respective business in effect as of the date of application by Customer for credit from MLBFS, or cease operating any such material business; (iv) neither Customer nor any Business Guarantor shall cause or permit any other person or entity to assume or succeed to any material business or operations of Customer or such Business Guarantor; and (v) neither Customer nor any Business Guarantor shall cause or permit any material change in its controlling ownership. (h) Minimum Tangible Net Worth. Customer's and Business Guarantors combined "tangible net worth" as of the period ending December 31, 2000, and thereafter shall at all times exceed $3,500,000.00. For the purposes hereof, the term "tangible net worth" shall mean Customer's and Business Guarantors combined net worth as shown on Customer's regular consolidated financial statements prepared in a manner consistent with the terms hereof, but excluding an amount equal to (i) any assets which are ordinarily classified as "intangible" in accordance with generally accepted accounting principles, and (ii) any amounts now or hereafter directly or indirectly owing to Customer by officers, shareholders or affiliates of Customer. (i) Minimum Net Cash Flow. The combined "Net Cash Flow" of Customer and Business Guarantors as of the end of each of its fiscal years shall not be less than $700,000.00. As used herein, "Net Cash Flow" shall mean the (i) the sum of Customer's and Business Guarantors annual net after-tax income, any non- recurring expenses, and depreciation and similar non-cash charges, less (ii) the sum of the current portion of Customer's long term debt, any non-recurring income, and any dividends or other distributions to its owners; all as set forth on Customer's regular consolidated annual financial statements prepared in a manner consistent with the terms hereof. 3.4 COLLATERAL (a) Pledge of Collateral. To secure payment and performance of the Obligations, Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants to MLBFS first liens and security interests in and upon all of the Collateral, subject only to Permitted Liens. (b) Liens. Except upon the prior written consent of MLBFS, Customer shall not create or permit to exist any lien, encumbrance or security interest upon or with respect to any Collateral now owned or hereafter acquired other than Permitted Liens. (c) Performance of Obligations. Customer shall perform all of its obligations owing on account of or with respect to the Collateral; it being understood that nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or otherwise, shall be deemed an assumption by MLBFS of any of Customer's said obligations. -6- (d) Sales and Collections. So long as no Event of Default shall have occurred and be continuing, Customer may in the ordinary course of its business: (i) sell any Inventory normally held by Customer for sale, (ii) use or consume any materials and supplies normally held by Customer for use or consumption, and (iii) collect all of its Accounts. Customer shall take such action with respect to protection of its Inventory and the other Collateral and the collection of its Accounts as MLBFS may from time to time reasonably request. (e) Account Schedules. Upon the request of MLBFS, made now or at any reasonable time or times hereafter, Customer shall deliver to MLBFS, in addition to the other information required hereunder, a schedule identifying, for each Account and all Chattel Paper subject to MLBFS' security interests hereunder, each Account Debtor by name and address and amount, invoice or contract number and date of each invoice or contract. Customer shall furnish to MLBFS such additional information with respect to the Collateral, and amounts received by Customer as proceeds of any of the Collateral, as MLBFS may from time to time reasonably request. (f) Alterations and Maintenance. Except upon the prior written consent of MLBFS, Customer shall not make or permit any material alterations to any tangible Collateral which might materially reduce or impair its market value or utility. Customer shall at all times keep the tangible Collateral in good condition and repair, reasonable wear and tear excepted, and shall pay or cause to be paid all obligations arising from the repair and maintenance of such Collateral, as well as all obligations with respect to any Location of Tangible Collateral, except for any such obligations being contested by Customer in good faith by appropriate proceedings. (g) Location. Except for movements required in the ordinary course of Customer's business, Customer shall give MLBFS 30 days' prior written notice of the placing at or movement of any tangible Collateral to any location other than a Location of Tangible Collateral. In no event shall Customer cause or permit any material tangible Collateral to be removed from the United States without the express prior written consent of MLBFS. (h) Insurance. Customer shall insure all of the tangible Collateral under a policy or policies of physical damage insurance providing that losses will be payable to MLBFS as its interests may appear pursuant to a Lender's Loss Payable Endorsement and containing such other provisions as may be reasonably required by MLBFS. Customer shall further provide and maintain a policy or policies of comprehensive public liability insurance naming MLBFS as an additional party insured. Customer and each Business Guarantor shall maintain such other insurance as may be required by law or is customarily maintained by companies in a similar business or otherwise reasonably required by MLBFS. All such insurance policies shall provide that MLBFS will receive not less than 10 days prior written notice of any cancellation, and shall otherwise be in form and amount and with an insurer or insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a copy or certificate of each such policy or policies and, prior to any expiration or cancellation, each renewal or replacement thereof. (i) Event of Loss. Customer shall at its expense promptly repair all repairable damage to any tangible Collateral. In the event that any tangible Collateral is damaged beyond repair, lost, totally destroyed or confiscated (an "Event of Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00 or more, then, on or before the first to occur of (i) 90 days after the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on which either Customer or MLBFS shall receive any proceeds of insurance on account of such Event of Loss, or any underwriter of insurance on such Collateral shall advise either Customer or MLBFS that it disclaims liability in respect of such Event of Loss, Customer shall, at Customer's option, either replace the Collateral subject to such Event of Loss with comparable Collateral free of all liens other than Permitted Liens (in which event Customer shall be entitled to utilize the proceeds of insurance on account of such Event of Loss for such purpose, and may retain any excess proceeds of such insurance), or deposit into the WCMA Account an amount equal to the actual cash value of such Collateral as determined by either the insurance company's payment (plus any applicable deductible) or, in absence of insurance company payment, as reasonably determined by MLBFS; it being further understood that any such deposit shall be accompanied by a like permanent reduction in the Maximum WCMA Line of Credit. Notwithstanding the foregoing, if at the time of occurrence of such Event of Loss or any time thereafter prior to replacement or line reduction, as aforesaid, an Event of Default shall have occurred and be continuing hereunder, then MLBFS may at its sole option, exercisable at any time while such Event of Default shall be continuing, require Customer to either replace such Collateral or make a deposit into the WCMA Account and reduce the Maximum WCMA Line of Credit, as aforesaid. (j) Notice of Certain Events. Customer shall give MLBFS immediate notice of any attachment, lien, judicial process, encumbrance or claim affecting or involving $25,000.00 or more of the Collateral. (k) Indemnification. Customer shall indemnify, defend and save MLBFS harmless from and against any and all claims, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any nature whatsoever which may be asserted against or incurred by MLBFS arising out of or in any manner occasioned by (i) the ownership, collection, possession, use or operation of any Collateral, or (ii) any failure by Customer to perform any of its obligations hereunder; excluding, however, from said indemnity any such claims, liabilities, etc. arising directly out of the willful wrongful act or active gross negligence of MLBFS. This indemnity shall survive the expiration or termination of this Loan Agreement as to all matters arising or accruing prior to such expiration or termination. 3.5 EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an "Event of Default" under this Loan Agreement: (a) Exceeding the Maximum WCMA Line of Credit. If the WCMA Loan Balance shall at any time exceed the Maximum WCMA Line of Credit and Customer shall fail to deposit sufficient funds into the WCMA Account to reduce the WCMA Loan Balance below the Maximum WCMA Line of Credit within five (5) Business Days after written notice thereof shall have been given by MLBFS to Customer. (b) Other Failure to Pay. Customer shall fail to pay to MLBFS or deposit into the WCMA Account when due any other amount owing or required to be paid or deposited by Customer under this Loan Agreement, or shall fail to pay when due any other Obligations, and any such failure shall continue for more than five (5) Business Days after written notice thereof shall have been given by MLBFS to Customer. -7- (c) Failure to Perform. Customer or any Guarantor shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Loan Agreement or any of the Additional Agreements (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for ten (10) Business Days after written notice thereof shall have been given by MLBFS to Customer. (d) Breach of Warranty. Any representation or warranty made by Customer or any Guarantor contained in this Loan Agreement or any of the Additional Agreements shall at any time prove to have been incorrect in any material respect when made. (e) Default Under Other Agreement. A default or Event of Default by Customer or any Guarantor shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS, MLPF&S or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed. (f) Bankruptcy Event. Any Bankruptcy Event shall occur. (g) Material Impairment. Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of full payment or performance by Customer or any Guarantor of any of their respective liabilities or obligations under this Loan Agreement or any of the Additional Agreements to which Customer or such Guarantor is a party has been materially impaired. The existence of such a material impairment shall be determined in a manner consistent with the intent of Section 1-208 of the UCC. (h) Acceleration of Debt to Other Creditors. Any event shall occur which results in the acceleration of the maturity of any indebtedness of $100,000.00 or more of Customer or any Guarantor to another creditor under any indenture, agreement, undertaking, or otherwise. (i) Seizure or Abuse of Collateral. The Collateral, or any material part thereof, shall be or become subject to any material abuse or misuse, or any levy, attachment, seizure or confiscation which is not released within ten (10) Business Days. 3.6 REMEDIES (a) Remedies Upon Default. Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose: (i) Termination. MLBFS may without notice terminate the WCMA Line of Credit and all obligations to provide the WCMA Line of Credit or otherwise extend any credit to or for the benefit of Customer (it being understood, however, that upon the occurrence of any Bankruptcy Event the WCMA Line of Credit and all such obligations shall automatically terminate without any action on the part of MLBFS); and upon any such termination MLBFS shall be relieved of all such obligations. (ii) Acceleration. MLBFS may declare the principal of and interest on the WCMA Loan Balance, and all other Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived; provided, however, that upon the occurrence of any Bankruptcy Event all such principal, interest and other Obligations shall automatically become due and payable without any action on the part of MLBFS. (iii) Exercise Other Rights. MLBFS may exercise any or all of the remedies of a secured party under applicable law, including, but not limited to, the UCC, and any or all of its other rights and remedies under this Loan Agreement and the Additional Agreements. (iv) Possession. MLBFS may require Customer to make the Collateral and the records pertaining to the Collateral available to MLBFS at a place designated by MLBFS which is reasonably convenient to Customer, or may take possession of the Collateral and the records pertaining to the Collateral without the use of any judicial process and without any prior notice to Customer. (v) Sale. MLBFS may sell any or all of the Collateral at public or private sale upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may purchase any Collateral at any such public sale. The net proceeds of any such public or private sale and all other amounts actually collected or received by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any time in the collection of the Obligations and in the protection, collection and sale of the Collateral, will be applied to the payment of the Obligations, with any remaining proceeds paid to Customer or whoever else may be entitled thereto, and with Customer and each Guarantor remaining jointly and severally liable for any amount remaining unpaid after such application. (vi) Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith upon receipt, transmit and deliver to MLBFS in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by MLBFS) which may be received by Customer at any time in full or partial payment of any Collateral, and require that Customer not commingle any such items which may be so received by Customer with any other of its funds or property but instead hold them separate and apart and in trust for MLBFS until delivery is made to MLBFS. (vii) Notification of Account Debtors. MLBFS may notify any Account Debtor that its Account or Chattel Paper has been assigned to MLBFS and direct such Account Debtor to make payment directly to MLBFS of all amounts due or becoming due with respect to such Account or Chattel Paper; and MLBFS may enforce payment and collect, by legal proceedings or otherwise, such Account or Chattel Paper. -8- (viii) Control of Collateral. MLBFS may otherwise take control in any lawful manner of any cash or non-cash items of payment or proceeds of Collateral and of any rejected, returned, stopped in transit or repossessed goods included in the Collateral and endorse Customer's name on any item of payment on or proceeds of the Collateral. (b) Set-Off. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credit, deposits, accounts, financial assets, investment property, securities and any other property of Customer which is in transit to or in the possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S. Customer hereby collaterally assigns and grants to MLBFS a continuing security interest in all such property as additional Collateral. (c) Power of Attorney. Effective upon the occurrence and during the continuance of an Event of Default, Customer hereby irrevocably appoints MLBFS as its attorney-in-fact, with full power of substitution, in its place and stead and in its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion take any action and to execute any instrument which MLBFS may deem necessary or advisable to accomplish the purposes of this Loan Agreement, including, but not limited to, to receive, endorse and collect all checks, drafts and other instruments for the payment of money made payable to Customer included in the Collateral. (d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available in the Additional Agreements, at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively. (e) Notices. To the fullest extent permitted by applicable law, Customer hereby irrevocably waives and releases MLBFS of and from any and all liabilities and penalties for failure of MLBFS to comply with any statutory or other requirement imposed upon MLBFS relating to notices of sale, holding of sale or reporting of any sale, and Customer waives all rights of redemption or reinstatement from any such sale. Any notices required under applicable law shall be reasonably and properly given to Customer if given by any of the methods provided herein at least 5 Business Days prior to taking action. MLBFS shall have the right to postpone or adjourn any sale or other disposition of Collateral at any time without giving notice of any such postponed or adjourned date. In the event MLBFS seeks to take possession of any or all of the Collateral by court process, Customer further irrevocably waives to the fullest extent permitted by law any bonds and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, and any demand for possession prior to the commencement of any suit or action. 3.7 MISCELLANEOUS (a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Loan Agreement or any of the Additional Agreements shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any waiver of any provision of this Loan Agreement or any of the Additional Agreements, nor any consent to any departure by Customer therefrom, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement or any of the Additional Agreements and any consent to any departure by Customer from the terms of this Loan Agreement or any of the Additional Agreements shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Customer shall in any case entitle Customer to any other or further notice or demand in similar or other circumstances. (b) Disclosure. Customer hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Customer. In connection with said authorization, the parties recognize that in order to provide a WCMA Line of Credit certain information about Customer is required to be made available on a computer network accessible by certain affiliates of MLBFS, including MLPF&S. (c) Communications. All notices and other communications required or permitted hereunder shall be in writing, and shall be either delivered personally, mailed by postage prepaid certified mail or sent by express overnight courier or by facsimile. Such notices and communications shall be deemed to be given on the date of personal delivery, facsimile transmission or actual delivery of certified mail, or one Business Day after delivery to an express overnight courier. Unless otherwise specified in a notice sent or delivered in accordance with the terms hereof, notices and other communications in writing shall be given to the parties hereto at their respective addresses set forth at the beginning of this Loan Agreement, or, in the case of facsimile transmission, to the parties at their respective regular facsimile telephone number. (d) Fees, Expenses and Taxes. Customer shall pay or reimburse MLBFS for: (i) all Uniform Commercial Code filing and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS' rights hereunder or in the Collateral or any other collateral for the Obligations; (ii) any and all stamp, transfer and other taxes and fees payable or determined to be payable in connection with the execution, delivery and/or recording of this Loan Agreement or any of the Additional Agreements; and (iii) all reasonable fees and out-of-pocket expenses (including, but not limited to, reasonable fees and expenses of outside counsel) incurred by MLBFS in connection with the collection of any sum payable hereunder or under any of the Additional Agreements not paid when due, the enforcement of this Loan Agreement or any of the Additional Agreements and the protection of MLBFS' rights hereunder or thereunder, excluding, however, salaries and normal overhead attributable to MLBFS' employees. Customer hereby authorizes MLBFS, at its option, to either cause any and all such fees, expenses and taxes to be paid with a WCMA Loan, or invoice Customer therefor (in which event Customer shall pay all such fees, expenses and taxes within 5 Business Days after receipt of such invoice). The obligations of Customer under this paragraph shall survive the expiration or termination of this Loan Agreement and the discharge of the other Obligations. (e) Right to Perform Obligations. If Customer shall fail to do any act or thing which it has covenanted to do under this Loan Agreement or any representation or warranty on the part of Customer contained in this Loan Agreement shall be breached, MLBFS may, in its sole discretion, after 5 Business -9- Days written notice is sent to Customer (or such lesser notice, including no notice, as is reasonable under the circumstances), do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer upon demand, with interest at the Interest Rate during the period from and including the date funds are so expended by MLBFS to the date of repayment, and all such amounts shall be additional Obligations. The payment or performance by MLBFS of any of Customer's obligations hereunder shall not relieve Customer of said obligations or of the consequences of having failed to pay or perform the same, and shall not waive or be deemed a cure of any Default. (f) Further Assurances. Customer agrees to do such further acts and things and to execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Loan Agreement or any of the Additional Agreements, or to establish, perfect and maintain MLBFS' security interests and liens upon the Collateral, including, but not limited to: (i) executing financing statements or amendments thereto when and as reasonably requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local law, causing the owners and/or mortgagees of the real property on which any Collateral may be located to execute and deliver to MLBFS waivers or subordinations reasonably satisfactory to MLBFS with respect to any rights in such Collateral. (g) Binding Effect. This Loan Agreement and the Additional Agreements shall be binding upon, and shall inure to the benefit of MLBFS, Customer and their respective successors and assigns. Customer shall not assign any of its rights or delegate any of its obligations under this Loan Agreement or any of the Additional Agreements without the prior written consent of MLBFS. Unless otherwise expressly agreed to in a writing signed by MLBFS, no such consent shall in any event relieve Customer of any of its obligations under this Loan Agreement or the Additional Agreements. (h) Headings. Captions and section and paragraph headings in this Loan Agreement are inserted only as a matter of convenience, and shall not affect the interpretation hereof. (i) Governing Law. This Loan Agreement, and, unless otherwise expressly provided therein, each of the Additional Agreements, shall be governed in all respects by the laws of the State of Illinois. (j) Severability of Provisions. Whenever possible, each provision of this Loan Agreement and the Additional Agreements shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Loan Agreement or any of the Additional Agreements which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Loan Agreement and the Additional Agreements or affecting the validity or enforceability of such provision in any other jurisdiction. (k) Term. This Loan Agreement shall become effective on the date accepted by MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof, shall continue in effect so long thereafter as the WCMA Line of Credit shall be in effect or there shall be any Obligations outstanding. (l) Counterparts. This Loan Agreement may be executed in one or more counterparts which, when taken together, constitute one and the same agreement. (m) Jurisdiction; Waiver. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT (INCLUDING THE WCMA NOTE SET FORTH HEREIN) AND THE ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER IRREVOCABLY SUBMITS ITSELF TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE AND THE CONVENIENCE OF ANY SUCH FORUM, AND ANY AND ALL RIGHTS TO REMOVE SUCH ACTION FROM STATE TO FEDERAL COURT. CUSTOMER FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE WCMA LINE OF CREDIT, THIS LOAN AGREEMENT, ANY ADDITIONAL AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS LOAN AGREEMENT. CUSTOMER FURTHER WAIVES THE RIGHT TO BRING ANY NON-COMPULSORY COUNTERCLAIMS. (n) Integration. THIS LOAN AGREEMENT, TOGETHER WITH THE ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. WITHOUT LIMITING THE FOREGOING, CUSTOMER ACKNOWLEDGES THAT EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN: (I) NO PROMISE OR COMMITMENT HAS BEEN MADE TO IT BY MLBFS, MLPF&S OR ANY OF THEIR RESPECTIVE EMPLOYEES, AGENTS OR REPRESENTATIVES TO EXTEND THE AVAILABILITY OF THE WCMA LINE OF CREDIT OR THE MATURITY DATE, OR TO INCREASE THE MAXIMUM WCMA LINE OF CREDIT, OR OTHERWISE EXTEND ANY OTHER CREDIT TO CUSTOMER OR ANY OTHER PARTY; (II) NO PURPORTED EXTENSION OF THE MATURITY DATE, INCREASE IN THE MAXIMUM WCMA LINE OF CREDIT OR OTHER EXTENSION OR AGREEMENT TO EXTEND CREDIT SHALL BE VALID OR BINDING UNLESS EXPRESSLY SET FORTH IN A WRITTEN INSTRUMENT SIGNED BY MLBFS; AND (III) THIS LOAN AGREEMENT SUPERSEDES AND REPLACES ANY AND ALL PROPOSALS, LETTERS OF INTENT AND APPROVAL AND COMMITMENT LETTERS FROM MLBFS TO CUSTOMER, NONE OF WHICH SHALL BE CONSIDERED AN ADDITIONAL AGREEMENT. NO AMENDMENT OR MODIFICATION OF THIS AGREEMENT OR ANY OF THE ADDITIONAL AGREEMENTS TO WHICH CUSTOMER IS A PARTY SHALL BE EFFECTIVE UNLESS IN A WRITING SIGNED BY BOTH MLBFS AND CUSTOMER. -10- IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year first above written. DREAMS PRODUCTS, INC. D/B/A MOUNTED MEMORIES By: _________________________________________________________________________ Signature (1) Signature (2) - ----------------------------------------------------------------------------- Printed Name Printed Name - ----------------------------------------------------------------------------- Title Title STATE OF _______________ } } SS. COUNTY OF___________________________} The foregoing instrument was acknowledged before me this day of ____________ AD, 2000 by __________________________________________ of DREAMS PRODUCTS, INC. D/B/A MOUNTED MEMORIES, a Utah corporation, on behalf of the corporation. Said person is personally known to me or has produced ______________________ as identification. _______________________________________ NOTARY PUBLIC _______________________________________ PRINTED NAME OF NOTARY PUBLIC My Commission Expires: - ------------------------------ [S E A L] Accepted at Chicago, Illinois: MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. By:___________________________________________________________ -11- EXHIBIT A ATTACHED TO AND HEREBY MADE A PART OF WCMA LOAN AND SECURITY AGREEMENT NO. 760- 07H76 BETWEEN MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. AND DREAMS PRODUCTS, INC. D/B/A MOUNTED MEMORIES ================================================================================ Additional Locations of Tangible Collateral: 8201 E. Pacific Place Suite 604 Denver, Colorado -12- EX-10.5 3 dex105.txt EMPLOYMENT AGREEMENT Exhibit 10.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of September 4, 2000, is between Dreams, Inc., a Utah corporation (the "Company") and Mark Viner (the "Employee"). In consideration of the foregoing and the mutual promises and covenants set forth herein, Company and Employee agree: 1. EMPLOYMENT. ---------- 1.1 Employment and Term. The Company hereby employs the ------------------- Employee, and Employee shall serve the Company, upon the terms and conditions herein set forth, for a term commencing on the date of this Agreement and expiring on the last day of the 36th calendar month following the date first written above (the "Term of Employment"), unless earlier terminated pursuant to Section 4 below. 1.2 Position and Duties. The Employee is engaged as the ------------------- Company's Chief Financial Officer to exercise and faithfully perform to the best of his ability on behalf of Company the powers and duties customarily performed as Chief Financial Officer. The duties of the Chief Financial Officer shall generally be those set forth in the bylaws for the Company, subject to modification and further delegation as determined from time to time by the Board of Directors of the Company. The Employee shall report directly to the Company's Chief Executive Officer. 1.3 Other Activities. Nothing in this Agreement shall be ---------------- construed to prevent Employee from devoting a portion of his time to community or charitable activities, from investing his assets in any form or manner he deems appropriate or from serving as a director of any corporation, provided such activities do not unreasonably interfere with the duties under this Agreement and do not violate the provisions of Section 3.1. 2. COMPENSATION. ------------ 2.1 Base Salary ----------- 1. During the first year of the Term of Employment Company will pay Employee a salary of $130,000 per year, semi-monthly. 2. During the second year of the Term of Employment Company will pay Employee a salary of $143,000 per year, semi- monthly. 3. During the third year of the Term of Employment Company will pay Employee a salary of $157,300 per year, semi-monthly. 1 2.2 Stock Option Agreements. The Company agrees to amend all previously ----------------------- issued stock option agreements with Employee to reflect a new expiration date of October 4, 2003. Specifically, this will amend the expiration dates provided in the September 4, 1998 grant of 250,000 options and the January 31, 2000 grant of 300,000 options. The vesting schedules and option prices contained therein will not change. 2.3 Benefits. The Company shall provide standard benefits as are provided -------- for other Company officers. Those benefits shall include a car allowance in an amount not to exceed $500 per month, plus reimbursement for applicable automobile insurance, registration expenses and taxes, medical and dental insurance for Employee and immediate family, and three weeks annual vacation. In the event the Company does not have a medical and dental plan in effect upon commencement of employment, the Company will pay COBRA premiums for Employee's prior coverage until the Company's plan takes effect which the Company will use its best efforts to cause to occur within 18 months. 2.4 Withholding. Employee agrees that the Company shall deduct and ----------- withhold from his salary and from all other amounts paid to Employee, all state and federal tax and other withholdings required by law. 2.5 Expenses. The Company shall reimburse Employee for reasonable expenses -------- incurred on behalf of the Company in connection with his performance of his obligations hereunder during the term of this Agreement. 2.6 Termination. Without in any way limiting the other provisions of this ----------- Agreement, upon termination of Employee's employment, whether by expiration of the term of this Agreement or as provided for in Section 4, Employee shall cease to receive or have any right to receive salary or any other compensation provided for above or otherwise. 3. NONCOMPETITION AND DISCLOSURE OF INFORMATION. -------------------------------------------- 3.1 Noncompetition. During the Term of Employment and for a period of two -------------- years after the termination of Employee's employment with Company (as further limited hereinafter) the Employee will not, directly or indirectly, be employed by, own, manage, operate, act as an agent for, join, control or participate in the ownership, management, operation or control of or be connected with in any manner, any business engaged in memorabilia sales or the franchising of stores that sell memorabilia ("Competitive Business"). The Employee shall be deemed to be connected with such business if he is the sole proprietor of such business, such business is carried on by a partnership in which he is a general or limited partner agent or employee, or a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prevent the purchase or ownership by the Employee of shares of less than one percent (1%) in a publicly held corporation. 2 3.2 Disclosure of Information. The Employee recognizes and acknowledges ------------------------- that the confidential, proprietary information of the Company, and other intellectual property of the Company including contacts made within the scope of Employee's duties hereunder and such trade secrets or information as may exist from time to time, including without limitation technical information regarding the Company's business, information as to the identity of employees, customers and potential or existing suppliers of the Company or its affiliates, information as to the marketing or other plans of the Company and other similar items, are valuable, special and unique assets of the Company's business, access to and knowledge of which are essential to the performance of the duties of Employee hereunder. Such property and information shall remain the exclusive property of the Company at all times during and subsequent to the Term of Employment. Employee will not, during or after the Term of Employment, in whole or in part, remove Company's records either in original, duplicated or copied form, from the premises of the Company, nor disclose such secrets or confidential or proprietary information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall Employee make use of any such property for his own purposes or for the benefit of any person, firm, corporation or other entity (except the Company or its affiliates) under any circumstances, during or after the Term of Employment. 3.3 Injunctive Relief. If there is a breach or threatened breach of the ----------------- provisions of Section 3.1 or 3.2 of this Agreement by Employee, the Company shall be entitled to an injunction restraining the Employee from breaching or violating the provisions of this Section 3, it being agreed that the loss and damages suffered by virtue of any breach are incapable of being made certain. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies for such breach or threatened breach. 4. EARLY TERMINATION OF AGREEMENT. ------------------------------ 4.1 Early Termination of Agreement. This Agreement shall terminate earlier ------------------------------ than expiration of the Term of Employment ("Early Termination") upon the occurrence of any of the following events: (a) Immediately upon notice from the Company to the Employee for cause. The term "cause" shall refer and be limited to: (i) any act of embezzlement or conversion of assets of the Company; (ii) the Employee's material breach of any material covenant of this Agreement; (iii) an act of gross malfeasance or misfeasance by Employee; (iv) habitual or repeated material non-performance of duties. However, with regard to (ii) and (iv) above, "cause" shall not have occurred until Company notifies Employee of such event and Employee shall not have cured such event within a period of fifteen (15) days after his receipt of notice and the Board of Directors shall have voted to terminate Employee's employment. 3 Company's failure to notify in writing shall not be construed to be a waiver by Company of its right to later notify Employee. (b) Upon mutual agreement of Company and Employee. 4.2 Obligations Surviving Early Termination. Notwithstanding the --------------------------------------- Early Termination of this Agreement as contemplated in Section 4.1 above or expiration of the term of this Agreement, the provisions of this Agreement relating to the Employee's covenant not to compete, and Employee's obligation to maintain and protect trade secrets and confidential, proprietary rights and information of the Company shall maintain in force and effect pursuant to the terms of this Agreement. 5. GENERAL PROVISIONS. ------------------ 5.1 (a) Binding Agreement. This Agreement shall be binding upon and ----------------- shall inure to the benefit of the heirs, legal representatives, successors and assigns, as applicable, of the respective parties hereto, and any entities resulting from the reorganization, consolidation or merger of any party hereto. (b) Headings. The headings used in this Agreement are inserted -------- for reference purposes only and shall not be deemed to limit or affect in any way the meaning or interpretation of any of the terms or provisions of this Agreement. (c) Counterparts. This Agreement may be signed upon any number ------------ of counterparts with the same effect as if the signature to any counterpart were upon the same instrument. (d) Severability. The provisions of this Agreement are ------------ severable, and should any provision hereof be found to be void, voidable or unenforceable, such void, voidable or unenforceable provision shall not affect any other portion or provision of this Agreement. Without limiting the generality of the above, should any provision be unenforceable as a result of a time period or geographic area, the time period and/or geographic area shall be reduced to the longest period and/or largest area which would render the provision enforceable. (e) Waiver. Any waiver by any party hereto of any breach of any ------ kind or character whatsoever by any other party, whether such waiver be direct or implied, shall not be construed as a continuing waiver or consent to any subsequent breach of this Agreement on the part of the other party. (f) Modification. This Agreement may not be modified except by ------------ an instrument in writing signed by the parties hereto. 4 (g) Governing Law. This Agreement shall be interpreted, ------------- construed and enforced according to the laws of the state of Utah. (h) Attorneys' Fees. In the event any action or proceeding is --------------- brought by either party against the other under this Agreement, the prevailing party shall be entitled to recover attorneys' fees and costs in such amount as the court may adjudge reasonable. (i) Notice. Any notice, consent, request, objection or ------ communication to be given by either party to this Agreement shall be in writing and shall be either delivered personally or by Airborne, Federal Express or other commercial overnight delivery service addressed as follows: Company: Dreams, Inc. 5017 Hiatus Road Sunrise, Florida 33351 Employee: Mark Viner 880 Tanglewood Circle Weston, Florida 33327 (j) Assignment. Employee may not assign his rights and ---------- obligations pursuant to this Agreement to a third party without the written consent of the Company. (k) Securities Documents. It shall be a condition to the -------------------- issuance of any securities by Company to Employee, including shares of the Company's common stock, that Employee shall execute and deliver to Company all documents deemed necessary by the Company's counsel in order to comply with the securities laws of the United States and the states thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first set forth above. COMPANY: DREAMS, INC. By: ______________________________ Its:_______________________________ EMPLOYEE: ___________________________________ Mark Viner 5 -----END PRIVACY-ENHANCED MESSAGE-----