-----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, BiQe9x9MGTjS1dPiH5y+Zt3fEJTSMUBdG/HlRX6Pq37yYLUKifET2lwu0N7yJ7DY J5ubCSxQ+sZlrHrYGXHROg== 0001021408-02-002329.txt : 20020414 0001021408-02-002329.hdr.sgml : 20020414 ACCESSION NUMBER: 0001021408-02-002329 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30310 FILM NUMBER: 02546690 BUSINESS ADDRESS: STREET 1: 2 SOUTH UNIVERSITY DRIVE STREET 2: SUITE 325 CITY: PLANTATION STATE: FL ZIP: 11111 BUSINESS PHONE: 9543770002 FORMER COMPANY: FORMER CONFORMED NAME: STRATAMERICA CORP DATE OF NAME CHANGE: 19920703 10QSB 1 d10qsb.txt FORM 10-QSB FORM 10-QSB SECURITY AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001. ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______________________ to _____________________. Commission file number: 0-15399 DREAMS, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Utah 87-0368170 - ------------------------------------------------------------------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 2 South University Drive, Suite. 325, Plantation, Florida 33324 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (954) 377-0002 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No________ ------ APPLICABLE ONLY TO CORPORATE ISSUERS As of February 10, 2002, there were 57,852,835 shares of Common Stock, no par value per share outstanding. Transitional Small Business Disclosure Format: Yes_____ No X ----- DREAMS, INC. INDEX
PAGE ---- Part I. Financial Information................................................................... 1 Item 1. Financial Statements (unaudited)........................................................ 1 Condensed Consolidated Balance Sheet.................................................... 1 Condensed Consolidated Statements of Income............................................. 2 Condensed Consolidated Statements of Cash Flows......................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 10 Part II. Other Information....................................................................... 15 Item 2. Changes in Securities................................................................... 15
Dreams, Inc. and Subsidiaries Condensed Consolidated Balance Sheet - Unaudited As of December 31, 2001 (Dollars in Thousands, except share amounts)
ASSETS ------ Current assets: Cash and cash equivalents $ 481 Accounts receivable, net 2,333 Notes receivable 5 Inventories 6,670 Prepaid expenses and deposits 219 ------------- Total current assets 9,708 Property and equipment, net 584 Intangible assets, net 3,897 ------------- Total assets $ 14,189 ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 475 Accrued liabilities 614 Current portion of long-term debt 46 Borrowings under line of credit 1,690 Deferred credits 20 ------------- Total current liabilities 2,845 Long-term debt, less current portion 1,304 ------------- Total liabilities 4,149 ------------- Commitments and contingencies - Stockholders' equity: Common stock and paid-in capital, no par value; authorized 100,000,000 Shares; 57,852,835 shares issued and outstanding 23,064 Accumulated deficit (12,773) ------------- 10,291 Less: deferred compensation (251) ------------- Total stockholders' equity 10,040 ------------- Total liabilities and stockholders' equity $ 14,189 =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Dreams, Inc. and Subsidiaries Condensed Consolidated Statements of Income - Unaudited (Dollars in Thousands, except earnings per share and share amounts)
For the nine months ended: For the three months ended: Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2001 2000 2001 2000 ---- ---- ---- ---- Revenues $ 13,018 $ 10,536 $ 4,926 $ 4,440 ----------- ----------- ----------- ----------- Expenses: Cost of sales 7,498 6,094 2,682 2,577 Selling, general and administrative 4,107 3,058 1,479 1,077 expenses Depreciation and amortization 55 194 20 50 ----------- ----------- ----------- ----------- Total expenses 11,660 9,346 4,181 3,704 ----------- ----------- ----------- ----------- Income before interest and taxes 1,358 1,190 745 736 Interest, net 171 334 52 70 ----------- ----------- ----------- ----------- Income before provision for income taxes 1,187 856 693 666 Current tax expense 60 100 34 76 Deferred tax expense - - - - ----------- ----------- ----------- ----------- Income before extraordinary item 1,127 756 659 590 Extraordinary item: Early extinguishment of debt - (489) - (489) ----------- ----------- ----------- ----------- Net income $ 1,127 $ 267 $ 659 $ 101 =========== =========== =========== =========== Earnings per share: Basic: Earnings per share $ 0.02 $ 0.01 $ 0.01 $ 0.00 =========== =========== =========== =========== Weighted average shares 56,390,653 44,435,413 57,412,618 52,962,643 outstanding =========== =========== =========== =========== Diluted: Earnings per share $ 0.02 $ 0.01 $ 0.01 $ 0.00 =========== =========== =========== =========== Weighted average shares 57,466,582 51,786,469 58,036,965 56,053,433 outstanding =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Dreams, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows - Unaudited (Dollars in Thousands)
Nine Months Ended December 31, 2001 2000 ---- ---- Net cash used in operating activities $ (238) $ (1,327) -------------- ----------- Cash flows from investing activities: Acquisition costs (56) - Purchase of property and equipment (46) (77) -------------- ----------- Net cash used in investing activities (102) (77) -------------- ----------- Cash flows from financing activities: Proceeds from sale of stock - 4,419 Proceeds from term loan 1,000 - Net change in line of credit borrowings (292) 1,407 Repurchase of warrants - (1,250) Repayment on notes payable and term loan (77) (3,000) -------------- ----------- Net cash provided by financing activities 631 1,576 -------------- ----------- Net increase in cash, cash equivalents and restricted cash 291 172 Cash, cash equivalents and restricted cash at beginning of period 190 236 -------------- ----------- Cash, cash equivalents and restricted cash at end of period $ 481 $ 408 ============== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts 1. Management's Representations The condensed consolidated interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the financial statements and the notes thereto, included in the Company's Annual Report on Form 10K-SB, for the fiscal year ended March 31, 2001. The accompanying condensed consolidated interim financial statements have been prepared, in all material respects, in conformity with the standards of accounting measurements set forth in Accounting Principles Board Opinion No. 28 and reflect, in the opinion of management, all adjustments, which are of normal recurring nature, necessary to summarize fairly the financial position and results of operations for such periods. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. 2. Nature of Business and Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation. Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation. New Accounting Pronouncements The Company has adopted as of April 1, 2001 the provisions of SFAS Nos. 141 and 142. Therefore, annual and quarterly amortization of goodwill and trademark of $140 and $35, respectively, is no longer recognized. The Company is presently undergoing an independent transitional fair value based impairment test. If the results of that test determine that the fair value is less than the recorded value, the Company will record an impairment loss in the June 30, 2001 quarter as a cumulative effect of a change in accounting principle. We anticipate this review to be complete by March 31, 2002. 4 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts Earnings Per Share For the nine months ended December 31, 2001, weighted average shares outstanding for basic earnings per share purposes and diluted earnings per share purposes were 56,390,653 and 57,466,582, respectively. Included in diluted shares is the diluted effect of common stock equivalents relating to stock options of 1,075,929. For the three months ended December 31, 2001, weighted average shares outstanding for basic earnings per share purposes and diluted earnings per share purposes were 57,412,618 and 58,036,965, respectively. Included in diluted shares is the diluted effect of common stock equivalents relating to stock options of 624,347. Stock options to purchase up to 1,025,000 and 225,000 shares of the Company's common stock at an average exercise price of $0.50 and $0.75 per share were not considered in the calculation of diluted earnings per share for the three and nine month periods ended December 31, 2001, respectively, due to their antidilutive effect. Acquisition Effective August 15, 2001, the Company purchased the Greene Organization for 2,200,000 restricted shares of the Company's common stock and $300,000 of cash. Of the $300,000 in cash, $150,000 had already been paid on deposit prior to April 1, 2001 and the remaining $150,000 was paid in the first quarter of fiscal 2002. In connection with the acquisition, the Company also entered into an employment agreement with Warren H. Greene. In accordance with the Agreement, the Company will pay Warren H. Greene $250,000 and an annual bonus in an amount, as determined by the Agreement. The term of the employment agreement is five years. Warren H. Greene is the brother-in-law of the Company's Chief Executive Officer. 5 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts 3. Business Segment Information The Company has two reportable segments: the Manufacturing/Distribution segment and the Franchise Operations segment. The Manufacturing/Distribution segment represents the manufacturing and wholesaling of sports memorabilia products, custom artwork and acrylic cases. Sales are handled primarily through in-house salespersons that sell to specialty retailers and other distributors in the United States. The Company's manufacturing and distributing facilities are located in the United States. The majority of the Company's products are manufactured in these facilities. The Franchise Operations segment represents the results of the Company's franchise program. The Company is in the business of selling Field of Dreams(R) retail store franchises in the United States and generates revenues through the sale of those franchises, continuing royalties and sales of certain merchandise to franchises. Summarized financial information concerning the Company's reportable segments is shown in the following tables. Corporate related items, results of insignificant operations and income and expenses not allocated to reportable segments are included in the reconciliations to consolidated results table. Segment information for the nine and three months periods ended December 31, 2001 and 2000 was as follows: Manufacturing/ Franchise Nine Months Ended: Distribution Operations Total ----------------- ------------ ---------- ----- December 31, 2001 Net sales $11,591 $1,094 $12,685 Intersegment net sales - - - Operating earnings 1,486 440 1,926 Total assets 9,305 495 9,800 December 31, 2000 Net sales $ 9,372 $ 1,164 $10,536 Intersegment net sales - - - Operating earnings 1,208 149 1,357 Total assets 7,500 505 8,005 6 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts Reconciliation to consolidated amounts is as follows: YTD FY2002 YTD FY2001 ---------- ---------- Revenues: --------- Total revenues for reportable segments $12,685 $10,536 Other revenues 333 - Eliminations of intersegment revenues - - ------- -------- Total consolidated revenues $13,018 $10,536 Operating earnings: ------------------- Total earnings for reportable segments $ 1,926 $ 1,357 Other loss (568) (167) Interest expense (171) (334) ------- -------- Total consolidated income before taxes $ 1,187 $ 856 Manufacturing/ Franchise Three Months Ended: Distribution Operations Total ------------------ ------------ ---------- ----- December 31, 2001 Net sales $ 4,245 $ 514 $ 4,759 Intersegment net sales - - - Operating earnings 613 263 876 Total assets. 9,305 495 9,800 December 31, 2000 Net sales $ 3,914 $ 526 $ 4,440 Intersegment net sales - - - Operating earnings 628 156 784 Total assets 7,500 505 8,005 Reconciliation to consolidated amounts is as follows: Q3 FY2002 Q3 FY2001 --------- --------- Revenues: --------- Total revenues for reportable segments $ 4,759 $ 4,440 Other revenues 167 - Eliminations of intersegment revenues - - ------- ------- Total consolidated revenues $ 4,926 $ 4,440 7 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts Operating earnings: ------------------ Total earnings for reportable segments 876 784 Other loss (131) (48) Interest expense (52) (70) ------ -------- Total consolidated income before taxes $ 693 $ 666 4. Inventories The components of inventories as of December 31, 2001 are as follows: Memorabilia products $ 5,551 Licensed products 724 Acrylic cases and raw materials 528 ------- 6,803 Less reserve for obsolescence (133) ------- $ 6,670 ------- 5. Intangible Assets The following table presents a reconciliation of net income and earnings per share amounts, as reported in the financial statements, to those amounts adjusted for goodwill and intangible asset amortization determined in accordance with the provisions of SFAS No. 142. YTD FY2002 YTD FY2001 ---------- ---------- Reported net income $ 1,127 $ 267 Add back: goodwill amortization - 30 Add back: trademarks amortization - 75 Income tax effect - (6) ------- ------ Adjusted net income $ 1,127 $ 366 ------- ------ Basic and diluted earnings per share: Reported net income $ 0.02 $ 0.01 Goodwill amortization 0.00 0.00 Trademarks amortization 0.00 0.00 Income tax effect 0.00 0.00 ------- ------ Adjusted net income $ 0.02 $ 0.01 ------- ------ 8 Dreams, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements - Unaudited Dollars in Thousands, Except per Share Amounts Q3 FY2002 Q3 FY2001 --------- --------- Reported net income $ 659 $ 101 Add back: goodwill amortization - 10 Add back: trademarks amortization - 25 Income tax effect - (2) ------ ------- Adjusted net income $ 659 $ 134 ------ ------- Basic and diluted earnings per share: Reported net income $ 0.01 $ 0.00 Goodwill amortization 0.00 0.00 Trademarks amortization 0.00 0.00 Income tax effect 0.00 0.00 ------ ------- Adjusted net income $ 0.01 $ 0.00 ------ ------- As of December 31, 2001, intangible assets consists of the following: Gross Carrying Accumulated Amount Amortization ------ ------------ Goodwill $ 2,190 $ 83 Trademark 2,000 210 ------- ------ $ 4,190 $ 293 ------- ------ The trademark of $2.0 million and goodwill of $788 were being amortized over 20 years. Upon the initial adoption of SFAS 142, the Company reassessed the useful lives of the intangible assets and determined the trademark is deemed to have an indefinite useful life because it is expected to generate cash flows indefinitely and the Company intends on continuing to register the trademark. Thus, the Company has ceased amortization of the trademark, as well as the goodwill as of April 1, 2001. No amortization has been recorded on the $1.4 million of goodwill incurred related to the August 2001 acquisition of The Greene Organization. 6. Related Party Transaction On December 18, 2001 the Company advanced $120,000 to an Executive Officer of the Company. Accordingly, this amount was reflected in accounts receivable at December 31, 2001. This amount was repaid to the Company subsequent to December 31, 2001. 9 7. Term Loan On November 1, 2001, the Company converted $1.0 million of its line of credit into a four-year term loan. The Company will make equal monthly payments of principal and interest under the term loan. The balance on the term loan at December 31, 2001 was $959,000. The line of credit and term loan carry a floating annual interest rate based on adding a fixed interest charge of 2.4% to the "30-day Dealer Commercial Paper" rate. As of February 10, 2002, the Company's availability under the line of credit was approximately $2.2 million. 8. Commitments The Company is a party to certain contracts with several athletes which will require the Company to make minimum payments to these athletes over the next three years. The payments are in exchange for autographs on inventory items to be received in the future. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-QSB under "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward- looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: competition; seasonality; success of operating initiatives; new product development and introduction schedules; acceptance of new product offerings; franchise sales; advertising and promotional efforts; adverse publicity; expansion of the franchise chain; availability, locations and terms of sites for franchise development; changes in business strategy or development plans; availability and terms of capital; labor and employee benefit costs; changes in government regulations; and other factors particular to the Company. NEW ACCOUNTING PRONOUNCEMENTS The Company has adopted as of April 1, 2001 the provisions of SFAS Nos. 141 and 142. Therefore, annual and quarterly amortization of goodwill and trademark of $140,000 and $35,000, respectively, is no longer recognized. The Company is presently undergoing an independent transitional fair value based impairment test. If the results of that test determine that the fair value is less than the recorded value, the Company will record an impairment loss in the June 30, 2001 quarter as a cumulative effect of a change in accounting principle. We anticipate this review to be complete by March 31, 2002. GENERAL Dreams, Inc. ("Company") operates through its wholly-owned subsidiary Dreams Franchise Corp. ("DFC") and through Dreams Products, Inc. ("DPI") and Dreams Entertainment, Inc. ("DEI"), wholly-owned subsidiaries of DFC. DFC is the franchisor of Field of Dreams(R) retail units that sell sports and celebrity memorabilia products. As of February 10, 2002, there were 35 Field of Dreams(R) franchises operating in 18 states. DPI is a manufacturer/wholesaler of sports memorabilia products and acrylic cases. It sells to a wide customer base, which includes internet companies, traditional catalog companies and other retailers of sports and celebrity memorabilia products, including Field of Dreams(R). Approximately 13 percent of DPI's revenues are generated through sales to Field of Dreams(R) franchises. DPI is licensed by the National Football League and Major League Baseball as a distributor of autographed products. 11 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(R) stores. There can be no assurance, however, that any additional units will open or that they will be successful. RESULTS OF OPERATIONS Nine Months Ended December 31, 2001 Compared to the Nine Months Ended December 31, 2000 Revenues. Total revenues increased 23.6% from $10.5 million in the first nine months of fiscal 2001 to $13.0 million in the same period of fiscal 2002 due to an increase in the Company's manufacturing/wholesaling operations. Manufacturing and wholesale revenues increased 23.4% from $9.4 million in the first nine months of fiscal 2001 to $11.6 million in the first nine months of fiscal 2002, due primarily to increased product offerings, continued development of business from existing customers and an overall increase in the Company's distribution channels. The Company increased its sales staff by 40% in late fiscal 2001 and we plan to expand further in calendar 2002 in an effort to continue increasing sales. Revenues from franchise operations were comparable in both periods decreasing slightly from $1.2 million in the first nine months of fiscal 2001 to $1.1 million in the first nine months of fiscal 2002. The number of franchises was similar throughout both fiscal periods. The Company realized approximately $332,000 in net revenues generated through athlete representation and marketing fees, a new line of business entered into in January 2001. Costs and expenses. Cost of sales of manufacturing and wholesale products were $7.5 million in the first nine months of fiscal 2002 versus $6.1 million in the same period of fiscal 2001. As a percentage of manufacturing and wholesale revenues, cost of sales was 64.6% in the first nine months of fiscal 2002 and was 64.5% in the same period of fiscal 2001. Selling, general and operating expenses ("S,G&A") increased from $3.1 million in the first nine months of fiscal 2001 (29.0% of total revenue) to $4.1 million in the same period of fiscal 2002 (31.5% of total revenue). The slight increase as a percentage of revenues relates to the Company's investment in employees in newly created positions in calendar 2001 in anticipation of associated revenue growth. Depreciation and amortization decreased from $194,000 in the first nine months of fiscal 2001 to $55,000 in the first nine months of fiscal 2002. The decrease is due to the adoption of 12 FAS 142 which no longer requires the amortization of goodwill. Therefore, annual and quarterly amortization of goodwill of $140,000 and $35,000, respectively, is no longer recognized. Interest expense, net. Net interest expense decreased 48.8% from $334,000 in first nine months of fiscal 2001 to $171,000 in the same period in fiscal 2002, due primarily to the elimination of a $3.0 million note payable in October 2000 which had monthly interest of $35,000. This decrease was partially offset by additional borrowings on the line of credit. Provision for income taxes. At December 31, 2001, the Company had available federal net operating loss carry-forwards of approximately $2.5 million, which expire in various years beginning in 2009 through 2018. A valuation allowance was provided for the full amount of federal taxes as of the end of both periods ended December 31, 2000 and 2001. However, a provision for state income taxes was provided for in both nine month periods of fiscal 2001 and fiscal 2002 for applicable taxes. The Company will evaluate in the quarter ending March 31, 2002 whether the deferred tax valuation allowance of approximately $2.5 million should be relieved based on the Company's expected future profitability. Three Months Ended December 31, 2001 Compared to the Three Months Ended December 31, 2000 Revenues. Total revenues increased 10.9% from $4.4 million in the third quarter of fiscal 2001 to $4.9 million in the same period of fiscal 2002 due to an increase in the Company's manufacturing/wholesaling operations. Manufacturing and wholesale revenues increased 8.5% from $3.9 million in the third quarter of fiscal 2001 to $4.3 million in the third quarter of fiscal 2002, due primarily to increased product offerings, continued development of business from existing customers and an overall increase in the Company's distribution channels. The Company increased its sales staff by 40% in late fiscal 2001 and we plan to expand further in calendar 2002 in an effort to continue increasing sales. Revenues from franchise operations were comparable in both quarterly periods decreasing slightly from $505,000 in the third quarter of fiscal 2001 to $481,000 in the third quarter of fiscal 2002. The number of franchises was similar throughout both fiscal quarters. The Company realized approximately $166,000 in net revenues generated through athlete representation and marketing fees, a new line of business entered into in January 2001. Costs and expenses. Cost of sales of manufacturing and wholesale products were $2.7 million in the third three months of fiscal 2002 versus $2.6 million in the same period of fiscal 2001. As a percentage of manufacturing and wholesale revenues, cost of sales was 62.8% in the fiscal 2002 quarter versus 65.5% in the same quarter in the prior year. The change mostly relates to a shift in the sales mix. 13 Selling, general and operating expenses ("S,G&A") increased from $1.1 million in the third quarter of fiscal 2001 (24.3% of total revenue) to $1.5 million in the same period of fiscal 2002 (30.0% of total revenue). S,G&A expenses as a percentage of total revenues have increased slightly due to a buildup in infrastructure which was necessary to generate the incremental revenues. Depreciation and amortization decreased from $50,000 in the third quarter of fiscal 2001 to $20,000 in the third three months of fiscal 2002. The decrease is due to the adoption of FAS 142 which no longer requires the amortization of goodwill. Therefore, annual and quarterly amortization of goodwill of $140,000 and $35,000, respectively, is no longer recognized. Interest expense, net. Net interest expense decreased 25.8% from $70,000 in fiscal third quarter of 2001 to $52,000 in the same period in fiscal 2002, due primarily to the elimination of a $3.0 million note payable in October 2000 which had monthly interest of $35,000. The increase was partially offset by increased borrowings on the line of credit. Provision for income taxes. At December 31, 2001, the Company had available federal net operating loss carry-forwards of approximately $2.5 million, which expire in various years beginning in 2009 through 2018. A valuation allowance was provided for the full amount of federal taxes as of the end of both third quarter periods of fiscal 2001 and fiscal 2002. However, a provision for state income taxes was provided for in both quarterly periods of fiscal 2001 and fiscal 2002 for applicable taxes. The Company will evaluate in the quarter ending March 31, 2002 whether the deferred tax valuation allowance of approximately $2.5 million should be relieved based on the Company's expected future profitability. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, the Company's cash and cash equivalents were $481,000 compared to $190,000 at March 31, 2001. Net accounts receivable at December 31, 2001 were $2.3 million compared to $1.9 million at March 31, 2001. Cash used in operations amounted to $238,000 for the first nine months of fiscal 2002, compared to cash used in operations of $1.3 million in the same period of fiscal 2001. The difference primarily relates to the large investment in inventory the Company made in the third quarter of fiscal 2001 (approximately $1.2 million). In November 2000, the Company received its first line of credit facility which allowed for significant inventory investment leading into the holiday season of calendar 2000. The inventory levels achieved during the third quarter of fiscal 2000 remained fairly consistent throughout calendar 2001. The net repayments against our line of credit, which is classified in the financing section of the Statement of Cash Flows, was $292,000 during the first nine months of fiscal 2002. Outstanding borrowings against our line of credit were $1.7 million at December 31, 2001. The line of credit is used for working capital purposes. On November 1, 2001, the Company converted $1.0 million of its line of credit into a four-year term loan. The Company will make equal monthly payments of principal and interest under the term loan. The balance on the term 14 loan at December 31, 2001 was $959,000. The line of credit and term loan carry a floating annual interest rate based on adding a fixed interest charge of 2.4% to the "30-day Dealer Commercial Paper" rate. As of February 10, 2002, the Company's availability under the line of credit was approximately $2.2 million. The Company presently does not operate or own any Field of Dreams(R) units. We plan to sell franchised units to prospective and current third-party franchisees in fiscal 2002 and beyond. There are no material capital expenditures planned for in the foreseeable future, nor any payments planned for off-balance sheet obligations or other demands or commitments for which payments become due after the next 12 months. On December 18, 2001 the Company advanced $120,000 to an Executive Officer of the Company. Accordingly, this amount was reflected in accounts receivable at December 31, 2001. This amount was repaid to the Company subsequent to December 31, 2001. The Company believes its current available cash position, taking into account the availability under the line of credit is sufficient to meet its cash needs on both a short-term and long-term basis. There are no demands, commitments, events, or uncertainties, as they relate to liquidity which could negatively affect the Company's ability to operate and grow as planned. 15 Part II. Other Information. Item 2. Changes in Securities. On December 22, 2001, the Company issued 500,000 shares of its common stock to Mine-O-Mine, Inc. as consideration for services to be performed. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. 16 SIGNATURE In accordance with the Exchange Act, the Registrant has caused this report to be signed on behalf of the Registrant by the undersigned in the capacities indicated, thereunto duly authorized on February 11, 2002. DREAMS, INC. /s/ Mark Viner -------------------------------------------- Mark Viner, Chief Financial Officer, Principal Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----