-----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, KQD+IuPMmhPJFOdfC90/ZsAwloxyoxGoIPLCUz2RKE1FzYqdHU0/Kb6/dAQ22CEL VnGhfr2t6uBaUydtzZ4v9w== 0001047469-99-034907.txt : 19990908 0001047469-99-034907.hdr.sgml : 19990908 ACCESSION NUMBER: 0001047469-99-034907 CONFORMED SUBMISSION TYPE: 10SB12G PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990907 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: 10SB12G SEC ACT: SEC FILE NUMBER: 000-15399 FILM NUMBER: 99706890 BUSINESS ADDRESS: STREET 1: 5009 HIATUS ROAD 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 10SB12G 1 FORM 10-SB 12G UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 Dreams, Inc. - ------------------------------------------------------------------------------- (Name of Small Business Issuer in its charter) Utah 87-0368170 - ------------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5009 Hiatus Road, Sunrise, Florida 33351 - ------------------------------------- --------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number ( 954 ) 742 - 8544 ------- ---------- ------------ Securities to be registered under Section 12(b) of the Act: Title of each class Name of each exchange on which to be so registered each class is to be registered None N/A - ------------------------------------- --------------------------------------- - ------------------------------------- --------------------------------------- Securities to be registered under Section 12(g) of the Act: Common stock, no par value - ------------------------------------------------------------------------------- (Title of class) - ------------------------------------------------------------------------------- (Title of class) PART I Item 1. DESCRIPTION OF BUSINESS. GENERAL. Dreams, Inc. ("Registrant") is a Utah Corporation which was formed in April 1980. During fiscal year ended March 31, 1999, Registrant's primary lines of business were the offer and sale of Field of Dreams-Registered Trademark- 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 35 Field of Dreams-Registered Trademark- franchise stores open and operating. Additionally, six Area Development Agreements which are currently effective have been sold to franchisees. Thirteen franchised stores have been opened pursuant to those six agreements. An additional eleven franchised stores may be opened under those agreements. DPI has a manufacturing and distribution facility located in Sunrise, Florida and a distribution center in Denver, Colorado. See "Mounted Memories" for information regarding the reorganization of Registrant which resulted in the acquisition of the assets and business now employed by DPI. See "Consolidated Financial Statements" for financial information. FIELD OF DREAMS-Registered Trademark- FRANCHISING BACKGROUND. Registrant conducts its Field of Dreams-Registered Trademark- operations through its subsidiary DFC. DFC licenses certain rights from MCA/Universal Merchandising Inc. ("MCA") to use the name "Field of Dreams-Registered Trademark-" in connection with retail operations and catalog sales. Field of Dreams-Registered Trademark- 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 Registrant. Registrant does not own or operate any Field of Dreams-Registered Trademark- stores. Until December 1996 the Registrant was engaged in the restaurant business as the owner of certain Shari's restaurants and until July 1995 as the owner of a restaurant/bar in Palm Desert, California. Registrant is no longer involved in the restaurant or sports bar business. MERCHANDISING LICENSE AGREEMENT. DFC has acquired from MCA the exclusive license to use "Field of Dreams-Registered Trademark-" as the name of retail stores in the United States and a non-exclusive right to use the name "Field of Dreams-Registered Trademark-" as a logo on products. DFC has also licensed from MCA the exclusive right to sublicense the "Field of Dreams-Registered Trademark-" 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-Registered Trademark- 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 2 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-Registered Trademark- mark for approval prior to use. Ownership of the Field of Dreams-Registered Trademark- name remains with MCA and will not become that of DFC or Registrant. 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-Registered Trademark-" name. Such a termination would have a seriously adverse effect on DFC's and Registrant'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-Registered Trademark- stores outside of the United States, DFC has a right of first refusal to obtain the license for such non-United States territory. DFC must comply with certain terms and conditions in order to exercise the right of first refusal. 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. Registrant 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-Registered Trademark- 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 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. 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"). STANDARD FRANCHISES: Pursuant to a Standard franchise, a franchisee obtains the right to open and operate a single Field of Dreams-Registered Trademark- 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-Registered Trademark- 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. DFC reserves 3 the right to modify at any time the system used in the store, and DFC may also change the name used in the system from Field of Dreams-Registered Trademark- to any other name and require all franchisees to discontinue any use of any aspect of the system or the name Field of Dreams-Registered Trademark-. 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-Registered Trademark- 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-Registered Trademark- 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 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-Registered Trademark- 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. 4 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 transferrable 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. Seasonal franchisees must pay Registrant 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-Registered Trademark- 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. FRANCHISE BROKER. The officers of DFC currently act as sales agents for Field of Dreams-Registered Trademark- franchises. Registrant may engage an outside Franchise broker in the future. MOUNTED MEMORIES. Mounted Memories ("MMI") is one of the nation's largest suppliers of sports and celebrity memorabilia products and acrylic cases. MMI also organizes, operates and participates in hobby and collectible shows. Through its numerous 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 hobby and collectible shows, and at the same time, generate inventory for sale. 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 the largest selection and supply of acrylic cases, with over 50 combinations of materials, colors and styles. 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-Registered Trademark- franchise stores purchase products from MMI and have historically provided approximately ten 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 2,000 square feet of its warehousing facility 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, Registrant 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 Registrant'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, Registrant, 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, Registrant and all of its subsidiaries borrowed $3,000,000 from Sirrom Investments, Inc. ("Sirrom"). The loan bears interest at 14% per annum and is payable interest only monthly until November 16, 2003 at which time all principal and interest is due and payable. The loan is secured by all of Registrant's assets and a pledge of 27,059,470 shares (and 750,000 options to acquire shares) pledged by the control persons of Registrant and certain of their family members and associated persons and entities. The pledgedshares constitute approximately 67% of Registrant's currently issued and outstanding shares. Registrant also granted to Sirrom warrants to purchase a number of shares of Registrant's common stock. The number of shares which may be purchased pursuant to exercise of the warrants varies between a minimum of 14% and a maximum of 18.5% of the then issued and outstanding shares. The exercise price of the warrants is $0.01 per share. The warrants have anti-dilution rights, registration rights and co-sale rights. The warrant also has a "put" feature which entitles Sirrom to require Registrant to purchase the warrants for their fair market value. Fair market value is determined by an appraisal process. Payment of the "put" price may be paid by Registrant by issuance to Sirrom of a promissory note with 10% interest per annum and 24 monthly payments of principal and interest. 6 COMPETITION. DFC competes with other larger, more well known and substantially better funded franchisors for the sale of franchises. Field of Dreams-Registered Trademark- stores compete with other retail establishments of all kinds. Registrant 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 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. Registrant employs forty (40) full-time employees and four (4) part-time employees. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS. Certain statements in this Form 10-SB constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Registrant to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: competition; seasonality; success of operating initiatives; new product development and introduction schedules; acceptance of new product offerings; franchise sales; advertising and promotional efforts; adverse publicity; expansion of the franchise chain; availability, locations and terms of sites for franchise development; changes in business strategy or development plans; availability and terms of capital; labor and employee benefit costs; changes in government regulations; the effects of Year 2000 issues; and other factors particular to Registrant. 7 GENERAL. The Registrant's fiscal year ends March 31, and the fiscal years ended March 31, 2000, March 31, 1999 and March 31, 1998 are referred to as "fiscal 2000", "fiscal 1999" and "fiscal 1998", respectively. Registrant operates through its wholly-owned subsidiary DFC and through DPI and Dreams Entertainment, Inc. ("DEI"), wholly-owned subsidiaries of DFC. DFC is a franchisor of Field of Dreams-Registered Trademark- retail stores which sell sports and celebrity memorabilia products. As of September 1, 1999, there were 35 Field of Dreams-Registered Trademark- franchises operating in 20 states and in the District of Columbia. DPI is a wholesaler of sports memorabilia products and acrylic cases. It sells to a wide customer base, which includes internet companies, traditional catalog companies and other retailers of sports and celebrity memorabilia products, including Field of Dreams-Registered Trademark- retail stores. Approximately, ten percent of DPI's revenues are generated through sales to Field of Dreams-Registered Trademark- franchises. DPI is licensed by the National Football League and Major League Baseball as a distributor of autographed products. DEI was incorporated in fiscal 1999 and has been inactive since its inception. Registrant believes that the factors that will drive the future growth of its business will be the opening of new franchised units and, to some extent, capitalizing on its relationships with certain entities, such as the National Football League, Major League Baseball, Universal Studios and with certain well-known athletes, as those relationships and agreements will allow. Registrant plans to open approximately ten franchised units each of the next three fiscal years. There can be no assurance, however, that any such franchised units will open or that they will be successful. RESULTS OF OPERATIONS. FISCAL 1999 COMPARED TO FISCAL 1998 REVENUES. Total revenues increased 269.2% from $1.9 million in fiscal 1998 to $7.0 million in fiscal 1999. Retail and wholesale revenues increased 826.9% from $595,000 in fiscal 1998 to $5.5 million in fiscal 1999, due primarily to the acquisition of MMI effective November 1, 1999. MMI had wholesale sales of approximately $5.5 million in fiscal 1999. Excluding MMI's wholesale sales, Registrant's retail and wholesale revenues declined from $595,000 in fiscal 1998 to $4,000 in fiscal 1999, due primarily to Registrant realizing $475,000 from sales of an NBA lithograph in fiscal 1998 which was not sold in fiscal 1999. The balance of the decrease reflects Registrant's efforts to change its core business focus, moving more towards franchising and wholesale sales and away from retail sales. 8 Franchise fee and royalty revenues increased 55.1% from $882,000 in fiscal 1998 to $1.4 million in fiscal 1999, due primarily to the opening of eight franchised units in fiscal 1999 ($308,000 of the increase) and the inclusion of a full year of royalties from seven franchises opened during fiscal 1998 ($110,000 of the increase.) Other revenue increased 302.5% from $40,000 in fiscal 1998 to $161,000 in fiscal 1999, due to Registrant realizing a full year of commission revenue in fiscal 1999 from an outside party's sale of miscellaneous products with the Field of Dreams-Registered Trademark- logo imprinted on them. Prior to November 1997, Registrant sold these products directly and recognized the sales as retail revenues. In fiscal 1998, Registrant purchased the remaining minority shares of DFC and recognized a one-time gain of $386,000. Additionally, in fiscal 1998, Registrant sold property and equipment and recognized a gain of $5,000. COSTS AND EXPENSES. Registrant's fiscal 1999 cost of sales of $3.1 million represent MMI's cost of sales from the date of acquisition during fiscal 1999. Fiscal 1998 cost of sales represent costs associated with the sale of the NBA lithographs and other retail items sold by Registrant, which were phased out in fiscal 1999. Operating expenses increased 163.6% from $472,000 in fiscal 1998 to $1.2 million in fiscal 1999, due to the acquisition of MMI ($384,000 of the increase), significant write-off of bad debts ($169,000 of the increase) and costs associated with a lithograph project which realized immaterial sales ($150,000 of the increase). General and administrative expenses increased 131.7% from $811,000 in fiscal 1998 to $1.9 million in fiscal 1999 due to the acquisition of MMI ($591,000 of the increase) and a $409,000 preferential distribution to a company owned by Registrant's Chairman in fiscal 1999. The preferential distribution was treated as compensation expense and was the result of Registrant issuing shares of its common stock at a discounted value. Depreciation and amortization increased from $10,000 in fiscal 1998 to $126,000 in fiscal 1999 due to amortization of goodwill and debt issuance costs associated with the fiscal 1999 acquisition of MMI ($92,000 of the increase). Registrant eliminated its minority interests in fiscal 1998. INTEREST EXPENSE, NET. Net interest expense increased 133.9% from $127,000 in fiscal 1998 to $297,000 in fiscal 1999, due primarily to interest charges associated with the $3.0 million note issued by Registrant in November 1999 ($158,000 of the increase). PROVISION FOR INCOME TAXES. At March 31, 1999, Registrant had available net operating loss carryforwards of approximately $4.7 million, which expire in various years beginning in 2007 through 2014. Accordingly, a valuation allowance was provided for the full amount of federal taxes as of the end of fiscal 1998 and fiscal 1999. However, a provision for state income taxes was provided for in fiscal 1999 for applicable taxes. See Note 10 to the Consolidated Financial Statements of Registrant. 9 OTHER. Registrant realized income from discontinued operations of $190,000 and $268,000 in fiscal 1998 and 1999, respectively. The amounts represent gains associated with the foregiveness of debt, or expiration of liability, to former shareholders and unrelated third party creditors of a restaurant segment discontinued by Registrant prior to fiscal 1998. Registrant also realized income from discontinued operations of $114,000 in fiscal 1998 due to the reversal of previously accrued losses and foregiveness of debt relating to an investment in which Registrant had a 50% interest. THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 REVENUES. Total revenues increased $2.7 million from $226,000 in the first three months of fiscal 1999 to $2.9 million in the first three months of fiscal 2000. Retail and wholesale revenues increased $2.6 million from $19,000 in the first three months of fiscal 1999 to $2.6 million in the first three months of fiscal 2000, due primarily to the acquisition of MMI effective November 1, 1999 ($2.55 million of the increase). Franchise fee and royalty revenues increased 42.5% from $207,000 in the first three months of fiscal 1999 to $295,000 in the first three months of fiscal 2000, due primarily to the opening of three franchised units in the first quarter of fiscal 2000 versus two units in the first quarter of fiscal 1999 ($23,000 of incremental franchise fees) and the opening of nine franchised units since the first quarter of fiscal 1999 ($43,000 of additional royalties). COSTS AND EXPENSES. Registrant's fiscal 2000 first quarter cost of sales of $1.6 million represent MMI's cost of sales. Fiscal 1999 first quarter cost of sales of $5,000 represent costs associated with the sale of miscellaneous retail items sold by the Company, which were phased out during fiscal 1999. Operating expenses increased 77.5% from $129,000 in the first three months of fiscal 1999 to $229,000 in the first three months of fiscal 2000, due primarily to the acquisition of MMI ($144,000 of the increase) offset by savings realized by DFC through consolidating its company headquarters with MMI's during the first quarter of fiscal 2000. General and administrative expenses increased 138.7% from $230,000 in the first three months of fiscal 1999 to $549,000 in the first three months of fiscal 2000, due primarily to the acquisition of MMI ($408,000 of the increase) offset by savings realized by DFC through consolidation of its company headquarters with MMI's during the first quarter of fiscal 2000. Depreciation and amortization increased from $2,000 in the first quarter of fiscal 1999 to $66,000 in the first quarter of fiscal 2000 due to amortization of goodwill and debt issuance costs associated with the November 1999 acquisition of MMI ($56,000 of the increase). INTEREST EXPENSE, NET. Net interest expense increased 142.3% from $52,000 in the first quarter of fiscal 1999 to $126,000 in the first quarter of fiscal 2000, due primarily to interest charges associated with the $3.0 million note issued by Registrant in November 1999 offset by elimination of debt after the first quarter of fiscal 1999. 10 PROVISION FOR INCOME TAXES. At June 30, 1999, Registrant had available net operating loss carryforwards of approximately $4.6 million, which expire in various years beginning in 2007 through 2014. Accordingly, a valuation allowance was provided for the full amount of federal taxes as of the end of the first quarter for both fiscal 1999 and fiscal 2000. However, a provision for state income taxes was provided for in the first quarter of fiscal 2000 for applicable taxes. See Note 10 to the Consolidated Financial Statements of Registrant. LIQUIDITY AND CAPITAL RESOURCES The primary sources of Registrant's cash are net cash flows from operating activities and short-term vendor financing. Currently, Registrant does not have available any established lines of credit with banking facilities. Registrant's cash and cash equivalents were $346,000 as of June 30, 1999. At March 31, 1999, Registrant's cash and cash equivalents were $425,000 compared with $87,000 at March 31, 1998. During the three months ended June 30, 1999, consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") increased $672,000 to $534,000 from a loss of ($138,000) for the three months ended June 30, 1998. The increase directly relates to DPI's acquisition of MMI in November 1998, which provided $434,000, or 81.3%, of Registrant's first quarter fiscal 2000 EBITDA. Registrant presently does not operate or own any Field of Dreams-Registered Trademark- stores, and does not plan to own any in the future. It will continue to sell franchised units to prospective and current third-party franchisees. Additionally, there are no major capital expenditures planned for in the foreseeable future, nor any payments planned for off-balance sheet obligations or other demands or commitments for which payments become due after the next 12 months. Registrant 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 reflects a strong working capital ratio and its long-term debt obligations require interest-only payments totaling $39,000 per month. Registrant's management is not aware of any known trends or demands, commitments, events, or uncertainties, as they relate to liquidity which could negatively affect Registrant's ability to operate and grow as planned. YEAR 2000 READINESS. The year 2000 issue pertains to computer programs that were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize the year "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations. 11 During fiscal years 1998 and 1999, Registrant replaced its accounting software package with the latest available version that purported to be "Y2K compliant". Registrant uses only the modules within its accounting software package to run its operations. The only other software utilized are modules within the most current version of Microsoft Office, which proclaims that all of its software is "Y2K compliant". Registrant's server operates using Microsoft NT software which proclaims to be "Y2K compliant". All hardware utilized for Registrant's local area network has been purchased during fiscal 1998 and 1999. The total cost for all hardware and software programs purchased to help ensure year 2000 readiness approximated $35,000. Registrant is not aware of any difficulties that will arise from customers or vendors who have not updated their software to be year 2000 compliant. However, there can be no guarantee that the Company will not encounter unexpected year 2000 compliance problems that will adversely affect its operations. ITEM 3. DESCRIPTION OF PROPERTIES. Registrant leases approximately 26,000 square feet of office, manufacturing and warehouse space between two offices in Sunrise, Florida (approximately 23,000 square feet) and Denver, Colorado (approximately 3,000 square feet). All manufacturing is performed at the Florida location. Registrant's principal executive offices are located at its Florida facility. Registrant'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. Registrant's Florida lease terminates in April 2003. Florida rent is approximately $15,700 per month plus certain expenses and escalates to approximately $17,700 in its final year. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. PRINCIPAL SHAREHOLDERS. The following table sets forth as of September 1, 1999, the number of Registrant's voting securities beneficially owned by persons who own five percent or more of Registrant's voting stock, by each director, and by all 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 Title and of Type of Shares of Class Beneficial Owner Ownership Owned Class ----- ---------------- --------- ----- ----- No par value Common Stock Sam D. Battistone Record and 14,266,495(1)(3) 27.7% 2887 Green Valley Pkwy Beneficial Henderson, NV 89014 12 No par value Common Stock Ross Tannenbaum Record and 12,500,000 24.3% 5009 Hiatus Road Beneficial Sunrise, FL 33351 No par value Dale Larsson Record and 425,300 0.8% Common Stock 1776 North State St, #130 Beneficial Orem, UT 84057 No par value Common Stock Mark Viner Record and 83,333(5) 0.2% 5009 Hiatus Road Beneficial Sunrise, FL 33351 No par value Sirrom Investments, Inc. Record and 10,871,753(4) 21.1% Common Stock 500 Church St., Suite 200 Beneficial Nashville, TN 37219 No par value Common Stock All Officers and Record and 27,275,128 52.9% Directors as a Beneficial Group (4 persons)(2)
- ---------------------------------------------------- (1) Includes 3,100,000 shares owned by family members of which Mr. Battistone disclaims ownership. (2) The directors and officers have sole voting and investment power as to the shares beneficially owned by them. (3) Sam D. Battistone, has pledged to B.A. Leasing and Capital Corporation, an unaffiliated corporation, all shares of common stock of Registrant which he now owns or may acquire in the future to secure personal indebtedness. Mr. Battistone is currently not in compliance with the terms of the applicable agreements. (4) Warrants to purchase shares issued in connection with Mounted Memories financing. (5) Includes 83,333 shares which are the subject of stock options. 27,059,470 shares of Registrant's no par value common stock (and 750,000 options) have been pledged to Sirrom to secure Registrant's obligations in connection with a $3.0 million loan. Should Registrant default on any obligation to Sirrom and should Sirrom exercise its rights as a secured party, a change in control of Registrant would occur. ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. DIRECTORS AND OFFICERS. The Directors and Executive Officers of Registrant and the positions held by each of them are as follows. All directors serve until Registrant's next annual meeting of shareholders. 13
Serving as Director of Position Held With Name Age Registrant Since the Registrant ---- --- ---------------- -------------- Sam D. Battistone 59 1983 Chairman/Director Ross Tannenbaum 37 1998 President/Director Dale Larsson 55 1999 Director Mark Viner 33 1998 Secretary/Treasurer/ Chief Financial Officer
BIOGRAPHICAL INFORMATION. SAM D. BATTISTONE. For more than the past five years, Sam D. Battistone has been majority shareholder, Chairman, Chief Executive Officer, President and a Director of Registrant. 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 Registrant sold its interest in the team. He served as a founding director of Sambo's Restaurants, Inc. and variously as President, Chief Executive Officer, Vice-Chairman and Chairman of the Board of Directors from 1967 to 1979. During that period, Sambo's grew from a 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 Registrant 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. DALE E. LARSSON. For more than the past five years until 1999, Dale E. Larsson was the Secretary-Treasurer and director of Registrant. 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. 14 MARK VINER. Mr. Viner has been Secretary, Treasurer and Chief Financial Officer of Registrant since November 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. Item 6. EXECUTIVE COMPENSATION. The following table sets forth information concerning compensation for services in all capacities by the Registrant and its subsidiaries for fiscal years ended March 31, 1997, 1998 and 1999 of those persons who were, at March 31, 1999, the Chief Executive Officer of the Registrant and other highly compensated executive officers and employees of Registrant. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Securities Name and principal Other Annual Underlying Position Year Salary Compensation(3) Options/SARs - -------- ---- ------ ------------ ------------ Ross Tannenbaum, 1997 - - - CEO and Director 1998 - - - 1999 46,875(1) 4,000 - Joseph Casey, former 1997 120,000 6,000 - Officer and Director 1998 120,000 6,000 - 1999 120,000 6,000 500,000 John Walrod, Vice 1997 - - - President 1998 21,846(2) - - 1999 120,000 - 200,000
- ---------------- (1) Mr. Tannenbaum's employment with Registrant commenced on November 10, 1998. (2) Mr. Walrod's employment with Registrant commenced on January 27, 1998. (3) Other Annual Compensation represents automobile allowances. Registrant 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 subject to certain adjustments based on Registrant's financial performance. 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. 15 Registrant and Mark Viner entered into an Employment Agreement on September 4, 1998. Under the terms of that Agreement, Mr. Viner is employed for a three year period at a base salary rate of $108,000 per year with minimum eight percent per year increases. Mr. Viner received an incentive bonus in 1998 pursuant to the terms of the Agreement and was issued options to purchase 250,000 shares of Registrant's common stock at an exercise price of $0.4375 per share, the closing price of the common stock at the date of the Agreement. The options are conditioned upon continued employment by Registrant of Mr. Viner and vest 1/3 per year beginning on the first anniversary of his Employment Agreement. Mr. Viner also receives certain benefits including car allowance and insurance. The Employment Agreement may be terminated for cause prior to expiration of its full term. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Options/SARs Employees in Base Price Expiration Name (1) Granted (#) Fiscal Year ($ / Share) Date - -------- ------------ -------------- ----------- ---- Joseph Casey 500,000 53% $ 0.44 09/25/03 Mark Viner 250,000 26% $ 0.44 10/01/01 John Walrod 200,000 21% $ 0.19 01/01/02
(1) All options were issued pursuant to terms provided for in employment agreements at the fair market value at the date of grants. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. From October 1997 to November 1998, Registrant borrowed a total of $522,000 from Signature, Inc., a corporation owned by the children of Sam D. Battistone, Chairman of Registrant. Registrant repaid that indebtedness plus interest in November 1998 by issuing 2,275,000 shares of its common stock to Signature, Inc. plus cash payments totaling $90,000. In July 1998, Registrant borrowed $200,000 from J. Roger Battistone, the brother of Sam D. Battistone. Registrant repaid the principal plus accrued interest in November 1998 by issuing 1,020,000 of its common stock to J. Roger Battistone. From April 1997 to July 1998, Registrant borrowed a total of $210,000 from Invest West Sports, Inc., a corporation owned by Sam D. Battistone. Registrant repaid all indebtedness to Invest West Sports, Inc. (including interest) during fiscal years 1998 and 1999. 16 During the fiscal year ended March 31, 1999, Registrant borrowed $70,000 from Dreamstar, a corporation owned by Sam D. Battistone. During the same fiscal year, the Registrant repaid all principal and accrued interest owed Dreamstar by issuing to Dreamstar 460,000 shares of common stock and paying $25,000 in cash. The stock was trading at approximately $0.20 at the time of the exchange. The $46,000 discount was booked as compensation expense, and charged to a operational income during fiscal 1999. In November 1998, Dreamstar assumed an obligation of Registrant and Registrant was released of a $362,500 obligation Registrant owed to the National Basketball Association. In consideration for that assumption and release, Registrant issued to Dreamstar 3,625,000 shares of common stock. The stock was trading at approximately $0.20 at the time of the exchange. The $362,500 discount was booked as compensation expense, and charged to a operational income during fiscal 1999. Prior to five years ago, Registrant agreed to issue to Sam D. Battistone 5,000,000 shares of its common stock for $250,000. At that time, Battistone delivered $250,000 to Registrant but Registrant had insufficient authorized shares to issue and deliver those shares to Battistone. InMarch 1997, Registrant and Battistone determined to rescind the transaction and return $250,000 to Battistone. Upon return of those funds, Battistone purchased from Registrant for a total of $250,000, ten lithographs depicting the National Basketball Association's 50 greatest players. ITEM 8. DESCRIPTION OF SECURITIES. The Company has authorized 100,000,000 shares of Common Stock, no par value per share, of which 40,148,500 shares of Common Stock are issued and outstanding as of March 31, 1999. All presently outstanding shares of the Company's Common Stock are validly issued, fully paid and non-assessable. The holders of Common Stock do not have any preemptive or other subscription rights. The holders of Common Stock are entitled to receive dividends, when, as and if declared by the Board of Directors out of funds legally available therefore. It is highly unlikely that dividends will be paid by the Company in the foreseeable future on its Common Stock. Each outstanding share has one vote on each matter voted on at a shareholders' meeting. Neither Registrant's Articles of Incorporation nor its Bylaws are designed to delay, defer or prevent a change in control. 17 PART II ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS. Registrant'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 Registrant's common stock for each quarter during fiscal years ended March 31, 1998 and 1999 and the three month period ended June 30, 1999 are as follows:
Fiscal Year Ended March 31, 1998: High Bid Price Low Bid Price -------------- ------------- First Quarter .35 .21 Second Quarter .34375 .20 Third Quarter .3125 .23 Fourth Quarter .37 .23 Fiscal Year Ended March 31, 1999: First Quarter .28 .17 Second Quarter .8125 .17 Third Quarter .4375 .1875 Fourth Quarter .375 .125 Fiscal Year Ended March 31, 2000: First Quarter .6875 .34375
On September 1, 1999, the high bid price was .375 and the low bid price was $.375 for Registrant'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, Registrant's transfer agent, indicate that there are 328 registered owners of Registrant's common stock as of September 1, 1999. Registrant has paid no dividends in the past two fiscal years. Registrant has no intention of paying dividends in the future. ITEM 2. LEGAL PROCEEDINGS. None 18 ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. On March 10, 1999, Registrant dismissed Pritchett, Siler & Hardy, P.C. ("PSH") and on March 12, 1999 engaged Margolies, Fink and Wichrowski as its principal independent accountants. The change of independent accountants was approved by Registrant's Board of Directors. There were no disagreements with PSH on any matter of accounting principles or practices, financial disclosure or auditing scope or procedure. PSH's audit reports of the past two years did not contain any adverse or disclaimed opinions, nor were the opinions qualified or modified as to uncertainty, audit scope or accounting principles. ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, Registrant has sold the following securities without registration under the Securities Act of 1933. In each case, sales were made directly by the Registrant without the involvement of an underwriter. In each case Registrant relied upon the private placement exemption set out in Section 4(2) of the Securities Act of 1933 and there was no advertising or general solicitation. All purchasers were financially sophisticated individuals with substantial net worth and/or met the definition of "Accredited Investor" as set out in Regulation D promulgated pursuant to the Securities Act of 1933. All purchasers received information regarding Registrant and its financial condition and the opportunity to obtain additional information from and ask questions of representatives of Registrant. Each purchaser provided evidence of nondistributive intent and the transfer of shares was appropriately restricted by Registrant.
Date of Sale Title of Security Amount Sold Total Purchase Price - ------------------------------ ---------------------------- --------------------------- ---------------------------- June 1997 Common Stock 50,000 shares $9,000 December 1997 Common Stock 1,450,000 shares Exchange for all shares of Dreams Franchise Corporation not owned by Registrant September 1998 Common Stock (1) 4,085,000 shares Release of $46,000 indebtedness and assumption of $362,500 of debt owed by Registrant to unrelated third party 19 October 1998 Options to purchase shares 750,000 shares Issued in connection with of Common Stock (2) employment agreements November 1998 Common Stock (3) 15,000,000 shares Partial consideration for all assets of Mounted Memories, Inc. November 1998 Warrants to Purchase 11,873,758 shares Partial consideration for Common Stock (4) loan by Sirrom November 1998 Common Stock (5) 25,000 shares Fee For Subordination of Debt November 1998 Common Stock (5) 3,363,500 shares Release of $672,700 debt owed to affiliates of Registrant November 1998 Common Stock (5) 375,000 shares Issued in connection with purchase of Mounted Memories, Inc. November 1998 Common Stock (5) 800,000 shares Release of $160,000 debt January 1999 Options to purchase shares 200,000 shares Issued in connection with of Common Stock (2) employment agreement
- ---------------------------------- (1) Consideration paid by and all shares issued to corporation owned and controlled by Sam D. Battistone, Chairman of Registrant. (2) Issued to one officer, one employee and one former officer of Registrant in connection with employment agreements. 20 (3) Issued to three shareholders of Mounted Memories, Inc. in connection with acquisition of Mounted Memories, Inc. (4) Issued to Sirrom as partial consideration for loan to acquire assets of Mounted Memories, Inc. (5) Issued in connection with acquisition of Mounted Memories assets. ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The following are the statutory, Articles of Incorporation, and Bylaw provisions or other arrangements that insure or indemnify controlling persons, directors or officers of the Registrant or affects his or her liability in that capacity. The Registrant's Articles of Incorporation provide the following: ARTICLE V - INDEMNIFICATION AND LIMITATION OF LIABILITY This corporation shall indemnify all officers, directors and agents to the fullest extent permitted by law. To the fullest extent permitted by the Utah Revised Business Corporation Act or any other applicable law as now in effect or as it may hereafter be amended, directors of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for any action taken or any failure to take any action as a director. Neither any amendment nor repeal of this resolution, or the adoption of any provision of the Articles of Incorporation of this corporation inconsistent with this resolution, shall eliminate or reduce the effect of this resolution in respect of any matter occurring, or any cause of action, suit or claim that, but for this resolution, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. The Registrant's Bylaws provide the following: ARTICLE VIII - INDEMNIFICATION SECTION 1. INDEMNIFICATION. No officer or director shall be personally liable for any obligations of the corporation or for any duties or obligations arising out of any acts or conduct of said officer or director performed for or on behalf of the corporation. The corporation shall and does hereby indemnify and hold harmless each person and his heirs and administrators who shall serve at any time as a director or officer of the corporation from and against any and all claims, judgments and liabilities to which such persons shall become subject by reason of his having heretofore or hereafter been a director or officer of the corporation, or by reason of any action alleged to have been heretofore or hereafter taken or omitted to have been taken by him as such director or officer, and shall reimburse any such person for all legal and other expenses reasonably incurred by him in 21 connection with any such claim or liability; PROVIDED that the corporation shall have the power to defend such person from all suits or claims as provided for under the provisions of the Utah Business Corporation Act; PROVIDED FURTHER, however, that no such person shall be indemnified against, or be reimbursed for, or be defended against any expense or liability incurred in connection with any claim or action arising out of his own negligence or willful misconduct. The rights accruing to any person under the foregoing provisions of this section shall not exclude any other right to which he may lawfully be entitled, nor shall anything herein contained restrict the right of the corporation to indemnify or reimburse such person in any proper case, event though not specifically provided for herein or otherwise permitted. The corporation, its directors, officers, employees and agents shall be fully protected in taking any action or making any payment, or in refusing so to do in reliance upon the advice of counsel. SECTION 2. OTHER INDEMNIFICATION. The indemnification herein provided shall not be deemed exclusive of any other right to indemnification to which any person seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action taken in his official capacity and as to action taken in an other capacity while holding such office. It is the intent hereof that all officers and directors be and hereby are indemnified to the fullest extent permitted by the laws of the State of Utah and these Bylaws. The indemnification herein provided shall continue as to any person who has ceased to be a director, officer or employee, and shall inure to the benefits of the heirs, estate and personal representative of any such person. SECTION 3. INSURANCE. The board of Directors may, in its discretion, direct that the corporation purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against liability under the provision of this section. SECTION 4. SETTLEMENT BY CORPORATION. The right of any person to be indemnified shall be subject always to the right of the corporation by the Board of Directors, in lieu of such indemnify, to settle any claim, action, suit or proceeding at the expense of the corporation by the payment of the amount of such settlement and the costs and expenses incurred in connection therewith. The Utah Revised Business Corporation Act provides as follows: 16-10a-840. General Standards of Conduct for Directors and Officers. (1) Each Director shall discharge his duties as a Director, including duties as a member of a committee, and each officer with discretionary authority shall discharge his duties under that authority: (a) in good faith; 22 (b) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) in a manner the Director or officer reasonably believes to be in the best interests of the corporation. (2) In discharging his duties, a Director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (a) one or more officers or employees of the corporation whom the Director or officer reasonably believes to be reliable and competent in the matters presented; (b) legal counsel, public accountants, or other persons as to matters the Director or officer reasonably believes are within the person's professional or expert competence; or (c) in the case of a Director, a committee of the board of Directors of which he is not a member, if the Director reasonably believes the committee merits confidence. (3) A Director or officer is not acting in good faith if he has knowledge concerning the matter in question that makes reliance otherwise permitted by Subsection (2) unwarranted. (4) A Director or officer is not liable to the corporation, its shareholders, or any conservator or receiver, or any assignee or successor-in-interest thereof, for any action taken, or any failure to take any action, as an officer or Director, as the case may be, unless: (a) the Director or officer has breached or failed to perform the duties of the office in compliance with this section; and (b) the breach or failure to perform constitutes gross negligence, willful misconduct, or intentional infliction of harm on the corporation or the shareholders. 6-10a-841. Limitation of Liability of Directors. (1) Without limiting the generality of Subsection 16-10a-840(4), if so provided in the articles of incorporation or in the bylaws or a resolution to the extent permitted in Subsection (3), a corporation may eliminate or limit the liability of a Director to the corporation or to its shareholders for monetary damages for any action taken or any failure to take any action as a Director, except liability for: (a) the amount of a financial benefit received by a Director to which he is not entitled; (b) an intentional infliction of harm on the corporation or the shareholders; 23 (c) a violation of Section 16-10a-842; or (d) an intentional violation of criminal law. (2) No provision authorized under this section may eliminate or limit the liability of a Director for any act or omission occurring prior to the date when the provision becomes effective. (3) Any provision authorized under this section to be included in the articles of incorporation may also be adopted in the bylaws or by resolution, but only if the provision is approved by the same percentage of shareholders of each voting group as would be required to approve an amendment to the articles of incorporation including the provision. (4) Any foreign corporation authorized to transact business in this state, including any federally chartered depository institution authorized under federal law to transact business in this state, may adopt any provision authorized under this section. (5) With respect to a corporation that is a depository institution regulated by the Department of Financial Institutions or by an agency of the federal government, any provision authorized under this section may include the elimination or limitation of the personal liability of a Director or officer to the corporation's members or depositors. 6-10a-842. Liability of Directors for Unlawful Distributions. (1) A Director who votes for or assents to a distribution made in violation of Section 16-0a-640 or the articles of incorporation is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating Section 16-10a-640 or the articles of incorporation, if it is established that the Director's duties were not performed in compliance with Section 16-10a-840. In any proceeding commenced under this section, a Director has all of the defenses ordinarily available to a Director. (2) A Director held liable under Subsection (1) for an unlawful distribution is entitled to contribution: (a) from every other Director who could be held liable under Subsection (1) for the unlawful distribution; and (b) from each shareholder, who accepted the distribution knowing thedistribution was made in violation of Section 16-10a-640 or the articles of incorporation, the amount of the contribution from each shareholder being the amount of the distribution to the shareholder multiplied by the percentage of the amount of distribution to all shareholders that exceeded what could have been distributed to shareholders without violating Section 16-10a-640 or the articles of incorporation. 24 (3) A proceeding under this section is barred unless it is commenced within two years after the date on which the effect of the distribution is measured under Subsection 16-10a-640(5) or (7). 16-10a-902. Authority to Indemnify Directors. (1) Except as provided in Subsection (4), a corporation may indemnify an individual made a party to a proceeding because he is or was a Director, against liability incurred in the proceeding if: (a) his conduct was in good faith; and (b) he reasonably believed that his conduct was in, or not opposed to, the corporation's best interests; and (c) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. (2) A Director's conduct with respect to any employee benefit plan for a purpose he reasonably believed to be in or not opposed to the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of Subsection (1)(b). (3) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the Director did not meet the standard of conduct described in this section. (4) A corporation may not indemnify a Director under this section: (a) in connection with a proceeding by or in the right of the corporation in which the Director was adjudged liable to the corporation; or (b) in connection with any other proceeding charging that the Director derived an improper personal benefit, whether or not involving action in his official capacity, in which proceeding he was adjudged liable on the basis that he derived an improper personal benefit. (5) Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. 25 16-10a-903. Mandatory Indemnification of Directors. Unless limited by its articles of incorporation, a corporation shall indemnify a Director who was successful, on the merits or otherwise, in the defense of any proceeding, or in the defense of any claim, issue, or matter in the proceeding, to which he was a party because he is or was a Director of the corporation, against reasonable expenses incurred by him in connection with the proceeding or claim with respect to which he has been successful. 16-10a-904. Advance of Expenses for Directors. (1) A corporation may pay for or reimburse the reasonable expenses incurred by a Director who is a party to a proceeding in advance of final disposition of the proceeding if: (a) the Director furnishes the corporation a written affirmation of his good faith belief that he has met the applicable standard of conduct described in Section 16-10a-902; (b) the Director furnishes to the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet the standard of conduct; and (c) a determination is made that the facts then known to those making the determination would not preclude indemnification under this part. (2) The undertaking required by Subsection (1)(b) must be an unlimited general obligation of the Director but need not be secured and may be accepted without reference to financial ability to make repayment. (3) Determinations and authorizations of payments under this section shall be made in the manner specified in Section 16-10a-906. 16-10a-905. Court-Ordered Indemnification of Directors. Unless a corporation's articles of incorporation provide otherwise, a Director of the corporation who is or was a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court considers necessary, may order indemnification in the following manner: (1) if the court determines that the Director is entitled to mandatory indemnification under Section 16-10a-903, the court shall order indemnification, in which case the court shall also order the corporation to pay the Director's reasonable expenses incurred to obtain court-ordered indemnification; and 26 (2) if the court determines that the Director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the Director met the applicable standard of conduct set forth in Section 16-10a-902 or was adjudged liable as described in Subsection 16-10a-902(4), the court may order indemnification as the court determines to be proper, except that the indemnification with respect to any proceeding in which liability has been adjudged in the circumstances described in Subsection 16-10a-902(4) is limited to reasonable expenses incurred. 16-10a-906. Determination and Authorization of Indemnification of Directors. (1) A corporation may not indemnify a Director under Section 16-10a-902 unless authorized and a determination has been made in the specific case that indemnification of the Director is permissible in the circumstances because the Director has met the applicable standard of conduct set forth in Section 16-10a-902. A corporation may not advance expenses to a Director under Section 16-10a-904 unless authorized in the specific case after the written affirmation and undertaking required by Subsections 16-10a-904(1)(a) and (b) are received and the determination required by Subsection 16-10a-904(1)(c) has been made. (2) The determinations required by Subsection (1) shall be made: (a) by the board of Directors by a majority vote of those present at a meeting at which a quorum is present, and only those Directors not parties to the proceeding shall be counted in satisfying the quorum; or (b) if a quorum cannot be obtained as contemplated in Subsection (2)(a), by a majority vote of a committee of the board of Directors designated by the board of Directors, which committee shall consist of two or more Directors not parties to the proceeding, except that Directors who are parties to the proceeding may participate in the designation of Directors for the committee; (c) by special legal counsel: (i) selected by the board of Directors or its committee in the manner prescribed in Subsection (a) or (b); or (ii) if a quorum of the board of Directors cannot be obtained under Subsection (a) and a committee cannot be designated under Subsection (b), selected by a majority vote of the full board of Directors, in which selection Directors who are parties to the proceeding may participate. (d) by the shareholders, by a majority of the votes entitled to be cast by holders of qualified shares present in person or by proxy at a meeting. 27 (3) A majority of the votes entitled to be cast by the holders of all qualified shares constitutes a quorum for purposes of action that complies with this section. Shareholders' action that otherwise complies with this section is not affected by the presence of holders, or the voting, of shares that are not qualified shares. (4) Unless authorization is required by the bylaws, authorization of indemnification and advance of expenses shall be made in the same manner as the determination that indemnification or advance of expenses is permissible. However, if the determination that indemnification or advance of expenses is permissible is made by special legal counsel, authorization of indemnification and advance of expenses shall be made by a body entitled under Subsection (2)(c) to select legal counsel. 16-10a-907. Indemnification of Officers, Employees, Fiduciaries, and Agents. Unless a corporation's articles of incorporation provide otherwise: (1) an officer of the corporation is entitled to mandatory indemnification under Section 16-10a-903, and is entitled to apply for court-ordered indemnification under Section 16-10a-905, in each case to the same extent as a Director; (2) the corporation may indemnify and advance expenses to an officer, employee, fiduciary, or agent of the corporation to the same extent as to a Director; and (3) a corporation may also indemnify and advance expenses to an officer, employee, fiduciary, or agent who is not a Director to a greater extent, if not inconsistent with public policy, and if provided for by its articles of incorporation, bylaws, general or specific action of its board of Directors, or contract. 16-10a-908. Insurance. A corporation may purchase and maintain liability insurance on behalf of a person who is or was a Director, officer, employee, fiduciary, or agent of the corporation, or who, while serving as a Director, officer, employee, fiduciary, or agent of the corporation, is or was serving at the request of the corporation as a Director, officer, partner, trustee, employee, fiduciary, or agent of another foreign or domestic corporation or other person, or of an employee benefit plan, against liability asserted against or incurred by him in that capacity or arising from his status as a Director, officer, employee, fiduciary, or agent, whether or not the corporation would have power to indemnify him against the same liability under Section 16-10a-902, 16-10a-903, or 16-10a-907. Insurance may be procured from any insurance company designated by the board of Directors, whether the insurance company is formed under the laws of this state or any other jurisdiction of the United States or elsewhere, including any insurance company in which the corporation has an equity or any other interest through stock ownership or otherwise. 28 16-10a-909. Limitations on Indemnification of Directors. (1) A provision treating a corporation's indemnification of, or advance for expenses to, Directors that is contained in its articles of incorporation or bylaws, in a resolution of its shareholders or board of Directors, or in a contract (except an insurance policy) or otherwise, is valid only if and to the extent the provision is not inconsistent with this part. If the articles of incorporation limit indemnification or advance of expenses, indemnification and advance of expenses are valid only to the extent not inconsistent with the articles of incorporation. (2) This part does not limit a corporation's power to pay or reimburse expenses incurred by a Director in connection with the Director's appearance as a witness in a proceeding at a time when the Director has not been made a named defendant or respondent to the proceeding. Registrant does not carry errors and omissions insurance covering its officers, Directors or control persons. 29 PART F/S FINANCIAL STATEMENTS TABLE OF CONTENTS
Page INDEPENDENT AUDITORS' REPORTS F/S-1 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets F/S-3 Consolidated Statements of Income F/S-4 Consolidated Statements of Stockholders' Equity F/S-6 Consolidated Statements of Cash Flows F/S-7 Notes to Consolidated Financial Statements F/S-9
Part FS Table of Contents INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Dreams, Inc. We have audited the accompanying consolidated balance sheet of Dreams, Inc. and subsidiaries as of March 31, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 audit provides 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, 1999 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Margolies, Fink and Wichrowski Certified Public Accountants Pompano Beach, Florida June 23, 1999 Part FS Page 1 INDEPENDENT AUDITORS' REPORT Board of Directors DREAMS, INC. We have audited the accompanying consolidated balance sheet of Dreams, Inc. at March 31, 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended March 31, 1998. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the consolidated financial position of Dreams, Inc. as of March 31, 1998, and the consolidated results of its operations and its cash flows for the year ended March 31, 1998, in conformity with generally accepted accounting principles. /s/ June 1, 1998 Pritchett, Siler & Hardy, P.C. Salt Lake City, Utah Part FS Page 2 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT EARNING PER SHARE AMOUNTS)
(Unaudited) June 30, March 31, March 31, 1999 1999 1998 -------- -------- --------- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 346 $ 425 $ 87 Restricted cash 374 415 2 Accounts receivable, net 1,144 1,369 11 Inventories 2,890 2,799 139 Prepaid expenses and deposits 137 34 50 Due from related party - - 2 Notes receivable 19 19 5 ------- ------- ------- Total current assets 4,910 5,061 296 PROPERTY AND EQUIPMENT, NET 130 119 - GOODWILL, NET 2,415 2,446 - DEBT ISSUANCE COSTS, NET 423 437 - ------- ------- ------- TOTAL ASSETS $7,878 $8,063 $ 296 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 502 $ 883 $ 149 Accrued liabilities 782 865 655 Current portion of long-term debt - - 25 Notes payable, including $0, $0 and $91 to related parties - - 1,087 Payable to restricted cash - - 218 Deferred franchise fees 90 128 105 Net liabilities of discontinued restaurant segment - - 268 ------- ------- ------- Total current liabilities 1,374 1,876 2,507 LONG-TERM DEBT, LESS CURRENT PORTION 3,443 3,443 402 ------- ------- ------- TOTAL LIABILITIES 4,817 5,319 2,909 ------- ------- ------- COMMITMENTS AND CONTINGENCIES - - - Part FS Page 3 STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $0.00, $0.00 and $0.05 par value; authorized 100,000,000, 100,000,000 and 50,000,000 shares; 40,148,500, 40,148,500 and 16,500,000 shares issued and outstanding 18,084 18,084 825 Additional paid-in-capital - - 12,530 Accumulated deficit (15,023) (15,340) (15,968) ------- -------- -------- Total stockholders' equity (deficit) 3,061 2,744 (2,613) ------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,878 $ 8,063 $ 296 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
Three months ended (unaudited) ------------------------------ June 30, June 30, Fiscal Fiscal 1999 1998 1999 1998 ------- -------- --------- -------- REVENUES: Retail / Wholesale $ 2,578 $ 19 $ 5,515 $ 595 Franchise fees and royalties 295 207 1,368 882 Other 3 - 161 40 Gain on purchase of minority interest - - - 386 Gain on sale of property and equipment - - - 5 ------- -------- --------- -------- Total revenues 2,876 226 7,044 1,908 ------- -------- --------- -------- EXPENSES: Cost of sales 1,564 5 3,064 354 Operating expenses 229 129 1,244 472 General and administrative expenses 549 230 1,878 811 Depreciation and amortization 66 2 126 10 Minority interest in earnings of consolidated subsidiary - - - 6 ------- -------- --------- -------- Total expenses 2,408 366 6,312 1,653 ------- -------- --------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES 468 (140) 732 255 ------- -------- --------- -------- Interest, net 126 52 297 127 ------- -------- --------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES 342 (192) 435 128 Current tax expense 25 - 416 - Deferred tax expense - - (341) - ------- -------- --------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS 317 (192) 360 128 Part FS Page 4 DISCONTINUED OPERATIONS: Gain on disposal of restaurant segment - - 268 190 Gain on disposal of operations of unconsolidated subsidiary - - - 114 ------- -------- --------- -------- INCOME FROM DISCONTINUED OPERATIONS - - 268 304 NET INCOME (LOSS) $ 317 $ (192) $ 628 $ 432 ======= ======== ========= ========= EARNINGS PER SHARE: BASIC: Income from continuing operations $ 0.01 $ (0.01) $ 0.01 $ 0.01 ======= ======== ========= ========== Net income $ 0.01 $ (0.01) $ 0.02 $ 0.03 ======= ======== ========= ========== Weighted average shares outstanding 40,148,500 16,500,000 25,181,915 15,398,630 =========== ============ ============ ============= DILUTED: Income from continuing operations $ 0.01 $ (0.01) $ 0.01 $ 0.01 ======= ======== ========= ========== Net income $ 0.01 $ (0.01) $ 0.02 $ 0.03 ======= ======== ========= ========== Weighted average shares outstanding 40,148,500 16,500,000 25,181,915 15,398,630 =========== =========== =========== =============
The accompanying notes are an integral part of these consolidated financial statements. Part FS Page 5 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT EARNING PER SHARE AMOUNTS)
Additional Total Shares Common Paid-in Accumulated Stockholders' Outstanding Stock Capital Deficit Equity ----------- ------- --------- ---------- ------------ Balance at March 31, 1997 15,000,000 $ 750 $ 12,234 $ (16,400) $ (3,416) Issuance of 50,000 shares common stock for cash, December 1997, at $0.18 per share 50,000 3 6 - 9 Shares issued to acquire minority interest in subsidiary (See Note 9) 1,450,000 72 290 - 362 Net income for the year ended March 31, 1998 - - - 432 432 ----------- ------- --------- ---------- ------------ Balance at March 31, 1998 16,500,000 $ 825 $ 12,530 $ (15,968) $ (2,613) Shares issued in exchange of notes payable (See Note 9) 8,248,500 412 1,237 - 1,649 Shares issued to acquire assets of Mounted Memories, Inc. (See Note 3) 15,000,000 750 2,250 - 3,000 Conversion of third party fees to equity 400,000 20 60 - 80 Elimination of par value - 16,077 (16,077) - - Net income for the year ended March 31, 1999 - - - 628 628 ----------- --------- --------- ---------- ------------ Balance at March 31, 1999 40,148,500 $ 18,084 $ - $ (15,340) $ 2,744 Net income for the three months ended June 30, 1999 - - - 317 317 ----------- --------- --------- ---------- ------------ Balance at June 30, 1999 (unaudited) 40,148,500 $ 18,084 $ - $ (15,023) $ 3,061 ========== ========== ========= ========== ============
The accompanying notes are an integral part of these consolidated financial statements. Part FS Page 6 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
Three months ended (unaudited) ------------------------------ June 30, June 30, Fiscal Fiscal 1999 1998 1999 1998 ------- ------- ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 317 $ (192) $ 628 $ 432 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization: Property and equipment 10 2 35 10 Goodwill 31 - 52 - Debt issuance costs 25 - 39 - Provision for losses on accounts and notes receivable - - 211 - Gain on purchase of minority interest - - - (386) Gain on sale of property and equipment - - - (5) Gain on disposal of restaurant segment - - (268) (190) Gain on disposal of operations of unconsolidated subsidiary - - - (114) Change in assets and liabilities, net of effects from acquisition of business: (Increase) decrease in accounts receivable 225 (3) (356) 25 (Increase) decrease in accounts receivable - related party - 2 2 (2) (Increase) decrease in inventories (91) 6 (590) 106 (Increase) decrease in prepaid expenses (103) (7) 83 6 Increase in notes receivable - - (14) (77) Increase (decrease) in accounts payable (381) 19 249 (33) Increase (decrease) in accrued liabilities (83) 29 143 (212) Increase (decrease) in deferred franchise fees (38) (2) 23 (30) Decrease in net liabilities of discontinued operations - - - (7) Other (11) (36) 52 - ------- ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (99) (182) 289 (477) ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Mounted Memories, Inc., net of cash acquired - - (2,218) - Purchase of property and equipment (21) - (24) (8) ------- ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (21) - (2,242) (8) ------- ------- ------- ------- Part FS Page 7 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable - 232 591 232 Proceeds from long-term debt - - 3,000 368 Payments on notes payable - (137) (450) (504) Financing costs capitalized - - (437) - Purchase of common stock - - - 8 Minority interest - - - 6 ------- ------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES - 95 2,704 110 ------- ------- ------- ------- NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH $ (120) $ (87) $ 751 $ (375) CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD 840 89 89 464 ------- ------- ------- ------- CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $ 720 $ 2 $ 840 $ 89 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. Part FS Page 8 DREAMS, INC. AND SUBSIDIARIES NOTES TO THE 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 was inactive throughout fiscal 1999 and as of March 31, 1999. DPI is a wholesaler of sports memorabilia products and acrylic cases. DPI pays an annual fee to the National Football League which officially licenses DPI's football memorabilia products. BASIS OF PRESENTATION The accompanying 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, 1999 and March 31, 1998 are herein referred to as "fiscal 1999" and "fiscal 1998", 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 $90 and $2 at March 31, 1999 and 1998, respectively. The Company also had $325 restricted as to use at March 31, 1999 relating to an acquisition (see Note 3). 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 $755 and $0 in fiscal 1999 and 1998, respectively. Part FS Page 9 DREAMS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) FRANCHISE FEE 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) is being amortized by the straight-line method over 20 years. Costs relating to the issuance of debt are capitalized and amortized over the term of the related debt. As of March 31, 1999, the unamortized debt issuance costs were $437, net of accumulated amortization of $40. 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. Part FS Page 10 DREAMS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 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, 1999 and 1998, 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 During fiscal 1998, 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 period. Dilutive earnings per share was not presented, as its effect was not material to the financial statements for fiscal years presented. When applicable, the Company's diluted EPS will include the dilutive effect of potential stock options and certain warrant exercises, calculated using the treasury stock method. 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 proforma disclosure as required by Statement No. 123 in the notes to the consolidated financial statements. Part FS Page 11 DREAMS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 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 uncollectable accounts receivable, inventory obsolescence, depreciation, taxes, contingencies, among others. Actual results could differ from those estimated by management and changes in such estimates may affect amounts reported in future periods. RECLASSIFICATION Certain items previously reported in specific financial statement captions have been reclassified to conform with the fiscal 1999 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 uncollectable accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is limited. The Company had a consolidated allowance for doubtful accounts at March 31, 1999 of approximately $211. The Company believes any credit risk beyond this amount would be negligible. 3. BUSINESS COMBINATION During November 1998, DPI acquired all of the assets of Mounted Memories, Inc. ("MMI"), a wholesaler of sports memorabilia products and acrylic cases. The aggregate consideration paid was $5.3 million, consisting of cash in the amount of $2.3 million and the issuance of Part FS Page 12 DREAMS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 15,000,000 shares of Dreams, Inc. common stock, which was trading at approximately $0.20 at the date of the transaction. The purchase price was financed through the issuance of a long-term note of $3.0 million (see Note 8). The acquisition was accounted for as a purchase and, accordingly, MMI's results are included in the consolidated financial statements since the date of acquisition. The purchase price exceeded the fair value of the net assets acquired by approximately $2.5 million, which is recognized as goodwill and is being amortized over 20 years. As of March 31, 1999, $325 of the loan proceeds was being held by an escrow agent of the lender until certain criteria have been met. The criteria relates to Dreams, Inc.'s payment, or creditor's acceptance of a plan for payment, of liabilities for certain state income taxes, penalties and interest (see Note 10). Upon these conditions being met, the funds in escrow will be released to the shareholders of MMI to be used to pay its tax liability attributable to MMI's operations from January 1, 1998 through the date of acquisition, and the Company will accordingly adjust goodwill. If the conditions are not met, the funds must be returned to the lender. Since the conditions for release have not been met as of March 31, 1999, the Company appropriately categorized the escrowed funds as restricted cash on the balance sheet. The following unaudited proforma information has been prepared assuming MMI had been acquired as of the beginning of the periods presented. The proforma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the acquisition had been made as of those dates. In addition, the proforma information is not intended to be a projection of future results and does not reflect synergies expected to result from the integration of MMI and the Company's operations. PROFORMA INFORMATION (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years ended March 31 1999 1998 --------------------------------------------- ------- ------- Sales and other income $12,446 $ 9,334 Net income from continuing operations 575 220 Earnings per share from continuing operations $ 0.01 $ 0.01
Part FS Page 13 DREAMS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 4. INVENTORIES The components of inventories are as follows:
(Unaudited) June 30, March 31, March 31, 1999 1999 1998 ------- ------- ------- Memorabilia products $ 2,298 $ 2,199 $ 139 Licensed products 391 370 - Acrylic cases and raw materials 276 305 - ------- ------- ------- 2,965 2,874 139 Less reserve for obsolescence (75) (75) - ------- ------- ------- $ 2,890 $ 2,799 $ 139 ------- ------- -------
5. PROPERTY AND EQUIPMENT The components of property and equipment as of March 31 are as follows:
1999 1998 ----- ----- Leasehold improvements $ 23 $ 20 Machinery and equipment 71 - Office and other equipment 232 47 Transportation equipment 47 - ----- ----- 373 67 Less accumulated depreciation and amortization (254) (67) ----- ----- $ 119 $ - ----- -----
During the year ended March 31, 1998 the Company wrote down the remaining property and equipment in connection with the purchase of the minority interest (see Note 9). Part FS Page 14 DREAMS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 6. ACCRUED LIABILITIES Accrued liabilities consisted of the following at March 31:
1999 1998 ---- ---- Payroll costs (including commissions) $ 99 $ 25 Interest 35 15 Rent - 50 Sales taxes 9 - Income taxes, penalties and interest (see Note 10) 491 425 Other 231 140 ---- ---- $865 $655 ---- ----
7. NOTES PAYABLE Notes payable consisted of the following at March 31:
1999 1998 ------ ------ Notes payable to a related party (company owned by major shareholder), interest at 12%, due on demand, unsecured. $ - $ 91 Various notes payable to others, interest ranging to 24 percent, due on demand, unsecured. - 3 Notes payable to franchisee at a rate of 12 percent interest, convertible into DFC common stock at $1.50 per share, principal and interest due March 1, 1998, unsecured. - 25 Note payable to bank, interest at variable rate equal to 1.5% percent over index rate, principal and interest payments due April 1998. - 149 Note payable to vendor, interest at 18%, principal and interest payment of $1 due May 1998. - 1
Part FS Page 15 DREAMS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
Note payable to NBA Legends Foundation for inventory financing, payments based on sales with minimum payments of no less than $125 per quarter beginning July 15, 1997 until January 15, 1998 at which time payments shall be no less than $250. - 363 Unsecured demand notes payable to an individual, interest at 12%. - 305 Six $25 unsecured demand notes payable to four individuals, loans bear a flat rate of interest of $5 per note. - 150 ------ ------ $ - $1,087 ------ ------
In July 1998, the Company borrowed $200 at a rate of 12% interest from the brother of the Company's Chairman. The Company repaid the principal and accrued interest of $4 through the issuance of 1,020,000 shares of its common stock in November 1998. The stock was trading at approximately $0.20 at the time of the exchange. In November 1998, Dreamstar, a corporation owned by the Company's Chairman, assumed the Company's obligation of $363 owed to the NBA Legends Foundation. In consideration for that assumption and release, the Company issued Dreamstar 3,625,000 shares of common stock. The stock was trading at approximately $0.20 at the time of the exchange. The preferential distribution of $363 was booked as compensation expense, and charged to operational income during fiscal 1999. In addition, Dreamstar loaned the Company $70, at a rate of 12% interest, during fiscal 1999. As of November 1998, the Company owed Dreamstar $46, net of repayments and accrued interest of $1. The Company paid this obligation in November 1998 by issuing 460,000 shares of its common stock. The stock was trading at approximately $0.20 at the time of the exchange. The preferential distribution of $46 was booked as compensation expense, and charged to operational income during fiscal 1999. In November 1998, the Company exchanged its remaining notes payable for 3,143,500 of its common shares. The total amount of remaining notes payable at the time of the exchange was $629, net of repayments and accrued interest of $32. The stock was trading at approximately $0.20 at the time of the exchange. Part FS Page 16 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 8. LONG-TERM DEBT Long-term debt consists of the following at March 31:
1999 1998 ------ ------ 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. $ 3,000 $ - Note payable to an individual at 12% interest, with monthly interest only payments of $4 through November 2007. Secured through a personal guarantee of the Company's Chairman and is subordinate to the 14% note described above. 443 427 ------- ------- 3,443 427 Less current portion ( - ) (25) ------- ------- $ 3,443 $ 402 ------- -------
Future maturities of long-term debt are summarized as follows:
Fiscal year ----------- 2000 $ - 2001 - 2002 - 2003 - 2004 3,000 Thereafter 443 --------- $ 3,443 ---------
9. STOCKHOLDERS' EQUITY On January 14, 1999 the stockholders of the Company approved a resolution which amended the Company's Restated Articles of Incorporation to increase the number of authorized shares of common stock from 50,000,000 shares, par value $0.05, to 100,000,000 shares, of no par value common stock. As a result of this amendment, the additional paid-in capital account has been combined with common stock as presented in the Consolidated Statements of Stockholders' Equity. Part FS Page 17 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) COMMON STOCK During December 1997, the Company issued 50,000 shares of its previously authorized, but unissued common stock. Total proceeds from the sale of stock amounted to $9. During December 1997, the Company issued 1,450,000 common shares valued at $0.25 per share or $362 to purchase the 5,111,465 remaining minority shares of DFC. In connection with the purchase, the Company wrote down the value of all non-current assets including $18 in property and equipment, $72 in long-term notes receivable and $4 in other assets. This transaction resulted in the Company recognizing a one-time gain of $386 during fiscal 1998. During November 1998, the Company issued 400,000 shares of its previously authorized, but unissued common stock to third parties for services rendered. The value assigned to the issuance of these shares totaled $80. The stock was trading at approximately $0.20 per share at the time of the transaction. WARRANTS The Company 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. The number of shares which may be purchased pursuant to exercise of the warrants varies between a minimum of 14% and a maximum of 18.5% of the issued and outstanding shares. The exercise price of the warrants is $0.01 per share. The warrants have anti-dilution rights, registration rights and co-sale rights. The warrants also have a "put" feature which entitles the lending institution to require the Company to purchase the warrants for their fair market value determined by an appraisal process. Payment of the "put" price may be paid by the Company by issuance to the lending institution of a promissory note with 10% interest per annum and 24 monthly payments of principal and interest. 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 over a three or five year period. Part FS Page 18 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) Transactions and other information relating to the plan for fiscal 1999 are summarized as follows:
Stock Options ------------------------------- Shares Wtd. Avg. Price ------ ---------------- Outstanding at April 1, 1998 - Granted 950,000 $ .38 Exercised - ------- Outstanding at March 31, 1999 950,000 $ .38 ------- -------
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, 2001. The options vest ratably over three years beginning on the first anniversary date of the grant. 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. The remaining 100,000 vest on the first anniversary date of the grant. Part FS Page 19 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) The following table summarizes information about all of the stock options outstanding at March 31, 1999:
Outstanding options Exercisable options ---------------------------------------- ----------------------- Weighted average Range of remaining Weighted Weighted exercise prices Shares life (years) avg. price Shares avg. price - --------------- ------- ------------ ---------- ------- ---------- $ .15 - .25 200,000 2.75 $ .19 100,000 $.19 .26 - .50 750,000 3.83 .44 250,000 .44 - --------------------------------------------------------------------------------------------- $ .15 - .50 950,000 3.61 $ .38 350,000 $.37 - ------------ ------- ------ ------ ------- ------- - ------------ ------- ------ ------ ------- -------
For purposes of the following proforma 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 1999: no dividend yield; volatility of 24%; risk-free interest rate of 6%; and an expected term of five years. The weighted average Black-Scholes value of options granted during fiscal 1999 was $.31 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:
For the years ended March 31, 1999 1998 ---------- --------- Net income - As reported $ 628 $ 432 ---------- --------- ---------- --------- Pro forma $ 630 $ 432 ---------- --------- ---------- --------- Basic income per share - As reported $ .02 $ .03 ---------- --------- ---------- --------- Pro forma $ .02 $ .03 ---------- --------- ---------- --------- Diluted income per share - As reported $ .02 $ .03 ---------- --------- ---------- --------- Pro forma $ .02 $ .03 ---------- --------- ---------- ---------
Part FS Page 20 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 10. INCOME TAXES The provision (benefit) for income taxes consisted of the following:
1999 1998 ---- ---- Current: Federal tax expense $ 341 $ - State tax expense 75 - Deferred: Federal tax expense $(341) $ - State tax expense - - ----- ----- $ 75 $ - ----- -----
The Company's deferred tax balances consist of the following at March 31:
1999 1998 ---- ---- Deferred tax assets: Net operating loss carryforward $ 1,608 $ 1,992 Accelerated depreciation for book purposes - 5 Accrued liabilities 54 73 Deferred revenue 50 41 Inventory capitalization adjustment 15 - Allowance for doubtful accounts 52 - ------- ------- 1,779 2,111 Deferred tax liability: Accelerated depreciation for tax purposes (9) - ------- ------- 1,770 2,111 Valuation allowance (1,770) (2,111) ------- ------- $ - $ - ------- -------
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, 1999, a valuation allowance for the full amount of the net deferred tax asset was recorded because of pre-1999 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, 1999 and 1998 was $341 and $17, respectively. Part FS Page 21 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) A reconciliation of the Company's effective tax rate compared to the statutory federal tax rate for the years ended March 31, 1999 and 1998 is as follows:
1999 1998 ---- ---- Federal income taxes at statutory rate 34% 34% State taxes, net of federal benefit 6 5 Gain on acquisition of minority interest - (35) Valuation allowance (52) (4) Stock based compensation adjustment 24 - Other (1) - --- --- 11% -% --- ---
The Company at March 31, 1999 and 1998 has $415 and $425, 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, 1999, the Company had available net operating loss carryforwards of approximately $4,728, which expire in various years beginning in 2007 through 2014. 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 $1,501, which expire in various years through 2005. 11. COMMITMENTS AND CONTINGENCIES As of March 31, 1999, the Company leases office and warehouse space under operating leases in Florida (approximately 23,000 square feet) and Colorado (approximately 3,000 square feet). The leases for these two facilities expire in April 2003 and September 2002, respectively. Rent expense charged to operations for fiscal 1999 and fiscal 1998 was $118 and $29, respectively. Part FS Page 22 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) The aggregate minimum annual lease payments under noncancellable operating leases are as follows:
Fiscal ------ 2000 $ 208 2001 206 2002 204 2003 212 2004 17 Thereafter - ------ Total minimum lease commitments $ 847 ------
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. The Company's Chairman does not have an employment agreement but can be compensated under terms set forth by the lending institution which lent the Company $3.0 million in fiscal 1999 (see Note 8). The Chairman does not receive a base salary. However, for fiscal years 2000 - 2003, the Company may make a bonus payment to the Chairman in the amount of $90 if the Company's audited earnings before interest, depreciation and amortization ("EBITDA") exceeds $1.5 million for such fiscal year. An additional $90 bonus payment may be made to the Chairman if EBITDA in such fiscal year exceeds $2.0 million. The Company's Chairman did not receive any salary or bonus payments in fiscal 1999. 12. DISCONTINUED OPERATIONS OF RESTAURANTS CLOSED AND SOLD The Company was formerly engaged in the ownership and operation of family style restaurants and a sports cafe through Heidi's Holding Corporation ("HHC") (formerly known as Shari's Franchise Corporation ("SFC")) and B.B. O'Brien's, Inc. ("BB's"), respectively. These operations were discontinued with the sale of HHC and the related restaurants. During February and March 1996, the Company sold a majority of the family style restaurants owned by HHC to various third parties. Part FS Page 23 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) Effective December 31, 1996, the Company sold the stock of HHC, which included the one remaining Heidi's restaurant to Battistone Financial Group, a related party, for the return of 2,000,000 shares of the Company's common stock. The gain on the sale of this stock totaling $631 was accounted for as an increase in additional paid-in capital during the year ended March 31, 1997. In July 1995, the Company closed its BB O'Brien's sports bar. All fixed assets and goodwill related to BB's were fully depreciated and amortized during the year ended March 31, 1995. At March 31, 1998, BB's had net liabilities owed to unrelated third parties of $268. The Company received an opinion during fiscal 1999 from independent counsel concluding that the statute of limitations for liability on these obligations had expired. Consequently, the Company eliminated these liabilities from its balance sheet and recognized the effect in discontinued operations in fiscal 1999. 13. RELATED PARTY TRANSACTIONS The Company's Chairman often makes advances to the Company, which are non-interest bearing and payable upon demand. These net advances totaled $52 and $59 at March 31, 1999 and 1998, respectively, and have been included in accrued liabilities on the balance sheet for those respective dates. The Company had certain amounts payable and receivable to related parties for purchases of certain sports memorabilia merchandise. During the year ended March 31, 1998, the payable and receivable were combined leaving a receivable from the related parties for $2. This amount was repaid in fiscal 1999. During the years ended March 31, 1999 and 1998 a shareholder and officer of the Company through December 1998, loaned the Company $92 and $29, respectively, to pay for obligations of the Company. The fiscal 1998 loan included a flat rate of interest of $2. As of March 31, 1998, the fiscal 1998 loan and applicable interest was paid in full. The fiscal 1999 loans included interest at 12% per annum. The net amount due, including accrued interest of $1, at November 18, 1999 was $14 and was repaid through issuance of the Company's common stock at the market rate at the time of the exchange (see Note 7). 14. 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 of $5 for each new franchised unit opened and one percent of each franchised unit's gross sales. This $5 fee is Part FS Page 24 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) not an advance against royalties. At March 31, 1999, DFC had 34 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. The license agreement expires December 2000. 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 USL. Termination of the license agreement would eliminate DFC's right to use the Field of Dreams service mark. On June 5, 1997, DFC received from USL a notice of termination of the USL License based upon an allegation of more than four material breaches within a period of eighteen (18) months. Subsequently, USL suspended the notice of termination as DFC and USL negotiated a settlement of and amendment to the License agreement. Effective September 1997, DFC and USL agreed that the USL License is in good standing. Under the terms of the settlement agreement, DFC was required to pay to USL $100 over a one year period and immediately pay all royalties due. The Company paid USL $75 in fiscal 1998 and the remaining $25 in fiscal 1999. The settlement agreement also modified the USL License to exclude USL properties and the surrounding five-mile radius (excluding large regional malls) from DFC's exclusive territory. DFC has the right of first refusal to the third-party retail sports memorabilia operation on the USL properties. Should DFC fail to meet its obligation under the settlement agreement, the USL license would again be in breach and subject to termination by USL. 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. Part FS Page 25 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 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, 1999, 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, 1999 and 1998 was $189 and $126, respectively. DFC franchise activity is summarized as follows for the years ended March 31:
1999 1998 ---- ---- In operation at year end 34 27 Opened during the year 8 7 Closed during the year 1 3 Under development at year end 3 2
15. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest during fiscal 1999 and 1998 was $156 and $131, respectively. The Company did not pay any income taxes during fiscal 1999 or fiscal 1998.
1999 1998 ---- ---- Noncash investing and financing activities: Capital stock issued for acquisition $ 3,000 $ - Capital stock issued as consideration to extinguish debt 1,649 - Capital stock issued for payment of services to third parties 80 - Capital stock issued to acquire minority interest in subsidiary - 362 Details of acquisition: Fair value of assets acquired $ 3,577 $ - Liabilities assumed (552) - Capital stock issued (750) - ------- ------ Cash paid 2,275 - Less cash acquired (57) - ------- ------ Net cash paid for acquisition $ 2,218 $ - ------- ------
Part FS Page 26 DREAMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS) 16. UNAUDITED INTERIM STATEMENTS The financial statements as of June 30, 1999 and for the three months ended June 30, 1999 and 1998 are unaudited; however, in the opinion of the management of Dreams, Inc., all adjustments (consisting solely of normal recurring adjustments) necessary to a fair presentation of the financial statements for these interim periods have been made. The results for the interim period ended June 30, 1999 are not necessarily indicative of the results to be obtained for a full fiscal year. Part FS Page 27 PART III -------- Item 1 Exhibit Index
Exhibit Number Page # 2 (i) Articles of Incorporation (ii) Bylaws 6 Material Contracts (i) Sirrom Financing Agreements (ii) Ross Tannenbaum Employment Agreement (iii) Merchandise License Agreement 7 Letter on change in certifying accountant
Exhibit Index Pursuant to the requirements of Section 12 of the Securities Exchange Age of 1934, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. DREAMS, INC. Date: By: ----------------------------- ---------------------------------- (Signature) Signature Page EX-2.I 2 EXHIBIT 2(I) EXHIBIT 2(i) Articles of Incorporation Articles of Inc ARTICLES OF AMENDMENT Pursuant to Section 16-10a-1006 of the Utah Revised Business Corporation Act, Dreams, Inc., a Utah corporation hereby files with the Utah Division of Corporations and Commercial Code the following Articles of Amendment: FIRST: The name of the corporation is Dreams, Inc. SECOND: The following Article replaces in its entirety the correspondingly numbered Article in the Company's Revised Articles of Incorporation: ARTICLE IV - STOCK THE AGGREGATE NUMBER OF SHARES OF COMMON STOCK WHICH THIS CORPORATION SHALL HAVE AUTHORITY TO ISSUE IS 100,000,000 (ONE HUNDRED MILLION) NO PAR VALUE PER SHARE. UPON THE EFFECTIVENESS OF THESE ARTICLES OF AMENDMENT PURSUANT TO THE UTAH REVISED BUSINESS CORPORATION ACT, EACH SHARE OF THE CORPORATION'S PREVIOUSLY ISSUED AND OUTSTANDING $0.05 PAR VALUE COMMON STOCK SHALL BE DEEMED CONVERTED INTO ONE SHARE OF THIS CORPORATION'S NO PAR VALUE COMMON STOCK. THE CORPORATION SHALL INSTITUTE PROCEDURES TO PROVIDE FOR THE ORDERLY EXCHANGE OF CERTIFICATES. THIRD: Provisions for implementing the conversion of $0.05 par value common shares into no par value common shares are contained in Article IV. FOURTH: The Amendment was adopted on January 14, 1999. FIFTH: The Amendment was approved by the Company's shareholders. The number of shares of common stock, the Company's only class of stock, issued and outstanding on January 14, 1999 was 40,148,500 (Forty Million One Hundred Forty Eight Thousand Five Hundred). SIXTH: The number of shares entitled to be voted was 40,148,500 (Forty Million One Hundred Forty Eight Thousand Five Hundred). SEVENTH: 23,946,495 (Twenty Three Million Nine Hundred Forty Six Thousand Four Hundred Ninety Five) shares were indisputably represented at the meeting. EIGHTH: The total number of shares cast in favor of the above amendment was 23,946,495 (Twenty Three Million Nine Hundred Forth Six Thousand Four Hundred Ninety Five) and the total number of shares cast against the above ArtOfInc Page 1 amendment was - 0 - (None). The number of votes cast for the amendment was sufficient for approval. Filed in accordance with Section 16-10a-120 of the Utah Revised Business Corporation Act this 14th day of January, 1999. DREAMS, INC., a Utah corporation By: ---------------------------------- SAM D. BATTISTONE Its: President By: ---------------------------------- MARK VINER Its: Secretary STATE OF NEVADA ) : ss. COUNTY OF CLARK ) On the 14th day of January, 1999, before me, the undersigned Notary, personally appeared Sam D. Battistone, known or identified to me to be the President of Dreams, Inc., a Utah corporation, and acknowledged to me that such corporation executed the foregoing instrument. Dated this 14th day of January, 1999. ------------------------------------ NOTARY PUBLIC My Commission Expires: ArtOfInc Page 2 STATE OF NEVADA ) : ss. COUNTY OF CLARK ) On the 14th day of January, 1999, before me, the undersigned Notary, personally appeared Mark Viner, known or identified to me to be the Secretary of Dreams, Inc., a Utah corporation, and acknowledged to me that such corporation executed the foregoing instrument. Dated this 14th day of January, 1999. ------------------------------------------ NOTARY PUBLIC My Commission Expires: ArtOfInc Page 3 ARTICLES OF AMENDMENT Pursuant to Section 16-10a-1006 of the Utah Revised Business Corporation Act, the corporation known prior to this amendment as StratAmerica Corporation hereby files with the Utah Division of Corporations and Commercial Code the following Articles of Amendment: FIRST: The name of the corporation, prior to the effectiveness of this amendment, is StratAmerica Corporation. SECOND: The following articles replace in their entirety the correspondingly numbered articles in the Company's Revised Articles of Incorporation: ARTICLE I - NAME The name of this corporation is Dreams, Inc. ARTICLE IV - STOCK The aggregate number of shares of common stock which this corporation shall have authority to issue is 50,000,000 (fifty million) $.05 par value per share. ARTICLE V - INDEMNIFICATION AND LIMITATION OF LIABILITY This corporation shall indemnify all officers, directors and agents to the fullest extent permitted by law. To the fullest extent permitted by the Utah Revised Business Corporation Act or any other applicable law as now in effect or as it may hereafter be amended, directors of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for any action taken or any failure to take any action as a director. Neither any amendment nor repeal of this resolution, or the adoption of any provision of the Articles of Incorporation of this corporation inconsistent with this resolution, shall eliminate or reduce the effect of this resolution in respect of any matter occurring, or any cause of action, suit or claim that, but for this resolution, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. THIRD: Each of the above amendments were adopted on March 28, 1996, by the Shareholders of the Company in the manner prescribed by Utah law. FOURTH: The number of shares of common stock, the Company's only class of stock, issued and outstanding on March 28, 1996, was 10,000,000 (ten million). ArtOfInc Page 4 FIFTH: The number of shares entitled to be voted was 10,000,000 (ten million). SIXTH: The total number of shares cast in favor of all the above amendments was 8,117,490 and the total number of shares cast against the above amendments was 18,540. SEVENTH: 8,132,430 shares were indisputably represented at the meeting. Filed in accordance with Section 16-10a-120 of the Utah Revised Business Corporation Act this 28th day of March, 1996. STRATAMERICA CORPORATION, a Utah corporation By:____________________________________ SAM D. BATTISTONE Its: President By:____________________________________ DALE E. LARSSON Its: Secretary STATE OF UTAH ) : ss. COUNTY OF SALT LAKE ) On the 28th day of March, 1996, before me, the undersigned Notary, personally appeared Sam D. Battistone, known or identified to me to be the President of StratAmerica Corporation, and acknowledged to me that such corporation executed the foregoing instrument. Dated this 28th day of March, 1996. ----------------------------------- NOTARY PUBLIC My Commission Expires: ArtOfInc Page 5 STATE OF UTAH ) : ss. COUNTY OF SALT LAKE ) On the 28th day of March, 1996, before me, the undersigned Notary, personally appeared Dale E. Larsson, known or identified to me to be the Secretary of StratAmerica Corporation, and acknowledged to me that such corporation executed the foregoing instrument. Dated this 28th day of March, 1996. ----------------------------------- NOTARY PUBLIC My Commission Expires: ArtOfInc Page 6 REVISED ARTICLES OF INCORPORATION OF STRATAMERICA CORPORATION ARTICLE I - NAME The name of this corporation is StratAmerica Corporation. ARTICLE II - DURATION The duration of this corporation is perpetual. ARTICLE III - PURPOSES A. The purposes for which this corporation is organized are to engage in all aspects of the restaurant business. B. This corporation shall have all of the powers granted or allowed by the Utah Business Corporation Act, as may be amended from time to time, and all of the powers necessary or convenient to effect any or all of the purposes for which this corporation is organized. C. This corporation shall have power to acquire by purchase, exchange, gift, bequest, subscription or otherwise, and to hold, own, mortgage, pledge, hypothecate, sell, assign, transfer, exchange or otherwise dispose of or deal in or with its own corporate securities or stock or other securities, including, without limitation, any shares of stock, bonds, debentures, notes, mortgages, or other obligations, and any certificates, receipts or other instruments representing rights or interest therein or any property or assets created or issued by any person, firm, association, or corporation, or any government or subdivisions, agencies or instrumentalities thereof; to make payment therefor in any lawful manner or to issue in exchange therefor its own securities or to use its unrestricted any unreserved earned surplus and/or unrestricted and unreserved capital surplus for the purchase of its own shares, and to exercise as owner or holder of any securities, any and all rights, powers and privileges in respect thereof. D. This corporation shall have power to act as fully and to the same extent as a natural person might, or could do, in any part of the world as principal, agent, partner, general or limited, trustee or otherwise, either alone or in conjunction with any person, firm or corporation. ARTICLE IV - STOCK The aggregate number of shares of common stock which this corporation shall have authority to issue is 10,000,000 shares, $.05 par value share. ArtOfInc Page 7 Effective upon the issuance by the Utah Division of Corporations and Commercial Code of a Certificate of Revision effecting these Revised Articles of Incorporation, each five shares of the corporation's previously issued and outstanding $.01 par value stock shall be deemed converted into one share of the corporation's $.05 par value common stock. The corporation shall institute procedures to provide for the orderly exchange of certificates and payment for fractional shares. ARTICLE V - INDEMNIFICATION AND LIMITATION OF LIABILITY This corporation shall indemnify all officers, directors and agents to the fullest extent permitted by law. To the fullest extent permitted by the Utah Business Corporation Act as the same exists or may hereafter be amended, a director of this corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. ARTICLE VI - PRE-EMPTIVE RIGHTS Shareholders shall not have pre-emptive rights to acquire shares of common stock of this corporation. ARTICLE VII - DIRECTORS The number of Directors shall be not less than three (3). The number of Directors constituting the initial Board of Directors is three (3). Thereafter, the number of Directors shall be determined by the Bylaws. ARTICLE VII - COMMON DIRECTORS No contract or other transaction between this corporation and one or more of its Directors or any other corporation, firm, association or entity in which one or more of its Directors are directors or officers or are financially interested, shall be either void or voidable because of such relationship or interest, or because such Director or Directors are present at the meeting of the Board of Directors, or a committee thereof, which authorizes, approves or ratifies such contract or transaction, or because his or their votes are counted for such purpose of: (a) the fact of such relationship or interest is disclosed or known to the Board of Directors or committee which authorizes, approves or ratifies the contract or transaction by vote or consent of such interested Director; or (b) the fact of such relationship or interest is disclosed or known to the shareholders entitled to vote and they authorize, approve or ratify such contract or transaction by vote or written consent; or (c) the contract or transaction is fair and reasonable to the corporation. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or committee thereof which authorizes, approves or ratifies such contract or transaction. ArtOfInc Page 8 ARTICLE IX - REVISED ARTICLES These Revised Articles of Incorporation supercede the original Articles of Incorporation and all amendments thereto. ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF STRATAMERICA CORPORATION Pursuant to the provisions of the Utah Business Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The following Amendment to the Articles of Incorporation was adopted by the shareholders of StratAmerica Corporation on June 2, 1989 in the manner prescribed by the Utah Business Corporation Act: The attached Revised Articles of Incorporation were adopted and are incorporated by this reference. SECOND: The number of shares of common stock of the corporation outstanding at the time of such adoption was 24,630,981 and the number of shares entitled to vote thereon was 24,630,981. THIRD: The number of shares voted for such amendment was 18.585,683 and the number of shares voted against such amendment was 57,750. FOURTH: The exchange and cancellation of issued certificates and the issuance and delivery of new certificates shall be effected in the manner set forth in the Revised Articles of Incorporation. FIFTH: Stated capital of StratAmerica Corporation is not changed by this Amendment. STRATAMERICA CORPORATION By: --------------------------------- Sam D. Battistone, President ATTESTED AND VERIFIED this 8th day of June, 1989. - ----------------------------------- Dale E. Larsson, Secretary ArtOfInc Page 9 STATE OF CALIFORNIA ) :ss. COUNTY OF RIVERSIDE ) The foregoing instrument was acknowledged before me this 8th day of June, 1989, by Sam D. Battistone, President of StratAmerica Corporation, a Utah corporation. --------------------------------------- NOTARY PUBLIC Residing at: -------------------------- ArtOfInc Page 10 STATE OF UTAH ) :ss. COUNTY OF SALT LAKE ) The foregoing instrument was acknowledged before me this 8th day of June, 1989, by Dale E. Larsson, Secretary of StratAmerica Corporation, a Utah corporation. --------------------------------------- NOTARY PUBLIC Residing at: --------------------------- My Commission Expires: - --------------------- ArtOfInc Page 11 EX-2.II 3 EXHIBIT 2(II) EXHIBIT 2(ii) Bylaws Bylaws BYLAWS OF DREAMS, INC.
TABLE OF CONTENTS PAGE ---- ARTICLE I NAME, REGISTERED OFFICE, AND REGISTERED AGENT 1.1 Name.........................................................1 1.2 Business Office..............................................1 1.3 Registered Office............................................1 ARTICLE II SHAREHOLDERS 2.1 Annual Shareholder Meetings..................................1 2.2 Special Shareholder Meetings ................................2 2.3 Place of Shareholder Meeting.................................2 2.4 Notice of Shareholder Meeting................................2 2.5 Fixing of Record Date........................................4 2.6 Shareholder List ...........................................5 2.7 Shareholder Quorum and Voting Requirements...................5 2.8 Increasing Either Quorum or Voting Requirements..............5 2.9 Proxies .....................................................6 2.10 Voting of Shares.............................................6 2.11 Corporation's Acceptance of Votes ...........................6 2.12 Informal Action by Shareholders..............................7 2.13 Voting For Directors.........................................8 2.14 Shareholder's Right to Inspect Corporate Records.............8 2.15 Financial Statements shall be Furnished to the Shareholders..9 2.16 Dissenter's Rights..........................................10 ARTICLE III BOARD OF DIRECTORS 3.1 General Powers..............................................10 3.2 Number, Tenure, and Qualifications of Directors.............10 3.3 Regular Meetings of the Board of Directors..................10 3.4 Special Meetings............................................11 Bylaws Index Page i 3.5 Notice of, and Waiver of Notice for, Special Director Meetings....................................................11 3.6 Director Quorum ............................................11 3.7 Directors, Manner of Acting.................................12 3.8 Establishing a "Supermajority" Quorum or Voting Requirement for the Board of Directors....................12 3.9 Director Action Without a Meeting...........................13 3.10 Removal of Directors........................................13 3.11 Board of Director Vacancies.................................13 3.12 Director Compensation ......................................14 3.13 Director Committees.........................................14 3.14 Chairman....................................................15 ARTICLE IV OFFICERS 4.1 Number of Officers..........................................15 4.2 Appointment and Term of Office .............................15 4.3 Removal of Officers ........................................16 4.4 President ..................................................16 4.5 The Vice-Presidents ........................................16 4.6 The Secretary ..............................................16 4.7 The Treasurer ..............................................17 4.8 Assistant Secretaries and Assistant Treasurers..............17 4.9 Salaries ...................................................17 4.10 Other Officers .............................................17 4.11 Surety Bonds................................................18 ARTICLE V INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS, AND EMPLOYEES 5.1 Indemnification of Directors................................18 5.2 Advance Expenses for Directors..............................19 5.3 Indemnification of Officers, Agents and Employees Who Are Not Directors...........................19 ARTICLE VI CERTIFICATES FOR SHARES AND THEIR TRANSFER 6.1 Certificates for Shares.....................................19 6.2 Shares Without Certificates.................................20 6.3 Registration of the Transfer of Shares......................20 6.4 Restrictions on Transfer of Shares Permitted................21 6.5 Acquisition of Shares ......................................22 6.6 Lost or Destroyed Certificates..............................22 Bylaws Index Page ii ARTICLE VII DISTRIBUTIONS 7.1 Distributions ..............................................22 ARTICLE VIII CORPORATE SEAL 8.1 Corporate Seal .............................................22 ARTICLE IX CONTRACTS, LOANS, CHECKS AND DEPOSITS 9.1 Contracts...................................................23 9.2 Loans.......................................................23 9.3 Deposits....................................................23 9.4 Checks and Drafts...........................................23 9.5 Bonds and Debentures........................................23 ARTICLE X EMERGENCY BYLAWS 10.1 Emergency Bylaws............................................23 ARTICLE XI AMENDMENTS 11.1 Amendment...................................................24 ARTICLE XII EXEMPTION FROM CONTROL SHARES ACQUISITION ACT..........25
Bylaws Index Page iii BYLAWS OF DREAMS, INC. ARTICLE I NAME, OFFICES AND REGISTERED AGENT 1.1 NAME. The name of this corporation is Dreams, Inc. 1.2 BUSINESS OFFICE. The principal office of the corporation shall be located at any place either within or outside the State of Utah as designated in the company's most recent document on file with the Utah Department of Commerce, Division of Corporations and Commercial Code (the "Division") providing information regarding the principal office of the corporation. The corporation may have such other offices, either within or without the State of Utah as the board of directors may designate or as the business of the corporation may require from time to time. The corporation shall maintain at its principal office a copy of certain records, as specified in Section 2.14 of Article II of these bylaws. 1.3 REGISTERED OFFICE. The registered office of the corporation, required by Section 501 of the Utah Revised Business Corporation Act (the "Act") shall be located within Utah. The address of the registered office may be changed from time to time. The name of the initial registered agent of this corporation is Dale E. Larsson. ARTICLE II SHAREHOLDERS 2.1 ANNUAL SHAREHOLDER MEETING. The annual meeting of the shareholders shall be held on the 31st day of July, in each year, beginning with the year 2000, at the hour of 11:00 o'clock a.m., or at such other time on such other day within such month as shall be fixed by the board of directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday in the State of Utah, such meeting shall be held on the next succeeding business day. If the election of directors shall not be held on the day designated herein for any annual meeting of the shareholders, or at any subsequent continuation after adjournment thereof, the board of directors may cause the election to be held at a special meeting of the shareholders when convenient. Failure to hold an annual meeting shall not work a forfeiture or dissolution of the corporation. Bylaws Page 1 2.2 SPECIAL SHAREHOLDER MEETINGS. Special meetings of the shareholders, for any purpose or purposes, described in the meeting notice, may be called by the president, or by the board of directors and shall be called by the president at the request of the holders of not less than one-tenth of all outstanding votes of the corporation entitled to be cast on any issue at the meeting. 2.3 PLACE OF SHAREHOLDER MEETING. The board of directors may designate any place for any annual or special meeting of the shareholders, unless a majority of the shareholders entitled to vote at the meeting agree by written consents (which may be in the form of waiver of notice or otherwise) to another location, which may be either within or without the State of Utah. If no designation is made, the place of meeting shall be the principal office of the corporation. 2.4 NOTICE OF SHAREHOLDER MEETING. (a) REQUIRED NOTICE. Written notice stating the place, day and hour of any annual or special shareholder meeting shall be delivered not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the president, the board of directors, or other persons calling the meeting, to each shareholder of record, entitled by the Act or the articles of incorporation to receive notice of the meeting. Notice shall be deemed to be effective at the earlier of: (1) When deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid; (2) On the date shown on the return receipt if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee; (3) When received; or (4) Five days after deposit in the United States mail, if mailed postpaid and correctly addressed to an address other than that shown in the corporation's current record of shareholders. Bylaws Page 2 (b) ADJOURNED MEETING. If any shareholder meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time and place, if the new date, time and place is announced at the meeting before adjournment. But if a new record date for the adjourned meeting is, or must be fixed then notice must be given pursuant to the requirements of paragraph (a) of this Section 2.4, to those persons who are shareholders as of the new record date. (c) WAIVER OF NOTICE. The shareholder may waive notice of the meeting (or any notice required by the Act, articles of incorporation, or bylaws), by a writing signed by the shareholder entitled to the notice, which is delivered to the corporation (either before or after the date and time stated in the notice) for inclusion in the minutes or filing with the corporate records. A shareholders's attendance at a meeting: (1) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; (2) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. (d) CONTENTS OF NOTICE. The notice of each special shareholder meeting shall include a description of the purpose or purposes for which the meeting is called. Except as provided in this Section 2.4(d), or as provided in the corporation's articles, or otherwise in the Act, the notice of an annual shareholder meeting need not include a description of the purpose or purposes for which the meeting is called. If a purpose of any shareholder meeting is to consider either: (1) A proposed amendment to the articles of incorporation (including any restated articles requiring shareholder approval); (2) A plan of merger or share exchange; (3) The sale, lease, exchange or other disposition of all, or substantially all of the corporation's property; (4) The dissolution of the corporation; or Bylaws Page 3 (5) The removal of a director, the notice must so state and be accompanied by respectively a copy or summary of the: (i) Articles of amendment; (ii) Plan of merger or share exchange; and (iii) Transaction for disposition of all the corporation's property. If the proposed corporate action creates dissenters' rights, the notice must state that shareholders are, or may be entitled to assert dissenters' rights, and must be accompanied by a copy of Part 13 of the Act. If the corporation issues, or authorizes the issuance of shares for promissory notes or for promises to render services in the future, the corporation shall report in writing to all the shareholders the number of shares authorized or issued, and the consideration received with or before the notice of the next shareholder meeting. Likewise, if the corporation indemnifies or advances expenses to a director, this shall be reported to all the shareholders with or before notice of the next shareholder's meeting. 2.5 FIXING OF RECORD DATE. For the purpose of determining shareholders of any voting group entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive payment of any distribution or dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a date as the record date. Such record date shall not be more than 70 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is so fixed by the board for the determination of shareholders entitled to notice of, or to vote at a meeting of shareholders, or shareholders entitled to receive a share dividend or distribution, the record date for determination of such shareholders shall be at the close of business on: (a) With respect to an annual shareholder meeting or any special shareholder meeting called by the board or any person specifically authorized by the board or these bylaws to call a meeting, the day before the first notice is delivered to shareholders; (b) With respect to a special shareholder's meeting demanded by the shareholders, the date the first shareholder signs the demand; (c) With respect to the payment of a share dividend, the date the board authorizes the share dividend; (d) With respect to actions taken in writing without a meeting (pursuant to Article II, Section 2.12), the date the first shareholder signs a consent; (e) And with respect to a distribution to shareholders, (other than one involving a repurchase or reacquisition of shares), the date the board authorizes the distribution. Bylaws Page 4 When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. 2.6 SHAREHOLDER LIST. The officer or agent having charge of the stock transfer books for shares of the corporation shall make a complete record of the shareholders entitled to vote at each meeting of shareholders thereof, arranged in alphabetical order, with the address of and the number of shares held by each. The list must be arranged by voting group (if such exists, see Article II, Section 2.6) and within each voting group by class or series of shares. The shareholder list must be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting. The list shall be available at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting is to be held. A shareholder, his agent, or attorney is entitled on written demand to inspect and, subject to the requirements of Section 2.13 of this Article II, to copy the list during regular business hours and at his expense, during the period it is available for inspection. The corporation shall maintain the shareholder list in written form or in another form capable of conversion into written form within a reasonable time. 2.7 SHAREHOLDER QUORUM AND VOTING REQUIREMENTS. If the articles of incorporation or the Act provides for voting by a single voting group on a matter, action on that matter is taken when voted upon by that voting group. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless the articles of incorporation, a bylaw or the Act provide otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. If the articles of incorporation or the Act provide for voting by two or more voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately. Action may be taken by one voting group on a matter even though no action is taken by another voting group entitled to vote on the matter. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation, a bylaw or the Act require a greater number of affirmative votes. Bylaws Page 5 2.8 INCREASING EITHER QUORUM OR VOTING REQUIREMENTS. For purposes of this Section 2.8 a "supermajority" quorum is a requirement that more than a majority of the votes of the voting group be present to constitute a quorum; and a "supermajority" voting requirement is any requirement that requires the vote of more than a majority of the affirmative votes of a voting group at a meeting. The shareholders, but only if specifically authorized to do so by the articles of incorporation, may adopt, amend, or delete a bylaw which fixes a "supermajority" quorum or "supermajority" voting requirement. The adoption or amendment of a bylaw that adds, changes, or deletes a "supermajority" quorum or voting requirement for shareholders must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirement then in effect or proposed to be adopted, whichever is greater. A bylaw that fixes a supermajority quorum or voting requirement for shareholders may not be adopted, amended, or repealed by the board of directors. 2.9 PROXIES. At all meetings of shareholders, a shareholder may vote in person, or vote by proxy which is executed in writing by the shareholder or which is executed by his duly authorized attorney-in-fact. Such proxy shall be filed with the secretary of the corporation or other person authorized to tabulate votes before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution unless otherwise provided in the proxy. 2.10 VOTING OF SHARES. Unless otherwise provided in the articles, each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. Except as provided by specific court order, no shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Provided, however, the prior sentence shall not limit the power of the corporation to vote any shares, including its own shares, held by it in a fiduciary capacity. Redeemable shares are not entitled to vote after notice of redemption is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares. Bylaws Page 6 2.11 CORPORATION'S ACCEPTANCE OF VOTES. (a) If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the corporation if acting in good faith is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholders. (b) If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of its shareholder, the corporation if acting in good faith is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if: (1) The shareholder is an entity as defined in the Act and the name signed purports to be that of an officer or agent of the entity; (2) The name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment; (3) The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment; (4) The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment; (5) Two or more persons are the shareholder as co-tenants or fiduciaries and the named signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all the co-owners. (c) The corporation is entitled to reject a vote, consent, waiver or proxy appointment if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. (d) The corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this section are not liable in damages to the shareholder for the consequences of the acceptance or rejection. (e) Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this section is valid unless a court of competent jurisdiction determines otherwise. Bylaws Page 7 2.12 INFORMAL ACTION BY SHAREHOLDERS. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if one or more consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having no less than the minimum number of votes that would be necessary to authorize or take the action and are entitled to vote with respect to the subject matter thereof and are delivered to the corporation for inclusion in the minute book. If the act to be taken requires that notice be given to non-voting shareholders, the corporation shall give the non-voting shareholders written notice of the proposed action at least 10 days before the action is taken, which notice shall contain or be accompanied by the same material that would have been required if a formal meeting had been called to consider the action. A consent signed under this section has the effect of a meeting vote and may be described as such in any document. 2.13 VOTING FOR DIRECTORS. Unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. 2.14 SHAREHOLDER'S RIGHT TO INSPECT CORPORATE RECORDS. (a) MINUTES AND ACCOUNTING RECORDS. The corporation shall keep as permanent records minutes of all meetings of its shareholders or board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, and a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation. The corporation shall maintain appropriate accounting records. (b) ABSOLUTE INSPECTION RIGHTS OF RECORDS REQUIRED AT PRINCIPAL OFFICE. If he gives the corporation written notice of his demand at least five business days before the date on which he wishes to inspect and copy, a shareholder (or his agent or attorney) has the right to inspect and copy, during regular business hours any of the following records, all of which the corporation is required to keep at its principal office: (1) Its articles or restated articles of incorporation and all amendments to them currently in effect; (2) Its bylaws or restated bylaws and all amendments to them currently in effect; (3) Resolutions adopted by its board of directors creating one or more classes or series of shares, and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding; (4) The minutes of all shareholders' meetings, and records of all action taken by shareholders without a meeting, for the past three years; Bylaws Page 8 (5) All written communications to shareholders generally within the past three years, including the financial statement furnished for the past three years to the shareholders; (6) A list of the names and business addresses of its current directors and officers; and (7) Its most recent annual report delivered to the Secretary of State. (c) CONDITIONAL INSPECTION RIGHT. In addition, if he gives the corporation a written demand made in good faith and for a proper purpose at least five business days before the date on which he wishes to inspect and copy, he describes with reasonable particularity his purpose and the records he desires to inspect, and the records are directly connected with his purpose, a shareholder of a corporation (or his agent or attorney) is entitled to inspect and copy, during regular business hours at a reasonable location specified by the corporation, any of the following records of the corporation: (1) Excerpts from minutes of any meeting of the board of directors, records of any action of a committee of the board of directors on behalf of the corporation, minutes of any meeting of the shareholders, and records of action taken by the shareholders or board of directors without a meeting, to the extent not subject to inspection under paragraph (a) of this Section 2.13; (2) Accounting records of the corporation; and (3) The record of shareholders (compiled no earlier than the date of the shareholder's demand). (d) COPY COSTS. The right to copy records includes, if reasonable, the right to receive copies made by photographic, xerographic, or other means. The corporation may impose a reasonable charge, covering the costs of labor and material, for copies of any documents provided to the shareholder. The charge may not exceed the estimated cost of production or reproduction of the records. (e) SHAREHOLDER INCLUDES BENEFICIAL OWNER. For purposes of this Section 2.14, the term "shareholder" shall include a beneficial owner whose shares are held in a voting trust or by a nominee on his behalf. 2.15 FINANCIAL STATEMENTS SHALL BE FURNISHED TO THE SHAREHOLDERS. (a) The corporation shall furnish its shareholders annual financial statements, which may be consolidated or combined statements of the corporation and one or more of its subsidiaries, as appropriate, that include a balance sheet as of the end of the fiscal year, an income statement for that year, and a statement of changes in shareholders' equity for the year unless that information appears Bylaws Page 9 elsewhere in the financial statements. If financial statements are prepared for the corporation on the basis of generally accepted accounting principles, the annual financial statements for the shareholders also must be prepared on that basis. (b) If the annual financial statements are reported upon by a public accountant, his report must accompany them. If not, the statements must be accompanied by a statement of the president or the person responsible for the corporation's accounting records: (1) Stating his reasonable belief whether the statements were prepared on the basis of generally accepted accounting principles and, if not, describing the basis of preparation; and (2) Describing any respects in which the statements were not prepared on a basis of accounting consistent with the statements prepared for the preceding year. (c) A corporation shall mail the annual financial statements to each shareholder within 120 days after the close of each fiscal year. Thereafter, on written request from a shareholder who was not mailed the statements, the corporation shall mail him the latest financial statements. 2.16 DISSENTER'S RIGHTS. Each shareholder shall have the right to dissent from and obtain payment for his shares when so authorized by the Act, articles of incorporation, these bylaws, or in a resolution of the board of directors. ARTICLE III BOARD OF DIRECTORS 3.1 GENERAL POWERS. Unless the articles of incorporation have dispensed with or limited the authority of the board of directors by describing who will perform some or all of the duties of a board of directors, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of the board of directors. 3.2 NUMBER, TENURE, AND QUALIFICATIONS OF DIRECTORS. Unless otherwise provided in the articles of incorporation, the number of directors of the corporation shall be not less than three (3) nor more than seven (7). Each director shall hold office until the next annual meeting of shareholders or until removed. However, if his term expires, he shall continue to serve until his successor shall have been elected and qualified or until there is a decrease in the number of directors. Directors need not be residents of the State of Utah or shareholders of the corporation unless so required by the articles of incorporation. Bylaws Page 10 3.3 REGULAR MEETINGS OF THE BOARD OF DIRECTORS. A regular meeting of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. (If so permitted by Section 3.7, any such regular meeting may be held by telephone.) 3.4 SPECIAL MEETINGS OF THE BOARD OF DIRECTORS. Special meetings of the board of directors may be called by or at the request of the president or any one director. The person authorized to call special meetings of the board of directors may fix any place, only within the county where this corporation has its principal office as the place for holding any special meeting of the board of directors, or if permitted by Section 3.7, such meeting may be held by telephone. 3.5 NOTICE OF, AND WAIVER OF NOTICE FOR, SPECIAL DIRECTOR MEETINGS. Unless the articles of incorporation provide for a longer or shorter period, notice of any special director meeting shall be given at least two days previously thereto either orally or in writing. If mailed, notice of any director meeting shall be deemed to be effective at the earlier of: (a) When received; (b) Five days after deposited in the United States mail, addressed to the director's business office, with postage thereon prepaid; or (c) The date shown on the return receipt if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the director. Any director may waive notice of any meeting. Except as provided in the next sentence, the waiver must be in writing, signed by the director entitled to the notice, and filed with the minutes or corporate records. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business and at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting, and does not thereafter vote for or assent to action taken at the meeting. Unless required by the articles of incorporation, neither the business to be transacted at, nor the purpose of, any special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. 3.6 DIRECTOR QUORUM. If bylaw Section 3.2 establishes a fixed board size, a majority of the number of directors shall constitute a quorum for the transaction of business at any meeting of the board of directors, unless the articles require a greater number. Bylaws Page 11 If bylaw Section 3.2 permits a variable-range size board (a board size set by resolution within a given range), a majority of the number of directors prescribed by resolution, (or if no number is prescribed the number in office immediately before the meeting begins) shall constitute a quorum for the transaction of business at any meeting of the board of directors, unless the articles require a greater number. Any amendment to this quorum requirement is subject to the provisions of Section 3.8 of this Article III. 3.7 DIRECTORS, MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present when the vote is taken shall be the act of the board of directors unless the articles of incorporation require a greater percentage. Any amendment which changes the number of directors needed to take action, is subject to the provisions of Section 3.8 of this Article III. Unless the articles of incorporation provide otherwise, any or all directors may participate in a regular or special meeting by, or conduct of the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. A director who is present at a meeting of the board of directors or a committee of the board of directors when corporate action is taken is deemed to have assented to the action taken unless: (a) He objects at the beginning of the meeting (or promptly upon his arrival) to holding it or transacting business at the meeting; or (b) His dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) He delivers written notice of his dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. 3.8 ESTABLISHING A "SUPERMAJORITY" QUORUM OR VOTING REQUIREMENT FOR THE BOARD OF DIRECTORS. For purposes of this Section 3.8, a "supermajority" quorum is a requirement that more than a majority of the directors in office constitute a quorum; and a "supermajority" voting requirement is any requirement that requires the vote of more than a majority of those directors present at a meeting at which a quorum is present to be the act of the directors. Bylaws Page 12 A bylaw that fixes a supermajority quorum or supermajority voting requirement may be amended or repealed: (a) If originally adopted by the shareholders, only by the shareholders (unless otherwise provided by the shareholders); (b) If originally adopted by the board of directors, either by the shareholders or by the board of directors. A bylaw adopted or amended by the shareholders that fixes a supermajority quorum or supermajority voting requirement for the board of directors may provide that it may be amended or repealed only by a specified vote of either the shareholders or the board of directors. Subject to the provisions of the preceding paragraph, action by the board of directors to adopt, amend, or repeal a bylaw that changes the quorum or voting requirement for the board of directors must meet the same quorum requirement and be adopted by the same vote required to take action under the quorum and voting requirement then in effect or proposed to be adopted, whichever is greater. 3.9 DIRECTOR ACTION WITHOUT A MEETING. Unless the articles of incorporation provide otherwise, any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if all the directors take the action, each one signs a written consent describing the action taken, and the consents are filed with the records of the corporation. Action taken by consents is effective when the last director signs the consent, unless the consent specifies a different effective date. A signed consent has the effect of a meeting vote and may be described as such in any document. 3.10 REMOVAL OF DIRECTORS. The shareholders may remove one or more directors at a meeting called for that purpose if notice has been given that a purpose of the meeting is such removal. The removal may be with or without cause unless the articles provide that directors may only be removed with cause. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove him. If cumulative voting is not authorized, a director may be removed only if the number of votes sufficient to elect him under cumulative voting is voted against his removal. If cumulative voting is not authorized, a director may be removed only if the number of votes cast to remove him exceeds the number of votes cast not to remove him. 3.11 BOARD OF DIRECTOR VACANCIES. Unless the articles of incorporation provided otherwise, if a vacancy occurs on the board of directors, including a vacancy resulting from an increase in the number of directors, the shareholders may fill the vacancy. During such time that the shareholders fail or are unable to fill such vacancies then and until the shareholders act: Bylaws Page 13 (a) The board of directors may fill the vacancy; or (b) If the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group are entitled to vote to fill the vacancy if it is filled by the shareholders. A vacancy that will occur at a specific later date (by reason of a resignation effective at a later date) may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs. The term of a director elected to fill a vacancy expires at the next shareholders' meeting at which directors are elected. However, if his term expires, he shall continue to serve until his successor is elected and qualifies or until there is a decrease in the number of directors. 3.12 DIRECTOR COMPENSATION. Unless otherwise provided in the articles, by resolution of the board of directors, each director may be paid his expenses, if any, of attendance at each meeting of the board of directors, and may be paid a stated salary as director or a fixed sum for attendance at each meeting of the board of directors or both. No such payment shall preclude any director from serving the corporation in any capacity and receiving compensation therefor. 3.13 DIRECTOR COMMITTEES. (a) CREATION OF COMMITTEES. Unless the articles of incorporation provide otherwise, the board of directors may create one or more committees and appoint members of the board of directors to serve on them. Each committee must have two or more members, who serve at the pleasure of the board of directors. (b) SELECTION OF MEMBERS. The creation of a committee and appointment of members to it must be approved by the greater of: (1) A majority of all the directors in office when the action is taken; or (2) The number of directors required by the articles of incorporation to take such action, (or if not specified in the articles the numbers required by Section 3.7 of this Article III to take action). (c) REQUIRED PROCEDURES. Sections 3.4, 3.5, 3.6, 3.7, 3.8 and 3.9 of this Article III, which govern meetings, action without meetings, notice and waiver of notice, quorum and voting requirements of the board of directors, apply to committees and their members. Bylaws Page 14 (d) AUTHORITY. Unless limited by the articles of incorporation, each committee may exercise those aspects of the authority of the board of directors which the board of directors confers upon such committee in the resolution creating the committee. Provided, however, a committee may not: (1) Authorize distributions; (2) Approve or propose to shareholders action that the Utah Revised Business Corporation Act requires be approved by shareholders; (3) Fill vacancies on the board of directors or on any of its committees; (4) Amend the articles of incorporation pursuant to the authority of directors, to do so granted by Section 10.02 of the Utah Revised Business Corporation Act; (5) Adopt, amend, or repeal bylaws; (6) Approve a plan of merger not requiring shareholder approval; (7) Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the board of directors; or (8) Authorize or approve the issuance or sale or contract for sale of shares or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the board of directors may authorize a committee (or a senior executive officer of the corporation) to do so within limits specifically prescribed by the board of directors. 3.14 CHAIRMAN. The board of directors may elect from its own number a chairman of the board, who shall preside at all meetings of the board of directors, and shall perform such other duties as may be prescribed from time to time by the board of directors. ARTICLE IV OFFICERS 4.1 NUMBER OF OFFICERS. The officers of the corporation shall be a president, a secretary, and a treasurer, each of whom shall be appointed by the board of directors. Such other officers and assistant officers as may be deemed necessary, including any vice-presidents, may be appointed by the board of directors. If specifically authorized by the board of directors, an officer may appoint one or more officers or assistant officers. The same individual may simultaneously hold more than one office in the corporation. Bylaws Page 15 4.2 APPOINTMENT AND TERM OF OFFICE. The officers of the corporation shall be appointed by the board of directors for a term as determined by the board of directors. (The designation of a specified term grants to the officer no contract rights, and the board can remove the officer at any time prior to the termination of such term). If no term is specified, they shall hold office until they resign, die, or until they are removed in the manner provided in Section 4.3 of this Article IV. 4.3 REMOVAL OF OFFICERS. Any officer or agent may be removed by the board of directors at any time, with or without cause. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Appointment of an officer or agent shall not of itself create contract rights. 4.4 PRESIDENT. The president shall be the principal executive officer of the corporation and, subject to the control of the board of directors, shall in general supervise and control all of the business and affairs of the corporation. He shall, when present, preside at all meetings of the shareholders and of the board of directors. He may sign, with the secretary or any other proper officer of the corporation thereunto authorized by the board of directors, certificates for shares of the corporation and deeds, mortgages, bonds, contracts, or other instruments which the board of directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these bylaws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the board of directors from time to time. 4.5 THE VICE-PRESIDENTS. If appointed, in the absence of the president or in the event of his death, inability or refusal to act, the vice-president (or in the event there be more than one vice presidency, the vice-presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their appointment) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president.) Any vice-president may sign, with the secretary or an assistant secretary, certificates for shares of the corporation the issuance of which have been authorized by resolution of the board of directors; and shall perform such other duties as from time to time may be assigned to him by the president or by the board of directors. 4.6 THE SECRETARY. The secretary shall: (a) Keep the minutes of the proceedings of the shareholders and of the board of directors in one or more books provided for that purpose; Bylaws Page 16 (b) See that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) Be custodian of the corporate records and of any seal of the corporation and if there is a seal of the corporation, see that it is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized; (d) When requested or required, authenticate any records of the corporation; (e) Keep a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholder; (f) Sign with the president, or a vice-president, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the board of directors; (g) Have general charge of the stock transfer books of the corporation; and (h) In general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the board of directors. 4.7 THE TREASURER. The treasurer shall: (a) Have charge and custody of and be responsible for all funds and securities of the corporation; (b) Receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies, or other depositaries as shall be selected by the board of directors; and (c) In general perform all of the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the president or by the board of directors. If required by the board of directors, the treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the board of directors shall determine. 4.8 ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries, when authorized by the board of directors, may sign with the president or a vice-president certificates for shares of the corporation the issuance of which shall have been authorized by a resolution of the board of directors. The assistant treasurers shall respectively, if required by the board of directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the board of directors shall determine. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or the treasurer, respectively, or by the president or the board of directors. Bylaws Page 17 4.9 SALARIES. The salaries of the officers shall be fixed from time to time by the board of directors. 4.10 OTHER OFFICERS. Other officers may be elected by the board of directors and shall perform such duties and have such powers as may be assigned to them by the board of directors. 4.11 SURETY BONDS. If the board of directors shall so require, any officer or agent of the corporation shall execute to the corporation a bond in such funds and with such surety or sureties as the board of directors may direct. ARTICLE V INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS, AND EMPLOYEES 5.1 INDEMNIFICATION OF DIRECTORS. Unless otherwise provided in the articles, the corporation shall indemnify any individual made a party to a proceeding because he is or was a director of the corporation, against liability incurred in the proceeding, but only if the corporation has authorized the payment in accordance with Section 906 of the Act and a determination has been made in accordance with the procedures set forth in Section 906(2) of the Act that the director met the standards of conduct in paragraph (a), (b) and (c) below. (a) STANDARD OF CONDUCT. The individual shall demonstrate that: (1) He conducted himself in good faith; and (2) He reasonably believed: (i) In the case of conduct in his official capacity with the corporation, that his conduct was in its best interests; (ii) In all other cases, that his conduct was at least not opposed to its best interests; and (iii) In the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. (b) NO INDEMNIFICATION PERMITTED IN CERTAIN CIRCUMSTANCES. The corporation shall not indemnify a director under this Section 5.1 of Article V: Bylaws Page 18 (1) In connection with a proceeding by or in the right of the corporation which the director was adjudged liable to the corporation; or (2) In connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. (c) INDEMNIFICATION IN DERIVATIVE ACTIONS LIMITED. Indemnification permitted under this Section 5.1 of Article V in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. 5.2 ADVANCE EXPENSES FOR DIRECTORS. If a determination is made, following the procedures of Section 906 that the director has met the following requirements; and if an authorization of payment is made, following the procedures and standards set forth in Section 906 of the Act then unless otherwise provided in the articles of incorporation, the company shall pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding, if: (a) The director furnishes the corporation a written affirmation of his good faith belief that he has meet the standard of conduct described in Section 5.1 of this Article V; (b) The director furnishes the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet the standard of conduct (which undertaking must be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment); and (c) A determination is made that the facts then known to those making the determination would not preclude indemnification under Section 5.1 of this Article V or the Act. 5.3 INDEMNIFICATION OF OFFICERS, AGENTS AND EMPLOYEES WHO ARE NOT DIRECTORS. Unless otherwise provided in the articles of incorporation, the board of directors may indemnify and advance expenses to any officer, employee, or agent of the corporation, who is not a director of the corporation, to any extent consistent with public policy, as determined by the general or specific action of the board of directors. Bylaws Page 19 ARTICLE VI CERTIFICATES FOR SHARES AND THEIR TRANSFER 6.1 CERTIFICATES FOR SHARES. (a) CONTENT. Certificates representing shares of the corporation shall at minimum, state on their face the name of the issuing corporation and that it is formed under the laws of Utah; the name of the person to whom issued; and the number and class of shares and the designation of the series, if any, the certificate represents; and be in such form as determined by the board of directors. Such certificates shall be signed (either manually or by facsimile) by the president or a vice president and by the secretary or an assistant secretary and may be sealed with a corporate seal or a facsimile thereof. Each certificate for shares shall be consecutively numbered or otherwise identified. (b) LEGEND AS TO CLASS OR SERIES. If the corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine variations for future series) must be summarized on the front or back of each certificate. Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge. (c) SHAREHOLDER LIST. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. (d) TRANSFERRING SHARES. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe. 6.2 SHARES WITHOUT CERTIFICATES. (a) ISSUING SHARES WITHOUT CERTIFICATES . Unless the articles of incorporation provide otherwise, the board of directors may authorize the issue of some or all the shares of any or all of its classes or series without certificates. The authorization does not affect shares already represented by certificates until they re surrendered to the corporation. (b) INFORMATION STATEMENT REQUIRED. Within a reasonable time after the issue or transfer of shares without certificates, the corporation shall send the shareholder a written statement containing at minimum: (1) The name of the issuing corporation and that it is organized under the law of this state; Bylaws Page 20 (2) The name of the person to whom issued; and (3) The number and class of shares and the designation of the series, if any, of the issued shares. If the corporation is authorized to issue different classes of shares or different series within a class, the written statement shall describe the designations, relative rights, preferences, and limitations applicable to each class and the valuation in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine variations for future series). 6.3 REGISTRATION OF THE TRANSFER OF SHARES. Registration of the transfer of shares of the corporation shall be made only on the stock transfer books of the corporation. In order to register a transfer, the record owner shall surrender the shares to the corporation for cancellation, properly endorsed by the appropriate person or persons with reasonable assurances that the endorsements are genuine and effective. Unless the corporation has established a procedure by which a beneficial owner of shares held by a nominee is to be recognized by the corporation as the owner, the person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. 6.4 RESTRICTIONS ON TRANSFER OF SHARES PERMITTED. The board of directors (or shareholders) may impose restrictions on the transfer or registration of transfer of shares (including any security convertible into, or carrying a right to subscribe for or acquire shares). A restriction does not affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreement or voted in favor of the restriction. A restriction on the transfer or registration of transfer of shares may be authorized: (a) To maintain the corporation's status when it is dependent on the number or identity of its shareholders; (b) To preserve exemptions under federal or state securities law; (c) For any other reasonable purpose. A restriction on the transfer or registration of transfer of shares may: (1) Obligate the shareholder first to offer the corporation or other persons separately, consecutively, or simultaneously) an opportunity to acquire the restricted shares; (2) Obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares; Bylaws Page 21 (3) Require the corporation, the holders or any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable; (4) Prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable. A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certificate or is contained in the information statement required by Section 6.2 of this Article VI with regard to shares issued without certificates. Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction. 6.5 ACQUISITION OF SHARES. The corporation may acquire its own shares and unless otherwise provided in the articles of incorporation, the shares so acquired constitute authorized but unissued shares. If the articles of incorporation prohibit the reissue of acquired shares, the number of unauthorized shares is reduced by the number of shares acquired, effective upon amendment of the articles of incorporation, which amendment shall be adopted by the shareholders or the board of directors without shareholder action. The articles of amendment must be delivered to the Secretary of State and must set forth: (a) The name of the corporation; (b) The reduction in the number of authorized shares, itemized by class and series; and (c) The total number of authorized shares, itemized by class and series, remaining after reduction of the shares. 6.6 LOST OR DESTROYED CERTIFICATES. The board of directors may direct a new certificate to be issued to replace any certificate heretofore issued by the corporation and alleged to have been lost or destroyed if the owner makes an affidavit that the certificate is lost or destroyed. The board of directors may, at its discretion, require the owner of such certificate or has legal representative to give the corporation a bond in such sum and with such sureties as the board of directors may direct to indemnify the corporation and transfers, agents and registrars, if any, against claims that may be made on account of the issuance of such new certificates. A new certificate may be issued with declaring any bond. Bylaws Page 22 ARTICLE VII DISTRIBUTIONS 7.1 DISTRIBUTIONS. The board of directors may authorize, and the corporation may make, distributions (including dividends on its outstanding shares) in the manner and upon the terms and conditions provided by law and in the corporation's articles of incorporation. ARTICLE VIII CORPORATE SEAL 8.1 CORPORATE SEAL. The board of directors may provide a corporate seal which may be circular in form and have inscribed thereon any designation including the name of the corporation, State of Utah as the state of incorporation, and the words "Corporate Seal." ARTICLE IX CONTRACTS, LOANS, CHECKS AND DEPOSITS 9.1 CONTRACTS. The board of directors may authorize any officer(s), or agent(s), to enter into any contract or execute and deliver any instrument in the name and on behalf of the corporation, and such authority may be either general or confined to specific instances. 9.2 LOANS. No loan or advances shall be contracted on behalf of the corporation, no negotiable paper or other evidence of its obligation under any loan or advance shall be issued in its name, and no property of the corporation shall be mortgaged, pledged, hypothecated, or transferred as security for the payment of any loan, advance, indebtedness, or liability of the corporation unless and except as authorized by the board of directors. Any such authorization may be either general confined to specific instances. 9.3 DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the board of directors may select, or as may be selected by an officer or agent so authorized by the board of directors. Bylaws Page 23 9.4 CHECKS AND DRAFTS. All notes, drafts, acceptances, checks, endorsements, and evidences of indebtedness of the corporation shall be signed by the president and by the treasurer of the corporation and in such manner as the board of directors from time to time may determine. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories shall be made in such manner as the board of directors from time to time may determine. 9.5 BONDS AND DEBENTURES. Every bond or debenture issued by the corporation shall be evidenced by an appropriate instrument which shall be signed by the president or a vice-president and by the treasurer or by the secretary and the seal of the corporation may, but need not, be affixed thereto. ARTICLE X EMERGENCY BYLAWS 10.1 EMERGENCY BYLAWS. Unless the articles of incorporation provide otherwise, the following provisions of this Article IX, Section 9.1 "Emergency Bylaws" shall be effective during an emergency which is defined as when a quorum of the corporation's directors cannot be readily assembled because of some catastrophic event. During such emergency: (a) NOTICE OF BOARD MEETINGS. Any one member of the board of directors or any one of the following officers: president, vice-president, secretary, or treasurer, may call a meeting of the board of directors. Notice of such meeting need be given only to those directors whom it is practicable to reach, and may be given in any practical manner, including by publication and radio. Such notice shall be given at least six hours prior to commencement of the meeting. (b) TEMPORARY DIRECTORS AND QUORUM. One or more officers of the corporation present at the emergency board meeting, as is necessary to achieve a quorum, shall be considered to be directors for the meeting, and shall so serve in order of rank, and within the same rank, in order of seniority. In the event that less than a quorum (as determined by Article III, Section 3.6) of the directors are present (including the officers serving as directors) shall constitute a quorum. (c) ACTIONS PERMITTED TO BE TAKEN. The board as constituted in paragraph (b), and after notice as set forth in paragraph (a) may: (1) OFFICERS' POWERS. Prescribe emergency posers to any officer of the corporation; (2) DELEGATION OF ANY POWER. Delegate to any officer or director, any of the powers of the board of directors; Bylaws Page 24 (3) LINES OF SUCCESSION. Designate lines of succession of officers and agents, in the event that any of them are unable to discharge their duties; (4) RELOCATE PRINCIPAL PLACE OF BUSINESS. Relocate the principal place of business, or designate successive or simultaneous principal places of business; (5) ALL OTHER ACTION. Take any other action, convenient, helpful, or necessary to carry on the business of the corporation. ARTICLE XI AMENDMENTS 11.1 AMENDMENTS. The corporation's board of directors may amend or repeal the corporation's bylaws unless: (a) The articles of incorporation or the Act reserve this power exclusively to the shareholders in whole or part; or (b) The shareholders in adopting, amending, or repealing a particular bylaw provide expressly that the board of directors may not amend or repeal that bylaw; or (c) The bylaw either establishes, amends, or deletes, a supermajority shareholder quorum or voting requirement (as defined in Section 2.7 of Article II). Any amendment which changes the voting or quorum requirement for the board must comply with Article III, Section 3.8, and for the shareholders, must comply with Article II, Section 2.8. The corporation's shareholders may amend or repeal the corporation's bylaws even though the bylaws may also be amended or repealed by its board of directors. ARTICLE XII EXEMPTION FROM CONTROL SHARES ACQUISITION ACT The provisions of the Control Shares Acquisition Act as set out in Section 61-6-1 et. seq. as amended or any replacement Act shall not apply to control share acquisitions of shares of this Corporation. Bylaws Page 25 I certify that the foregoing Bylaws are the Bylaws of Dreams, Inc., a Utah corporation and that the same remain in effect unchanged to the present date. DATED: This day of , 1999. ------- ----------------------- ------------------------------------ Mark Viner, Secretary Bylaws Page 26 EX-6.I 4 EXHIBIT 6(I) EXHIBIT 6(i) Sirrom Financing Agreements Loan Agreement Secured Promissory Note Stock Purchase Warrant Security Agreement - Dreams, Inc./DFC/DEI/DPI Intellectual Property Security Agreement Pledge and Security Agreement - Dreams, Inc. Pledge and Security Agreement - DFC Sirrom Financing Agreements LOAN AGREEMENT THIS LOAN AGREEMENT ("Agreement"), dated as of the ____ day of November, 1998, is made and entered into on the terms and conditions hereinafter set forth, by and between DREAMS, INC., a Utah corporation, DREAMS FRANCHISE CORPORATION, a California corporation, DREAMS ENTERTAINMENT, INC., a Utah corporation and DREAMS PRODUCTS, INC., a Utah corporation (individually a "Borrower" and collectively the "Borrowers"), and SIRROM INVESTMENTS, INC., a Tennessee corporation ("Lender"). RECITALS: WHEREAS, Borrowers have requested that Lender make available to Borrowers a term loan in the original principal amount of Three Million Dollars ($3,000,000) (the "Loan") on the terms and conditions hereinafter set forth, and for the purpose(s) hereinafter set forth; and WHEREAS, in order to induce Lender to make the Loan to Borrowers, Borrowers have made certain representations to Lender; and WHEREAS, Lender, in reliance upon the representations and inducements of Borrowers, has agreed to make the Loan upon the terms and conditions hereinafter set forth. AGREEMENT: NOW, THEREFORE, in consideration of the agreement of Lender to make the Loan, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree as follows: ARTICLE 1 THE LOAN 1.1 EVIDENCE OF LOAN INDEBTEDNESS AND REPAYMENT. Subject to the terms and conditions contained herein, the Lender shall make the Loan to Borrowers by wire transfer in immediately available funds. The Loan shall be evidenced by a Secured Promissory Note in the original principal amount of Three Million Dollars ($3,000,000), dated as of the date hereof, executed by Borrowers in favor of Lender (the "Note"). The Loan shall be payable in accordance with the terms of the Note. The Note, this Agreement and any other instruments and documents executed by Borrowers, or any shareholder, member, partner, subsidiary or affiliate of Borrowers ("Affiliates"), now or hereafter evidencing, securing or in any way related to the indebtedness evidenced by the Note are herein SirromAgmts Page 1 individually referred to as a "Loan Document" and collectively referred to as the "Loan Documents." The term "Obligations" as used herein shall refer to (a) the Loan to be made concurrently or in connection with this Agreement, as evidenced by the Note, and any renewals or extensions thereof, (b) the full and prompt payment and performance of any and all other indebtednesses and other obligations of Borrowers to Lender, direct or contingent (including but not limited to obligations incurred as indorser, guarantor or surety), however evidenced or denominated, and however and whenever incurred, including but not limited to indebtednesses incurred pursuant to any present or future commitment of Lender to Borrowers and (c) all future advances made by Lender for taxes, levies, insurance and preservation of the collateral securing the Loan and all attorneys' fees, court costs and expenses of whatever kind incident to the collection of any of said indebtedness or other obligations and the enforcement and protection of the security interest created hereby or by the other Loan Documents. 1.2 PROCESSING FEE. Borrowers shall pay Lender a processing fee of Ninety Thousand Dollars ($90,000), Twenty Thousand Dollars ($20,000) of which has previously been paid to Lender and Seventy Thousand Dollars ($70,000) of which shall be paid on the date the Loan is funded. 1.3 PREPAYMENT. Borrowers may prepay the indebtedness evidenced by the Note in whole or in part at any time and from time to time, without penalty or premium. 1.4 PURPOSES OF LOAN AND USE OF PROCEEDS. The purpose of the Loan shall be to (i) provide additional working capital to Borrowers and (ii) finance the acquisition of Mounted Memories, Inc. ARTICLE 2 REPRESENTATIONS AND WARRANTIES 2.1 BORROWER'S REPRESENTATIONS. Each Borrower hereby represents and warrants to Lender as follows (except as set forth on a disclosure schedule hereto which shall be labeled to correspond to the appropriate provision hereof): (a) CORPORATE STATUS. Each Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah or California, as applicable; and has the corporate power to own and operate its properties, to carry on its business as now conducted and to enter into and to perform its obligations under this Agreement and the other Loan Documents to which it is a party. Each Borrower is duly qualified to do business and in good standing in each state in which a failure to be so qualified would have a material adverse effect on Borrower's financial condition or its ability to conduct its business in the manner now conducted. (b) SUBSIDIARIES. Schedule 2.1(b) hereto is a complete list of each corporation, partnership, joint venture or other business organization (the "Subsidiary" or, with respect to all such organizations, the "Subsidiaries") in which each Borrower or any Subsidiary SirromAgmts Page 2 owns, directly or indirectly, any capital stock or other equity interest, or with respect to which each Borrower or any Subsidiary, alone or in combination with others, is in a control position, which list shows the jurisdiction of incorporation or other organization and the percentage of stock or other equity interest of each Subsidiary owned by such Borrower. Each Subsidiary which is a corporation is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is duly qualified to transact business as a foreign corporation and is in good standing in the jurisdictions listed in Schedule 2.1(b), which are the only jurisdictions where the properties owned or leased or the business transacted by it makes such licensing or qualification to do business as a foreign corporation necessary, and no other jurisdiction has demanded, requested or otherwise indicated that (or inquired whether) it is required so to qualify. Each Subsidiary which is not a corporation is duly organized and validly existing under the laws of the jurisdiction of its organization. The outstanding capital stock of each Subsidiary which is a corporation is validly issued, fully paid and nonassessable. Each Borrower and its Subsidiaries have good and valid title to the equity interests in the Subsidiaries shown as owned by each of them on Schedule 2.1(b), free and clear of all liens, claims, charges, restrictions, security interests, equities, proxies, pledges or encumbrances of any kind. Except where otherwise indicated herein or unless the context otherwise requires, any reference to Borrowers herein shall include Borrowers and all of their Subsidiaries. (c) AUTHORIZATION. Each Borrower has full legal right, power and authority to conduct its business and affairs. Each Borrower has full legal right, power and authority to enter into and perform its obligations under the Loan Documents, without the consent or approval of any other person, firm, governmental agency or other legal entity. The execution and delivery of this Agreement, the borrowing hereunder, the execution and delivery of each Loan Document to which each Borrower is a party, and the performance by each Borrower of its obligations thereunder are within the corporate powers of each Borrower and have been duly authorized by all necessary corporate action properly taken and each Borrower has received all necessary governmental approvals, if any, that are required. The officer(s) executing this Agreement, the Note and all of the other Loan Documents to which each Borrower is a party are duly authorized to act on behalf of such Borrower. (d) VALIDITY AND BINDING EFFECT. This Agreement and the other Loan Documents are the legal, valid and binding obligations of each Borrower, enforceable in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. (e) CAPITALIZATION. As of the date hereof and giving effect to the Mounted Memories, Inc. acquisition, the authorized capital stock of Dreams, Inc. consists solely of 50,000,000 shares of common stock, $.05 par value per share ("Common Stock"), of which 40,898,500 shares are issued and outstanding (the "Shares") and 11,873,758 shares of which are reserved for issuance upon exercise of the Stock Purchase Warrant dated as of the date hereof and issued to Lender (the "Warrant"); provided, however, that the number of shares SirromAgmts Page 3 reserved for issuance upon exercise of the Warrant may be increased from time to time in accordance with the term of the Warrant. Attached hereto as Schedule 2.1(e) as a table showing the capitalization of Dreams, Inc., as of the date hereof, on a fully diluted basis. As of the date hereof, Dreams, Inc. does not have outstanding any stock or securities convertible or exchangeable for any shares of its Common Stock or containing any profit participation features, and does not have outstanding any rights or options to subscribe for or to purchase its Common Stock or any stock appreciation rights or phantom stock plans, except as set forth on Schedule 2.1(e) and the Warrant. Schedule 2.1(e) accurately sets forth the following with respect to all outstanding options and rights to acquire the Dreams, Inc.'s Common Stock: (i) the total number of shares issuable upon exercise of all outstanding options; (ii) the range of exercise prices for all such outstanding options; (iii) the number of shares issuable, the exercise price and the expiration date for each such outstanding option; and (iv) with respect to all outstanding options, warrants and rights to acquire Dreams, Inc.'s capital stock other than the Warrant, the holder, the number of shares covered, the exercise price and the expiration date. As of the date hereof, Dreams, Inc. is not subject to any obligation (contingent or otherwise) to repurchase, redeem, retire or otherwise acquire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock, except as set forth in the Warrant or on Schedule 2.1(e). As of the date hereof, all of the outstanding shares of Dreams, Inc.'s capital stock are validly issued, fully paid and nonassessable. Except as set forth on Schedule 2.1(e), there are no statutory or contractual preemptive rights, rights of first refusal, anti-dilution rights or any similar rights, held by stockholders or option holders of Dreams, Inc., with respect to the issuance of the Warrant or the issuance of the Common Stock upon exercise of the Warrant and all such rights have been effectively waived with regard to the issuance of the Warrant, the exercise of the Warrant and the issuance of the Common Stock upon exercise of the Warrant. Dreams, Inc. has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its capital stock, and the offer, sale and issuance of the Warrant hereunder do not require registration under the Securities Act of 1933, as amended, or any applicable state securities laws. To the best of Dreams, Inc.'s knowledge, there are no agreements among Dreams, Inc.'s shareholders with respect to any other aspect of Dreams, Inc.'s affairs, except as set forth on Schedule 2.1(e). Dreams, Inc. owns all of the issued and outstanding shares of capital stock of Dreams Franchise Corporation and Dreams Entertainment, Inc. and Dreams Franchise Corporation owns all of the issued and outstanding shares of capital stock of Dreams Products, Inc. (f) TRADEMARKS, PATENTS, ETC. Schedule 2.1(f) is an accurate and complete list of all patents, trademarks, tradenames, trademark registrations, service names, service marks, copyrights, licenses, formulas and applications therefor owned by each Borrower or used or required by each Borrower in the operation of its business, title to each of which is, except as set forth in Schedule 2.1(f) hereto, held by such Borrower free and clear of all adverse claims, liens, security agreements, restrictions or other encumbrances. Except as set forth in Schedule 2.1(f), each Borrower owns or possesses adequate (and will use its best efforts to obtain as expediently as possible any additional) licenses or other rights to use all patents, trademarks, trade names, service marks, trade secrets or other intangible property rights and SirromAgmts Page 4 know-how necessary to entitle such Borrower to conduct its business as presently being conducted. There is no infringement action, lawsuit, claim or complaint which asserts that any Borrower's operations violate or infringe the rights or the trade names, trademarks, trademark registrations, service names, service marks or copyrights of others with respect to any apparatus or method of such Borrower or any adversely held trademarks, trade names, trademark registrations, service names, service marks or copyrights, and no Borrower is not in any way making use of any confidential information or trade secrets of any person, except with the consent of such person. Except as set forth in Schedule 2.1(f), each Borrower has taken reasonable steps to protect its proprietary information (except disclosure of source codes pursuant to licensing agreements) and is the lawful owner of the proprietary information free and clear of any claim of any third party. As used herein, "proprietary information" includes without limitation, (i) any computer programming language, software, hardware, firmware or related documentation, inventions, technical and nontechnical data related thereto, and (ii) other documentation, inventions and data related to patterns, plans, methods, techniques, drawings, finances, customer lists, suppliers, products, special pricing and cost information, designs, processes, procedures, formulas, research data owned or used by any Borrower or marketing studies conducted by any Borrower, all of which such Borrower considers to be commercially important and competitively sensitive and which generally has not been disclosed to third parties. (g) NO CONFLICTS. Consummation of the transactions contemplated hereby and the performance of the obligations of each Borrower under and by virtue of the Loan Documents do not conflict with, and will not result in any breach of, or constitute a default or trigger a lien under, any mortgage, security deed or agreement, deed of trust, lease, bank loan or credit agreement, corporate charter or bylaws, agreement or certificate of limited partnership, partnership agreement, license, franchise or any other instrument or agreement to which any Borrower is a party or by which any Borrower or its respective properties may be bound or affected or to which any Borrower has not obtained an effective waiver. (h) LITIGATION. Except as set forth on Schedule 2.1(h), there are no actions, suits, arbitrations, administrative hearings or other proceedings pending, or, to the knowledge of each Borrower threatened, against or affecting any Borrower or any of Borrower's property or involving the validity or enforceability of any of the Loan Documents at law or in equity, or before any governmental or administrative agency. To each Borrower's knowledge, such Borrower is not subject to any order, writ, injunction, decree or demand of any court or any governmental authority. (i) FINANCIAL STATEMENTS. The financial statements of Borrowers dated March 31, 1998, which are attached hereto as Schedule 2.1(i)(A), are true and correct in all material respects, have been prepared on the basis of generally accepted accounting principles consistently applied, and fairly present the financial condition of Borrowers as of the date(s) thereof. No material adverse change has occurred in the financial condition of any Borrower since the date(s) thereof, and no additional borrowings have been made by any Borrower since the date(s) thereof other than as set forth on Schedule 2.1(i)(B). SirromAgmts Page 5 (j) OTHER AGREEMENTS; NO DEFAULTS. Schedule 2.1(r) is a list of the contracts and corporate restrictions that could have a material adverse effect on the business, properties, assets, operations or conditions, financial or otherwise, of any Borrower, or the ability of Borrower to carry out its obligations under the Loan Documents to which it is a party. No Borrower is in default in any respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument material to its business to which it is a party, including but not limited to this Agreement and the other Loan Documents, and no other default or event has occurred and is continuing that with notice or the passage of time or both would constitute a default or event of default under any of same. (k) COMPLIANCE WITH LAW. Each Borrower has obtained all necessary licenses, permits and approvals and authorizations necessary or required in order to conduct its business and affairs as heretofore conducted and as hereafter intended to be conducted except to the extent that any failure to obtain such licenses, permits, approvals or authorizations, in the aggregate, cannot be reasonably expected to have a material adverse effect on its business, operations, property or financial condition and will not materially adversely affect such Borrower's ability to perform its obligations under the Loan Documents. To each Borrower's knowledge, such Borrower is in compliance with all laws, regulations, decrees and orders applicable to it (including but not limited to laws, regulations, decrees and orders relating to environmental, occupational and health standards and controls, antitrust, monopoly, restraint of trade or unfair competition), except to the extent that any noncompliance, in the aggregate, cannot reasonably be expected to have a material adverse effect on its business, operations, property or financial condition and will not materially adversely affect such Borrower's ability to perform its obligations under the Loan Documents. (l) DEBT. Schedule 2.1(l) is a complete and correct list of all credit agreements, indentures, purchase agreements, promissory notes and other evidences of indebtedness, guaranties, capital leases and other instruments, agreements and arrangements presently in effect providing for or relating to extensions of credit (including agreements and arrangements for the issuance of letters of credit or for acceptance financing) in respect of which each Borrower or any of its properties is in any manner directly or contingently obligated and the maximum principal or face amounts of the credit in question that are outstanding and that can be outstanding are correctly stated, and all liens of any nature given or agreed to be given as security therefor are correctly described or indicated in Schedule 2.1(l). (m) TAXES. Except as set forth on Schedule 2.1(m), each Borrower has filed or caused to be filed all tax returns that are required to be filed (except for returns that have been appropriately extended), and has paid, or will pay when due, all taxes shown to be due and payable on said returns and all other taxes, impositions, assessments, fees or other charges imposed on it by any governmental authority, agency or instrumentality, prior to any delinquency with respect thereto (other than taxes, impositions, assessments, fees and SirromAgmts Page 6 charges currently being contested in good faith by appropriate proceedings, for which appropriate amounts have been reserved). Except as set forth on Schedule 2.1(m), no tax liens have been filed against any Borrower or any of its property. (n) CERTAIN TRANSACTIONS. Except as set forth on Schedule 2.1(n) hereto, no Borrower is indebted, directly or indirectly, to any of its shareholders, officers or directors or to their respective spouses or children, in any amount whatsoever, and none of said shareholders, officers or directors or any members of their immediate families, are indebted to any Borrower or have any direct or indirect ownership interest in any firm or corporation with which any Borrower has a business relationship, or any firm or corporation which competes with any Borrower, except that shareholders, officers and/or directors of each Borrower may own no more than 4.9% of outstanding stock of publicly traded companies which may compete with any Borrower. No shareholder, officer or director or any member of their immediate families, is, directly or indirectly, interested in any material contract with Borrower. No Borrower is a guarantor or indemnitor of any indebtedness of any other person, firm, corporation or other legal entity. (o) SMALL BUSINESS CONCERN. Dreams, Inc., together with its "affiliates" (as that term is defined in Title 13, Code of Federal Regulations, Section 121.103), is a "small business concern" within the meaning of the Small Business Investment Act of 1958, as amended, and the regulations promulgated thereunder. The information set forth in the Small Business Administration Forms 480, 652 and Parts A and B of Form 1031 regarding Dreams, Inc. upon delivery, pursuant to Section 4.1 hereof, will be accurate and complete. Dreams, Inc. does not presently engage in, and it will not hereafter engage in, any activities, and Dreams, Inc. will not use directly or indirectly, the proceeds from the Loan, for any purpose for which a Small Business Investment Company is prohibited from providing funds by the Small Business Investment Act and the regulations thereunder, including Title 13, Code of Federal Regulations Section 107.720. (p) STATEMENTS NOT FALSE OR MISLEADING. No representation or warranty given as of the date hereof by any Borrower contained in this Agreement or any schedule attached hereto or any statement in any document, certificate or other instrument furnished or to be furnished by any Borrower to Lender pursuant hereto, taken as a whole, contains or will (as of the time so furnished) contain any untrue statement of a material fact, or omits or will (as of the time so furnished) omit to state any material fact which is necessary in order to make the statements contained therein not misleading in any material respect. (q) MARGIN REGULATIONS. No Borrower is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock. No proceeds received pursuant to this Agreement will be used to purchase or carry any equity security of a class which is registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. SirromAgmts Page 7 (r) SIGNIFICANT CONTRACTS. Schedule 2.1(r) is a complete and correct list of all contracts, agreements and other documents pursuant to which any Borrower receives revenues in excess of $25,000 per fiscal year or has committed to make expenditures in excess of $25,000 per fiscal year. Each such contract, agreement and other document is in full force and effect as of the date hereof and no Borrower knows of any reason why such contracts, agreements and other documents would not remain in full force and effect pursuant to the terms thereof. (s) ENVIRONMENT. Each Borrower has duly complied with, and its business, operations, assets, equipment, property, leaseholds or other facilities are in compliance with, the provisions of all federal, state and local environmental, health, and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder. Each Borrower has been issued and will maintain all required federal, state and local permits, licenses, certificates and approvals relating to (i) air emissions; (ii) discharges to surface water or groundwater; (iii) noise emissions; (iv) solid or liquid waste disposal; (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes (which shall include any and all such materials listed in any federal, state or local law, code or ordinance and all rules and regulations promulgated thereunder as hazardous or potentially hazardous); or (vi) other environmental, health or safety matters. No Borrower has received notice of, or knows of, or suspects facts which might constitute any violations of any federal, state or local environmental, health or safety laws, codes or ordinances, and any rules or regulations promulgated thereunder with respect to its businesses, operations, assets, equipment, property, leaseholds, or other facilities. Except in accordance with a valid governmental permit, license, certificate or approval, there has been no emission, spill, release or discharge into or upon (i) the air; (ii) soils, or any improvements located thereon; (iii) surface water or groundwater; or (iv) the sewer, septic system or waste treatment, storage or disposal system servicing the premises, of any toxic or hazardous substances or wastes at or from the premises; and accordingly the premises of each Borrower are free of all such toxic or hazardous substances or wastes. There has been no complaint, order, directive, claim, citation or notice by any governmental authority or any person or entity with respect to (i) air emissions; (ii) spills, releases or discharges to soils or improvements located thereon, surface water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems servicing the premises; (iii) noise emissions; (iv) solid or liquid waste disposal; (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or waste; or (vi) other environmental, health or safety matters affecting each Borrower or its business, operations, assets, equipment, property, leaseholds or other facilities. No Borrower has any indebtedness, obligation or liability (absolute or contingent, matured or not matured), with respect to the storage, treatment, cleanup or disposal of any solid wastes, hazardous wastes or other toxic or hazardous substances (including without limitation any such indebtedness, obligation, or liability with respect to any current regulation, law or statute regarding such storage, treatment, cleanup or disposal). (t) FEES/COMMISSIONS. No Borrower has agreed to pay any finder's fee, commission, origination fee (except for the processing and commitment fees due pursuant SirromAgmts Page 8 to Section 1.2 hereof and a commission payable to Brent Knudsen in the amount of $75,000) or other fee or charge to any person or entity with respect to the Loan and investment transactions contemplated hereunder. (u) ERISA. Each Borrower is in compliance in all material respects with all applicable provisions of Title IV of the Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. Section 1001 et seq. (1975), as amended from time to time ("ERISA"). Neither a reportable event nor a prohibited transaction (as defined in ERISA) has occurred and is continuing with respect to any pension plan that is subject to the requirements of ERISA (a "Plan"); no notice of intent to terminate a Plan has been filed nor has any Plan been terminated; no circumstances exist which constitute grounds entitling the Pension Benefit Guaranty Corporation (together with any entity succeeding to or all of its functions, the "PBGC") to institute proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings; no Borrower nor any commonly controlled entity (as defined in ERISA) has completely or partially withdrawn from a multiemployer plan (as defined in ERISA); each Borrower and each commonly controlled entity has met its minimum funding requirements under ERISA with respect to all of its Plans and the present fair market value of all Plan property exceeds the present value of all vested benefits under each Plan, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA and the regulations thereunder for calculating the potential liability of any Borrower or any commonly controlled entity to the PBGC or the Plan under Title IV or ERISA; and no Borrower nor any commonly controlled entity has incurred any liability to the PBGC under ERISA. (v) TITLE TO PROPERTIES. Each Borrower has good, indefeasible and insurable title to, or valid leasehold interests in, all its real properties and good title to its other assets, free and clear of all liens other than Permitted Liens (as defined in Section 3.15 hereof). (w) LIMITED OFFERING OF NOTE AND WARRANT. No Borrower nor anyone acting on its behalf has offered the Note, the Warrant or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof, with, any person other than Lender and not more than 35 other institutional investors. No Borrower nor anyone acting on its behalf has taken, or will take, any action which would subject the issuance or sale of the Note and Warrant to Section 5 of the Securities Act of 1933, as amended, or the registration or qualification provisions of the blue sky laws of any state. (x) REGISTRATION RIGHTS. Except as described in the Warrant and as set forth on Schedule 2.1(x), Borrower is not under any obligation to register under the Securities Act of 1933, as amended, or the Trust Indenture Act of 1939, as amended, any of its presently outstanding securities or any of its securities that may subsequently be issued. SirromAgmts Page 9 (y) EMPLOYEES. No Borrower has current labor problems or disputes which have resulted or any Borrower reasonably believes could be expected to have a material adverse effect on the operations, properties or financial condition of such Borrower, or such Borrower's ability to perform its obligations hereunder. (z) ISSUANCE TAXES. All taxes imposed on any Borrower in connection with the issuance, sale and delivery of the Note, the Warrant and the capital stock issuable upon exercise of the Warrant have been or will be fully paid, and all laws imposing such taxes have been or will be fully satisfied by Borrowers. (aa) SOLVENCY. As of the date hereof and giving effect to the making of the Loan, each Borrower (i) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage and is able to pay its debts as they mature, (ii) owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its probable liabilities (including contingencies), and (iii) does not believe that it will incur debts or liabilities beyond its ability to pay such debts or liabilities as they mature. (bb) LOCATION OF PROPERTIES, PLACES OF BUSINESS. The only jurisdictions in which each Borrower maintains any tangible personal property or carries on business are as listed in Schedule 2.1(ab) hereto. All billings for the supply of goods and services by each Borrower are made from, and require payment to be made to, the chief executive office of the such Borrower. No Borrower has, during the five (5) years preceding the date of this Agreement, been known as or used any other corporate, trade or fictitious name, or acquired all or substantially all of the assets, capital stock or operating units of any person. No Borrower has, during the five (5) years preceding the date of this Agreement, had a business location at any address other than addresses set forth on Schedule 2.1(ab). (cc) YEAR 2000 COMPATIBILITY. Each Borrower has reviewed its financial accounting systems and other computer systems for year 2000 compatibility and has not identified any issues that could have a material adverse effect on such Borrower's business, operations, property or financial condition. (dd) INTERRELATEDNESS OF BORROWERS. The business operations of each Borrower are interrelated and complement one another, and such entities have a common business purpose, with intercompany bookkeeping and accounting adjustments used to separate their respective properties, liabilities and transactions. To permit their uninterrupted and continuous operations, such entities now require and will from time to time hereafter require funds and credit accommodations for general business purposes. The proceeds of the Loan will directly or indirectly benefit each Borrower hereunder, severally and jointly, regardless of which Borrower requests or receives part or all of the proceeds of such advances. SirromAgmts Page 10 ARTICLE 3 COVENANTS AND AGREEMENTS Borrowers covenant and agree, jointly and severally, that during the term of this Agreement: 3.1 PAYMENT OF OBLIGATIONS. Borrowers shall pay the indebtedness evidenced by the Note according to the terms thereof, and shall timely pay or perform, as the case may be, all of the other obligations of Borrowers to Lender, direct or contingent, however evidenced or denominated, and however and whenever incurred, including but not limited to indebtedness incurred pursuant to any present or future commitment of Lender to Borrowers, together with interest thereon, and any extensions, modifications, consolidations and/or renewals thereof and any notes given in payment thereof. 3.2 FINANCIAL STATEMENTS AND REPORTS. Dreams, Inc. shall furnish to Lender (a) as soon as practicable and in any event within one hundred twenty (120) days after the end of each fiscal year of Dreams, Inc., an audited consolidated and consolidating balance sheet of Borrowers as of the close of such fiscal year, an audited consolidated and consolidating statement of operations of Borrowers as of the close of such fiscal year and an audited consolidated and consolidating statement of cash flows for Borrowers for such fiscal year, prepared in accordance with generally accepted accounting principles consistently applied and accompanied by an unqualified audit report prepared by an independent certified public accountant acceptable to Lender showing the financial condition of Borrowers at the close of such fiscal year and the results of its operations during such fiscal year and accompanied by a certificate of the President of Dreams, Inc., stating that to the best of the knowledge of such officer, Borrowers have kept, observed, performed and fulfilled each covenant, term and condition of this Agreement and the other Loan Documents during the preceding fiscal year and that no Event of Default has occurred and is continuing (or if an Event of Default has occurred and is continuing, specifying the nature of same, the period of existence of same and the action Borrower proposes to take in connection therewith), (b) within thirty (30) days of the end of each calendar month, a status report indicating the financial performance of each Borrower during such month and the financial position of each Borrower as of the end of such month in the format required by Lender (which format will be delivered to Borrowers on a diskette), (c) within thirty (30) days of the end of each quarter, a consolidated and consolidating balance sheet of Borrowers as of the close of such quarter and a consolidated and consolidating statement of operations of Borrower as of the close of such quarter, all in reasonable detail, and prepared substantially in accordance with generally accepted accounting principles consistently applied (except for the absence of footnotes and subject to year-end adjustments), and (d) with reasonable promptness, such other financial data, including without limitation, accounts receivable agings, as Lender may reasonably request. Without Lender's prior written consent, no Borrower shall modify or change any accounting policies or procedures, including such Borrower's fiscal year, in effect on the date hereof. 3.3 MAINTENANCE OF BOOKS AND RECORDS; INSPECTION. Each Borrower shall maintain its books, accounts and records in accordance with generally accepted accounting principles consistently applied, and after reasonable notice from Lender permit Lender, its officers and employees and any professionals designated by Lender in writing, at such Borrower's expense, to SirromAgmts Page 11 visit and inspect any of its properties, corporate books and financial records, and to discuss its accounts, affairs and finances with such Borrower or the principal officers of such Borrower during reasonable business hours, all at such times as Lender may reasonably request; provided that no such inspection shall materially interfere with the conduct of such Borrower's business. 3.4 INSURANCE. Without limiting any of the requirements of any of the other Loan Documents, Borrowers shall maintain, in amounts customary for entities engaged in comparable business activities, (a) to the extent required by applicable law, worker's compensation insurance (or maintain a legally sufficient amount of self insurance against worker's compensation liabilities, with adequate reserves, under a plan approved by Lender, such approval not to be unreasonably withheld or delayed), and (b) fire and "all risk" casualty insurance on its properties against such hazards and in at least such amounts as are customary in Borrowers' business. Borrowers will make reasonable efforts to obtain and maintain public liability insurance in an amount, and at a cost, deemed reasonable to the Borrowers' Board of Directors. At the request of Lender, Borrowers will deliver forthwith a certificate specifying the details of such insurance in effect. 3.5 TAXES AND ASSESSMENTS. Each Borrower shall (a) file all tax returns and appropriate schedules thereto that are required to be filed under applicable law, prior to the date of delinquency, (b) pay and discharge all taxes, assessments and governmental charges or levies imposed upon such Borrower upon its income and profits or upon any properties belonging to it, prior to the date on which penalties attach thereto, and (c) pay all taxes, assessments and governmental charges or levies that, if unpaid, might become a lien or charge upon any of its properties; provided, however, that any Borrower in good faith may contest any such tax, assessment, governmental charge or levy described in the foregoing clauses (b) and (c) so long as appropriate reserves in accordance with generally accepted accounting principles are maintained with respect thereto. 3.6 CORPORATE EXISTENCE. Each Borrower shall maintain its corporate existence and good standing in the state of its incorporation, and its qualification and good standing as a foreign corporation in each jurisdiction in which such qualification is necessary pursuant to applicable law. 3.7 COMPLIANCE WITH LAW AND OTHER AGREEMENTS. Except where the failure to do so would not materially adversely affect any Borrower's operations, properties, financial condition or its ability to fulfill its obligations under the Loan Documents, each Borrower shall maintain its business operations and property owned or used in connection therewith in compliance with (a) all applicable federal, state and local laws, regulations and ordinances governing such business operations and the use and ownership of such property, and (b) all agreements, licenses, franchises, indentures and mortgages to which each Borrower is a party or by which each Borrower or any of its properties is bound. Without limiting the foregoing, each Borrower shall pay all of its indebtedness promptly in accordance with the terms thereof. 3.8 NOTICE OF DEFAULT; PERCEIVED BREACH. Borrowers shall give written notice to Lender of the occurrence of any default, event of default or Event of Default under this Agreement or any other Loan Document promptly upon the occurrence thereof. Borrowers agree to give Lender prompt written notice of any action or inaction by or on behalf of Lender in connection with this SirromAgmts Page 12 Agreement or the Obligations that Borrowers believe may be actionable against Lender or a defense to payment of any or all Obligations for any reason, including, but not limited to, commission of a tort or violation of any contractual duty or duty implied by law. 3.9 NOTICE OF LITIGATION. Borrowers shall give notice, in writing, to Lender of (a) any actions, suits or proceedings, instituted by any persons whomsoever against Borrowers or affecting any of the assets of Borrowers wherein the amount at issue is in excess of Fifty Thousand and No/100ths Dollars ($50,000.00) and (b) any dispute, not resolved within ninety (90) days of the commencement thereof, between any Borrower on the one hand and any governmental regulatory body on the other hand, which dispute might materially interfere with the normal operations of any Borrower. 3.10 CONDUCT OF BUSINESS. Each Borrower will continue to engage in a business of the same general type and manner as conducted by it on the date of this Agreement. Without ten (10) days' prior written notice to Lender, no Borrower shall change its name or location of doing business. In the event any Borrower makes a change of its name or location of doing business, such Borrower shall promptly execute any and all financing statements and amendments or continuations thereof and any other documents that Lender may reasonably request to evidence, continue, and/or perfect any security interest in or pledge of collateral securing the Loan. 3.11 ERISA PLAN. If any Borrower has in effect, or hereafter institutes, a Plan that is subject to the requirements of ERISA, then the following warranty and covenants shall be applicable during such period as any such Plan shall be in effect: (a) such Borrower hereby warrants that no fact that might constitute grounds for the involuntary termination of the Plan, or for the appointment by the appropriate United States District Court of a trustee to administer the Plan, exists at the time of execution of this Agreement; (b) such Borrower hereby covenants that throughout the existence of the Plan, such Borrower's contributions under the Plan will meet the minimum funding standards required by ERISA and Borrower will not institute a distress termination of the Plan; and (c) such Borrower covenants that it will send to Lender a copy of any notice of a reportable event (as defined in ERISA) required by ERISA to be filed with the Labor Department or the Pension Benefit Guaranty Corporation, at the time that such notice is so filed. 3.12 DIVIDENDS, DISTRIBUTIONS, STOCK RIGHTS, ETC. Without the prior written consent of Lender, no Borrower shall declare or pay any dividend of any kind (other than stock dividends payable to all holders of any class of capital stock), in cash or in property, on any class of the capital stock of any Borrower, or purchase, redeem, retire or otherwise acquire for value any shares of such stock, nor make any distribution of any kind in cash or property in respect thereof, nor make any return of capital of shareholders, nor make any payments in cash or property in respect of any stock options, stock bonus or similar plan nor grant any preemptive rights with respect to the capital stock of any Borrower; provided however that Borrower may pay when due the tax liability of the shareholders of Mounted Memories, Inc. attributable to the operations of Mounted Memories, Inc. for the time period January 1, 1998 until the date hereof in accordance with the Escrow Agreement of even date herewith. SirromAgmts Page 13 3.13 GUARANTIES; LOANS; PAYMENT OF DEBT. Without the prior written consent of Lender, no Borrower shall guarantee nor be liable in any manner, whether directly or indirectly, or become contingently liable after the date of this Agreement in connection with the obligations or indebtedness of any person or entity whatsoever other than Borrowers, except for the endorsement of negotiable instruments payable to any Borrower for deposit or collection in the ordinary course of business. Without the prior written consent of Lender, no Borrower shall (a) make any loan, advance or extension of credit to any person other than in the normal course of its business, or (b) make any payment on any subordinated debt other than trade payables incurred in the ordinary course of such Borrower's business. 3.14 DEBT. Without the prior written consent of Lender, no Borrower shall create, incur, assume or suffer to exist indebtedness of any description whatsoever, excluding: (a) the indebtedness evidenced by the Note; (b) the endorsement of negotiable instruments payable to any Borrower for deposit or collection in the ordinary course of business; (c) trade payables incurred in the ordinary course of business of any Borrower (each of which, individually, does not exceed $50,000); and (d) the indebtedness listed on Schedule 2.1(l) hereto. 3.15 NO LIENS. Without the prior written consent of Lender, no Borrower shall create, incur, assume or suffer to exist any lien, security interest, security title, mortgage, deed of trust or other encumbrance upon or with respect to any of its assets, now owned or hereafter acquired, except the following permitted liens (the "Permitted Liens"): (a) liens in favor of Lender; (b) liens for taxes or assessments or other governmental charges or levies if not yet due and payable; (c) liens on leased equipment granted in connection with the leasing of such equipment in favor of the lessor of such equipment; (d) liens described on Schedule 2.1(l) hereto. 3.16 MERGERS, CONSOLIDATIONS, ACQUISITIONS AND SALES. Without the prior written consent of Lender, no Borrower shall (a) be a party to any merger, consolidation or corporate reorganization, nor (b) purchase or otherwise acquire all or substantially all of the assets or stock of, or any partnership or joint venture interest in, any other person, firm or entity, nor (c) sell, transfer, convey, or lease all or any substantial part of its assets, nor (d) create any Subsidiaries nor convey any of its assets to any Subsidiary. Lender consents to the acquisition by any Borrower of all or substantially SirromAgmts Page 14 all of the assets or stock of Mounted Memories, Inc. which acquisition shall occur contemporaneously with the closing of the Loan. 3.17 TRANSACTIONS WITH AFFILIATES. No Borrower shall enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any affiliate (except another Borrower), except in the ordinary course of and pursuant to the reasonable requirements of a Borrower's business and upon fair and reasonable terms no less favorable to such Borrower than such Borrower would obtain in a comparable arm's length transaction with a person not an affiliate. For the purposes of this Section 3.17, "affiliate" shall mean a person, corporation, partnership or other entity controlling, controlled by or under common control with such Borrower. 3.18 EMPLOYMENT CONTRACTS. Without the prior written consent of Lender, no Borrower shall (i) enter into any employment agreement or other written compensation agreement that has a term of greater than one year with any of such Borrower's executive officers or (ii) increase total compensation paid to the executive officers of Borrowers by more than ten percent (10%) per year. Notwithstanding the foregoing, Lender acknowledges and agrees that Borrower may pay the compensation set forth on Schedule 3.18. 3.19 ENVIRONMENT. Each Borrower shall be and remain in compliance with the provisions of all federal, state and local environmental, health, and safety laws, codes and ordinances, and all rules and regulations issued thereunder; notify Lender immediately of any notice of a hazardous discharge or environmental complaint received from any governmental agency or any other party; notify Lender immediately of any hazardous discharge from or affecting its premises; immediately contain and remove the same, in compliance with all applicable laws; promptly pay any fine or penalty assessed in connection therewith; permit Lender to inspect the premises, to conduct tests thereon, and to inspect all books, correspondence, and records pertaining thereto; and at Lender's request, and at such Borrower's expense, provide a report of a qualified environmental engineer, satisfactory in scope, form, and content to Lender, and such other and further assurances reasonably satisfactory to Lender that the condition has been corrected. 3.20 LANDLORD CONSENTS. Each Borrower shall use its best efforts to obtain a Landlord Consent and Subordination of Lien, in a form reasonably satisfactory to Lender, from each landlord from whom such Borrower now or hereafter may lease space. 3.21 ISSUANCE OF CAPITAL STOCK. Without the prior written consent of Lender, no Borrower shall issue any shares of capital stock of such Borrower or securities convertible into or exercisable for shares of capital stock of such Borrower; provided, however that Dreams, Inc. may issue capital stock (and, if necessary, file the related Form S-8) in connection with an employee benefit plan so long as the amount of capital stock issued under such plan does not in the aggregate exceed 5% of the issued and outstanding stock of Dreams, Inc. SirromAgmts Page 15 ARTICLE 4 CONDITIONS TO CLOSING 4.1 CLOSING OF THE LOAN. The obligation of Lender to fund the Loan on the date hereof (the "Closing Date") is subject to the fulfillment, on or prior to the Closing Date, of each of the following conditions: Borrowers shall have performed and complied in all material respects with all of the covenants, agreements, obligations and conditions required by this Agreement. Lender shall have received an opinion of the Borrowers' counsel, Hunter & Brown, dated the Closing Date, in form and substance satisfactory to Lender's counsel, Chambliss, Bahner & Stophel, P.C. Borrowers shall have delivered to Lender a Note executed by Borrowers, in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender a Stock Purchase Warrant executed by Dreams, Inc., in form and substance satisfactory to Lender, and the related Warrant Valuation Letter executed by Dreams, Inc. Borrowers shall have delivered to Lender a Security Agreement and related UCC-1 Financing Statement(s), executed by Borrowers, each of which is in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender a Pledge and Security Agreement and related stock certificates, stock powers and voting proxies, executed by Dreams, Inc., in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender a Pledge and Security Agreement and related stock certificate, stock power and voting proxy, executed by Dreams Franchise Corporation, in form and substance to Lender. Borrowers shall have delivered to Lender an Intellectual Property Security Agreement executed by Borrowers, in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender an Authorization Agreement for Pre-Authorized Payments (Debit) executed by Borrowers, in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender Pledge and Security Agreements and related stock certificates, stock powers and voting proxies executed by Invest West Sports, Inc., Stonehil Financial, Mark Battistone, Cynthia Hill, Justin Battistone, Kelly Battistone, Dann Battistone, Brian Battistone, Roger Battistone, Dreamstar, Sam D. Battistone, Joseph Casey, Dale Larsson, Ross Tannenbaum, and Mark Viner, in form and substance satisfactory to SirromAgmts Page 16 Lender and related UCC-1 Financing Statement(s) executed by Joseph Casey and Mark Viner, each of which is in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender the Small Business Administration Forms 480, 652 and 1031 (Parts A and B) completed by Dreams, Inc. Borrowers shall have delivered to Lender the Small Business Administration Economic Impact Assessment completed by Dreams, Inc., in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender copies of the corporate charter and other publicly filed organizational documents of each Borrower, certified by the Secretary of State or other appropriate public official in the jurisdiction in which each Borrower is incorporated. Borrowers shall have delivered to Lender certified (as of the date of this Agreement) copies of all corporate action taken by each Borrower, including resolutions of the Board of Directors, authorizing the execution, delivery and performance of the Loan Documents. Borrowers shall have delivered to Lender a certificate as to the legal existence and good standing of each Borrower, issued by the Secretary of State or other appropriate public official in the jurisdiction in which each Borrower is incorporated. Borrowers shall have delivered to Lender certificates of the Secretaries of State or other appropriate public officials as to each Borrower's qualification to do business and good standing in each jurisdiction in which a failure to be so qualified would have a material adverse effect on the financial condition or the ability to conduct the business in the manner now conducted and as hereafter intended to be conducted. Borrowers shall have delivered to Lender a copy of the executed Shareholder Indemnification Agreement between Dreams Products, Inc. and Mitch Adelstein, Ross Tannenbaum and Scott Widelitz (the "Employees"), respectively, which Shareholder Indemnification Agreement includes noncompetition covenants relating to the Employees, executed by Employees and Dreams, Inc. in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender copies of life insurance policies on the lives of Ross Tannenbaum and Sam Battistone, respectively, naming Lender as beneficiary each in the amount of $3,000,000 within sixty (60) days of closing. Borrowers shall have delivered to Lender copies of the executed Asset Purchase Agreement relating to Mounted Memories, Inc., in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender a Subordination Agreement executed by Borrowers and Robert L. Hild, in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender a payoff letter executed by First Bank, N.A. SirromAgmts Page 17 Borrowers shall have delivered to Lender Release of Obligations and Stock Purchase Agreements executed by Signature, Inc., Robert Kester, Riley Robinson, Dayton Wittke, Dino Satallante, Roger Battistone, and Dale Larsson, respectively, all in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender a Letter Agreement executed by NBA Properties, Inc., NBA Legends Foundation, Dreams Franchise Corporation and Dreamstar Corporation in form and substance satisfactory to Lender. Borrowers shall have delivered a consent and letter agreement regarding Universal Studios Licensing Agreement executed by Universal Studios Licensing, Inc., in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender a letter agreement regarding conversion of the note payable to Dreamstar. Borrowers shall have delivered to Lender a copy of the executed Agreement between Borrower and the Tablers, in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender a Consent to Pledge of Options executed by Dreams, Inc., in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender an opinion regarding contingent liabilities in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender copies of Employment Agreements executed by Ross Tannenbaum, Mark Viner, Joseph Casey, Scott Widelitz and Mitch Adelstein, respectively. Borrowers shall have delivered to Lender an Escrow Agreement executed by Borrowers, in form and substance satisfactory to Lender. Borrowers shall have delivered to Lender certified copies of the Articles of Amendment to the Articles of Incorporation of Dreams, Inc. changing the par value to $.01 per share and increasing the number of authorized shares, together with corporate resolutions within forty-five (45) days of closing. SirromAgmts Page 18 ARTICLE 5 DEFAULT AND REMEDIES 5.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default hereunder: (a) Default in the payment of the principal of or interest on the indebtedness evidenced by the Note in accordance with the terms of the Note, which default is not cured within five (5) days; (b) Any misrepresentation by Borrowers, or any Affiliates as to any material matter hereunder or under any of the other Loan Documents, or delivery by Borrowers of any schedule, statement, resolution, report, certificate, notice or writing to Lender that is untrue in any material respect on the date as of which the facts set forth therein are stated or certified; (c) Failure of Borrowers or any Affiliates to perform any of their obligations, covenants or agreements under this Agreement, the Note or any of the other Loan Documents; (d) Any Borrower (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within sixty (60) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of sixty (60) days or more; (e) Any Borrower shall be liquidated, dissolved, partitioned or terminated, or the charter thereof shall expire or be revoked; (f) A default or event of default shall occur under any of the other Loan Documents and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (g) Any Borrower shall default in the timely payment or performance of any obligation now or hereafter owed to Lender in connection with any other indebtedness of Borrower now or hereafter owed to Lender; SirromAgmts Page 19 (h) Any Borrower shall have defaulted and continue to be in default in the timely payment of or performance of any covenant relating to any other indebtedness or obligation, which in the aggregate exceeds Twenty Five Thousand and No/100ths Dollars ($25,000.00) or materially adversely affects such Borrower's operations, properties or financial condition (except for amounts subject to bona fide disputes which are resolved within sixty (60) days or which Borrower is continuing diligently to pursue); (i) Ross Tannenbaum or Sam Battistone shall no longer be significantly involved in the management of Borrower. With respect to any Event of Default described above that is capable of being cured and that does not already provide its own cure procedure (a "Curable Default"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if such Curable Default is fully cured and/or corrected within thirty (30) days (ten (10) days, if such Curable Default may be cured by payment of a sum of money) of written notice thereof to Borrowers given in accordance with the provisions hereof. 5.2 ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event of Default described in subsection 5.1(d), the indebtedness evidenced by the Note as well as any and all other indebtedness of any Borrower to Lender shall be immediately due and payable in full; and upon the occurrence of any other Event of Default described above, Lender at any time thereafter may at its option accelerate the maturity of the indebtedness evidenced by the Note as well as any and all other indebtedness of any Borrower to Lender; all without notice of any kind. Upon the occurrence of any such Event of Default and the acceleration of the maturity of the indebtedness evidenced by the Note: (a) Lender shall be immediately entitled to exercise any and all rights and remedies possessed by Lender pursuant to the terms of the Note and all of the other Loan Documents; and (b) Lender shall have any and all other rights and remedies that Lender may now or hereafter possess at law, in equity or by statute. 5.3 REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred upon or reserved to Lender by this Agreement or any of the other Loan Documents is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder, under any of the other Loan Documents or now or hereafter existing at law, in equity or by statute. No delay or omission by Lender to exercise any right, power or remedy accruing upon the occurrence of any Event of Default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every right, power and remedy given by this Agreement and the other Loan Documents to Lender may be exercised from time to time and as often as may be deemed expedient by Lender. SirromAgmts Page 20 5.4 PROCEEDS OF REMEDIES. Any or all proceeds resulting from the exercise of any or all of the foregoing remedies shall be applied as set forth in the Loan Document(s) providing the remedy or remedies exercised, if none is specified, or if the remedy is provided by this Agreement, then as follows: First, to the costs and expenses, including without limitation reasonable attorneys' fees and disbursements, incurred by Lender in connection with the exercise of its remedies; Second, to the expenses of curing the default that has occurred, in the event that Lender elects, in its sole discretion, to cure the default that has occurred; Third, to the payment of the Obligations of Borrowers, including but not limited to the payment of the principal of and interest on the indebtedness evidenced by the Note, in such order of priority as Lender shall determine in its sole discretion; and Fourth, the remainder, if any, to Borrowers or to any other person lawfully thereunto entitled. ARTICLE 6 TERMINATION 6.1 TERMINATION OF THIS AGREEMENT. This Agreement shall remain in full force and effect until the payment in full by Borrowers of the Obligations, at which time Lender shall cancel the Note and deliver it to Borrowers; provided, however, that the indemnities provided in Section 7.15 shall survive the termination of this Agreement. ARTICLE 7 MISCELLANEOUS 7.1 PERFORMANCE BY LENDER. If Borrowers shall default in the payment, performance or observance of any covenant, term or condition of this Agreement, which default is not cured within the applicable cure period, then Lender may, at its option, pay, perform or observe the same, and all payments made or costs or expenses incurred by Lender in connection therewith (including but not limited to reasonable attorneys' fees), with interest thereon at the highest default rate provided in the Note, shall be immediately repaid to Lender by Borrowers and shall constitute a part of the Obligations. Lender shall be the sole judge of the necessity for any such actions and of the amounts to be paid. 7.2 SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Whenever in this Agreement one of the parties hereto is named or referred to, the heirs, legal representatives, successors, successors-in-title and assigns of such parties shall be included, and all covenants and agreements contained in this SirromAgmts Page 21 Agreement by or on behalf of Borrowers or by or on behalf of Lender shall bind and inure to the benefit of their respective heirs, legal representatives, successors-in-title and assigns, whether so expressed or not. 7.3 COSTS AND EXPENSES. Borrowers agree to pay all reasonable costs and expenses incurred by Lender in connection with the making of the Loan, including but not limited to filing fees, recording taxes and reasonable attorneys' fees, promptly upon demand of Lender. Borrowers further agree to pay all premiums for insurance required to be maintained by Borrowers pursuant to the terms of the Loan Documents and all of the out-of-pocket costs and expenses incurred by Lender in connection with the collection of the Loan, amendment to the Loan Documents, or prepayment of the Loan, including but not limited to reasonable attorneys' fees, promptly upon demand of Lender. 7.4 ASSIGNMENT. The Note, this Agreement and the other Loan Documents may be endorsed, assigned and/or transferred in whole or in part by Lender, and any such holder and/or assignee of the same shall succeed to and be possessed of the rights and powers of Lender under all of the same to the extent transferred and assigned. Lender may grant participations in all or any portion of its interest in the indebtedness evidenced by the Note, and in such event Borrowers shall continue to make payments due under the Loan Documents to Lender and Lender shall have the sole responsibility of allocating and forwarding such payments in the appropriate manner and amounts. Borrowers shall not assign any of their rights nor delegate any of their duties hereunder or under any of the other Loan Documents without the prior written consent of Lender. 7.5 TIME OF THE ESSENCE. Time is of the essence with respect to each and every covenant, agreement and obligation of Borrowers hereunder and under all of the other Loan Documents. 7.6 SEVERABILITY. If any provision(s) of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 7.7 INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM ALLOWED BY LAW. Anything in this Agreement, the Note or any of the other Loan Documents to the contrary notwithstanding, in no event whatsoever, whether by reason of advancement of proceeds of the Loan, acceleration of the maturity of the unpaid balance of the Loan or otherwise, shall the interest and other charges agreed to be paid to Lender for the use of the money advanced or to be advanced hereunder exceed the maximum amounts collectible under applicable laws in effect from time to time. It is understood and agreed by the parties that, if for any reason whatsoever the interest or loan charges paid or contracted to be paid by Borrowers in respect of the indebtedness evidenced by the Note shall exceed the maximum amounts collectible under applicable laws in effect from time to time, then IPSO FACTO, the obligation to pay such interest and/or loan charges shall be reduced to the maximum amounts collectible under applicable laws in effect from time to time, and any amounts collected by Lender that exceed such maximum amounts shall be applied to the reduction of the principal balance of the SirromAgmts Page 22 indebtedness evidenced by the Note and/or refunded to Borrowers so that at no time shall the interest or loan charges paid or payable in respect of the indebtedness evidenced by the Note exceed the maximum amounts permitted from time to time by applicable law. 7.8 ARTICLE AND SECTION HEADINGS; DEFINED TERMS. Numbered and titled article and section headings and defined terms are for convenience only and shall not be construed as amplifying or limiting any of the provisions of this Agreement. 7.9 NOTICES. Any and all notices, elections or demands permitted or required to be made under this Agreement shall be in writing, signed by the party giving such notice, election or demand and shall be delivered personally, telecopied, or sent by certified mail or overnight via nationally recognized courier service (such as Federal Express), to the other party at the address set forth below, or at such other address as may be supplied in writing and of which receipt has been acknowledged in writing. The date of personal delivery or telecopy or two (2) business days after the date of mailing (or the next business day after delivery to such courier service), as the case may be, shall be the date of such notice, election or demand. For the purposes of this Agreement: The Address of Lender is: Sirrom Investments, Inc. Suite 200 500 Church Street Nashville, TN 37219 Attention: John Kirks Telecopy No.: 615/726-1208 with a copy to: Chambliss, Bahner & Stophel, P.C. 1000 Tallan Building Two Union Square Chattanooga, TN 37402 Attention: J. Patrick Murphy, Esq. Telecopy No.: 423/265-9574 The Address of Borrower is: Dreams, Inc. Dreams Franchise Corporation Dreams Entertainment, Inc. Dreams Products, Inc. 42-620 Caroline Court Palm Desert, CA 92211 Attention: Sam D. Battistone Telecopy No.: 760/779-0217 SirromAgmts Page 23 with a copy to: Hunter & Brown One Utah Center 201 South Main Street, Suite 1300 Salt Lake City, UT 84111-2215 Attention: J. Scott Hunter Telecopy No.: 801/532-8736 and to: Navon, Kopelman, O'Donnell & Lavin P.A. 2699 Stirling Road, Suite B-100 Ft. Lauderdale, FL 33312 Attention: Sam Navon Telecopy No.: 954/983-7021 7.10 ENTIRE AGREEMENT. This Agreement and the other written agreements between Borrowers and Lender represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein; provided, if there is a conflict between this Agreement and any other document executed contemporaneously herewith with respect to the Obligations, the provision of this Agreement shall control. The execution and delivery of this Agreement and the other Loan Documents by Borrowers were not based upon any fact or material provided by Lender, nor were Borrowers induced or influenced to enter into this Agreement or the other Loan Documents by any representation, statement, analysis or promise by Lender. 7.11 GOVERNING LAW AND AMENDMENTS. This Agreement shall be construed and enforced under the laws of the State of Tennessee applicable to contracts to be wholly performed in such State. No amendment or modification hereof shall be effective except in a writing executed by each of the parties hereto. 7.12 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained herein or in any of the Loan Documents or made by or furnished on behalf of Borrowers in connection herewith or in any Loan Documents shall survive the execution and delivery of this Agreement and the other Loan Documents. 7.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties to this Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 7.14 CONSTRUCTION AND INTERPRETATION. Should any provision of this Agreement require judicial interpretation, the parties hereto agree that the court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be more strictly construed against the party that itself or through its agent prepared the same, it being agreed that Borrowers, Lender and their respective agents have participated in the preparation hereof. SirromAgmts Page 24 7.15 GENERAL INDEMNIFICATION. Borrowers agree, jointly and severally, to indemnify Lender, its officers, directors, employees and agents (individually, an "Indemnified Party" and collectively, the "Indemnified Parties") and each of them and agrees to hold each of them harmless from and against any and all losses, liabilities, damages, costs, expenses and claims of any and every kind whatsoever (except those arising solely by reason of the gross negligence or wilful misconduct of an Indemnified Party) which may be imposed on, incurred by, or asserted against the Indemnified Parties or any of them arising by reason of any action or inaction or omission to any act legally required of Borrowers (including as required pursuant hereto or pursuant to any other Loan Document). 7.16 STANDARD OF CARE; LIMITATION OF DAMAGES. Lender shall be liable to Borrowers only for matters arising from this Agreement or otherwise related to the Obligations resulting from Lender's gross negligence or wilful misconduct, and liability for all other matters is hereby waived. Lender shall not in any event be liable to Borrowers for special or consequential damages arising from this Agreement or otherwise related to the Obligations. 7.17 CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Borrowers hereby irrevocably consent to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Agreement or the Obligations without waiving any requirement of service of process as required under the Rules of Civil Procedure. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. 7.18 WAIVER OF TRIAL BY JURY. LENDER AND BORROWERS HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN DOCUMENTS. SirromAgmts Page 25 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or have caused this Agreement to be executed by their duly authorized officers, as of the day and year first above written. LENDER: SIRROM INVESTMENTS, INC., a Tennessee corporation By: ------------------------------ Title: --------------------------- BORROWER: DREAMS, INC. a Utah corporation By: ------------------------------ Title: --------------------------- DREAMS FRANCHISE CORPORATION, a California corporation By: ------------------------------ Title: --------------------------- DREAMS ENTERTAINMENT, INC., a Utah corporation By: ------------------------------ Title: --------------------------- DREAMS PRODUCTS, INC., a Utah corporation By: ------------------------------ Title: --------------------------- SirromAgmts Page 26 INDEX OF SCHEDULES Schedule 2.1(b) - Subsidiaries Schedule 2.1(e) - Capitalization Table Schedule 2.1(f) - Intellectual Property Schedule 2.1(h) - Litigation Schedule 2.1(i)(A) and (B) - Financial Statements Schedule 2.1(l) - Debt and Liens Schedule 2.1(m) - Taxes Schedule 2.1(n) - Shareholder Loans Schedule 2.1(r) - Significant Contracts Schedule 2.1(x) - Registration Rights Schedule 2.1(ab) - Location of Properties and Place of Business Schedule 3.18 - Employment Contracts SirromAgmts Page 27 Schedule 3.18 With regard to Sam D. Battistone, Borrower may make the following payments: for the fiscal year ending March 31, 1999, no salary payments or bonus payments may be made to Sam D. Battistone; and for the fiscal years ending March 31, 2000, March 31, 2001, March 31, 2002 and March 31, 2003, to Borrower may make: (A) a bonus payment to Sam D. Battistone in the amount of $90,000 if Borrower's audited EBITDA (as hereinafter defined) exceeds $1,500,000 for such fiscal year and (B) an additional bonus payment to Sam D. Battistone in the amount of $90,000 if Borrower's audited EBITDA exceeds $2,000,000 for such fiscal year. For purposes of this Agreement, the term "EBITDA" shall mean net income PLUS income taxes PLUS depreciation expenses PLUS amortization expenses plus interest expense, all determined in accordance with generally accepted accounting principles. With regard to Ross Tannenbaum, Borrower may make the payments as set forth in the employment agreement dated November __, 1998, which has been reviewed and approved by Lender and a copy of which is attached hereto. Without the prior written consent of Lender, Borrower shall not increase the compensation for any of the following persons except as permitted under their respective current employment agreement, if any, (copies of which have been provided to Borrower): Mitch Adelstein, Scott Widelitz, Joseph Casey, John Walrod, Mark Viner, and Dale Larsson. SirromAgmts Page 28 SECURED PROMISSORY NOTE $3,000,000.00 November ___, 1998 FOR VALUE RECEIVED, the undersigned, DREAMS, INC., a Utah corporation, DREAMS FRANCHISE CORPORATION, a California corporation, DREAMS ENTERTAINMENT, INC., a Utah corporation and DREAMS PRODUCTS, INC., a Utah corporation (individually and collectively, "Maker"), jointly and severally promise to pay to the order of SIRROM INVESTMENTS, INC., a Tennessee corporation ("Payee"; Payee and any subsequent holder[s] hereof are hereinafter referred to collectively as "Holder"), at the office of Payee at Sirrom Investments, Inc., P.O. Box 30443, Nashville, TN 37241-0443, or at such other place as Holder may designate to Maker in writing from time to time, the principal sum of THREE MILLION AND NO/100THS DOLLARS ($3,000,000.00), together with interest on the outstanding principal balance hereof from the date hereof at the rate of fourteen percent (14.0%) per annum (computed on the basis of a 360-day year). Interest only on the outstanding principal balance hereof shall be due and payable monthly, in arrears, with the first installment being payable on the first (1st) day of January, 1999, and subsequent installments being payable on the first (1st) day of each succeeding month thereafter until November ___, 2003 (the "Maturity Date"), at which time the entire outstanding principal balance, together with all accrued and unpaid interest, shall be immediately due and payable in full. The indebtedness evidenced hereby may be prepaid in whole or in part, at any time and from time to time, without premium or penalty. Any such prepayments shall be credited first to any accrued and unpaid interest and then to the outstanding principal balance hereof. Time is of the essence of this Note. It is hereby expressly agreed that in the event that any Event of Default shall occur under and as defined in that certain Loan Agreement of even date herewith, between Maker and Payee (the "Loan Agreement"), which Event of Default is not cured following the giving of any applicable notice and within any applicable cure period set forth in the Loan Agreement, then, and in such event, the entire outstanding principal balance of the indebtedness evidenced hereby, together with any other sums advanced hereunder, under the Loan Agreement and/or under any other instrument or document now or hereafter evidencing, securing or in any way relating to the indebtedness evidenced hereby, together with all unpaid interest accrued thereon, shall, at the option of Holder and without notice to Maker, at once become due and payable and may be collected forthwith, regardless of the stipulated date of maturity. Upon the occurrence of any Event of Default as set forth herein, at the option of Holder and without notice to Maker, all accrued and unpaid interest, if any, shall be added to the outstanding principal balance hereof, and the entire outstanding principal balance, as so adjusted, shall bear interest thereafter until paid at an annual rate (the "Default Rate") equal to the lesser of (i) the rate that is seven percentage points (7.0%) in excess of the above-specified interest rate, or (ii) the maximum rate of interest allowed to be charged under applicable law (the "Maximum Rate"), regardless of whether or not there has been an acceleration of the payment of principal as set forth herein. All such interest shall be paid at the time of and as a condition precedent to the curing of any such Event of Default. SirromAgmts Page 29 In the event this Note is placed in the hands of an attorney for collection, or if Holder incurs any costs incident to the collection of the indebtedness evidenced hereby, Maker and any endorsers hereof agree to pay to Holder an amount equal to all such costs, including without limitation all reasonable attorneys' fees and all court costs. Presentment for payment, demand, protest and notice of demand, protest and nonpayment are hereby waived by Maker and all other parties hereto. No failure to accelerate the indebtedness evidenced hereby by reason of an Event of Default hereunder, acceptance of a past-due installment or other indulgences granted from time to time, shall be construed as a novation of this Note or as a waiver of such right of acceleration or of the right of Holder thereafter to insist upon strict compliance with the terms of this Note or to prevent the exercise of such right of acceleration or any other right granted hereunder or by applicable law. No extension of the time for payment of the indebtedness evidenced hereby or any installment due hereunder, made by agreement with any person now or hereafter liable for payment of the indebtedness evidenced hereby, shall operate to release, discharge, modify, change or affect the original liability of Maker hereunder or that of any other person now or hereafter liable for payment of the indebtedness evidenced hereby, either in whole or in part, unless Holder agrees otherwise in writing. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. The indebtedness and other obligations evidenced by this Note are further evidenced by (i) the Loan Agreement and (ii) certain other instruments and documents, as may be required to protect and preserve the rights of Maker and Payee, as more specifically described in the Loan Agreement. All agreements herein made are expressly limited so that in no event whatsoever, whether by reason of advancement of proceeds hereof, acceleration of maturity of the unpaid balance hereof or otherwise, shall the amount paid or agreed to be paid to Holder for the use of the money advanced or to be advanced hereunder exceed the Maximum Rate. If, from any circumstances whatsoever, the fulfillment of any provision of this Note or any other agreement or instrument now or hereafter evidencing, securing or in any way relating to the indebtedness evidenced hereby shall involve the payment of interest in excess of the Maximum Rate, then, IPSO FACTO, the obligation to pay interest hereunder shall be reduced to the Maximum Rate; and if from any circumstance whatsoever, Holder shall ever receive interest, the amount of which would exceed the amount collectible at the Maximum Rate, such amount as would be excessive interest shall be applied to the reduction of the principal balance remaining unpaid hereunder and not to the payment of interest. This provision shall control every other provision in any and all other agreements and instruments existing or hereafter arising between Maker and Holder with respect to the indebtedness evidenced hereby. This Note is intended as a contract under and shall be construed and enforceable in accordance with the laws of the State of Tennessee, except to the extent that federal law may be applicable to the determination of the Maximum Rate. Maker hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, SirromAgmts Page 30 Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Note or the indebtedness evidenced hereby without waiving any requirement of service of process as required under the rules of civil procedure. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Holder agrees to the contrary in writing. HOLDER AND MAKER HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN DOCUMENTS. As used herein, the terms "Maker" and "Holder" shall be deemed to include their respective successors, legal representatives and assigns, whether by voluntary action of the parties or by operation of law. MAKER: DREAMS, INC., a Utah corporation By: ---------------------------- Title: ------------------------- DREAMS FRANCHISE CORPORATION, a California corporation By: ---------------------------- Title: ------------------------- DREAMS ENTERTAINMENT, INC., a Utah corporation By: ---------------------------- Title: ------------------------- DREAMS PRODUCTS, INC., a Utah corporation By: ---------------------------- Title: ------------------------- SirromAgmts Page 31 STOCK PURCHASE WARRANT This STOCK PURCHASE WARRANT ("Warrant") is issued this ____ day of November, 1998, by DREAMS, INC., a Utah corporation (the "Company"), to SIRROM INVESTMENTS, INC., a Tennessee corporation (SIRROM INVESTMENTS, INC., and any subsequent assignee or transferee hereof are hereinafter referred to collectively as "Holder" or "Holders"). AGREEMENT: 1. ISSUANCE OF WARRANT; TERM. (a) For and in consideration of SIRROM INVESTMENTS, INC. making a loan to the Company in an amount of Three Million and no/100ths Dollars ($3,000,000) pursuant to the terms of a secured promissory note of even date herewith (the "Note") and related loan agreement of even date herewith (the "Loan Agreement"), and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company hereby grants to Holder the right to purchase 6,657,895 shares ("Base Amount") of the Company's common stock (the "Common Stock"), which the Company represents to equal 14% of the shares of capital stock outstanding on the date hereof, calculated on a fully diluted basis and assuming exercise of this Warrant, provided that in the event that any portion of the indebtedness evidenced by the Note is outstanding on the following dates, the Base Amount shall be increased to the corresponding number set forth below (the "Outstanding Debt Ratchets"):
DATE BASE AMOUNT ---------------------------- ------------------------------------- November ___, 2001 7,502,092 shares, which the Company represents to equal 15.5% of the shares of the Company's capital stock outstanding on the date hereof calculated on a fully diluted basis after exercise of this Warrant November ___, 2002 8,376,801 shares, which the Company represents to equal 17.0% of the shares of the Company's capital stock outstanding on the date hereof calculated on a fully diluted basis after exercise of this Warrant November ___, 2003 9,283,709 shares, which the Company represents to equal 18.5% of the shares of the Company's capital stock outstanding on the date hereof calculated on a fully diluted basis after exercise of this Warrant
(b) further provided that in the event that the Company's EBITDA (as hereinafter defined) for the fiscal year ending March 31, 1999 is less than $1,200,000, the initial Base SirromAgmts Page 32 Amount shall be increased to 8,977,720 shares, which the Company represents to equal 18% of the Company's capital stock outstanding on the date hereof calculated on a fully diluted basis after exercise of this Warrant (the "EBITDA Ratchet"). If the initial Base Amount is increased to 18% as set forth above because the Company's EBITDA for the fiscal year ending March 31, 1999 is less than $1,200,000 then the Outstanding Debt Ratchets shall be adjusted to increase the adjusted Base Amount by 1.5% per year if any portion of the indebtedness evidenced by the Note is outstanding beyond November ___, 2001, November ___, 2002 or November ___, 2003. By way of illustration, if the initial Base Amount is increased to 18% because the Company's EBITDA for the fiscal year ending March 31,1999 is less than $1,200,000 than the Outstanding Debt Ratchets for November ___, 2001, November ___, 2002 and November ___,2003 shall be 19.5%, 21.0% and 22.5%, respectively. (c) If the Company repays all or part of the principal portion of the indebtedness evidenced by the Note prior to the maturity date of the Note, any subsequent adjustments to the Base Amount then in effect for Outstanding Debt Ratchets shall be reduced in proportion to the percentage of the principal portion of the indebtedness that is repaid. By way of illustration, if Holder is entitled to have the initial Base Amount increased by 1.5% on November ___, 2001 because all or part of the principal portion of the indebtedness evidenced by the Note is outstanding and the Company repays $1,500,000 of principal due under the Note prior to November ___, 2001, the Base Amount then in effect would only increase by .75% as the result of an Outstanding Debt Ratchet adjustments and future Outstanding Debt Ratchets adjustments would be decreased proportionately. (d) For purposes of this Agreement, the term "EBITDA" shall mean net income PLUS income taxes PLUS interest expense PLUS depreciation expenses PLUS amortization expenses, all determined in accordance with generally accepted accounting principles, all as set forth in the Company's audited financial statements. (e) The shares of Common Stock issuable upon exercise of this Warrant are hereinafter referred to as the "Shares." This Warrant shall be exercisable at any time and from time to time from the date hereof until January ___, 2004 (the "Expiration Date"). 2. EXERCISE PRICE. The exercise price (the "Exercise Price") per share for which all or any of the Shares may be purchased pursuant to the terms of this Warrant shall be One Cent ($.01). 3. EXERCISE. This Warrant may be exercised by the Holder hereof (but only on the conditions hereinafter set forth) in whole or in part, upon delivery of written notice of intent to exercise to the Company in the manner at the address of the Company set forth in Section 14 hereof, together with this Warrant and payment to the Company of the aggregate Exercise Price of the Shares so purchased. The Exercise Price shall be payable, at the option of the Holder, (i) by certified or bank check, (ii) by the surrender of the Note or portion thereof having an outstanding principal balance equal to the aggregate Exercise Price or (iii) by the surrender of a portion of this Warrant where the Shares subject to the portion of this Warrant that is surrendered have a fair market value equal to the aggregate Exercise Price. In the absence of an established public market for the Common Stock, fair market value shall be established SirromAgmts Page 33 by the Company's board of directors in a commercially reasonable manner. Upon exercise of this Warrant as aforesaid, the Company shall as promptly as practicable, and in any event within fifteen (15) days thereafter, execute and deliver to the Holder of this Warrant a certificate or certificates for the total number of whole Shares for which this Warrant is being exercised in such names and denominations as are requested by such Holder. If this Warrant shall be exercised with respect to less than all of the Shares, the Holder shall be entitled to receive a new Warrant covering the number of Shares in respect of which this Warrant shall not have been exercised, which new Warrant shall in all other respects be identical to this Warrant. The Company covenants and agrees that it will pay when due any and all state and federal issue taxes which may be payable in respect of the issuance of this Warrant or the issuance of any Shares upon exercise of this Warrant. 4. COVENANTS AND CONDITIONS. The above provisions are subject to the following: (a) Neither this Warrant nor the Shares have been registered under the Securities Act of 1933, as amended ("Securities Act"), or any state securities laws ("Blue Sky Laws"). This Warrant has been acquired for investment purposes and not with a view to distribution or resale and may not be sold or otherwise transferred without (i) an effective registration statement for such Warrant under the Securities Act and such applicable Blue Sky Laws, or (ii) an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the Company and its counsel, that registration is not required under the Securities Act or under any applicable Blue Sky Laws (the Company hereby acknowledges that Chambliss, Bahner & Stophel, P.C. is acceptable counsel). Transfer of the Shares shall be restricted in the same manner and to the same extent as the Warrant and the certificates representing such Shares shall bear substantially the following legend: THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES ACTS AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER. The Holder hereof and the Company agree to execute such other documents and instruments as counsel for the Company reasonably deems necessary to effect the compliance of the issuance of this Warrant and any shares of Common Stock issued upon exercise hereof with applicable federal and state securities laws. The Company covenants and agrees that all Shares which may be issued upon exercise of this Warrant will, upon issuance and payment therefor, be legally and validly issued and outstanding, fully paid and nonassessable, free from all taxes, liens, charges and preemptive rights, if any, with SirromAgmts Page 34 respect thereto or to the issuance thereof. The Company shall at all times reserve and keep available for issuance upon the exercise of this Warrant such number of authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of this Warrant. (b) The Company covenants and agrees that it shall not sell any shares of the Company's capital stock at a price per share below the fair market value of such shares, without the prior written consent of the Holder hereof. In the event that the Company sells shares of Common Stock at a price per share below the fair market value of such shares (a "Below Market Transaction"), without the prior written consent of the Holder hereof, the Company covenants and agrees that the number of shares issuable upon exercise of this Warrant shall be equal to the product obtained by multiplying the number of shares issuable pursuant to this Warrant prior to the Below Market Transaction by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to consummation of the Below Market Transaction plus the number of shares of Common Stock issued in the Below Market Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to the Below Market Transaction plus the number of shares of Common Stock that the aggregate consideration received by the Company in the Below Market Transaction would purchase at fair market value. For purposes of this subsection, Common Stock shall be deemed to include that number of shares of Common Stock that would be obtained assuming (i) the conversion of any securities of the Company which, by their terms, are convertible into or exchangeable for Common Stock, and (ii) the exercise of all options to purchase or rights to subscribe for Common Stock or securities which, by their terms, are convertible into or exchangeable for Common Stock. In the absence of an established public market for the securities sold by the Company in a Below Market Transaction, fair market value shall be established by the Company's board of directors in a commercially reasonable manner. 5. TRANSFER OF WARRANT. Subject to the provisions of Section 4 hereof, this Warrant may be transferred, in whole or in part, to any person or business entity, by presentation of the Warrant to the Company with written instructions for such transfer. Upon such presentation for transfer, the Company shall promptly execute and deliver a new Warrant or Warrants in the form hereof in the name of the assignee or assignees and in the denominations specified in such instructions. The Company shall pay all expenses incurred by it in connection with the preparation, issuance and delivery of Warrants under this Section. 6. WARRANT HOLDER NOT SHAREHOLDER; RIGHTS OFFERING; PREEMPTIVE RIGHTS. Except as otherwise provided herein, this Warrant does not confer upon the Holder, as such, any right whatsoever as a shareholder of the Company. Notwithstanding the foregoing, if the Company should offer to all of the Company's shareholders the right to purchase any securities of the Company, then all shares of Common Stock that are subject to this Warrant shall be deemed to be outstanding and owned by the Holder and the Holder shall be entitled to participate in such rights offering. The Company shall not grant any preemptive rights with respect to any of its capital stock without the prior written consent of the Holder. SirromAgmts Page 35 7. OBSERVATION RIGHTS. The Holder of this Warrant shall receive notice of and be entitled to attend or may send a representative to attend all meetings of the Company's Board of Directors in a non-voting observation capacity and shall receive a copy of all correspondence and information delivered to the Company's Board of Directors, from the date hereof until such time as the indebtedness evidenced by the Note has been paid in full. 8. ADJUSTMENT UPON CHANGES IN STOCK. (a) If all or any portion of this Warrant shall be exercised subsequent to any stock split, stock dividend, recapitalization, combination of shares of the Company, or other similar event, occurring after the date hereof, then the Holder exercising this Warrant shall receive, for the aggregate Exercise Price, the aggregate number and class of shares which such Holder would have received if this Warrant had been exercised immediately prior to such stock split, stock dividend, recapitalization, combination of shares, or other similar event. If any adjustment under this Section 8(a), would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares subject to this Warrant shall be the next higher number of shares, rounding all fractions upward. Whenever there shall be an adjustment pursuant to this Section 8(a), the Company shall forthwith notify the Holder or Holders of this Warrant of such adjustment, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated. (b) If all or any portion of this Warrant shall be exercised subsequent to any merger, consolidation, exchange of shares, separation, reorganization or liquidation of the Company, or other similar event, occurring after the date hereof, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of securities of the Company or another entity, or the holders of Common Stock are entitled to receive cash or other property, then the Holder exercising this Warrant shall receive, for the aggregate Exercise Price, the aggregate number and class of shares, cash or other property which such Holder would have received if this Warrant had been exercised immediately prior to such merger, consolidation, exchange of shares, separation, reorganization or liquidation, or other similar event. If any adjustment under this Section 8(b) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares subject to this Warrant shall be the next higher number of shares, rounding all fractions upward. Whenever there shall be an adjustment pursuant to this Section 8(b), the Company shall forthwith notify the Holder or Holders of this Warrant of such adjustment, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated. SirromAgmts Page 36 9. PUT AGREEMENT. (a) The Company hereby irrevocably grants and issues to Holder the right and option to sell to the Company (the "Put") this Warrant not any shares acquired pursuant to the exercise of this Warrant for a period of thirty (30) days immediately prior to the Expiration Date, at a purchase price (the "Put Price") equal to the Fair Market Value (as hereinafter defined) of the shares of Common Stock issuable to Holder upon exercise of this Warrant less the Exercise Price. (b) Holder may exercise the Put by delivery of written notice (the "Put Notice") of such exercise to the Company in the manner and at the address of the Company set forth in Section 14 hereof. Except as provided in Section 21 hereof, the Company shall pay to Holder, in cash or by wire transfer of immediately available funds, the Put Price within thirty (30) days of the receipt of the Put Notice. (c) For purposes of this Section 9, the Fair Market Value of the shares of Common Stock of the Company issuable pursuant to this Warrant shall be determined as follows: (i) The Company and the Holder shall each appoint an independent, experienced appraiser who is a member of a recognized professional association of business appraisers. The two appraisers shall determine the value of the shares of Common Stock which would be issued upon the exercise of the Warrant, assuming that the sale would be between a willing buyer and a willing seller, both of whom have full knowledge of the financial and other affairs of the Company, and neither of whom is under any compulsion to sell or to buy. (ii) If the higher of the two appraisals is not ten percent (10%) greater than the lower of the appraisals, the Fair Market Value shall be the average of the two appraisals. If the higher of the two appraisals is equal to or greater than ten percent (10%) more than the lower of the two appraisals, then a third appraiser shall be appointed by the two appraisers, and if they cannot agree on a third appraiser, the American Arbitration Association shall appoint the third appraiser. The third appraiser, regardless of who appoints him or her, shall have the same qualifications as the first two appraisers. (iii) The Fair Market Value after the appointment of the third appraiser shall be the mean of the three appraisals. (iv) The fees and expenses of the appraisers shall be paid one-half by the Company and one-half by the Holder. SirromAgmts Page 37 (d) At the Company's request, Holder shall provide the Company with an affidavit in the form attached hereto as Exhibit A stating that Holder is the holder of the Warrant on the date the Put is exercised. Simultaneously with the payment of the Put Price, Holder will deliver the original of the Warrant to the Company at the time the payment of the Put Price is made. 10. REGISTRATION. (a) The Company and the Holder of the Warrant and the Shares agree that if at any time after the date hereof the Company shall propose to file a registration statement with respect to any of its Common Stock on a form suitable for a secondary offering (including its initial public offering), it will give notice in writing to such effect to the Holder(s) at least thirty (30) days prior to such filing, and, at the written request of any such registered holder, made within ten (10) days after the receipt of such notice, will include therein at the Company's cost and expense (including the fees and expenses of counsel to such Holder(s), but excluding underwriting discounts, commissions and filing fees attributable to the Shares included therein) such of the Shares as such Holder(s) shall request; provided, however, that if the offering being registered by the Company is underwritten and if the representative of the underwriters certifies in writing that the inclusion therein of the Shares would materially and adversely affect the sale of the securities to be sold by the Company thereunder, then the Company shall be required to include in the offering only that number of securities, including the Shares, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among all selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder, but in no event shall the total amount of Shares included in the offering be less than the number of securities included in the offering by any other single selling shareholder unless all of the Shares are included in the offering). Holder agrees to take action reasonably requested by the underwriter if such action is customarily required in connection with a public offering. (b) Whenever the Company undertakes to effect the registration of any of the Shares, the Company shall, as expeditiously as reasonably possible: (i) Prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement covering such Shares and use its best efforts to cause such registration statement to be declared effective by the Commission as expeditiously as possible and to keep such registration effective until the earlier of (A) the date when all Shares covered by the registration statement have been sold or (B) one hundred eighty (180) days from the effective date of the registration statement; provided, that before filing a registration statement or prospectus or any amendment or supplements thereto, the Company will furnish to each Holder of Shares covered by such registration statement and the underwriters, if any, copies of all such documents proposed to be filed (excluding exhibits, unless any such person shall specifically request exhibits), which documents will be subject to the review of SirromAgmts Page 38 such Holders and underwriters, and the Company will not file such registration statement or any amendment thereto or any prospectus or any supplement thereto (including any documents incorporated by reference therein) with the Commission if (A) the underwriters, if any, shall reasonably object to such filing or (B) if information in such registration statement or prospectus concerning a particular selling Holder has changed and such Holder or the underwriters, if any, shall reasonably object. (ii) Prepare and file with the Commission such amendments and post-effective amendments to such registration statement as may be necessary to keep such registration statement effective during the period referred to in Section 10(b)(i) and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement, and cause the prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed with the Commission pursuant to Rule 424 under the Securities Act. (iii) Furnish to the selling Holder(s) such numbers of copies of such registration statement, each amendment thereto, the prospectus included in such registration statement (including each preliminary prospectus), each supplement thereto and such other documents as they may reasonably request in order to facilitate the disposition of the Shares owned by them. (iv) Use its best efforts to register and qualify under such other securities laws of such jurisdictions as shall be reasonably requested by any selling Holder and do any and all other acts and things which may be reasonably necessary or advisable to enable such selling Holder to consummate the disposition of the Shares owned by such Holder, in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to transact business or to file a general consent to service of process in any such states or jurisdictions. (v) Promptly notify each selling Holder of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading and, at the request of any such Holder, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Shares, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading. (vi) Provide a transfer agent and registrar for all such Shares not later than the effective date of such registration statement. SirromAgmts Page 39 (vii) Enter into such customary agreements (including underwriting agreements in customary form for a primary offering) and take all such other actions as the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Shares (including, without limitation, effecting a stock split or a combination of shares). (viii) Make available for inspection by any selling Holder or any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such selling Holder or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the officers, directors, employees and independent accountants of the Company to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. (ix) Promptly notify the selling Holder(s) and the underwriters, if any, of the following events and (if requested by any such person) confirm such notification in writing: (A) the filing of the prospectus or any prospectus supplement and the registration statement and any amendment or post-effective amendment thereto and, with respect to the registration statement or any post-effective amendment thereto, the declaration of the effectiveness of such documents, (B) any requests by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information, (C) the issuance or threat of issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose and (D) the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threat of initiation of any proceeding for such purposes. (x) Make every reasonable effort to prevent the entry of any order suspending the effectiveness of the registration statement and obtain at the earliest possible moment the withdrawal of any such order, if entered. (xi) Cooperate with the selling Holder(s) and the underwriters, if any, to facilitate the timely preparation and delivery of certificates representing the Shares to be sold and not bearing any restrictive legends, and enable such Shares to be in such lots and registered in such names as the underwriters may request at least two (2) business days prior to any delivery of the Shares to the underwriters. (xii) Provide a CUSIP number for all the Shares not later than the effective date of the registration statement. (xiii) Prior to the effectiveness of the registration statement and any post-effective amendment thereto and at each closing of an underwritten offering, (A) make such representations and warranties to the selling Holder(s) and the underwriters, if any, SirromAgmts Page 40 with respect to the Shares and the registration statement as are customarily made by issuers in primary underwritten offerings; (B) use its best efforts to obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling Holders and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; (C) deliver such documents and certificates as may be reasonably requested (1) by the holders of a majority of the Shares being sold, and (2) by the underwriters, if any, to evidence compliance with clause (A) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company; and (D) obtain opinions of counsel to the Company and updates thereof (which counsel and which opinions shall be reasonably satisfactory to the underwriters, if any), covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by the selling Holders and underwriters or their counsel. Such counsel shall also state that no facts have come to the attention of such counsel which cause them to believe that such registration statement, the prospectus contained therein, or any amendment or supplement thereto, as of their respective effective or issue dates, contains any untrue statement of any material fact or omits to state any material fact necessary to make the statements therein not misleading (except that no statement need be made with respect to any financial statements, notes thereto or other financial data or other expertized material contained therein). If for any reason the Company's counsel is unable to give such opinion, the Company shall so notify the Holders of the Shares and shall use its best efforts to remove expeditiously all impediments to the rendering of such opinion. (xiv) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than forty-five (45) days after the end of any twelve-month period (or ninety (90) days, if such period is a fiscal year) (A) commencing at the end of any fiscal quarter in which the Shares are sold to underwriters in a firm or best efforts underwritten offering, or (B) if not sold to underwriters in such an offering, beginning with the first month of the first fiscal quarter of the Company commencing after the effective date of the registration statement, which statements shall cover such twelve-month periods. (c) After the date hereof, the Company shall not grant to any holder of securities of the Company any registration rights which have a priority greater than or equal to those granted to Holders pursuant to this Warrant without the prior written consent of the Holder(s). (d) The Company's obligations under Section 10(a) above with respect to each Holder of Shares are expressly conditioned upon such Holder's furnishing to the Company in writing such information concerning such holder and the terms of such holder's proposed SirromAgmts Page 41 offering as the Company shall reasonably request for inclusion in the registration statement. If any registration statement including any of the Shares is filed, then the Company shall indemnify each Holder thereof (and each underwriter for such holder and each person, if any, who controls such underwriter within the meaning of the Securities Act) from any loss, claim, damage or liability arising out of, based upon or in any way relating to any untrue statement of a material fact contained in such registration statement or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except for any such statement or omission based on information furnished in writing by such Holder of the Shares expressly for use in connection with such registration statement; and such holder shall indemnify the Company (and each of its officers and directors who has signed such registration statement, each director, each person, if any, who controls the Company within the meaning of the Securities Act, each underwriter for the Company and each person, if any, who controls such underwriter within the meaning of the Securities Act) and each other such Holder against any loss, claim, damage or liability arising from any such statement or omission which was made in reliance upon information furnished in writing to the Company by such holder of the Shares expressly for use in connection with such registration statement. (e) For purposes of this Section 10, all of the Shares shall be deemed to be issued and outstanding. (f) The sale of any securities to employees registered on Form S-8 or its replacement shall be exempt from this Section 10. (g) The registration rights granted pursuant to this Section 10 shall terminate on the Expiration Date. 11. CERTAIN NOTICES. In case at any time the Company shall propose to: (a) declare any cash dividend upon its Common Stock; (b) declare any dividend upon its Common Stock payable in stock or make any special dividend or other distribution to the holders of its Common Stock; (c) offer for subscription to the holders of any of its Common Stock any additional shares of stock in any class or other rights; (d) reorganize, or reclassify the capital stock of the Company, or consolidate, merge or otherwise combine with, or sell of all or substantially all of its assets to, another corporation; (e) voluntarily or involuntarily dissolve, liquidate or wind up of the affairs of the Company; or SirromAgmts Page 42 (f) redeem or purchase any shares of its capital stock or securities convertible into its capital stock; then, in any one or more of said cases, the Company shall give to the Holder of the Warrant, by certified or registered mail, (i) at least twenty (20) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (ii) in the case of such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place. Any notice required by clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and any notice required by clause (ii) shall specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. 12. RIGHTS OF CO-SALE. (a) The shareholders listed on the signature page hereof (the "Management Shareholders") shall not enter into any transaction that would result in the sale by him or it of any capital common stock of the Company now or hereafter owned by him or it, unless prior to such sale such Management Shareholder shall give written notice (the "Co-Sale Notice") to Holder addressed and delivered as set forth in Section 14 hereof, of his or its intention to effect such sale in order that Holder may exercise its rights under this Section 12 as hereinafter described. Such notice shall set forth (i) the number of shares to be sold by such Management Shareholder, (ii) the principal terms of the sale, including the price at which the shares are intended to be sold, and (iii) an offer by such Management Shareholder to use his or its best efforts to cause to be included with the shares to be sold by him or it in the sale, on a share-by-share basis and on the same terms and conditions, the Shares issuable or issued to Holder pursuant this Warrant. (b) If Holder has not accepted such offer in writing within a period of ten (10) days from the date of receipt of the Co-Sale Notice, then such Management Shareholder shall thereafter be free for a period of ninety (90) days to sell the number of shares specified in the Co-Sale Notice, at a price no greater than the price set forth in the Co-Sale Notice and on otherwise no more favorable terms to such Management Shareholder than as set forth in the Co-Sale Notice, without any further obligation to Holder in connection with such sale. In the event that such Management Shareholder fails to consummate such sale within such ninety-day period, the shares specified in Co-Sale Notice shall continue to be subject to this Section 12. (c) If Holder accepts such offer in writing within ten-day period, then such acceptance shall be irrevocable unless such Management Shareholder shall be unable to cause to be included in the sale the number of Shares of stock held by Holder and set forth in the SirromAgmts Page 43 written acceptance. In that event, such Management Shareholder and Holder shall participate in the sale equally, with such Management Shareholder and Holder each selling half the total number of such shares to be sold in the sale. (d) The co-sale rights granted pursuant to this Section 12 shall expire on the Expiration Date. (e) Notwithstanding anything contained in this Warrant or any other Loan Document (as defined in the Loan Agreement) to the contrary, in the event Holder accepts such offer in accordance with the terms and provisions of Paragraph 12(c) above, then Ross Tannenbaum shall participate in the sale with such Management Shareholder and Holder to the extent of twenty-five percent (25%) of the total number of such shares to be sold in the sale (i.e., in the event the Management Shareholder other than Ross Tannenbaum receives an offer to sell $1,000,000 shares, and Holder accepts such offer, then the Holder shall have the right to sell 500,000 shares, Ross Tannenbaum shall have the right to sell 250,000 shares, and the Management Shareholder in question shall have the right to sell 250,000 shares). In the event Ross Tannenbaum is the Management Shareholder who receives the offer to sell shares, then if Holder elects to accept such offer, then Holder and Ross Tannenbaum shall have equally in the sale, each selling half of the total number of shares to be sold in the sale.) 13. ARTICLE AND SECTION HEADINGS. Numbered and titled article and section headings are for convenience only and shall not be construed as amplifying or limiting any of the provisions of this Warrant. 14. NOTICE. Any and all notices, elections or demands permitted or required to be made under this Warrant shall be in writing, signed by the party giving such notice, election or demand and shall be delivered personally, telecopied, or sent by certified mail or overnight via nationally recognized courier service (such as Federal Express), to the other party at the address set forth below, or at such other address as may be supplied in writing and of which receipt has been acknowledged in writing. The date of personal delivery or telecopy or two (2) business days after the date of mailing (or the next business day after delivery to such courier service), as the case may be, shall be the date of such notice, election or demand. For the purposes of this Warrant: The Address of Holder is: Sirrom Investments, Inc. Suite 200 500 Church Street Nashville, TN 37219 Attention: John Kirks Telecopy No. 615/726-1208 SirromAgmts Page 44 with a copy to: Chambliss, Bahner & Stophel, P.C. 1000 Tallan Building Two Union Square Chattanooga, TN 37402 Attention: J. Patrick Murphy, Esq. Telecopy No. 423/265-9574 The Address of Company is: Dreams, Inc. 42-620 Caroline Drive Palm Desert, CA 92211 Attention: Sam D. Battistone Telecopy No. 760/779-0217 with a copy to: Hunter & Brown One Utah Center 201 South Main Street, Suite 1300 Salt Lake City, UT 84111-2215 Attention: J. Scott Hunter Telecopy No. 801/532-8736 and to: Navon, Kopelman, O'Donnell & Lavin P.A. 2699 Stirling Road, Suite B-100 Ft. Lauderdale, FL 33312 Attention: Sam Navon Telecopy No.: 954/983-7021 15. SEVERABILITY. If any provisions(s) of this Warrant or the application thereof to any person or circumstances shall be invalid or unenforceable to any extent, the remainder of this Warrant and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 16. ENTIRE AGREEMENT. This Warrant between the Company and Holder represents the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreement are merged herein. 17. GOVERNING LAW AND AMENDMENTS. This Warrant shall be construed and enforced under the laws of the State of Tennessee applicable to contracts to be wholly performed in such State. No amendment or modification hereof shall be effective except in a writing executed by each of the parties hereto. 18. COUNTERPARTS. This Warrant may be executed in any number of counterparts and be different parties to this Warrant in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Warrant. SirromAgmts Page 45 19. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. The Company hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Holder may be a party and which concerns this Warrant. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Holder agrees to the contrary in writing. 20. WAIVER OF TRIAL BY JURY. HOLDER AND THE COMPANY HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS WARRANT. 21. PAYMENT OF PUT PRICE. Notwithstanding any other provision contained herein to the contrary, the Holder will accept in payment of the Put Price a promissory note with interest at 10% per annum and monthly payments of principal and interest amortizing principal and interest over twenty four (24) months in which all interest and principal is due not less than twenty four (24) months after the Put is exercised with the right to prepay; in whole or in part, without penalty. 22. STOCK OPTION PLAN. Notwithstanding any provision contained herein to the contrary, the Company may establish a stock incentive plan for (i) the following existing employees: Lee Barney, Joseph Casey, Leah Jones, Dale Larsson, Mark Morse, Bethanie Mueller, Jolaine Saxton, John Walrod, Mark Viner, Monica Wall and Richard Watt and (ii) employees whose employment begins after the date of the closing of the Loan pursuant to which stock options to purchase a number of shares of capital stock of the Company not exceeding in the aggregate 5% of the fully diluted capital stock of the Company on the date hereof may be granted; provided that if Joseph Casey, Dale Larsson or Mark Viner ("Pledgors") receive any additional shares of stock pursuant to the plan, then Pledgors shall be required to take any action requested by Holder to reflect the pledge of such shares to Holder. Any stock issued pursuant to the stock incentive plan described in this Section 22 shall not trigger the anti-dilution provisions of Section 4(c) hereof (provided that such issuance complies with the terms of Section 22). IN WITNESS WHEREOF, the parties hereto have set their hands as of the date first above written. COMPANY: DREAMS, INC. a Utah corporation By: ---------------------------- Title: ------------------------- SirromAgmts Page 46 HOLDER: SIRROM INVESTMENTS, INC., a Tennessee corporation By: ---------------------------- Title: ------------------------- IN WITNESS WHEREOF, the parties hereto have executed or caused this Warrant to be executed as of the date first above written for the purpose of agreeing to the terms and conditions of Section 12 hereof. MANAGEMENT SHAREHOLDERS: -------------------------------- Sam D. Battistone -------------------------------- Joseph Casey -------------------------------- Dale Larsson -------------------------------- Ross Tannenbaum -------------------------------- Mark Viner SirromAgmts Page 47 EXHIBIT A FORM OF AFFIDAVIT STATE OF ___________________: : COUNTY OF ___________________: The undersigned, being first duly sworn, states that he or she is an officer of ___________________ and in his or her capacity states that: 1. Affiant is the _________________ of __________________________, a _____________________ corporation("Holder"), and as such officer, has full knowledge of the business and affairs of Holder and all matters hereinafter set forth. 2. Affiant covenants and agrees, represents and warrants that Holder is the owner and holder of that certain stock purchase warrant ("Warrant") dated November ___, 1998, executed by Dreams, Inc., a Utah corporation, in favor of Sirrom Investments, Inc. 3. Affiant covenants and agrees, represents and warrants that Holder has good right, power and authority to exercise the right to the "Put" under Section 9 of the Warrant. HOLDER: By: ------------------------------ Title: --------------------------- STATE OF ____________________: : COUNTY OF ___________________: Before me, a Notary Public of the state and county aforesaid, personally appeared (name) _____________________, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged ____self to be (title) ______________________ of ______________________________ the within named bargainor, a corporation, and that ___he as such (title) __________________, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by _______self as (title) _____________________. WITNESS my hand and seal, at office in (county, state) __________________ __________________, this _____ day of _________________________, 19____. -------------------------------- Notary Public My Commission Expires: ---------- SirromAgmts Page 48 SECURITY AGREEMENT THIS SECURITY AGREEMENT ("Agreement") is made as of the _______ day of ____________, 1998, by and between DREAMS, INC., a Utah corporation, DREAMS FRANCHISE CORPORATION, a California corporation, DREAMS ENTERTAINMENT, INC., a Utah corporation, and DREAMS PRODUCTS, INC., a Utah corporation (collectively "Borrower"), and SIRROM INVESTMENTS, INC., a Tennessee corporation ("Lender"). RECITALS: WHEREAS, Lender is making a loan (the "Loan") in the amount of $3,000,000 to Borrower, pursuant to that certain Loan Agreement of even date herewith by and between Borrower and Lender, as it may be amended, modified or extended from time to time (the "Loan Agreement"); and WHEREAS, in connection with the making of the Loan, Lender desires to obtain from Borrower and Borrower desires to grant to Lender a security interest in certain collateral more particularly described below. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. GRANT OF SECURITY INTEREST. Borrower hereby grants to Lender a security interest in the following described property excluding any rights in the Agreement between Universal Studios Licensing, Inc. and Dreams Franchise Corporation pursuant to which Dreams Franchise Corporation licenses certain rights to use the property "Field of Dreams" (collectively, the "Collateral"): (a) presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing (collectively, "Accounts"); (b) present and future general intangibles and other personal property (including choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, monies due under any royalty or licensing agreements, SirromAgmts Page 49 infringement claims, computer programs, computer discs, computer tapes, literature, reports, catalogs deposit accounts, insurance premium rebates, tax refunds, and tax refund claims) other than goods and Accounts, and Borrower's Books relating to any of the foregoing (collectively, "General Intangibles"); (c) present and future letters of credit, notes, drafts, instruments, certificated and uncertificated securities, documents, leases, and chattel paper, and Borrower's Books relating to any of the foregoing (collectively, "Negotiable Collateral"); (d) present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located, and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing (collectively, "Inventory"); (e) present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, dies, jigs, goods (other than consumer goods or farm products), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located (collectively, "Equipment"); (f) present and hereafter acquired books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's assets or liabilities, or the collateral; all information relating to Borrower's business operations or financial condition; and all computer programs, disc or tape files, printouts, funds or other computer prepared information, and the equipment containing such information (collectively, "Borrower's Books"); (g) substitutions, replacements, additions, accessions, proceeds, products to or of any of the foregoing, including, but not limited to, proceeds of insurance covering any of the foregoing, or any portion thereof, and any and all Accounts, General Intangibles, Negotiables, Collateral, Inventory, Equipment, money, deposits, accounts, or other tangible or intangible property resulting from the sale or other disposition of the accounts, general Intangibles, Negotiable Collateral, Inventory, Equipment, or any portion thereof or interest therein and the proceeds thereof. SirromAgmts Page 50 2. SECURED INDEBTEDNESS. The security interest granted hereby shall secure the prompt payment of the Obligations (as defined in the Loan Agreement) and the prompt performance of each of the covenants and duties under the Loan Documents (as defined in the Loan Agreement). 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents, warrants and agrees as follows: (a) Except as set forth on Schedule 3(a) hereto (the "Permitted Encumbrances"), Borrower is the owner of the Collateral free and clear of any liens and security interests. Borrower will defend the Collateral against the claims and demands of all persons other than the holders of the Permitted Encumbrances. (b) The address set forth on Schedule 3(b) hereto is Borrower's principal place(s) of business and the location of all tangible Collateral and the place where the records concerning all intangible Collateral are kept and/or maintained. (c) Borrower will pay all costs of filing of financing, continuation and termination statements with respect to the security interests created hereby, and Lender is authorized to do all things that it deems necessary to perfect and continue perfection of the security interests created hereby and to protect the Collateral. 4. AGREEMENTS WITH RESPECT TO THE COLLATERAL. Borrower covenants and agrees with Lender as follows: (a) Borrower will not permit any of the Collateral to be removed from the location specified herein, except for temporary periods in the normal and customary use thereof and in the ordinary course of business, without the prior written consent of Lender. (b) Borrower shall notify Lender in writing of any change in the location of Borrower's principal place of business (or residence) or the location of any tangible Collateral or the place(s) where the records concerning all intangible Collateral are kept or maintained. SirromAgmts Page 51 (c) Borrower will keep the Collateral in good condition and repair and will pay and discharge all taxes, levies and other impositions levied thereon as well as the cost of repairs to or maintenance of same, and will not permit anything to be done that may impair the value of any of the Collateral. If Borrower fails to pay such sums, Lender may do so for Borrower's account and add the amount thereof to the Obligations. (d) Until the occurrence of an Event of Default (as defined in the Loan Agreement), Borrower shall be entitled to possession of the Collateral and to use the same in any lawful manner, provided that such use does not cause excessive wear and tear to the Collateral, cause it to decline in value at an excessive rate, or violate the terms of any policy of insurance thereon. (e) Borrower will not sell, exchange, lease or otherwise dispose of any of the Collateral or any interest therein without the prior written consent of Lender. Notwithstanding the foregoing, so long as an Event of Default has not occurred, Borrower shall have the right to process and sell Borrower's inventory in the regular course of business. Lender's security interest hereunder shall attach to all proceeds of all sales or other dispositions of the Collateral. If at any time any such proceeds shall be represented by any instruments, chattel paper or documents of title, then such instruments, chattel paper or documents of title shall be promptly delivered to Lender and subject to the security interest granted hereby. If at any time any of Borrower's inventory is represented by any document of title, such document of title will be delivered promptly to Lender and subject to the security interest granted hereby. (f) Borrower will not allow the Collateral to be attached to real estate in such manner as to become a fixture or a part of any real estate. (g) Borrower will at all times keep the Collateral insured against all insurable hazards in amounts equal to the full cash value of the Collateral. Such insurance shall be in such companies as may be acceptable to Lender, with provisions satisfactory to Lender for payment of all losses thereunder to Lender as its interests may appear. If required by Lender, Borrower shall deposit the policies with Lender. Any money received by Lender under said policies may be applied to the payment of the Obligations, whether or not due and payable, or at Lender's option may be delivered by Lender to Borrower for the purpose of repairing or restoring the Collateral. Borrower assigns to Lender all right to receive proceeds of insurance not exceeding the amounts secured hereby, directs any insurer to pay all proceeds directly to Lender, and appoints Lender Borrower's attorney-in-fact to endorse any draft or SirromAgmts Page 52 check made payable to Borrower in order to collect the benefits of such insurance. If Borrower fails to keep the Collateral insured as required by Lender, Lender shall have the right to obtain such insurance at Borrower's expense and add the cost thereof to the Obligations. (h) Borrower will not permit any liens or security interests other than those created by this Agreement and the Permitted Encumbrances to attach to any of the Collateral, nor permit any of the Collateral to be levied upon under any legal process, nor permit anything to be done that may impair the security intended to be afforded by this Agreement, nor permit any tangible Collateral to become attached to or commingled with other goods without the prior written consent of Lender. 5. REMEDIES UPON DEFAULT. Upon an Event of Default under and as defined in the Loan Agreement, Lender may pursue any or all of the following remedies, without any notice to Borrower except as required below: (a) Lender may take possession of any or all of the Collateral. Borrower hereby consents to Lender's entry into any of Borrower's premises to repossess Collateral, and specifically consents to Lender's forcible entry thereto as long as Lender causes no significant damage to the premises in the process of entry (drilling of locks, cutting of chains and the like do not in themselves cause "significant" damage for the purposes hereof) and provided that Lender accomplishes such entry without a breach of the peace. (b) Lender may dispose of the Collateral at private or public sale. Any required notice of sale shall be deemed commercially reasonable if given at least five (5) days prior to sale. Lender may adjourn any public or private sale to a different time or place without notice or publication of such adjournment, and may adjourn any sale either before or after offers are received. The Collateral may be sold in such lots as Lender may elect, in its sole discretion. Lender may take such action as it may deem necessary to repair, protect, or maintain the Collateral pending its disposition. (c) Lender may recover any or all proceeds of accounts from any bank or other custodian who may have possession thereof. Borrower hereby authorizes and directs all custodians of Borrower's assets to comply with any demand for payment made by Lender pursuant to this Agreement, without the need of confirmation from Borrower and without making any inquiry as to the existence of an Event of Default or any other matter. Lender may engage a collection agent to collect accounts for a reasonable percentage commission or for any other reasonable compensation arrangement. SirromAgmts Page 53 (d) Lender may notify any or all account debtors that subsequent payments must be made directly to Lender or its designated agent. Such notice may be made over Lender's signature or over Borrower's name with no signature or both, in Lender's discretion. Borrower hereby authorizes and directs all existing or future account debtors to comply with any such notice given by Lender, without the need of confirmation from Borrower and without making any inquiry as to the existence of an Event of Default or as to any other matter. (e) Lender may, but shall not be obligated to, take such measures as Lender may deem necessary in order to collect any or all of the accounts. Without limiting the foregoing, Lender may institute any administrative or judicial action that it may deem necessary in the course of collecting and enforcing any or all of the accounts. Any administrative or judicial action or other action taken by Lender in the course of collecting the accounts may be taken by Lender in its own name or in Borrower's name. Lender may compromise any disputed claims and may otherwise enter into settlements with account debtors or obligors under the accounts, which compromises or settlements shall be binding upon Borrower. Lender shall have no duty to pursue collection of any account, and may abandon efforts to collect any account after such efforts are initiated. (f) Lender may, with respect to any account involving uncompleted performance by Borrower, and with respect to any general intangible or other Collateral whose value may be preserved by additional performance on Borrower's part, take such action as Lender may deem appropriate including, but not limited, to performing or causing the performance of any obligation of Borrower thereunder, the making of payments to prevent defaults thereunder, and the granting of adequate assurances to other parties thereto with respect to future performance. Lender's action with respect to any such accounts or general intangibles shall not render Lender liable for further performance thereunder unless Lender so agrees in writing. (g) Lender may exercise its lien upon and right of setoff against any monies, items, credits, deposits or instruments that Lender may have in its possession and that belong to Borrower or to any other person or entity liable for the payment of any or all of the Obligations. (h) Lender may exercise any right that it may have under any other document evidencing or securing the Obligations or otherwise available to Lender at law or equity. SirromAgmts Page 54 6. AUDITS AND EXAMINATIONS. Lender shall have the right, at any time, by its own auditors, accountants or other agents, to examine or audit any of the books and records of Borrower, or the Collateral, all of which will be made available upon request. Such accountants or other representatives of Lender will be permitted to make any verification of the existence of the Collateral or accuracy of the records that Lender deems necessary or proper. Any reasonable expenses incurred by Lender in making such examination, inspection, verification or audit shall be paid by Borrower promptly on demand and shall constitute part of the Obligations; provided, however that prior to an Event of Default, Borrower shall only be required to pay for one (1) such examination, inspection, verification or audit which shall not exceed $15,000 per examination, inspection, verification or audit. 7. TERMINATION STATEMENT. Upon receipt of proper written demand following the payment in full of the Obligations and termination of any commitment of Lender to make any future advances to Borrower, Lender at its option, shall send a termination statement with respect to any financing statement filed to perfect Lender's security interests in any of the Collateral to Borrower or cause such termination statement to be filed with the appropriate filing officer(s). 8. POWER OF ATTORNEY. Borrower hereby constitutes Lender or its designee, as Borrower's attorney-in-fact with power, upon the occurrence and during the continuance of an Event of Default, to endorse Borrower's name upon any notes, acceptances, checks, drafts, money orders, or other evidences of payment or Collateral that may come into either its or Lender's possession; to sign the name of Borrower on any invoice or bill of lading relating to any of the accounts receivable, drafts against customers, assignments and verifications of accounts receivable and notices to customers; to send verifications of accounts receivable; to notify the Post Office authorities to change the address for delivery of mail addressed to Borrower to such address as Lender may designate; to execute any of the documents referred to in Section 3(c) hereof in order to perfect and/or maintain the security interests and liens granted herein by Borrower to Lender; to do all other acts and things necessary to carry out the purposes of and remedies provided under this Agreement. All acts of said attorney or designee are hereby ratified and approved, and said attorney or designee shall not be liable for any acts of commission or omission (other than acts of gross negligence or willful misconduct), nor for any error of judgment or mistake of fact or law. This power being coupled with an interest is irrevocable until all of the Obligations are paid in full and any and all promissory notes executed in connection therewith are terminated and satisfied. 9. BINDING EFFECT. This Agreement shall inure to the benefit of Lender's successors and assigns and shall bind Borrower's heirs, representatives, successors and assigns. 10. SEVERABILITY. If any provision of this Agreement is held invalid, such invalidity shall not affect the validity or enforceability of the remaining provisions of this Agreement. SirromAgmts Page 55 11. GOVERNING LAW AND AMENDMENTS. This Agreement shall be construed and enforced under the laws of the State of Tennessee applicable to contracts to be wholly performed in such State. No amendment or modification hereof shall be effective except in a writing executed by each of the parties hereto. 12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained herein or made by or furnished on behalf of Borrower in connection herewith shall survive the execution and delivery of this Agreement. 13. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties to this Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 14. CONSTRUCTION AND INTERPRETATION. Should any provision of this Agreement require judicial interpretation, the parties hereto agree that the court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be more strictly construed against the party that itself or through its agent prepared the same, it being agreed that Borrower, Lender and their respective agents have participated in the preparation hereof. 15. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Borrower hereby irrevocably consents to the Jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Agreement or the Obligations. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. 16. WAIVER OF TRIAL BY JURY. LENDER AND BORROWER HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN DOCUMENTS. SirromAgmts Page 56 IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement, or have caused this Agreement to be executed as of the date first above written. BORROWER: DREAMS, INC., a Utah corporation By: ---------------------------- Title: ------------------------- DREAMS FRANCHISE CORPORATION, a California corporation By: ---------------------------- Title: ------------------------- DREAMS ENTERTAINMENT, INC., a Utah corporation By: ---------------------------- Title: ------------------------- DREAMS PRODUCTS, INC., a Utah corporation By: ---------------------------- Title: ------------------------- SirromAgmts Page 57 LENDER: SIRROM INVESTMENTS, INC., a Tennessee corporation By: ---------------------------- Title: ------------------------- SirromAgmts Page 58 SCHEDULE 3(a) PERMITTED ENCUMBRANCES Tax lien filed by the State of California in connection with franchise taxes which Borrower is in the process of settling. SirromAgmts Page 59 SCHEDULE 3(b) PRINCIPAL PLACE(S) OF BUSINESS AND LOCATION(S) OF COLLATERAL Principal place of business: 42-620 Caroline Court Palm Desert CA 92211 Other Locations of Tangible Collateral/Records Concerning Intangible Collateral: 1776 N. State Street, Suite 130 Orem, UT 84057 17744 Skypark Circle, Suite 225 Irvine, CA 92614 5009 Hiatus Road Sunrise, FL 33351 (Mounted Memories, Inc.) 8201 East Pacific Place Unit 604 Denver, CO 80231 (Mounted Memories, Inc.) SirromAgmts Page 60 INTELLECTUAL PROPERTY SECURITY AGREEMENT THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT ("Security Agreement"), is made as of November 17, 1998, by DREAMS, INC., a Utah corporation, DREAMS FRANCHISE CORPORATION, a California corporation, DREAMS ENTERTAINMENT, INC., a Utah corporation, and DREAMS PRODUCTS, INC., a Utah corporation (collectively the "Grantor"), in favor of SIRROM INVESTMENTS, INC., a Tennessee corporation (the "Lender"). RECITALS: WHEREAS, pursuant to that certain Loan Agreement of even date herewith, (as amended, extended, modified, restructured or renewed from time to time, the "Loan Agreement") by and among Grantor and Lender, Lender has agreed to make a loan in the aggregate principal amount of $3,000,000 (the "Loan") to Grantor evidenced by a Secured Promissory Note of even date herewith in the original principal amount of the Loan and executed by Grantor payable to the order of Lender (together with any amendments, extensions, modifications and/or renewals thereof and/or any promissory notes given in payment thereof, the "Note"); WHEREAS, Grantor owns certain Intellectual Property listed on SCHEDULE A hereto; WHEREAS, Grantor desires to mortgage, pledge and grant to Lender, for the benefit of Lender, a security interest in all of its right, title and interest in, to and under the Collateral, including without limitation, the property listed on the attached SCHEDULE A, together with any renewal or extension thereof, and all Proceeds (as hereinafter defined) thereof, to secure the payment of the Obligations (as hereinafter defined); and WHEREAS, it is a condition precedent to the obligation of the Lender to make the Loan to Grantor under the Loan Agreement, that Grantor execute this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the premises and to induce Lender to enter into the Loan Agreement and to induce Lender to make the Loan to Grantor under the Loan Agreement, Grantor hereby agrees with Lender, as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms which are defined in the Loan Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "COLLATERAL" has the meaning assigned to it in Section 2 of this Security Agreement. SirromAgmts Page 61 "COPYRIGHTS" means all types of protective rights granted (or applications therefor) for any work that constitutes copyrightable subject matter, including without limitation, literary works, musical works, dramatic works, pictorial, graphic and sculptural works, motion pictures and other audiovisual works, sound recordings, architectural works, in any country of the world and including, without limitation, any works referred to in SCHEDULE A hereto. "COPYRIGHT LICENSE" means any agreement material to the operation of Grantor's businesses, whether written or oral, providing for the grant by or to Grantor of any right to reproduce a copyrighted work, to prepare derivative works based on a copyrighted work, to distribute copies of a copyrighted work, to perform a copyrighted work or to display a copyrighted work, or to engage in any other legally protected activity with respect to a copyrighted work including, without limitation, any thereof referred to in SCHEDULE A hereto. "INTELLECTUAL PROPERTY" means all Patent Applications, Patents, Patent Licenses, Trademark Applications, Trademarks, Trademark Licenses, Copyrights, Copyright Licenses, Trade Secrets, Inventions, Know-how and other proprietary property or technology, and agreements relating thereto, including, without limitation, any and all improvements and future developments material to the operation of Grantor's businesses, as defined herein and/or referred to in SCHEDULE A hereto. "INVENTION" means any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof that is material to the operation of Grantor's businesses and developed by Grantor, its employees or agents, whether or not the subject of Patent(s) or Patent Application(s). "KNOW-HOW" means any knowledge or information that is material to Grantor's business and that enables Grantor to operate its business with the accuracy, efficiency or precision necessary for commercial success, including, without limitation, any such knowledge or information referred to in SCHEDULE B hereto. "OBLIGATIONS" means (a) loans to be made concurrently or in connection with this Agreement or the Loan Agreement as evidenced by one or more promissory notes payable to the order of Lender that shall be due and payable as set forth in such promissory notes, and any renewals or extensions thereof, (b) the full and prompt payment and performance of any and all other indebtedness and other obligations of Grantor to Lender, direct or contingent (including but not limited to obligations incurred as endorser, guarantor or surety), however evidenced or denominated, and however and whenever incurred, including but not limited to indebtedness incurred pursuant to any present or future commitment of Lender to Grantor and (c) all future advances made by Lender for taxes, levies, insurance and preservation of the Collateral and all attorney's fees, court costs and expenses of whatever kind incident to the collection of any of said indebtedness or other obligations and the enforcement and protection of the security interest created under this Security Agreement. SirromAgmts Page 62 "OTHER PROPRIETARY PROPERTY" means all types of protectable intangible property rights other than Patents, Trademarks and Copyrights, including without limitation, Trade Secrets, Know-how, computer software and the like, including, without limitation, all such rights referred to in SCHEDULE B hereto. "PATENTS" means all types of exclusionary or protective rights granted (or applications therefor) for inventions in any country of the world (including, without limitation, letters patent, plant patents, utility models, breeders' right certificates, inventor's certificates and the like), and all reissues and extensions thereof and all provisionals, divisions, continuations and continuations-in-part thereof, including, without limitation, all such rights referred to in SCHEDULE A hereto. "PATENT LICENSE" means any agreement material to the operation of Grantor's business, whether written or oral, providing for the grant by or to Grantor of any right to manufacture, use or sell any Invention covered by a Patent, including, without limitation, any thereof referred to in SCHEDULE A hereto. "PROCEEDS" means "proceeds," as such term is defined in Section 9-306(1) of the UCC and, to the extent not included in such definition, shall include, without limitation, (a) any and all proceeds of any insurance, indemnity, warranty, guaranty or letter of credit payable to Grantor, from time to time with respect to any of the Collateral, (b) all payments (in any form whatsoever) paid or payable to Grantor from time to time in connection with any taking of all or any part of the Collateral by any governmental authority or any Person acting under color of governmental authority), (c) all judgments in favor of Grantor in respect of the Collateral and (d) all other amounts from time to time paid or payable or received or receivable under or in connection with any of the Collateral. "SECURITY AGREEMENT" means this Intellectual Property Security Agreement, as amended, supplemented or otherwise modified from time to time. "TRADE SECRET" means any scientific or technical information, design, process, pattern, procedure, formula or improvement which is secret and of value including, without limitation, any such information referred to in SCHEDULE B hereto. "TRADEMARKS" means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other sources of business identifiers used in any country in the world, whether registered or unregistered, and the goodwill associated therewith, now existing and material to the businesses of Grantor or hereafter SirromAgmts Page 63 acquired, and (b) all registrations, recordings and renewals thereof, and all applications in connection therewith, issued by or filed in a national, state or local governmental authority of any country, including, without limitation, all such rights referred to in SCHEDULE A hereto. "TRADEMARK LICENSE" means any agreement, material to the businesses of Grantor, written or oral, providing for the grant by or to Grantor of any right to use any Trademark, including, without limitation, any thereof referred to in SCHEDULE A hereto. "UCC" means the Uniform Commercial Code as from time to time in effect in the State of Tennessee. 2. GRANT OF SECURITY INTEREST. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, Grantor hereby assigns and grants to Lender for the benefit of Lender a security interest in all of Grantor's right, title and interest in and to the Intellectual Property now owned or at any time hereafter acquired by Grantor or in which Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), that are material to the business of Grantor, including all Proceeds and products of any and all of the Intellectual Property, whether or not included in SCHEDULE A or SCHEDULE B and excluding any rights in the Agreement between Universal Studios Licensing, Inc. and Dreams Franchise Corporation pursuant to which Dreams Franchise Corporation licenses certain rights to use the property "Field of Dreams". 3. Representations and Warranties Concerning the Intellectual Property. Grantor represents and warrants that: (a) SCHEDULE A and SCHEDULE B hereto include all Intellectual Property and Other Proprietary Property owned by Grantor in its own name or as to which Grantor has any colorable claim of ownership that are material to the business of Grantor as of the date hereof. (b) Grantor is the sole legal and beneficial owner of the entire right, title and interest in and to the Intellectual Property and the Other Proprietary Property, and/or has the unrestricted right to use all such Intellectual Property and Other Proprietary Property pursuant to a valid license or other agreement. (c) Grantor's rights in and to the Intellectual Property are valid, subsisting, unexpired, enforceable and have not been abandoned. SirromAgmts Page 64 (d) All licenses, franchise agreements and other agreements conveying rights in and to the Intellectual Property and Other Proprietary Property are identified on SCHEDULE A and SCHEDULE B hereto and are in full force and effect. To the best knowledge of Grantor, Grantor is not in default under any such agreement, and no event has occurred which might constitute a default by Grantor under any such agreement. (e) Except as set forth in SCHEDULE A and except for sublicenses granted by Grantor to franchisees in the ordinary course of business, all of the Intellectual Property is free and clear of any and all liens, security interests, options, licenses, pledges, assignments, encumbrances and/or agreements of any kind, and Grantor has not granted any release, covenant not to sue, or non- assertion assurance to any third party with respect to any of the Intellectual Property. (f) All prior transfers and assignments of the interests of any and all predecessors in the Intellectual Property of Grantor were duly and validly authorized, executed, delivered, recorded and filed as required to vest Grantor with complete, unrestricted ownership rights therein. (g) Except for sublicenses granted by Grantor to franchisees in the ordinary course of business, Grantor has not, within the three (3) months prior to the date of execution of this Agreement, executed and/or delivered any assignment, transfer or conveyance of any of the Intellectual Property, recorded or unrecorded. (h) No proceedings have been instituted or are pending or, to Grantor's knowledge, threatened that challenge Grantor's rights to use the Intellectual Property or Other Proprietary Property, or to register or maintain the registration of the Intellectual Property. No holding, decision or judgment has been rendered by any governmental authority which would limit, cancel or question the validity of any of the Intellectual Property. No action or proceeding is pending (i) seeking to limit, cancel or question the validity of any of the Intellectual Property or Grantor's ownership thereof or (ii) which, if adversely determined, would reasonably be likely to have a material adverse effect on the value of any of the Intellectual Property. (i) To the best of Grantor's knowledge, the current conduct of Grantor's business and Grantor's rights in and to all of the Intellectual Property and Other Proprietary Property do not conflict with or infringe any proprietary right of any third party in any way which adversely affects the business, financial condition or business prospects of Grantor. Further, except as set forth in SCHEDULE A and SCHEDULE B, Grantor is not aware of any claim by any third party that such conduct or such rights conflict with or infringe any SirromAgmts Page 65 valid proprietary right of any third party in any way which affects the business, financial condition or business prospects of Grantor. Grantor is not making and has not made use of any confidential information of any third party except pursuant to express agreement of such third party. (j) Except for infringing for uses of "Field of Dreams", Grantor is unaware of any infringement by any other party upon its Intellectual Property rights. Grantor has heretofore exerted, continues and affirmatively covenants that it will hereafter continue to exert commercially reasonable efforts to prevent any infringement by third parties of Grantor's Intellectual Property rights or any theft of Grantor's Other Proprietary Property at Grantor's sole cost. (k) All past and present employees of Grantor and/or parties with whom Grantor (including any predecessor-in-interest of Grantor) had any contractual relationship ("contractors"), whose employment (or contractual) functions included or affected research and development or other material aspects of Intellectual Property have executed agreements requiring them to disclose to Grantor any and all inventions created or developed during and within the scope of their employment by or contractual relationship with Grantor and obligating them to assign all of their respective right, title and interest in and to all such inventions to Grantor. 4. COVENANTS. Grantor covenants and agrees with Lender that, from and after the date of this Security Agreement until the Obligations are paid in full: (a) From time to time, upon the written request of Lender, and at the sole expense of Grantor, Grantor will promptly and duly execute and deliver such further instruments and documents and take such further action as Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Security Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the UCC in effect in any jurisdiction with respect to the liens created hereby. Grantor also hereby authorizes Lender to file any such financing or continuation statement without the signature of Grantor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Security Agreement shall be sufficient as a financing statement for filing in any jurisdiction. (b) Grantor will not create, incur or permit to exist, will take all commercially reasonable actions to defend the Collateral against, and will take such other commercially reasonable action as is necessary to remove, any lien or claim on or to the Collateral, other than the liens created hereby, and other than as permitted pursuant to the Loan Agreement, and will take all commercially SirromAgmts Page 66 reasonable actions to defend the right, title and interest of Lender in and to any of the Collateral against the claims and demands of all persons whomsoever. (c) Grantor will not sell, transfer, license or sub-license or otherwise dispose of any of the Collateral, or attempt, offer or contract to so do. (d) Grantor will advise Lender promptly, in reasonable detail, at its address set forth in the Loan Agreement, (i) of any lien (other than liens created hereby or permitted under the Loan Agreement) on, or claim asserted against, Collateral and (ii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the liens created hereunder. (e) (i) Grantor (either itself or through licensees) will, except with respect to any Trademark that Grantor shall reasonably determine is of immaterial economic value to it or otherwise reasonably determines not to so do, (A) continue to use each Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (B) maintain as in the past the quality of products and services offered under such Trademark, (C) use reasonable efforts to employ such Trademark with the appropriate notice of registration, (D) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless within thirty (30) days after such use or adoption Lender, for its benefit, shall obtain a perfected security interest in such mark pursuant to this Security Agreement, and (E) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (ii) Grantor will not, except with respect to any Patent that Grantor shall reasonably determine is of immaterial economic value to it or otherwise reasonably determine so to do, do any act, or omit to do any act, whereby any Patent may become abandoned or dedicated. Without the prior written consent of Lender, Grantor shall not abandon any right to file a patent application, or abandon any pending patent application or patent if such abandonment would have a material adverse effect on the business of Grantor. (iii) Grantor will promptly notify Lender if it knows, or has reason to know, that any application relating to any Patent, Trademark or Copyright may become abandoned or dedicated, or of any adverse determination or material development (including, without limitation, the institution of, or any SirromAgmts Page 67 such determination or development in, any proceeding in the United States Patent and Trademark office or any court or tribunal in any country) regarding Grantor's ownership of any Patent, Trademark or Copyright, or its right to register the same or to keep and maintain the same. (iv) Whenever Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for any Patent or for the registration of any Trademark or Copyright with the United States Patent and Trademark Office, the United States Copyright Office, or any similar office or agency in any other country or any political subdivision thereof, Grantor shall report such filing to Lender within five (5) business days after the last day of the fiscal quarter in which such filing occurs. Upon request of Lender, Grantor shall execute and deliver any and all reasonably necessary agreements, instruments, documents, and papers as Lender may request to evidence Lender's security interest in any newly filed Patent, Copyright or Trademark and the goodwill and general intangibles of Grantor relating thereto or represented thereby, and Grantor hereby constitutes Lender its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full. (v) Grantor, except with respect to any Patent, Trademark or Copyright Grantor shall reasonably determine is of immaterial economic value to it or it otherwise reasonably determines not to so do, will take all reasonable and necessary steps, including, without limitation, in any proceedings before any tribunal, office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration or Patent) and to maintain each Patent and each registration of Trademarks and Copyrights, including, without limitation, filing of applications, applications for reissue, renewal or extensions, the payment of maintenance fees, participation in reexamination, opposition and infringement proceedings, and the filing of renewal applications, affidavits of use and affidavits of incontestability, when appropriate. Any expenses incurred in connection with such activities shall be paid by Grantor. (vi) In the event Grantor knows or has reason to know that any Patent, Trademark or Copyright included in the Collateral is infringed, misappropriated or diluted by a third party, Grantor shall promptly notify Lender after it learns thereof and shall, unless Grantor shall reasonably determine that such Patent, Trademark or Copyright is of immaterial economic value to Grantor which determination Grantor shall promptly report to Lender, promptly sue for infringement, misappropriation or dilution, or take such other actions as Grantor shall reasonably deem appropriate under the circumstances to protect such Patent, Trademark or Copyright. SirromAgmts Page 68 (vii) Grantor will furnish to Lender each year upon request, on the anniversary date of the execution of this Agreement, statements, schedules and an inventory identifying and describing the Collateral, including without limitation, all Intellectual Property acquired subsequent to the date of this agreement and not identified on SCHEDULE A and SCHEDULE B, all transfers, assignments, licenses or sub-licenses of the Collateral by Grantor, and such other information in connection with the Collateral as Lender may reasonably request, all in reasonable detail. Any such Intellectual Property shall automatically become part of the Collateral. 5. Lender's Appointment as Attorney-in-Fact. (a) Grantor hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Grantor and in the name of Grantor or in its own name, from time to time after the occurrence, and during the continuation of, an Event of Default (as defined in the Loan Agreement) in Lender's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement, and, without limiting the generality of the foregoing, Grantor hereby grants Lender the power and right, on behalf of Grantor without notice to or assent by Grantor, to do the following: (i) at any time when any Event of Default shall have occurred and is continuing in the name of Grantor or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under, or with respect to, any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Lender for the purpose of collecting any and all such moneys due with respect to such Collateral whenever payable; (ii) to pay or discharge taxes and liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or part of the premiums therefor and the costs thereof; and (iii) (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to Lender or as Lender shall direct, (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising SirromAgmts Page 69 out of any Collateral, (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral, (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral, (E) to defend any suit, action or proceeding brought against Grantor with respect to any Collateral, (F) to settle, compromise or adjust any suit, action or proceeding described in the preceding clause and, in connection therewith, to give such discharges or releases as Lender may deem appropriate, (G) to assign any Trademark or Copyright (along with goodwill of the business to which such Trademark or Copyright pertains), throughout the world for such term or terms, on such conditions, and in such manner, as Lender shall in its sole discretion determine, and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and to do, at Lender's option and Grantor's expense, at any time, or from time to time, all acts and things which Lender deems necessary to protect, preserve or realize upon the Collateral and the liens of Lender thereon and to effect the intent of this Security Agreement, all as fully and effectively as Grantor might do. Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) Grantor also authorizes Lender, at any time and from time to time, to execute, in connection with the sale provided for in Section 8 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) The powers conferred on Lender hereunder are solely to protect the interests of Lender in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its partners, officers, directors, employees or agents shall be responsible to Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct or failure to comply with mandatory provisions of applicable law. 6. PERFORMANCE BY LENDER OF GRANTOR'S OBLIGATIONS. If Grantor fails to perform or comply with any of its agreements contained herein and Lender, as provided for by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, then the expenses of Lender incurred in connection with such performance or compliance, together with interest SirromAgmts Page 70 thereon at the highest default rate provided in the Note, shall be payable by Grantor to Lender on demand and shall constitute Obligations secured hereby. 7. PROCEEDS. It is agreed that if an Event of Default shall occur and be continuing, then (a) all Proceeds received by Grantor consisting of cash, checks and other cash equivalents shall be held by Grantor in trust for Lender, segregated from other funds of Grantor, and shall, forthwith upon receipt by Grantor, be turned over to Lender in the exact form received by Grantor (duly endorsed by Grantor to Lender, if required), and (b) any and all such Proceeds received by Lender (whether from Grantor or otherwise) shall promptly be applied by Lender against, the Obligations (whether matured or unmatured), such application to be in such order as set forth in the Loan Agreement. 8. REMEDIES UPON DEFAULT. Upon an Event of Default under and as defined in the Loan Agreement, Lender may pursue any or all of the following remedies, without any notice to Grantor except as required below: Lender may give written notice of default to Grantor, following which Grantor shall not dispose of, conceal, transfer, sell or encumber any of the Collateral (including, but not limited to, cash proceeds) without Lender's prior written consent, even if such disposition is otherwise permitted hereunder in the ordinary course of business. Any such disposition, concealment, transfer or sale after the giving of such notice shall constitute a wrongful conversion of the Collateral. Lender may obtain a temporary restraining order or other equitable relief to enforce Grantor's obligation to refrain from so impairing Lender's Collateral. Lender may take possession of any or all of the Collateral. Grantor hereby consents to Lender's entry into any of Grantor's premises to repossess Collateral, and specifically consents to Lender's forcible entry thereto as long as Lender causes no significant damage to the premises in the process of entry (drilling of locks, cutting of chains and the like do not in themselves cause "significant" damage for the purposes hereof) and provided that Lender accomplishes such entry without a breach of the peace. Lender may dispose of the Collateral at private or public sale. Any required notice of sale shall be deemed commercially reasonable if given at least five (5) days prior to sale. Lender may adjourn any public or private sale to a different time or place without notice or publication of such adjournment, and may adjourn any sale either before or after offers are received. The Collateral may be sold in such lots as Lender may elect, in its sole discretion. Lender may take such action as it may deem necessary to repair, protect, or maintain the Collateral pending its disposition. SirromAgmts Page 71 Lender may exercise its lien upon and right of setoff against any monies, items, credits, deposits or instruments that Lender may have in its possession and that belong to Grantor or to any other person or entity liable for the payment of any or all of the Obligations. Lender may exercise any right that it may have under any other document evidencing or securing the Obligations or otherwise available to Lender at law or equity. 9. LIMITATION ON DUTIES REGARDING PRESERVATION OF COLLATERAL. Lender's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as Lender would deal with similar property for its own account. Neither Lender nor any of its partners, directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Grantor or otherwise. 10. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 11. SEVERABILITY. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12. SECTION HEADINGS. The section headings used in this Security Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 13. NO WAIVER: CUMULATIVE REMEDIES. Lender shall not by any act (except by a written instrument pursuant to Section 14 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by Lender of any right or remedy hereunder on any occasion shall not be construed as a bar to any right or remedy which Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. SirromAgmts Page 72 14. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS. None of the terms or provisions of this Security Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by Grantor and Lender, provided that any provision of this Security Agreement may be waived by Lender in a written letter or agreement executed by Lender or by facsimile transmission from Lender. This Security Agreement shall be binding upon the successors and assigns of Grantor and shall inure to the benefit of Lender and its successors and assigns. 15. NOTICES. Any and all notices, elections or demands permitted or required to be made under this Security Agreement shall be in writing, signed by the party giving such notice, election or demand and shall be delivered personally, telecopied, or sent by certified mail or overnight via nationally recognized courier service (such as Federal Express), to the other party at the address set forth below, or at such other address as may be supplied in writing and of which receipt has been acknowledged in writing. The date of personal delivery or telecopy or two (2) business days after the date of mailing (or the next business day after delivery to such courier service), as the case may be, shall be the date of such notice, election or demand. For the purposes of this Security Agreement: The Address of Lender is: Sirrom Investments, Inc. Suite 200 500 Church Street Nashville, TN 37219 Attention: John Kirks Telecopy No.: 615/726-1208 with a copy to: Chambliss, Bahner & Stophel, P.C. 1000 Tallan Building Two Union Square Chattanooga, TN 37402 Attention: J. Patrick Murphy, Esq. Telecopy No.: 423/265-9574 The Address of Grantor is: Dreams, Inc. Dreams Franchise Corporation Dreams Entertainment, Inc. Dreams Products, Inc. 42-620 Caroline Court Palm Desert, CA 92211 Attention: Sam D. Battistone Telecopy No.: 760/779-0217 SirromAgmts Page 73 with a copy to: Hunter & Brown One Utah Center 201 South Main Street, Suite 1300 Salt Lake City, UT 84111-2215 Attention: J. Scott Hunter Telecopy No.: 801/532-8736 and to: Navon, Kopelman, O'Donnell & Lavin, P.A. 2699 Stirling Road, Suite B-100 Ft. Lauderdale, FL 33312 Attention: Sam D. Navon Telecopy No.: 954/983-7021 16. GOVERNING LAW. This Security Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Tennessee applicable to contracts to be wholly performed in such State, or to the extent required, by federal law. 17. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties to this Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 18. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Grantor hereby irrevocably consents to the Jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Security Agreement or the Obligation. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. 19. WAIVER OF TRIAL BY JURY. LENDER AND GRANTOR HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN DOCUMENTS. SirromAgmts Page 74 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed and delivered as of the date first above written. GRANTOR: DREAMS, INC., a Utah corporation By: -------------------------------- Title: ----------------------------- DREAMS FRANCHISE CORPORATION, a California corporation By: -------------------------------- Title: ----------------------------- DREAMS ENTERTAINMENT, INC., a Utah corporation By: -------------------------------- Title: ----------------------------- DREAMS PRODUCTS, INC., a Utah corporation By: -------------------------------- Title: ----------------------------- LENDER: SIRROM INVESTMENTS, INC., a Tennessee corporation By: -------------------------------- Title: ----------------------------- SirromAgmts Page 75 SCHEDULE A SirromAgmts Page 76 SCHEDULE B SirromAgmts Page 77 PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT ("Agreement"), dated ____________, 1998, is made by and between DREAMS, INC., a Utah corporation ("Borrower") and SIRROM INVESTMENTS, INC., Tennessee corporation with its principal office and place of business in Nashville, Tennessee ("Lender"). RECITALS: WHEREAS, pursuant to that certain Loan Agreement of even date herewith, by and between Borrower and Lender, as amended, modified or extended from time to time (the "Loan Agreement"), Lender has made a loan to Borrower in the original principal amount of $3,000,000 (the "Loan"). The Loan is evidenced by a Secured Promissory Note of even date herewith, in the amount of the Loan, made and executed by Borrower, payable to the order of Lender (herein referred to, together with any extensions, modifications, renewals and/or replacements thereof, as the "Note"); and WHEREAS, it is a condition of Lender's agreement to make the Loan to Borrower that Borrower execute and deliver this Agreement to Lender. AGREEMENT: NOW THEREFORE, in consideration of the foregoing, and to enable Borrower to obtain the Loan and to induce Lender to make the Loan and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree as follows: 1. PLEDGE. As collateral security for the payment and performance in full of the Obligations (as defined in the Loan Agreement), Borrower hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto Lender, and hereby grants to Lender a security interest in, the collateral described in SCHEDULE 1 hereto, together with (i) all other shares of stock of the issuer(s) of such pledged securities of any class or category, which are now or hereafter owned by Borrower and (ii) the proceeds thereof and all cash, additional securities or other property at any time and from time to time receivable or otherwise distributable in respect of, in exchange for, or in substitution for any and all such pledged securities (all such pledged securities, the proceeds thereof, cash, dividends, additional securities and other property now or hereafter pledged hereunder are hereinafter collectively referred to as the "Pledged Securities"); SirromAgmts Page 78 TO HAVE AND TO HOLD the Pledged Securities, together with all rights, titles, interests, powers, privileges and preferences pertaining or incidental thereto, unto Lender, its successors and assigns, subject to the terms, covenants and conditions hereinafter set forth. Upon delivery to Lender, the Pledged Securities shall be accompanied by executed stock powers in blank and by such other instruments or documents as Lender or its counsel may reasonably request. Each delivery of certificates for such Pledged Securities shall be accompanied by a schedule showing the number of shares and the numbers of the certificates theretofore and then pledged hereunder, which schedule shall be attached hereto as SCHEDULE 1 and made a part hereof. Each schedule so delivered shall supersede any prior schedule so delivered. In the event that additional securities of the issuers listed on SCHEDULE 1 are issued to Pledgor, Pledgor agrees to promptly deliver the certificates representing such securities together with stock powers endorsed in blank, to Lender as part of the collateral pledged hereunder and such securities shall constitute part of the Pledged Securities. 2. OBLIGATIONS SECURED. This Agreement is made, and the security interest created hereby is granted to Lender, to secure prompt payment of the Obligations (as defined in the Loan Agreement) and the prompt performance of each of the covenants and duties of Borrower under the Loan Documents (as defined in the Loan Agreement). 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Lender (a) that Borrower is the legal and equitable owner of the Pledged Securities, (b) that Borrower has the complete and unconditional authority to pledge the Pledged Securities being pledged by it, and holds the same free and clear of all liens, charges, encumbrances and security interests of every kind and nature, (c) that any consent or approval of any governmental body or regulatory authority, or of any other party, that was or is necessary to the validity of this pledge, has been obtained, and (d) that the Pledged Securities are not subject to any limitations, restrictions, or obligations pursuant to any shareholder agreement, voting trust agreement or similar instrument. 4. REGISTRATION IN NOMINEE NAME; DENOMINATIONS. Lender shall have the right (in its sole and absolute discretion) to hold the certificates representing the Pledged Securities in its own name or in the name of the Borrower, endorsed or assigned in blank or in favor of Lender. Upon request and delivery of certificates representing the Pledged Securities to the issuer of the Pledged Securities, Lender may have such Pledged Securities registered in the name of Lender or any nominee or nominees of Lender. Lender shall at all times have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Agreement. SirromAgmts Page 79 5. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default under and as defined in the Loan Agreement, then, and in any such event, Lender shall have all of the rights, privileges and remedies of a secured party under the Uniform Commercial Code as in effect in the State of Tennessee, and without limiting the foregoing, Lender may (a) collect any and all amounts payable in respect of the Pledged Securities and exercise any and all rights, privileges, options and remedies of the holder and owner thereof, and (b) sell, transfer and/or negotiate the Pledged Securities, or any part thereof, at public or private sale, for cash, upon credit or for future delivery, as Lender shall deem appropriate, including without limitation, at Lender's option, the purchase of all or any part of the Pledged Securities at any public sale by Lender. Upon consummation of any sale, Lender shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Pledged Securities so sold. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of the Borrower, and the Borrower hereby waives (to the extent permitted by law) all rights of redemption, stay or appraisal that Borrower now has or may at any time in the future have under any rule of law or statute now existing or hereinafter enacted. Borrower hereby expressly waives notice to redeem and notice of the time, place and manner of such sale. 6. APPLICATION OF PROCEEDS. The proceeds of the sale of Pledged Securities sold pursuant to Section 5 hereof, and the proceeds of the exercise of any of Lender's other remedies hereunder, shall be applied by Lender in the manner set forth in the Loan Agreement. 7. REIMBURSEMENT OF LENDER. Borrower agrees to reimburse Lender, upon demand, for all expenses, including without limitation reasonable attorneys' fees, incurred by it in connection with the administration and enforcement of this Agreement, and agrees to indemnify Lender and hold it harmless from and against any and all liability incurred by it hereunder or in connection herewith, unless such liability shall be due to willful misconduct or gross negligence on the part of Lender. 8. NO WAIVER. No failure on the part of Lender to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by Lender preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies are cumulative and are not exclusive of any other remedies provided by law. 9. LIMITATION OF LENDER LIABILITY. Except in the case of their wilful misconduct or gross negligence, neither Lender nor its officers, employees, agents, representatives or nominees shall be liable for any loss incurred by Borrower arising out of any act or omission of Lender, its officers, employees, agents, representatives or nominees, with respect to the care, custody or preservation of the Pledged Securities. SirromAgmts Page 80 10. BINDING AGREEMENT. This Agreement and the terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the parties hereto and to all holders of the Obligations and their respective successors and assigns. 11. GOVERNING LAW; AMENDMENTS. This Agreement shall in all respects be construed in accordance with and governed by the laws of the State of Tennessee applicable to contracts to be wholly performed in such state. This Agreement may not be amended or modified, nor may any of the Pledged Securities be released except in a writing signed by the parties hereto. Time is of the essence with respect to the obligations of Borrower pursuant to this Agreement. 12. FURTHER ASSURANCES. Borrower agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments, as Lender may at any time request in connection with the administration and enforcement of this Agreement or relative to the Pledged Securities or any part thereof or in order to better assure and confirm unto Lender its rights and remedies hereunder. 13. HEADINGS. Section numbers and headings used herein are for convenience only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 14. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties to this Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 15. VOTING. As long as no Event of Default shall have occurred and be continuing, Borrower shall be entitled to exercise all voting and consensual powers with respect to the Pledged Securities. Immediately and without further notice to Borrower, upon the occurrence of any Event of Default, Lender shall have the right, at its election, to exercise all voting and consensual rights with respect to the Pledged Securities, and Borrower shall exercise and deliver to Lender such proxies as shall be necessary to permit Lender's exercise of such voting and consensual rights. 16. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Borrower hereby irrevocably consents to the Jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Agreement or the Obligations. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. SirromAgmts Page 81 17. WAIVER OF TRIAL BY JURY. LENDER AND BORROWER HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN DOCUMENTS. IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement, or have caused this Agreement to be duly executed by a duly authorized officer, all as of the day first above written. BORROWER: DREAMS, INC., a Utah corporation By: ---------------------------- Title: ------------------------- LENDER: SIRROM INVESTMENTS, INC., a Tennessee corporation By: ---------------------------- Title: ------------------------- SirromAgmts Page 82 The undersigned hereby acknowledges and confirms that the necessary changes and registrations on the books of the undersigned have been made to reflect the pledge of the Pledged Securities under the Pledge Agreement. In particular, the undersigned acknowledges and confirms that Lender has been designated as the only registered pledgee of the Pledged Securities. DREAMS FRANCHISE CORPORATION By: ---------------------------- Title: ------------------------- The undersigned hereby acknowledges and confirms that the necessary changes and registrations on the books of the undersigned have been made to reflect the pledge of the Pledged Securities under the Pledge Agreement. In particular, the undersigned acknowledges and confirms that Lender has been designated as the only registered pledgee of the Pledged Securities. DREAMS ENTERTAINMENT, INC. By: ---------------------------- Title: ------------------------- SiiromAgmts Page 83 SCHEDULE 1 PLEDGED SECURITIES
No. of Certificate Nos. Issuer Shares Class - ----------------------- --------------- ---------- -------------------- 1. Dreams Franchise Corporation 2. Dreams Entertainment, Inc.
SirromAgmts Page 84 PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT ("Agreement"), dated ____________, 1998, is made by and between DREAMS FRANCHISE CORPORATION, a California corporation ("Borrower") and SIRROM INVESTMENTS, INC., Tennessee corporation with its principal office and place of business in Nashville, Tennessee ("Lender"). RECITALS: WHEREAS, pursuant to that certain Loan Agreement of even date herewith, by and between Borrower and Lender, as amended, modified or extended from time to time (the "Loan Agreement"), Lender has made a loan to Borrower in the original principal amount of $3,000,000 (the "Loan"). The Loan is evidenced by a Secured Promissory Note of even date herewith, in the amount of the Loan, made and executed by Borrower, payable to the order of Lender (herein referred to, together with any extensions, modifications, renewals and/or replacements thereof, as the "Note"); and WHEREAS, it is a condition of Lender's agreement to make the Loan to Borrower that Borrower execute and deliver this Agreement to Lender. AGREEMENT: NOW THEREFORE, in consideration of the foregoing, and to enable Borrower to obtain the Loan and to induce Lender to make the Loan and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree as follows: 1. PLEDGE. As collateral security for the payment and performance in full of the Obligations (as defined in the Loan Agreement), Borrower hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto Lender, and hereby grants to Lender a security interest in, the collateral described in SCHEDULE 1 hereto, together with (i) all other shares of stock of the issuer(s) of such pledged securities of any class or category, which are now or hereafter owned by Borrower and (ii) the proceeds thereof and all cash, additional securities or other property at any time and from time to time receivable or otherwise distributable in respect of, in exchange for, or in substitution for any and all such pledged securities (all such pledged securities, the proceeds thereof, cash, dividends, additional securities and other property now or hereafter pledged hereunder are hereinafter collectively referred to as the "Pledged Securities"); SirromAgmts Page 85 TO HAVE AND TO HOLD the Pledged Securities, together with all rights, titles, interests, powers, privileges and preferences pertaining or incidental thereto, unto Lender, its successors and assigns, subject to the terms, covenants and conditions hereinafter set forth. Upon delivery to Lender, the Pledged Securities shall be accompanied by executed stock powers in blank and by such other instruments or documents as Lender or its counsel may reasonably request. Each delivery of certificates for such Pledged Securities shall be accompanied by a schedule showing the number of shares and the numbers of the certificates theretofore and then pledged hereunder, which schedule shall be attached hereto as SCHEDULE 1 and made a part hereof. Each schedule so delivered shall supersede any prior schedule so delivered. In the event that additional securities of the issuers listed on SCHEDULE 1 are issued to Pledgor, Pledgor agrees to promptly deliver the certificates representing such securities together with stock powers endorsed in blank, to Lender as part of the collateral pledged hereunder and such securities shall constitute part of the Pledged Securities. 2. OBLIGATIONS SECURED. This Agreement is made, and the security interest created hereby is granted to Lender, to secure prompt payment of the Obligations (as defined in the Loan Agreement) and the prompt performance of each of the covenants and duties of Borrower under the Loan Documents (as defined in the Loan Agreement). 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Lender (a) that Borrower is the legal and equitable owner of the Pledged Securities, (b) that Borrower has the complete and unconditional authority to pledge the Pledged Securities being pledged by it, and holds the same free and clear of all liens, charges, encumbrances and security interests of every kind and nature, (c) that any consent or approval of any governmental body or regulatory authority, or of any other party, that was or is necessary to the validity of this pledge, has been obtained, and (d) that the Pledged Securities are not subject to any limitations, restrictions, or obligations pursuant to any shareholder agreement, voting trust agreement or similar instrument. 4. REGISTRATION IN NOMINEE NAME; DENOMINATIONS. Lender shall have the right (in its sole and absolute discretion) to hold the certificates representing the Pledged Securities in its own name or in the name of the Borrower, endorsed or assigned in blank or in favor of Lender. Upon request and delivery of certificates representing the Pledged Securities to the issuer of the Pledged Securities, Lender may have such Pledged Securities registered in the name of Lender or any nominee or nominees of Lender. Lender shall at all times have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Agreement. 5. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default under and as defined in the Loan Agreement, then, and in any such event, Lender shall have all of the rights, privileges and remedies of a secured party under the Uniform Commercial Code as in effect in the SirromAgmts Page 86 State of Tennessee, and without limiting the foregoing, Lender may (a) collect any and all amounts payable in respect of the Pledged Securities and exercise any and all rights, privileges, options and remedies of the holder and owner thereof, and (b) sell, transfer and/or negotiate the Pledged Securities, or any part thereof, at public or private sale, for cash, upon credit or for future delivery, as Lender shall deem appropriate, including without limitation, at Lender's option, the purchase of all or any part of the Pledged Securities at any public sale by Lender. Upon consummation of any sale, Lender shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Pledged Securities so sold. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of the Borrower, and the Borrower hereby waives (to the extent permitted by law) all rights of redemption, stay or appraisal that Borrower now has or may at any time in the future have under any rule of law or statute now existing or hereinafter enacted. Borrower hereby expressly waives notice to redeem and notice of the time, place and manner of such sale. 6. APPLICATION OF PROCEEDS. The proceeds of the sale of Pledged Securities sold pursuant to Section 5 hereof, and the proceeds of the exercise of any of Lender's other remedies hereunder, shall be applied by Lender in the manner set forth in the Loan Agreement. 7. REIMBURSEMENT OF LENDER. Borrower agrees to reimburse Lender, upon demand, for all expenses, including without limitation reasonable attorneys' fees, incurred by it in connection with the administration and enforcement of this Agreement, and agrees to indemnify Lender and hold it harmless from and against any and all liability incurred by it hereunder or in connection herewith, unless such liability shall be due to willful misconduct or gross negligence on the part of Lender. 8. NO WAIVER. No failure on the part of Lender to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by Lender preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies are cumulative and are not exclusive of any other remedies provided by law. 9. LIMITATION OF LENDER LIABILITY. Except in the case of their wilful misconduct or gross negligence, neither Lender nor its officers, employees, agents, representatives or nominees shall be liable for any loss incurred by Borrower arising out of any act or omission of Lender, its officers, employees, agents, representatives or nominees, with respect to the care, custody or preservation of the Pledged Securities. 10. BINDING AGREEMENT. This Agreement and the terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the parties hereto and to all holders of the Obligations and their respective successors and assigns. SirromAgmts Page 87 11. GOVERNING LAW; AMENDMENTS. This Agreement shall in all respects be construed in accordance with and governed by the laws of the State of Tennessee applicable to contracts to be wholly performed in such state. This Agreement may not be amended or modified, nor may any of the Pledged Securities be released except in a writing signed by the parties hereto. Time is of the essence with respect to the obligations of Borrower pursuant to this Agreement. 12. FURTHER ASSURANCES. Borrower agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments, as Lender may at any time request in connection with the administration and enforcement of this Agreement or relative to the Pledged Securities or any part thereof or in order to better assure and confirm unto Lender its rights and remedies hereunder. 13. HEADINGS. Section numbers and headings used herein are for convenience only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 14. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties to this Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 15. VOTING. As long as no Event of Default shall have occurred and be continuing, Borrower shall be entitled to exercise all voting and consensual powers with respect to the Pledged Securities. Immediately and without further notice to Borrower, upon the occurrence of any Event of Default, Lender shall have the right, at its election, to exercise all voting and consensual rights with respect to the Pledged Securities, and Borrower shall exercise and deliver to Lender such proxies as shall be necessary to permit Lender's exercise of such voting and consensual rights. 16. CONSENT TO JURISDICTION; EXCLUSIVE VENUE. Borrower hereby irrevocably consents to the Jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Agreement or the Obligations. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. 17. WAIVER OF TRIAL BY JURY. LENDER AND BORROWER HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN DOCUMENTS. SirromAgmts Page 88 IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement, or have caused this Agreement to be duly executed by a duly authorized officer, all as of the day first above written. BORROWER: DREAMS FRANCHISE CORPORATION, INC., a California corporation By: ---------------------------- Title: ------------------------- LENDER: SIRROM INVESTMENTS, INC., a Tennessee corporation By: ---------------------------- Title: ------------------------- SirromAgmts Page 89 The undersigned hereby acknowledges and confirms that the necessary changes and registrations on the books of the undersigned have been made to reflect the pledge of the Pledged Securities under the Pledge Agreement. In particular, the undersigned acknowledges and confirms that Lender has been designated as the only registered pledgee of the Pledged Securities. DREAMS PRODUCTS, INC. By: ---------------------------- Title: ------------------------- SirromAgmts Page 90 SCHEDULE 1 PLEDGED SECURITIES
No. of Certificate Nos. Issuer Shares Class - ------------------------- ------------ ----------- ------------------- 1. Dreams Products, Inc.
SirromAgmts Page 91 EX-6.II 5 EXHIBIT 6(II) EXHIBIT 6(ii) Ross Tannenbaum Employment Agreement Employment Agreement EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (THE "Agreement"), dated as of the 10th day of November, 1998, is between Dreams, Inc., a Utah corporation (the "Company") and Ross Tannenbaum (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 60th 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 Vice- President to exercise and faithfully perform to the best of his ability on behalf of Company such duties as shall be determined by the Board of Directors of the Company, and as same may be modified from time to time. 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 performance of duties under this Agreement and do not violate the provisions of Section 3.1. 2. COMPENSATION. 2.1 BASE SALARY. Company shall pay Employee Two Hundred Fifty Thousand and No/100 Dollars ($250,000) per calendar year, payable semi- monthly, subject, however, to the "EBITA" (as hereinafter defined) adjustment. Notwithstanding the foregoing, commencing as of April 1, 2000, and on April 1st of each and every calendar year thereafter during the Term of Employment, in the event that the Company's EBITA for the immediately preceding fiscal year is: (a) less than One Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00), then for the fiscal year then in question (commencing April 1, 2000 through March 31, 2001), the base salary shall be Two Hundred Thousand and No/100 Dollars ($200,000.00), payable semi-monthly; or (b) equal to or greater than One Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00), then for the fiscal year then in question (commencing April 1, 2000 through March 31, 2001), the base salary shall Employment Agmt Page 1 be Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), payable semi-monthly. For purposes of this Agreement, the term "EBITA" shall mean net income plus interest expense, plus income tax, plus depreciation expenses, plus amortization expenses, all determined in accordance with generally accepted accounting principles, all as set forth in the Company's audited financial statements. 2.2 HEALTH INSURANCE. The Company shall provide health, medical and dental care insurance coverage for Employee and his dependents in amounts and coverage equivalent to the greater of the amount and coverage previously provided to Employee by his previous employer, Mounted Memories, Inc., or the insurance benefits and coverage provided by the Company in its health insurance coverage provided for other Company officers. 2.3 AUTOMOBILE ALLOWANCE. Company shall reimburse Employee or otherwise provide Employee an automobile allowance in the amount of Eight Hundred and No/100 dollars ($800.00) per month and a reimbursement for all insurance, fuel, maintenance, cellular and mobile telephones, repairs and upkeep therefor. The automobile allowance shall increase effective immediately preceding the adjustment then in question by a ratio of the "Index" (as hereinafter defined) for the month of November preceding the year of the date of adjustment then in question divided by the Index for the month of November of 1997. The "Index" shall mean the index numbers of retail commodity prices designated "Revised Consumer Price Index for all Urban Consumers - U.S. City Average - All Items (1982-1984=100) Prepared by the Bureau of Labor Statistics of the United States Department of Labor". In the event such Index is not published, then an index most comparable to the commodity index published shall be utilized. 2.4 DISABILITY AND LIFE INSURANCE. (a) Company shall pay for or reimburse Employee the cost of a disability insurance policy which shall provide the highest rate of compensation then available, but in no event less than Two Hundred Thousand and No/100 Dollars ($200,000.00) per year, a ninety (90) day waiting period, and benefits payable through the age of seventy-five (75). (b) Company shall pay for or reimburse Employee for a life insurance policy which will provide a death benefit in the amount of Two Million and No/100 Dollars ($2,000,000.00), which shall contain a cost of living adjustment endorsement for each calendar year during the term of this Agreement. Employment Agmt Page 2 (c) Provided, however, that the total annual cost of such disability and life insurance coverage for Employee to be paid by the Company shall not exceed Two Thousand Dollars ($2,000) per year. Any cost of such insurance in excess of $2,000 per year shall be paid by Employee. 2.5 DIRECTORS' AND OFFICERS' INSURANCE. At such time as it becomes available and economically feasible, Company will maintain director's and officers' insurance in sufficient amounts to insure against the personal liability of the Employee as a director of the Company for certain losses resulting from claims brought against directors and officers because of their alleged wrongful acts. 2.6 VACATION. The Employee shall be entitled to a four (4) week vacation each calendar year during the term of this Agreement. 2.7 BENEFITS. In addition to the other provisions of Section 2 set forth above, Company shall provide to Employee all other standard benefits and perquisites as are provided for other Company officers, directors and employees. 2.8 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. 2.9 EXPENSES. Employee is authorized to incur reasonable expenses for the business of company which are necessary for the promotion of Company's business and similar expenses that assist Employee in the performance of his duties hereunder. 2.10 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, provided, however, that nay previously earned compensation shall be paid by Company to Employee in accordance with the terms and provisions of this Agreement. 3. DISCLOSURE OF INFORMATION. 3.1 DISCLOSURE OF INFORMATION. The Employee recognizes and acknowledges that the confidential, proprietary information of the Company, and other intellectual property of this Company including contacts made prior to the commencement of this Agreement and those 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 Employment Agmt Page 3 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 (except the Company or its affiliates) under any circumstances, during or after the Term of Employment. 3.2 INJUNCTIVE RELIEF. If there is a breach or threatened breach of the provisions of Section 3.1 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. 3.3 EVENTS OF DEFAULT BY COMPANY. In the event of a breach or default by the Company hereunder, which results in Employee not receiving base salary (as set forth in Paragraph 2.1 above), for any reason and for a period of ninety (90) consecutive days, which reasons include, but are not limited to, the failure of the Company to pay to Employee the base salary while Employee remains in the employ of the Company or Employee ceases to be employed by the Company directly as a result of such breach or default by the Company, then the provisions of this Section 3 shall be void and of no further force or effect. 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 breach of any material covenant of this Agreement; (iii) habitual or repeated non-performance of material duties. However, with regard to (ii) and (iii) above, "cause" shall not have occurred until Company notifies Employee of such event, in writing, and Employee shall not have cured such event within a period of fifteen (15) days after receipt of such Employment Agmt Page 4 written notice, provided however, in the event such cure cannot be reasonably completed within said fifteen (15) day period, Employee shall have the right to commence to cure such event and diligently pursue such cure to completion. (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 if 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. (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. Employment Agmt Page 5 (f) MODIFICATION. This Agreement may not be modified except by an instrument in writing signed by the parties hereto. (g) GOVERNING LAW. This Agreement shall be interpreted, construed and enforced according to the laws of the State of Florida. Venue with respect to any litigation regarding this Agreement shall only be permitted in the Seventeenth Judicial Circuit in and for Broward County, Florida. (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 reasonable attorneys' fees and costs through all trial and appellate levels. (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. 42620 Caroline Court Palm Desert, CA 92211 Employee: Ross Tannenbaum 10520 Paris Street Cooper City, FL 33026 (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. Employment Agmt Page 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first set forth above. COMPANY: DREAMS, INC., a Utah corporation By: ---------------------------- Its: Secretary EMPLOYEE: ------------------------------- Ross Tannenbaum Employment Agmt Page 7 EX-6.III 6 EXHIBIT 6(III) EXHIBIT 6(iii) Merchandise License Agreement Merchandise License Agreement MERCHANDISING LICENSE AGREEMENT PRINCIPAL TERMS This Merchandising License agreement, consisting of (i) these Principal Terms (of which Schedule I attached hereto and incorporated herein is a part) and (ii) the Standard Terms and Conditions attached hereto and incorporated herein by this reference ("Standard Terms") (collectively the "Agreement"), dated May 22, 1991 ("Agreement Date"), is entered into between MERCHANDISING CORPORATION OF AMERICA, INC., 100 Universal City Plaza, Universal City, California 91608 ("Licensor") and SPORTS ARCHIVES, INC. 73-199 El Paseo, Suite A, Palm Desert, California 90060, ("Licensee"). WHEREAS, Licensor owns, controls or is authorized by the owner of the Licensed Elements (as herein defined) (the "Property Owner") to grant to third parties the right to use and exploit the Licensed Elements in connection with merchandising activities in accordance with the terms of this Agreement; and WHEREAS, Licensor desires to license to Licensee, and Licensee desires to license from Licensor, certain rights in and to the Licensed Elements in accordance with the terms of this Agreement; NOW, THEREFORE, in consideration of the mutual promises herein contained, it is agreed as follows: I. DEFINITIONS. Capitalized terms not defined herein are as defined on Schedule I or in the Standard Terms. II. GRANT OF LICENSE. (a) Subject to and in accordance with the provisions of this Agreement, including without limitation Schedule I hereto and the Standard Terms, Licensor hereby grants to Licensee: (i) the exclusive right to use and display the "Field of Dreams" service mark, during the Term described on Schedule I, to identify Licensee-owned retail stores in the Territory which offer and sell sports-related or celebrity-oriented merchandise and collectibles; License Agmt Page 1 (ii) the exclusive right to sublicense to franchisees the right to use and display the "Field of Dreams" service mark, during the Term, to identify franchised retail stores in the Territory which offer and sell sports-related or celebrity-oriented merchandise and collectibles; (iii) the non-exclusive right to affix the "Field of Dreams" trademark to Licensed Articles manufactured by Licensee or third party manufacturers which have been approved by Licensor, during the Term, which Licensed Articles shall be sold by Licensee only in Licensee-owned and franchised "Field of Dreams" retail stores or through mail order catalogs distributed by Licensee or its franchisees solely within the Territory; (iv) the exclusive right to use and display the "Field of Dreams" marks, during the Term, to advertise and promote franchises for "Field of Dreams" retail stores; and (v) the exclusive right to use and display, and sublicense franchisees to use and display, during the Term, the "Field of Dreams" marks in connection with the operation of Licensee-owned and franchisee-owned "Field of Dreams" retail stores, and advertising and promotional activities pertaining thereto, and on mail order catalogs distributed solely within the Territory. (b) The parties agree that Licensor has not prescribed and shall not provide Licensee with any marketing plan or system relating to the retail stores or catalog sales business to be conducted by the Licensee or its franchisees, nor shall Licensor provide any services or assistance to Licensee, or any franchisee, in connection therewith. Licensee shall be free to operate and license others to operate such retail stores and catalog sales businesses in accordance with Licensee's own advertising, marketing and operational systems, techniques, methods and plans, subject only to the limited controls set forth herein, which the parties acknowledge are necessary in order for Licensor to protect its interests in its trademarks, service marks, and copyrights. All offers and sales of franchises by Licensee, and all marketing conducted in connection therewith, shall be conducted by Licensee in its own name and on its own behalf, and in no event shall Licensee offer or sell, or purport to offer or sell, franchises in the name or on behalf of Licensor. Licensor in no event shall be obligated participate in any way with Licensee in connection with any franchising activities that Licensee may undertake or be characterized as a "franchisor" or "master franchisor" in any agreement or disclosure document used by Licensee. Without limiting the generality of the foregoing, Licensor shall not be obligated to submit to any state or federal agency, or provide to Licensee for its submission to any state or federal agency, any registration application or other filing, financial statements, biographical or other information concerning Licensor's officers, directors or other personnel, or otherwise assist Licensee in any way in connection with its submission or prosecution of franchise registration applications, and in License Agmt Page 2 no event shall Licensor be required to assume or undertake any obligation or liability to any franchisee or take any action which would expose Licensor to any obligation or liability to any of Licensee's franchisees. Licensee shall be solely responsible for ,and shall bear all costs and expenses associated with, compliance with all applicable franchise laws, rules and regulations, and shall reimburse Licensor for any costs or expenses it may incur in connection therewith. III. OPERATION OF AGREEMENT. This Agreement and the License herein granted shall become effective upon Licensor receiving a signed copy of these Principal Terms from Licensee and Licensor countersigning same, and the satisfaction of any other conditions precedent set forth herein or in the Standard Terms. In the event of any inconsistency between these Principal Terms and the Standard Terms, the Principal Terms shall control. In the case of any inconsistency between these Principal Terms and Schedule I, Schedule I shall control. IV. SPECIAL PROVISIONS. A. Nothing herein grants Licensee, or any franchisee, any right to use the names or likenesses of any actor or celebrity, including any actor or celebrity who appeared in the "Field of Dreams" motion picture. B. Neither Licensee, nor any franchisee, shall have the right to use the Property in whole or in part as its business name. C. Licensee and its franchisees may sell Licensed Articles on a "return" basis provided that such returns shall not reduce the Royalty payable to Licensor. D. Notwithstanding the Standard Terms, Licensor hereby consents (i) to the transfer of the outstanding shares of Licensee to Stratamerica Corporation and (ii) to the merger of Licensee, within six (6) months following the date on which this Agreement is executed, with a newly incorporated Utah or Delaware corporation, wholly owned by Stratamerica Corporation; provided that such surviving newly incorporated corporation shall thereupon assume and become responsible for all obligations of Licensee to Licensor. V. RIGHT OF FIRST REFUSAL. Provided that Licensee fully complies with its obligations under this Agreement, Licensor shall not open or sublicense any third party to open "Field of Dreams" retail locations in any geographic area outside the Territory unless Licensor shall have allowed Licensee a right of first refusal, exercisable strictly in the following manner: License Agmt Page 3 (a) If Licensor shall decide to license any third party to open "Field of Dreams" retail locations in any geographic area outside the Territory (the "Additional Territory"), Licensor first shall deliver to Licensee a written notice (the "Notice") setting forth the following information: (i) A description of the proposed Additional Territory; (ii) The amount of the initial license fee required to be paid to Licensor, and the amount or method of calculating any required continuing royalty to Licensor; and (iii) The minimum number of stores that the licensee must commit to open and the period of time during which such total number of stores must be opened. (b) If Licensee desires to undertake to develop the Additional Territory, it must within ten (10) days after Licensor's delivery of the Notice, notify Licensor in writing that it desires to undertake such development upon the terms set forth in the Notice (the "Exercise Notice"), and shall deliver to Licensor a non-refundable advance against the initial license fee equal to ten thousand United States dollars (U.S. $10,000.00) ("Exercise Fee"); (c) If Licensee timely delivers its Exercise Notice and Exercise Fee to Licensor in the manner described in paragraph (b), then the Licensor and Licensee shall negotiate in good faith for a period of ninety (90) days following Licensor's receipt of the Exercise Notice and Fee (the "Negotiation Period") in an effort to agree upon and execute a formal written license agreement for the Additional Territory; (e) If Licensee fails to timely and properly deliver the Exercise Notice and Exercise Fee, or if Licensor and Licensee fail to enter into an agreement pursuant to paragraph (c) within the Negotiation Period, Licensor shall thereafter be free to enter into an agreement with a third party to open "Field of Dreams" stores within the Additional Territory upon terms and conditions no more favorable to the Licensee than specified in the Notice. Notwithstanding the foregoing, if Licensee timely and properly delivers the Exercise Notice and Exercise Fee and the parties fail to enter into an agreement pursuant to paragraph (c) within the Negotiation Period by reason of Licensee's rejection of one or more specific, material terms offered by Licensor which Licensee has identified in writing prior to the License Agmt Page 4 expiration of the Negotiation Period as the basis for the parties' inability to reach an agreement, Licensor may not enter into a license agreement with any third party unless the third party accepts the identified terms rejected by the Licensee. "LICENSEE" "LICENSOR" MERCHANDISING CORPORATION OF AMERICA, INC. By: /s/ By: /s/ --------------------------- ---------------------------- Name: Sam D. Battistone Name: Sidney A. Kaufman Title: President Title: President Date: May 21, 1991 Date: 5/22/91 License Agmt Page 5 MERCHANDISING LICENSE AGREEMENT SCHEDULE I TO PRINCIPAL TERMS LICENSEE: Sports Archives, Inc. AGREEMENT DATE: June 1, 1990 PROPERTY: "Field of Dreams" trademark and service mark LICENSED ARTICLES: Licensor-approved memorabilia bearing the "Field of Dreams" trademark, to be sold in Licensee's company-owned and franchised "Field of Dreams" retail stores, upon the terms and conditions set forth herein. TERRITORY: United States [subject to Section 4(b) of the Standard Terms] TERM: INITIAL TERM EXPIRATION DATE: December 31, 1995 OPTION TO EXTEND? Yes OPTION TERMS: Successive five (5) year terms ADVANCE: INITIAL TERM ADVANCE: (a) $22,500, $2,500 of which was previously paid and the balance of which shall be paid upon execution hereof; (b) $2,500 payable upon the opening of each Licensee-owned store (as an advance against royalties); and (c) $5,000 payable upon the opening of each franchised store (not an advance against royalties). GUARANTEES: INITIAL TERM GUARANTEE: $2,500 per contract year OPTION TERM GUARANTEE: $2,500 per contract year License Agmt Page 6 ROYALTY RATE: 1% of Gross Sales of each and every store (licensee-owned and franchised), and of all mail order catalogue sales, payable semi-annually. MARKETING DATE: N/A INITIAL SHIPMENT DATE: N/A COPYRIGHT AND TRADEMARK NOTICE (except as may otherwise be approved by Licensor in writing on a case by case basis): [R] & [c] 1989 Universal City Studios, Inc. All rights reserved. Licensed by Merchandising Corporation of America, Inc. License Agmt Page 7 MERCHANDISING LICENSE AGREEMENT STANDARD TERMS AND CONDITIONS These Standard Terms and Conditions ("Standard Terms"), together with the Principal Terms to which they are attached, and any other schedules or exhibits attached hereto or thereto, constitute the Merchandising License Agreement ("Agreement") between the Licensor and Licensee. All capitalized terms not defined herein are as defined in the Principal Terms. In the event of any inconsistency between these Standard Terms and the Principal Terms, the Principal Terms shall control. 1. LICENSE. Upon the terms and conditions set forth in this Agreement, by this Agreement Licensor hereby grants to Licensee a non-transferable, non-assignable license to utilize (a) that artwork which is pre-approved in writing by Licensor relating to the Property, and (b) the name, title and logo of the Property (collectively the "Licensed Elements") solely in connection with the advertisement, manufacture, sale and distribution of the Licensed Articles in the Licensed Territory during the Term (the "License"). 2. RIGHTS IN LICENSE ELEMENTS. No action, omission or statement by Licensor or Licensee shall in any way extend or grant to Licensee: (a) any rights of ownership with respect to the Licensed Elements, or any physical materials, including without limitation artwork supplied to Licensee in connection with this Agreement ("Materials"); or (b) any other rights in the Licensed Elements or such Materials other than the License expressly created by this Agreement. Licensee shall have no rights whatsoever, other than the limited License herein granted, in either the Licensed Elements, any Materials supplied by Licensor, any modification or additions to the Licensed Elements or any copyrights, trademarks, trade names, or service marks which are in whole or in part derivative of the Licensed Elements or Materials, whether created by Licensee, Licensor or otherwise, all of which shall be the sole and exclusive property of Property Owner. Licensee hereby assigns and transfers to Property Owner all of Licensee's right, title and interest, throughout the universe in perpetuity, in: (a) all copyrights and goodwill in and to the Licensed Articles, artwork, literary text, instructions, cartons, containers, packing and wrapping material, tags, labels, devices, and advertising and display materials created in connection with the Licensed Articles now in existence or hereafter created by Licensee; and (b) all trademarks, trade names and/or service marks created by or through or arising out of Licensee's use of the Licensed Elements. Upon the request of Licensor, Licensee shall sign and deliver to Licensor or Property Owner documentation in form and substance satisfactory to Licensor confirming and effecting the foregoing. Nothing in this paragraph 2 is intended to convey to Licensor ownership of the tangible goods to which the Licensed Elements are affixed, or of any copyrights, trademarks, trade names, or service marks which are not in whole or in part derivative of the Licensed Elements or Materials, subject however, to Licensee's obligations upon expiration or termination as set forth in Section 10 below. License Agmt Page 8 3. TERM; OPTION TO EXTEND. Unless terminated earlier in accordance with the terms of this Agreement, the License herein granted shall commence upon the Agreement Date and shall continue until the Initial Term Expiration Date (the "Initial Term"); provided, however, that if the Principal Terms provide for an Option to Extend for one or more additional Option Terms, then Licensee may extend the Term at the end of the Initial Term, and each Option Term, for an additional Option Term provided that the Term shall not exceed in the aggregate, the Initial Term plus all Option Terms provided in the Principal Terms, provided that it shall be a condition to each such extension that during the Initial Term or then current Option Term, as applicable: (a) Licensee has fully performed all, and is not in default of any, of its material obligations under this Agreement; (b) Licensor has received in U.S. dollars in the United States, royalty payments from Licensee, inclusive of all advances, at least equal to the Option Term Guarantee; and (c) Licensee provides Licensor with at least 30 days written notice prior to the Initial Term Expiration Date of Licensee's exercise of such Option to Extend. As used herein, "Term" shall refer to the aggregate of the Initial Term and, if applicable, the Option Terms. 4. LICENSED TERRITORY. (a) The Licensed Territory shall be as set forth in the Principal Terms. If the Licensed Territory is comprised of individual countries expressly set forth in the Principal Terms, then such countries are herein referred to individually as a "Country". Licensee agrees that: (a) Licensee will not market, advertise, distribute or sell, nor permit any marketing, advertising, distribution or sales, directly or indirectly, of the Licensed Articles or the Licensed Elements or any likeness, characterization or representation thereof in any geographic area other than the Licensed Territory; (b) Licensee will not ship, deliver or otherwise transfer, or to the extent legally controllable by Licensee, permit the shipping, delivery or other transfer for resale of any Licensed Articles across or outside of the boundaries of the Licensed Territory; and (c) Licensee will not sell or permit the sale of Licensed Articles to persons or entities who Licensee knows or should know (through Licensee's own operations or by notice from Licensor) intend to, or are likely to resell the Licensed Articles in any geographic area other than the Licensed Territory. (b) If the offer or sale, or proposed offer or sale, of franchises by Licensee in the states of Hawaii, South Dakota, Minnesota or Washington, would in the opinion of the applicable state franchise law administrator or of Licensor's counsel, cause Licensor to be deemed to be a "franchisor' under the laws of any such state, thereby requiring Licensor to register or provide disclosure to prospective franchisees, or imposing any other duty, liability or obligation to any franchisee, Licensee shall not offer or sell any franchise in such state unless and until Licensee shall provide to Licensor a no-action letter, opinion or comparable determination by such state administrator, or other assurance satisfactory to Licensor, confirming that Licensor shall not be subject to any such obligation and liability. Licensee shall not file any application to register to sell franchises in any said state unless first it shall have notified Licensor in writing of its intent to do so. Licensee shall promptly reimburse License Agmt Page 9 Licensor for all costs and expenses (including attorney's fees) that it may incur in connection with any such application and/or in determining Licensor's legal rights and obligations associated with Licensee's proposed offer and sale of franchisees in such state(s). 5. CONSIDERATION. In consideration of the License herein granted, Licensee agrees to pay Licensor the following amounts: (a) ROYALTY. (i) Licensee shall pay to Licensor a royalty in an amount equal to one percent (1%) of all Gross Sales during the Term, payable semi-annually, on or before July 15 with respect to Gross Sales during the first six (6) months of that calendar year, and January 15 with respect to Gross Sales during the last six (6) months of the preceding calendar year. (ii) The term "Gross Sales" as used herein shall mean the aggregate amount of all sums received or receivable by Licensee and its sublicensees and franchisees, directly or indirectly, from or in connection with the operation of "Field of Dreams" stores and from or in connection with sales by means of catalogs, mail order and other media and methods of distribution connected with the use of the Licensed Elements, including revenues generated from any and all sources on account of the sale of goods and products, and from the rendering of services of any kind or nature, at or from such stores, or under, or connected with the use of, the Licensed Elements, whether for cash, credit, or barter. There shall be deducted from Gross Sales for purposes of said computation (but only to the extent that they have been included) the amount of all sales tax receipts or similar tax receipts which, by law, are chargeable to customers, if such taxes are separately stated when the customer is charged, and the amount of any actual refunds, rebates, overrings, and allowances given to customers in good faith. (b) ADVANCES. The Initial Term Advance, in the amount set forth in the Principal Terms, shall be due and payable to Licensor concurrently with delivery by Licensee to Licensor of a signed copy of the Principal Terms. The Initial Term Advance shall be a non-returnable, non-refundable advance against royalties payable to Licensor during the Initial Term. License Agmt Page 10 (c) ROYALTY GUARANTEES. (i) Licensee agrees that the aggregate amount of royalties paid to Licensor pursuant to Paragraph 5(a) during the Initial Term together with the Initial Term Advance paid to Licensor pursuant to Paragraph 5(b)(i) shall not be less than the amount of the Initial Term Guarantee set forth in the Principal Terms. Concurrently with the rendering of the statement due from Licensee, in accordance with Paragraph 6 hereof, after the expiration or earlier termination of the Initial Term, Licensee shall pay to Licensor an amount equal to that portion of the Initial Term Guarantee not previously paid to Licensor pursuant to Paragraphs 5(a) and 5(b)(i) above. (ii) If Licensee is granted and exercises an Option to Extend in accordance with Paragraph 3 hereof, Licensee agrees that the aggregate amount of royalties paid to Licensor pursuant to Paragraph 5(a) during the Option Term together with the Option Term Advance paid to Licensor pursuant to Paragraph 5(b)(ii) shall not be less than the amount of the Option Term Guarantee set forth on the Principal Terms. Concurrently with the rendering of the statement due from License, in accordance with Paragraph 6 hereof, after the expiration or earlier termination of the Option Term, Licensee shall pay to Licensor an amount equal to that portion of the Option Term Guarantee not previously paid to Licensor pursuant to Paragraphs 5(a) and 5(b)(ii) above. 6. PAYMENTS; ACCOUNTING. Not later than twenty-one (21) days following the end of: (a) each semi-annual reporting period (ending June 30, and December 31) during the Term of this Agreement, including each Option Term, if any, Licensee shall furnish to Licensor a full, complete and accurate statement on the form prescribed by Licensor from time to time, upon reasonable prior notice, specifying, for the applicable period: (i) the aggregate amount of all Gross Sales; (ii) the amount of Gross Sales of each store (whether Licensee- owned or franchised), and the address and owner of such store; (iii) the amount, by category, of Gross Sales from mail order sales, catalog sales, and other media and methods of distribution; and (iv) such other information as Licensor may reasonably require. License Agmt Page 11 Sales billed in other than U.S. dollars shall be computed and reported in U.S. dollars using the conversion rate in effect on the last day of the period to which the statement relates. Each statement shall be accompanied by payment of the amounts due Licensor under this Agreement, as shown on the statement. Licensor shall have the right to require that the statements rendered hereunder be certified as complete, true and accurate by a certified public accountant, to the best of his knowledge, and/or by Licensee's chief financial officer, with any expense of such certification borne by Licensee. Statements shall be provided for each period described in this Paragraph regardless of whether there are any Gross Sales during such period. The receipt or acceptance by Licensor of any royalty statement furnished pursuant to this Agreement, or the receipt or acceptance of any royalty payment made hereunder, shall not prevent Licensor from later contesting the validity or accuracy of such statement. 7. BOOKS, RECORD AND AUDIT. (a) MAINTENANCE AND ACCESS. Licensee shall keep and cause its sublicensees and franchisees to keep full, complete and accurate books of account and records covering all of its transactions relating to the subject matter of this Agreement, and Licensor shall have the right to examine or audit any or all such books of account and records as provided herein, and to make copies and extracts thereof. Licensee shall cause Licensor or its designated agent or agents to have reasonable access thereto for such purposes during normal business hours or at such other times as may be mutually agreeable to the parties hereto. Licensee shall maintain and cause its sublicensees and franchisees to maintain all such books and records for a period of at least three (3) years or such longer period as may be required by law, except that if a dispute arises between Licensee and Licensor prior to the end of any such three (3) year period with respect to any payment or the information contained in such books and records, then Licensee will maintain and cause its sublicensees and franchisees to maintain such books and records until the resolution of the dispute or six (6) years from the date of termination, whichever last occurs. (b) COSTS OF AUDIT. Examinations and audits requested by Licensor shall be conducted at the expense of Licensor, and Licensee shall provide in advance (at no cost to Licensor except for copying and mailing costs) copies of all other audits conducted by or for Licensee bearing on the subject of any such requested audit, and related auditor's work papers. Licensee shall provide to Licensor, at no charge, copies of each annual audited financial statement prepared by Licensee's auditors, and upon request, copies of each unaudited financials prepared by or for Licensee. If any audit discloses an underpayment by Licensee of five percent (5%) or more of the amount which should have been paid, Licensee shall immediately pay the additional amount with interest at a rate of four percent (4%) above the prime rate charged by Licensor's primary lending bank (or the maximum rate permissible under law, if less than such rate), and shall reimburse Licensor all costs incurred in connection with such audit. License Agmt Page 12 8. QUALITY STANDARDS. (a) HIGH QUALITY OPERATING STANDARDS. Licensee agrees that all retail stores operated by Licensee and its franchisees under the "Field of Dreams" name, and all advertising, promotion and merchandising activities relating thereto, including but not limited to sales through catalogs and mail order, and all sales and promotion of franchises by Licensee: (i) at all times shall be of high standard and of such style, appearance and quality as to protect and enhance the Property, the Licensed Elements and the goodwill pertaining thereto; (ii) shall meet Property Owner's and Licensor's quality standards and specifications; and (iii) shall comply with all applicable Federal, State and local laws. (b) HIGH QUALITY STANDARDS FOR LICENSED ARTICLES. Licensee agrees that the Licensed Articles covered by this Agreement: (i) at all times shall be of high standard and of such style, appearance and quality as to protect and enhance the Property, the Licensed Elements and the goodwill pertaining thereto; (ii) shall meet Property Owner's and Licensor's quality standards and specifications; and (iii) shall be manufactured, sold, distributed and marketed in accordance with all applicable Federal, State and local laws. Licensee shall not manufacture, authorize any third party to manufacture, offer, sell, market or distribute, or permit any franchisee or sublicensee to offer, sell, market or distribute, any Licensed Article which has not been approved first by Licensor in writing in its sole discretion. Licensee further agrees not to cause, suffer or permit the manufacture, sale, distribution or marketing of any damaged or defective Licensed Articles. (c) MANUFACTURING. (i) If Licensee desires to use any third party to manufacture or supply any Licensed Article or any advertisement, product packaging, carton, tag, promotional material, display for retail or wholesale sales, or other item related to any Licensed Articles or Licensee's exploitation thereof (collectively herein "Collateral Materials"), it shall first obtain Licensor's prior written approval of such manufacturer which shall not be unreasonably withheld. Licensor may impose reasonable conditions to such approval, including without limitation that such supplier (x) demonstrate to Licensor's reasonable satisfaction that it possesses the resources, facilities and capacity to manufacture a product which shall consistently meet the Licensor's high quality standards, and all applicable governmental standards and regulations, and (y) enter into a trademark license agreement in form prescribed by Licensor which may require the manufacturer, among other things, to permit Licensor to make periodic inspections and/or provide free product samples upon Licensor's request, and to manufacture products only for sale to Licensee and its franchisees during the term thereof. License Agmt Page 13 (ii) Prior to the regular manufacture of any Licensed Article, Licensee shall furnish to Licensor for approval one (1) representative sample or prototype of each design of each and every Licensed Article (herein 'Preproduction Samples"). Licensor in its sole discretion may approve or disapprove the use of such Licensed Article as represented by the sample. In addition, once regular manufacture has begun, and prior to shipment, Licensee shall furnish to Licensor at no charge to Licensor, twenty-five (25) samples of each design of each Licensed Article manufactured by Licensee ("Manufactured Samples"); provided, that if the per unit cost to Licensee of the Licensed Articles exceeds $250, Licensee shall furnish to Licensor at no charge to Licensor, five (5) samples of each such Manufactured Sample, and such additional evidence and assurance of consistent quality as Licensor may reasonably request. (iii) Licensed Articles shall not differ in any material respect from the approved Preproduction Samples without Licensor's prior written consent. No Licensed Articles shall be offered or sold until Licensor shall have approved the Manufactured Samples in writing. Sale of any Licensed Article by Licensee or any franchisee, the quality of which has not been specifically approved by Licensor as provided herein, shall be a material breach of this Agreement. Licensee agrees that Licensor shall have the right to take samples at random from production runs from time to time as Licensor may determine, in order to assure that proper quality control has been established. Licensor shall also have the right to have its representatives visit Licensee's plant or plants where the Licensed Articles or any element thereof are made, and where the containers, packaging material and the like are printed or produced in order to determine whether or not proper quality controls are being exercised. (iv) Prior to the institution of any changes in the method of production, form of production, materials used in production, or any other changes in engineering, design, or other criteria which could have a material effect on a Licensed Article previously approved for production or manufacture, Licensee shall furnish to Licensor for approval, one (1) Preproduction Sample in accordance with the provisions of Paragraph 8(b)(i), as well as twenty-five (25) Manufactured Samples manufactured in accordance with such new method. (v) In the event Licensor does not disapprove, in whole or in part, of samples submitted under this Paragraph within 14 days after receipt, such failure automatically constitutes disapproval by Licensor. Licensee may not manufacture or sell or offer for sale any Licensed Article without express written approval from Licensor as required herein. License Agmt Page 14 (d) APPROVAL OF COLLATERAL MATERIALS. Prior to regular manufacture or production of any Collateral Materials, Licensee shall submit a sample or, in Licensor's discretion, other representation of such item of Collateral Material to Licensor for approval. In the event Licensor does not disapprove of same, in whole or in part, within 14 days after receipt, such failure automatically constitutes disapproval by Licensor. Any alteration in any Collateral Material must be approved in advance by Licensor. Licensee shall provide Licensor, at no charge to Licensor, twenty-five (25) samples of each Collateral Material created by or at the request of Licensee. (e) QUALITY STANDARDS FOR OTHER GOODS AND SERVICES. Licensee agrees that with respect to all products and services other than Licensed Articles which are offered, sold, marketed or distributed by Licensee or its franchisees or sublicensees at "Field of Dreams" stores or by mail order or catalogs ("Non-Licensed Goods and Services"), such Non-Licensed Goods and Services: (i) at all times shall be of high standard and of such style, appearance and quality as to protect and enhance the Property, the Licensed Elements and the goodwill pertaining thereto; (ii) shall satisfy Property Owner's and Licensor's quality standards and specifications; and (iii) shall be manufactured, sold, distributed and marketed in accordance with all applicable Federal, State and local laws. Without limiting the generality of the foregoing, neither Licensee nor any of its franchisees or sublicensees shall offer, sell, market or distribute any Non-Licensed Goods or Services at any "Field of Dreams" store or through any related mail order or catalog sales activities if in Licensor's reasonable judgment the offer or sale of such goods or services might tend to injure, or diminish the value of, the name and reputation of the Licensor, or the Property or Licensed Elements or the goodwill pertaining thereto, and Licensee shall cease and cause its franchisees to cease to offer and sell any such product or service within fourteen (14) days after delivery of written notice by Licensor. (f) COMPLIANCE WITH LAW. Licensee shall comply in all respects with the Federal Trade Commission Rule on Franchising (the "FTC Rule") and all applicable state laws, rules and regulations pertaining to franchising; Licensee shall prepare its own Uniform Franchise Offering Circular, shall register and maintain proper registrations in all states and jurisdictions where such registration is or shall be required, and shall at all times comply with all of the provisions of all other applicable federal, state or local statutes, rules or ordinances. Licensee shall not file or use any offering circulars, prospectuses or other disclosure documents without first having (i) fully disclosed the terms of this License Agreement and its effects upon its franchisees, including without limitation the effect of Licensor's termination rights, (ii) fully disclosed in such offering circulars, prospectuses and disclosure documents, and provided in all agreements with franchisees, that Licensor shall have no obligation, liability or responsibility to any franchisee under any circumstances, and (iii) obtained the Licensor's prior written approval as to the form and content of such disclosures and provisions, which it may grant or withhold in its sole discretion. Such License Agmt Page 15 approval shall not constitute a warranty or representation by Licensor that any said document complies with any applicable law or that the disclosures therein made by Licensee are truthful or accurate, and such approval shall in no way limit, curtail or otherwise affect Licensee's indemnity obligations to Licensor pursuant to Section 13(a). 9. MARKETING DATE; SHIPMENT DEADLINES. (a) If the Principal Terms provide for a Marketing Date, then Licensee shall not: (i) sell or permit any third party to sell any Licensed Article to the public prior to the Marketing Date; (ii) advertise or market, or permit any third party to advertise or market, the Licensed Articles to the public earlier than the date which is thirty (30) days following such termination execute a trademark license agreement with Licensor upon the form prescribed by Licensor, which shall be terminable by the franchisee upon thirty (30) days prior to the Marketing Date; nor (iii) make any presentations to the trade, or permit any third party to make any presentations to the trade, with respect to the Licensed Articles, earlier than the date which is one hundred twenty (120) days prior to the Marketing Date. (b) If the Principal Terms provide for a Marketing Date, then in addition to Licensor's right to seek damages or any other remedies available under law or equity, Licensor reserves the right to terminate this Agreement, or to terminate the License as to all or any Licensed Articles throughout the Licensed Territory and/or as to any Country, by written notice to Licensee at any time if Licensee has not: (i) made available to Licensor complete Preproduction Samples of each Licensed Article for approval within three (3) months after the Agreement Date; or (ii) begun the regular distribution, sale and shipment of each and every Licensed Article throughout the Licensed Territory in commercially reasonable amounts by the Initial Shipment Date set forth on the Principal Terms; or (iii) for a period of three (3) or more consecutive months after initial shipment, continued the regular distribution, sale and shipment of each and every Licensed Article throughout the Licensed Territory in commercially reasonable amounts. As used herein, "commercially reasonable amounts" shall mean quantities and assortments sufficient to meet the public demand for the Licensed Articles. In the event of such termination, any and all rights herein terminated relative to any Licensed Article(s) and/or Country(ies*) shall forthwith automatically revert to Licensor and Property Owner. Termination of Licensee's rights with respect to any Licensed Article or Country under this Paragraph shall not relieve Licensee of its obligations to account to and pay Licensor royalties for all shipment of Licensed Articles, and to pay the applicable guarantee amounts in accordance with Paragraphs 5(a), 5(b) and 6 of these Standard Terms. License Agmt Page 16 10. EFFECT OF EXPIRATION OR EARLY TERMINATION. (a) Subject to paragraph 10(b) through 10(e) below, upon the expiration or early termination of the Term, Licensee and all of its franchisees shall (i) forthwith discontinue the use of the License Elements, including without limitation use of the Licensed Elements to identify the stores operated by Licensee and its franchisees and in connection with any catalogs or mail order materials, and otherwise; and (ii) not thereafter operate or do business under any name or in any manner that might tend to give the general public the impression that he is a Licensee of Licensor and shall promptly take such action as Licensor may direct to prevent any possible confusion in the mind of the public that Licensee or such franchisees are affiliated with or licensed by Licensor, including but not limited to, removal of signage, advertising, and other fixtures and furnishings that might tend to cause the public to associate Licensee or its franchisees with Licensor. (b) Except if in the opinion of Licensor's counsel to do so would constitute the unlawful offer or sale of a franchise to such franchisee, upon the early termination of this Agreement, Licensor shall permit each of Licensee's franchisees, but not Licensee, to continue to use the Licensed Elements to identify the stores operated by such franchisee for a period of up to six (6) months following the termination hereof, provided that (i) such franchisee's store is then operating in conformity with Licensor's and Property Owner's high standards for style, appearance and quality as to protect and enhance the Property, the Licensed Elements and the goodwill pertaining thereto, and with all applicable Federal, State and local laws, and (ii) such franchisee shall within thirty (30) days prior written notice and shall provide among other things for the payment by such franchisee of a royalty equal to four percent (4%) of such franchisee's Gross Sales during the term of such license agreement. Such royalty shall be payable solely for the continued right during the term thereof to use the Licensed Elements to identify the stores. Licensor shall have no obligation to provide any services or assistance whatsoever to the franchisee in connection with its operation of such store. (c) If at the end of the Initial Term or any Option Term, this Agreement expires without being extended pursuant to Section 3, and if Licensee shall have satisfied each of the conditions precedent set forth in paragraph (d) below, Licensee shall have the right, for a period not to exceed sixty (60) days following expiration hereof, to sell such inventory of Licensed Articles then on hand to (i) its franchisees who have ceased to conduct business under the name "Field of Dreams" for resale at their franchised locations to the general public in the ordinary course of business and not through "going-out-of-business", close-out, consignment, liquidation or auction sales, or similar methods; (ii) to the general public in the ordinary course of business and not through "going-out-of-business", close-out, consignment, liquidation or auction sales, or similar methods, at Company-owned stores which have ceased to conduct business under the name "Field of Dreams", and (iii) to customers placing orders through catalogs which were distributed at least ninety (90) days prior to the expiration of the Term. At the expiration of such sixty (60) day sell-off period, or License Agmt Page 17 immediately upon the expiration of this Agreement if Licensee fails to satisfy the conditions set forth in paragraph (d), Licensee shall, at Licensor's option and at Licensee's sole cost, immediately either (i) obliterate or remove the Licensed Elements from all Licensed Articles, or (ii) offer to sell to Licensor all inventory of Licensed Articles then on hand which is in good, resalable condition, at a price equal to fifty percent (50%) of Licensee's lowest wholesale price charged for such products to its franchisees during the preceding twelve (12) months, provided that Licensor may offset against such purchase price any sums payable by Licensee, or its affiliates, to Licensor. (d) Licensee's sixty (60) day sell of right as described in Section 10(c) shall be subject to Licensee's satisfaction of all of the following conditions precedent: (i) during the Term, Licensee shall have performed all of the material terms and conditions hereof on its part to be performed; (ii) at least thirty (30) days prior to the expiration of the Initial Term, or then current Option Term, Licensee shall have delivered to Licensor written notice of Licensee's intention not to extend the Term ("Non-Renewal Notice"), together with a written statement of Licensee's inventory of all of the Licensed Articles on hand, and of all orders for such inventory which have been received but not filled, as of the date of such notice; (iii) during the period from six (6) months prior to the date of Licensee's Non-Renewal Notice through the date of Licensee's notice of intent not to renew, Licensee shall not have caused to be manufactured more Licensed Articles than reasonably necessary to meet anticipated demand and during the period following delivery of Licensee's Non-Renewal Notice it shall not have manufactured products in excess of those required to satisfy orders on hand at the date of its Non-Renewal Notice; (iv) within seven (7) days after the expiration hereof, Licensee shall have delivered to Licensor a written statement of inventory of all of the Licensed Articles on hand at the time of such expiration or termination; provided, however, that Licensor shall have the right to take a physical inventory to ascertain or verify such inventory and statement, and refusal by Licensee to submit to such physical inventory by Licensor shall cause a forfeiture of Licensee's right to dispose of such inventory, with Licensor retaining all other legal and equitable rights Licensor may have in the circumstances; and License Agmt Page 18 (v) within seven (7) days after the expiration or termination hereof, Licensee shall pay Licensor, in addition to the royalty provided for in Paragraph 5(a) of these Standard Terms for the last six (6) months of the Term, an amount equal to one- third (1/3) of such amount in consideration for such sixty (60) day sell-off right, plus the full amount of any and all other sums then due to Licensor. (e) In the event of the termination of this Agreement for any reason prior to the expiration of the Term, unless Licensor shall agree otherwise, Licensee shall have no right to continue to sell Licensed Articles and shall, at Licensor's option and at Licensee's sole cost, immediately either (i) obliterate or remove the Licensed Elements from all Licensed Articles, and furnish Licensor with a Certificate evidencing such obliteration or removal, or (ii) offer to sell to Licensor all inventory of Licensed Articles then on hand, which is in good, resaleable condition, at a price equal to fifty percent (50%) of Licensee's lowest wholesale price charged for such products to its franchisees during the preceding twelve (12) months, provided that Licensor may offset against such purchase price any sums payable by Licensee, or its affiliates, to Licensor. (f) In no event shall Licensee have the right to manufacture or cause or permit any third party to manufacture any Licensed Articles after the expiration or earlier termination of the Term. Upon expiration or earlier termination of the Term, Licensee shall, at Licensor's option and at Licensee's sole cost, immediately either (i) destroy all stamps and devises used to imprint or affix the Licensed Elements on Licensed Articles, and with respect to any Licensed Articles as to which Licensee or Property Owner own the copyrights or trademarks destroy all molds, casts, modules and like equipment used to manufacture (collectively "molds") and provide Licensor with a Certificate of Destruction upon the completion of said destruction or (ii) deliver all such stamps, devices and, if applicable, molds to Licensor, and Licensor shall have the right to use all or any of such stamps, devices and molds without obligation to Licensee. (g) In the event of the termination of this Agreement for any reason prior to the expiration of the Term, all monies owed Licensor from Licensee, including without limitation any unpaid guarantee provided for in Paragraph 5(c) for the period of the Term in which the termination, if any, shall occur, shall be immediately due and payable, and shall be accounted for in accordance with Paragraph 6. (h) The expiration or termination of this Agreement shall be without prejudice to the rights of Licensor against Licensee and such expiration or termination shall not relieve Licensee of any of its obligations to Licensor existing at the time of expiration or termination or terminate those obligations of Licensee which, by their nature, survive the expiration or termination of this Agreement. It is expressly understood and agreed that the promises and agreements of Licensee contained in this Agreement, are also for the benefit of Licensor's parent company, and either of them may, in its own name, exercise all rights and remedies License Agmt Page 19 necessary or desirable to protect or enforce its respective interests, including, without limitation, obtaining injunctive relief to enforce the obligations of Licensee set forth in this Agreement. 11. LICENSEE'S BREACH; RIGHT TO CURE. (a) If Licensee breaches any of the terms and provisions of this Agreement, then Licensor, in addition to any other rights or remedies it may have under this Agreement or at law or in equity, shall have the right, if it so elects, to serve upon Licensee written notice of such breach. Except for the incurable breaches described in Paragraph 12 below, Licensee shall thereupon have a period of thirty (30) calendar days from the date of delivery of such notice within which to remedy such breach; except that with respect to breaches involving nonpayment the cure period shall be ten (10) calendar days. If, because of the nature of any breach other than one involving nonpayment, Licensee shall be unable to cure the same within said thirty (30) day period but demonstrates to Licensor's subjective satisfaction that it is making a good faith, diligent effort to remedy such breach, Licensee shall be given such additional time as Licensor deems reasonably necessary to cure said breach, upon the condition that Licensee shall continue diligently to do so. (b) Without limiting the generality of the foregoing, the following events shall constitute grounds for termination subject to the Licensee's right to cure, as set forth in paragraph (a): (i) If Licensee should make, sell, offer for sale, use distribute, broadcast, display or exhibit any Licensed Article or any Collateral Material which has not been approved by Licensor; (ii) If Licensee should sell, offer for sale, use distribute broadcast, display or exhibit any Licensed Articles or any Collateral Material which does not contain the appropriate legal notices; or (iii) If any of the Licensed Articles should be the subject of any government recall because of safety, health or other hazards or risks to the public (it being expressly understood that Licensee is obligated to comply with all governmental regulations relating to the Licensed Articles at its sole expense). (iv) If during the Term there shall cease to be at least one (1) Licensee-owned or franchised "Field of Dreams" retail store open and in operation within the Territory, and Licensee shall fail to demonstrate to Licensor's sole subjective satisfaction that Licensee is actively and diligently engaged in bona fide efforts to License Agmt Page 20 open additional "Field of Dreams" retail stores within thirty (30) days following written notice of Licensor's intent to terminate this Agreement on account of such absence of operating stores; (c) If Licensee fails to remedy such breach to Licensor's reasonable satisfaction within the applicable time period described above, then Licensor shall, in addition to any other rights or remedies, have the right to terminate this Agreement and the License herein granted as of the expiration of such applicable cure period, and shall have the right to sue for damages caused by such breach, including without limitation the right to receive unpaid royalties or guarantees. 12. LICENSOR'S ADDITIONAL RIGHTS TO TERMINATE. Notwithstanding Paragraph 11, Licensor shall, in addition to any other rights, have the right to terminate this Agreement immediately and without notice or opportunity to cure, upon the occurrence of any of the following events: (a) If Licensee should fail to deliver to Licensor evidence of insurance required by Paragraph 14 hereof, within fifteen (15) days following written request; (b) If, without Licensor's prior written consent, Licensee should sell substantially all of its assets to a single purchaser or to a group of purchasers, or if there should be a change of control of Licensee. As used herein, "control" shall mean 50% or more of the voting control of Licensee; (c) If Licensee should make an assignment for the benefit of creditors; (d) If Licensee should file a voluntary petition under Chapter 7 of the United States Bankruptcy Code (the "Code") or the involuntary adjudication of the Licensee as a debtor under either Chapter 7 or Chapter 11 of the Code, or the appointment of a trustee under the Code to operate or manage the affairs of the Licensee; (e) If more than six (6) months shall pass during which there is not open and in operation at least one (1) Licensee-owned or franchised "Field of Dreams" retail store, notwithstanding any demonstration of Licensee's best efforts to open additional stores; or (f) If Licensee shall default in any material obligation as to which Franchisee has previously received a notice of default from Licensor within the preceding twelve (12) months. License Agmt Page 21 (g) If Licensee, on four (4) or more occasions within any eighteen (18) month period, fails to comply with one (1) or more material requirements of this Agreement whether or not corrected after notice. 13. INDEMNITY. (a) Licensee hereby agrees to defend, indemnify and hold harmless Licensor and its affiliated companies, shareholders, directors, officers, employees, attorneys and agents (collectively the "indemnified parties") from and against the losses, damages, costs and expenses associated with any and all claims, demands, suits, proceedings or judgments arising out of (i) any alleged unauthorized use of or infringement upon any patent, copyright, design, mark, process, idea, method, device, right of privacy, publicity, or other property right by Licensee or any of its franchisees in connection with the Licensed Articles covered by this Agreement (except all claims that the use of Licensed Elements by Licensee in accordance with this Agreement infringes any such rights); (ii) any alleged defects in the Licensed Articles, or any alleged failure by Licensee or any of its franchisees to adequately perform any agreement or render any service, or any injury resulting from the sale or use of Licensed Articles, or the rendering of services by Licensee or any of its franchisees; (iii) any alleged violation of any law, rule or regulation governing the offer or sale of franchises or the relationship between franchisors and franchisees; any alleged breach of any agreement or contract between Licensee and any franchisee, whether oral, written express or implied; any alleged unfair acts or practices, fraud, misrepresentation, failure to disclose or other act or omission by Licensee in connection with its promotion, offer or sale of franchises or its continuing relationship with any of its franchisees; and (iv) any other alleged acts or omissions by Licensee. With respect to the foregoing indemnity, Licensee shall defend and hold harmless all of the indemnified parties and each of them, at no cost or expenses to them whatsoever, including but not limited to attorneys' fees and court costs. Licensor shall have the right, but not the obligation, to control the defense and resolution of any such action with attorneys of its own selection, and to be promptly reimbursed upon demand for all costs and expenses incurred in defending and resolving any such claims. (b) Licensor hereby indemnifies Licensee and undertakes to hold it harmless against any claims or suits arising solely out of the use by Licensee of the Licensed Elements as authorized in this Agreement, provided that prompt notice is given to Licensor of any claim or suit and provided further, that Licensor shall have the option to undertake and control the defense or resolution of any claim so made or suit so brought with attorneys of its own selection at Licensor's cost and expense. If Licensor elects to so control the defense and/or resolution, any costs, including without limitation attorneys' fees, incurred by Licensee in connection therewith without Licensor's express prior written consent shall be borne by Licensee. License Agmt Page 22 14. INSURANCE. Licensee agrees to maintain, at its sole expense, a Comprehensive General Liability insurance policy for the entire Term of this Agreement, as well as any sell-off period, including the coverage parts for contractual liability (applying to the terms and conditions of this Agreement), Products Liability and Personal Injury Liability, with a minimum combined single limit of liability of not less than U.S. $3,000,000.00 per occurrence, with a maximum deductible of $10,000.00. Licensee shall provide Certificates of Insurance evidencing same to Licensor from time to time upon request. License shall provide Licensor with a policy endorsement to Licensee's Product Liability insurance coverage, or an acceptable certificate of insurance naming Property Owner, Licensor, and any other parent or affiliated company of Licensor which Licensor may request to be named, as additional insureds. Such insurance policy shall provide that Licensor and any additional insureds shall receive at least thirty (30) days written notice before any cancellation or modification of such policy. 15. PROTECTION OF PROPERTY OWNER'S AND LICENSOR'S RIGHTS. (a) TRADEMARK AND COPYRIGHT NOTICE. Licensee shall cause to appear on or within each Licensed Article manufactured by or for Licensee under this License and within all Collateral Material proper legal copyright and/or trademark notices in the form set forth in the Principal Terms or otherwise requested in writing by Licensor. In no event shall Licensee manufacture any Licensed Articles or Collateral Material depicting the copyright and/or trademark notices to be contained thereon without written approval from Licensor. Each and every tag, label, carton, container, wrapping and packaging containing such notice and all advertising, promotional or display material bearing the Licensed Elements with such notice shall be submitted by Licensee to Licensor for its written approval prior to use by Licensee. Approval by Licensor shall not constitute a waiver of Licensor's rights or Licensee's duties under any provision of this Agreement. In the event that Licensee manufactures or distributes Licensed Articles or Collateral Material without the appropriate trademark and copyright notices, Licensor shall, in addition to all other rights and remedies under this Agreement, have the right to require Licensee, at its sole cost and expense, to recall said Licensed Articles or Collateral Material and correct the notice or destroy the Licensed Articles or Collateral Material. (b) VALUE AND SECONDARY MEANING. Licensee recognizes the great value of the Licensed Elements and of the goodwill associated therewith and acknowledges that the Licensed Elements and all rights therein (including copyright and trademark) and goodwill pertaining thereto and to all derivative works belong exclusively to Property Owner, that the Licensed Elements has a secondary meaning in the mind of the public (so that use by anyone of the foregoing without Property Owner's or Licensor's authorization would be unlawful); and that all use of the Licensed Elements pursuant to this Agreement will inure to the benefit of Property Owner. License Agmt Page 23 (c) PROPERTY OWNER'S AND LICENSOR'S RIGHTS, TITLE AND INTEREST. (i) All rights in and to the Licensed Elements, including any modifications or additions to said Licensed Elements whether created by or under the authority of Licensor or Licensee, shall be the sole and exclusive property of Property Owner, and Property Owner shall own all copyrights and other rights therein, without obligation to Licensee. (ii) Licensee hereby agrees that its every use of the Licensed Elements shall inure to the benefit of Property Owner and that Licensee shall not at any time acquire any rights in the Licensed Elements by virtue of any use it may make of the Licensed Elements. Furthermore, Licensee agrees that to the extent that creation of the Licensed Articles, or any modifications of or additions or contributions to the Licensed Articles or the Licensed Elements by Licensee create any copyright, trademark or other rights, such rights shall be and are hereby assigned to Property Owner. The Licensee, its employees, successors and/or assignees shall not register the Licensed Articles for copyright or trademark. (iii) Licensee, in acknowledging the rights, title and interest of Property Owner and Licensor in the Licensed Elements, agrees that it will not during the Term hereof or thereafter attack the rights of Property Owner or Licensor in the Licensed Elements, regardless of the basis of such attack and regardless of whether the same relates to title or validity. Licensee further agrees that it shall not during the Term hereof, or any time thereafter, dispute or contest, directly or indirectly, the validity of any of Property Owner's copyrights or trademarks in the Licensed Articles or Property subject to this Agreement. (iv) Licensee agrees to cooperate with Licensor to the extent necessary to acquire for Property Owner property rights in the Licensed Elements and to protect and enforce Property Owner's and Licensor's rights to the Licensed Elements. Licensor or Property Owner may commence or prosecute any claims or suits regarding the Licensed Articles in their own name or in the name of Licensee or join Licensee as a party thereto. Licensee shall notify Licensor in writing of any infringements or imitations of the Licensed Elements on articles similar to those covered by this Agreement which may come to Licensee's attention, and Licensor shall have the sole right to determine whether or not any action shall be taken on account of any such infringements or imitations. Licensee shall not institute any suite or take any actions on account of any such infringements or imitations without first obtaining the written consent of Licensor to do so, which may be given or withheld in Licensor's sole discretion. License Agmt Page 24 (v) Licensee will cooperate fully and in good faith with Property Owner and Licensor for the purpose of securing and preserving the rights of Property Owner and Licensor in and to the Licensed Elements. In the event there has been no previous registration of the Licensed Elements, Licensed Articles, or any material relating thereto, Licensee shall cooperate fully and in good faith with Property Owner and Licensor so as to enable Property Owner and Licensor to file, prosecute and register the same for purposes of copyright or trademark protection in appropriate classes in the name of Property Owner and/or Licensor, as Property Owner may determine. Upon request by Licensor, Licensee shall furnish at least six (6) photographs and/or specimens, as well as invoices or other proper evidence satisfactory to Licensor duly showing the first commercial shipment in interstate commerce, and such other things and documents as Licensor may require in the obtaining or preserving of a trademark, and thereafter, on a regular basis, representative samples of each Licensed Article and of any or all materials bearing trademarks. 16. REMEDIES. (a) Licensee acknowledges that its breach of this Agreement or its failure (except as otherwise provided herein) to cease the manufacture, marketing, sale and distribution of Licensed Articles at the termination or expiration of this Agreement or otherwise in violation of any terms hereof will result in immediate and irreparable damage to Licensor and to the rights of any subsequent licensee. Licensee acknowledges and admits that there is no adequate remedy at law for such breach of this Agreement or for such failure to cease manufacture, marketing, sale or distribution and Licensee agrees that in the event of such breach or such failure, Licensor shall be entitled to equitable relief by way of temporary and permanent injunctions and such other and further relief as any court of competent jurisdiction may deem just and proper. (b) Any and all payments due hereunder and not made to Licensor on a timely basis shall bear interest at a rate of two percent (2%) above the prime rate charged by Licensor's primary lending bank, but in no event higher than the maximum interest permissible by law. (c) Under no circumstances will Licensee have the right to offset from amounts otherwise payable from Licensee to Licensor hereunder or under any other agreements between Licensor and Licensee, any amounts, whether or not fixed, owing or allegedly owing from Licensor to Licensee under this Agreement or any other agreement between Licensor and Licensee. License Agmt Page 25 (d) Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which Licensor is entitled under this Agreement or otherwise, nor shall an election to terminate be deemed an election of remedies or a waiver of any claim for damage or otherwise. 17. NO PREMIUMS/PROMOTIONS/CLOSE-OUTS/CONSIGNMENTS. Licensee shall not sell or give away any Licensed Article in connection with any premium, giveaway or promotional arrangement, which rights are expressly reserved by Licensor. Licensee agrees to sell to Licensor, at favorable prices, such quantities of Licensed Articles requested by Licensor to sell or otherwise use in connection with any premium or promotional arrangement. The term "premium arrangement" shall refer to any arrangement whereby a Licensed Article is given away or sold in conjunction with another product or service. 18. RESERVATION OF RIGHTS. (a) If according to the Principal Terms the License hereby granted is exclusive then, subject to any other provision of these Standard Terms or the Principal Terms, Licensee's rights hereunder shall be exclusive during the Term and Licensor shall grant no conflicting rights. If according to the Principal Terms the Licensee herein granted is non-exclusive, then Licensee's rights hereunder shall be non-exclusive and nothing shall prevent Licensor from granting, or shall impair or limit Licensor's rights to grant, the same, similar or competing rights to one or more third parties. (b) All rights not expressly granted to Licensee are reserved to Licensor, and the exercise by Licensor of any reserved rights is hereby consented to by Licensee, without regard to the extent to which the exercise of any such rights by Licensor may be competitive with Licensee or the rights granted to Licensee hereunder. Without limiting the generality of the preceding sentence or of Paragraph 17 above, and notwithstanding anything to the contrary contained in this Agreement, Licensor expressly reserves the right to manufacture, market, distribute and sell any products, services or articles utilizing all or any of the Licensed Elements, which are similar or identical to the Licensed Articles (a) in connection with the promotion of exhibition of the Property, or (b) for any reason, if the sale of such products, services or articles occurs on the grounds, or within ten (10) miles, of any studio tour/theme park owned or operated by Licensor or any affiliate of Licensor. 19. NO REPRESENTATION BY LICENSOR. Licensor makes no warranty or representation as to the amount of gross sales, Net Sales or profits Licensee will derive hereunder from the Licensed Articles, or as to the performance or continued exploitation of, or marketing and advertising budget with respect to, any other product or products, including without limitation any television or theatrical motion pictures, based upon the Property. License Agmt Page 26 20. NOTICES. Whenever notice is required to be given under this Agreement, a writing signed by an officer of the party serving such notice by personal delivery, by telecopy or facsimile transmission, or by registered or certified mail, return receipt requested, to the other party shall be deemed good and sufficient notice delivered on the date of (i) receipt in the case of personal delivery or facsimile or telecopy transmission, or (ii) three (3) days after posting if sent by registered or certified mail. Such notice shall be addressed to Licensor and Licensee at their respective addresses set forth on page 1 of the Principal Terms, or such other address of which either party may notify the other in accordance with this Paragraph, or if by facsimile, to the following telephone numbers: If to Licensor: (818) 777-6271 If to Licensee: ( ) 21. NO ASSIGNMENT OR SUBLICENSE. This Agreement shall not be assigned or sublicensed by Licensee except with the prior written consent of Licensor and shall not be assigned by operation of law. Any assignment or sublicense in violation of the preceding sentence shall be null and void. This Agreement may be assigned by Licensor without any consent. Subject to such restriction and to the restriction against assignment by operation of law provided above, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. 22. ENTIRE AGREEMENT. This Agreement is intended by the parties as a final and complete expression of their agreement, and supersedes any and all prior and contemporaneous agreements and understandings relating to the subject matter hereof. 23. MODIFICATION AND WAIVER. This Agreement may not be modified and none of its terms may be waived, except in writing signed by both parties. A waiver by either party of any default shall not be deemed a waiver of a prior or subsequent default of the same or other provisions of this Agreement. The failure of either party to enforce, or the delay by either party in enforcing, any of its rights shall not be deemed a continuing waiver or a modification of this Agreement. 24. SEPARABILITY. If any part of this Agreement shall be declared invalid or unenforceable by a court of competent jurisdiction, it shall not affect the validity of the balance of this Agreement, provided, however, that if any provision of this Agreement pertaining to the payment of royalties by Licensee to Licensor shall be declared invalid or unenforceable by court of competent jurisdiction, Licensor shall have the right, at its option, to terminate this Agreement upon giving not less than ten (10) days' written notice to Licensee. License Agmt Page 27 25. PARAGRAPH HEADINGS. The headings of the Paragraphs are for convenience only and in no way limit or affect the provisions hereof. 26. GOVERNING LAW. This agreement shall be governed by and interpreted in accordance with the laws of the State of California applicable to agreements entered into and to be performed wholly in California. 27. CONSENT TO JURISDICTION. Licensee hereby consents to the exclusive jurisdiction of any State or Federal court empowered to enforce this Agreement in the State of California, Los Angeles County, and waives any objection thereto on the basis of personal jurisdiction or venue. * * END OF STANDARD TERMS * * License Agmt Page 28 EX-7 7 EXHIBIT 7 EXHIBIT 7 Letter on Change In Certifying Accountant Change In Certifying Accountant PRITCHETT, SILER & HARDY, P.C. CERTIFIED PUBLIC ACCOUNTANTS 430 EAST 400 SOUTH SALT LAKE CITY, UTAH 84111 (801) 328-2727 - FAX (801) 328-1123 August 31, 1999 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Gentlemen: We have read the statements of Dreams, Inc. pertaining to our firm included under Item 3 of Form 10-SB and agree with such statements as they pertain to our firm. We have no basis to agree or disagree with other statements of the registrant contained therein. PRITCHETT, SILER & HARDY, P.C. 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