UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-33405
DREAMS, INC.
(Exact name of registrant as specified in its charter)
Utah | 87-0368170 | |
State or other jurisdiction of incorporation or organization |
(I.R.S. Employer Identification No.) |
2 South University Drive, Suite 325, Plantation, Florida 33324
(Address of principal executive offices)
Registrants telephone number, including area code: (954) 377-0002
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 1, 2012 there were 44,670,304 shares outstanding of the registrants Common Stock.
INDEX
PAGE | ||||||
Part I. | 1 | |||||
Item 1. | 1 | |||||
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||||
Item 3. | 15 | |||||
Item 4. | 15 | |||||
Part II. | 16 | |||||
Item 1. | 16 | |||||
Item 1A. | 16 | |||||
Item 2. | 16 | |||||
Item 3. | 16 | |||||
Item 4. | 17 | |||||
Item 5. | 17 | |||||
Item 6. | 17 |
Item 1. | Financial Statements. |
Condensed Consolidated Balance Sheets
March 31, 2012 |
December 31, 2011 |
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(Dollars in Thousands, except share amounts) | (un-audited) | |||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash |
$ | 684 | $ | 1,860 | ||||
Accounts receivable, net |
5,532 | 11,590 | ||||||
Notes receivable, net |
107 | 131 | ||||||
Inventories |
47,104 | 44,695 | ||||||
Prepaid expenses and other current assets |
3,311 | 3,060 | ||||||
Deferred tax asset |
1,380 | 1,396 | ||||||
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Total current assets |
$ | 58,118 | $ | 62,732 | ||||
Property and equipment, net |
6,697 | 6,795 | ||||||
Deferred loan costs |
194 | 185 | ||||||
Notes receivable |
91 | 121 | ||||||
Other intangible assets, net |
5,686 | 5,738 | ||||||
Goodwill, net |
8,650 | 8,650 | ||||||
Other assets |
9 | 9 | ||||||
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Total assets |
$ | 79,445 | $ | 84,230 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
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Accounts payable |
$ | 9,589 | $ | 18,886 | ||||
Accrued liabilities |
5,032 | 9,818 | ||||||
Current portion of long-term debt |
250 | 275 | ||||||
Borrowings against line of credit |
22,155 | 10,500 | ||||||
Capital lease obligations, current |
325 | 445 | ||||||
Deferred revenues |
592 | 1,897 | ||||||
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Total current liabilities |
$ | 37,943 | $ | 41,821 | ||||
Long-term debt, less current portion |
1,418 | 1,418 | ||||||
Capital lease obligation |
866 | 698 | ||||||
Long-term deferred tax liability |
3,143 | 3,581 | ||||||
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Total Liabilities |
$ | 43,370 | $ | 47,518 | ||||
Stockholders equity: |
||||||||
Preferred stock authorized 10,000,000, issued and outstanding -0- shares |
| | ||||||
Common stock and additional paid-in capital, no par value; authorized 100,000,000 shares; shares issued and outstanding 44,670,304 and 44,662,579 shares as of March 31, 2012 and December 31, 2011, respectively |
44,215 | 44,179 | ||||||
Treasury stock 38,400 issued as of March 31, 2012 and December 31, 2011 |
(46 | ) | (46 | ) | ||||
Accumulated deficit |
(8,006 | ) | (7,354 | ) | ||||
Non-controlling interest in subsidiaries |
(88 | ) | (67 | ) | ||||
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Total stockholders equity |
36,075 | 36,712 | ||||||
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Total liabilities and stockholders equity |
$ | 79,445 | $ | 84,230 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Condensed Consolidated Statements of Operations Unaudited
(Dollars in Thousands, except share amounts and earnings per share amounts)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Revenues: |
||||||||
Manufacturing/Distribution |
$ | 2,751 | $ | 3,279 | ||||
Retail |
26,697 | 20,224 | ||||||
Other Fees |
74 | 28 | ||||||
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Total Revenues |
$ | 29,522 | $ | 23,531 | ||||
Expenses: |
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Cost of sales-mfg/distribution |
$ | 1,548 | $ | 1,884 | ||||
Cost of sales-retail |
14,289 | 10,983 | ||||||
Operating expenses |
13,880 | 12,026 | ||||||
Depreciation and amortization |
721 | 642 | ||||||
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Total Expenses |
$ | 30,438 | $ | 25,535 | ||||
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(Loss) from operations |
(916 | ) | (2,004 | ) | ||||
Interest (expense), net |
(177 | ) | (124 | ) | ||||
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(Loss) before income taxes |
$ | (1,093 | ) | $ | (2,128 | ) | ||
Provision for income tax benefit |
420 | 856 | ||||||
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Net (loss) |
$ | (673 | ) | $ | (1,272 | ) | ||
Loss attributable to non-controlling interest |
21 | 26 | ||||||
Net (loss) attributable to Dreams, Inc. |
$ | (652 | ) | $ | (1,246 | ) | ||
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(Loss) per share: |
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Basic: (Loss) per share |
$ | (0.01 | ) | $ | (0.03 | ) | ||
Weighted average shares outstanding Basic |
44,662,586 | 44,493,881 | ||||||
Diluted: (Loss) per share |
$ | (0.01 | ) | $ | (0.03 | ) | ||
Weighted average shares outstanding Diluted |
45,110,284 | 45,107,192 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Condensed Consolidated Statements of Cash Flows Unaudited
Three Months Ending March 31, 2012 and 2011
(Dollars in Thousands)
March 31, 2012 |
March 31, 2011 |
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Cash Flows from Operating Activities |
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Net (Loss) |
$ | (652 | ) | $ | (1,246 | ) | ||
Loss attributable to non-controlling interest |
(21 | ) | (26 | ) | ||||
Adjustments to reconcile net (loss) to net cash used in operating activities: |
||||||||
Depreciation |
669 | 501 | ||||||
Amortization |
52 | 140 | ||||||
Loan cost amortization |
16 | 24 | ||||||
Net loss from sale of property and equipment |
| 20 | ||||||
Stock based compensation |
33 | | ||||||
Deferred tax benefit, net |
(422 | ) | (853 | ) | ||||
(Increase) decrease in: |
||||||||
Accounts receivable |
6,058 | 6,042 | ||||||
Inventories |
(2,409 | ) | (1,029 | ) | ||||
Prepaid expenses and other current assets |
(251 | ) | (35 | ) | ||||
Increase (decrease) in: |
||||||||
Accounts payable |
(9,297 | ) | (8,962 | ) | ||||
Accrued liabilities |
(4,786 | ) | (4,922 | ) | ||||
Deferred revenues |
(1,305 | ) | (1,235 | ) | ||||
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Net cash (used in) operating activities |
$ | (12,315 | ) | $ | (11,581 | ) | ||
Cash Flows from Investing Activities |
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Purchase of property and equipment |
(386 | ) | (406 | ) | ||||
Proceeds from notes receivable |
54 | | ||||||
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Net cash (used in) investing activities |
$ | (332 | ) | $ | (406 | ) | ||
Cash Flows from Financing Activities |
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Proceeds from Line of Credit PNC |
47,570 | | ||||||
Pay down on Line of Credit PNC |
(35,915 | ) | | |||||
Proceeds from Line of Credit Regions |
| 39,393 | ||||||
Pay down on Line of Credit Regions |
| (27,857 | ) | |||||
Deferred loan costs |
(25 | ) | | |||||
Proceeds from stock option exercise |
3 | 270 | ||||||
Repayment of Capital lease |
(137 | ) | (20 | ) | ||||
Repayment of Notes payable |
(25 | ) | (49 | ) | ||||
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Net cash provided by financing activities |
$ | 11,471 | $ | 11,737 | ||||
Net (decrease) in cash |
(1,176 | ) | (250 | ) | ||||
Cash at beginning of period |
1,860 | 440 | ||||||
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Cash at end of period |
$ | 684 | $ | 190 | ||||
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Cash paid for interest during the period |
$ | 112 | $ | 100 | ||||
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Cash paid for taxes during the period |
$ | 460 | $ | 369 | ||||
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Supplemental Disclosure of Non Cash Financing Activity |
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Borrowings on Capital Lease |
185 | | ||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Notes to Condensed Consolidated Financial Statements Unaudited
Dollars in Thousands, Except per Share Amounts
1. | Managements Representations |
The condensed consolidated interim financial statements included herein have been prepared by Dreams, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the financial statements and the notes thereto, included in the Companys Annual Report on Form 10-K, for the calendar year ended December 31, 2011, filed with the SEC on March 29, 2012.
The accompanying condensed consolidated interim financial statements have been prepared, in all material respects, in conformity with the standards of accounting measurements set forth in FASB Accounting Standards Codification, ASC Topic 270 Interim Reporting and reflect, in managements opinion, all adjustments, which are of a normal recurring nature, necessary to summarize fairly the financial position and results of operations for such periods. Due to the seasonality of our business, the results of operations for such interim periods are not necessarily indicative of the results expected for future quarters or the full calendar year.
2. | Description of Business and Summary of Significant Accounting Policies |
Description of Business
Dreams, Inc. and its subsidiaries (collectively the Company) are principally engaged in the manufacturing, distribution and retailing of licensed sports products, sports & celebrity memorabilia and acrylic display cases through multiple distribution channels; including internet, brick & mortar, catalogue, kiosks, and trade shows. The Company is also in the business of athlete representation and corporate marketing of individual athletes. The Companys customers are located throughout North America.
Principals of Consolidation
The accompanying condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation.
Earnings per Share
For the three months ended March 31, 2012, weighted average shares outstanding for basic earnings per share purposes was 44,662,586. For the three months ended March 31, 2012, weighted average shares outstanding for diluted earnings per share purposes was 45,110,284. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.
For the three months ended March 31, 2011, weighted average shares outstanding for basic earnings per share purposes was 44,493,881. For the three months ended March 31, 2011, weighted average shares outstanding for diluted earnings per share purposes was 45,107,192. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.
Stock Compensation
Effective April 1, 2006, the Company adopted the provisions of, and accounted for stock-based compensation in accordance with FASB Accounting Standards Codification, Topic 718 Compensation Stock Compensation. Under the fair value recognition provisions of Topic 718, stock-based compensation cost is measured at the grant date based on the fair value of the award over the requisite service period, which is the vesting period. The Company elected the modified-prospective method of adoption, under which prior periods are not revised for comparative purposes. The Company has elected the graded-vesting attribution method for recognizing stock-based compensation expense over the requisite service period for each separately vesting tranche of awards as though the awards were, in substance, multiple awards. The valuation provisions of Topic 718 apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.
For the three months ended March 31, 2012 and March 31, 2011, the Company recorded $33 and $0 of pre-tax share-based compensation expense under Topic 718, recorded in selling and administrative expense in the Condensed Consolidated Statement of Operations, respectively. This expense was offset by approximately a $13 and $0 in a deferred tax benefit for non-qualified share-based compensation, respectively.
4
Share-Based Compensation Awards
The following disclosure provides information regarding the Companys share-based compensation awards, all of which are classified as equity awards in accordance with FASB Accounting Standards Codification, Topic 718 Compensation Stock Compensation:
Stock Options The Company grants stock options to employees that allow them to purchase shares of the Companys common stock. Options are also granted to outside members of the Board of Directors of the Company as well as independent contractors. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. Options generally vest immediately, however, the Company has granted options that vest over three to five years. Awards generally expire three to five years after the date of grant.
As of March 31, 2012, vested options totaled 552,902 with an average price of $.71. Unvested options totaled 285,125. Total outstanding options that were in the money at March 31, 2012 were 838,027 with an average price per option of $1.27. Of those options, the vested in the money options totaled 552,902 with an average price of $.71 and the in the money unvested options totaled 285,125.
During the three months ended March 31, 2012 there were 17,500 options granted, 6,000 options expired, no options cancelled, and 7,725 options exercised.
The following table summarizes the stock option activity from January 1, 2012, through March 31, 2012:
Options | Exercisable Price | Weighted Av. Exercise Price | ||||||||||
January 1, 2012 |
834,252 | $ | .41 - $2.75 | $ | .54 | |||||||
Granted |
17,500 | 2.79 | $ | 2.79 | ||||||||
Expired |
6,000 | 2.35 | $ | 2.35 | ||||||||
Cancelled |
| | $ | | ||||||||
Exercised |
7,725 | $ | .41 | $ | .41 | |||||||
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March 31, 2012 |
838,027 | $ | .41 - $2.79 | $ | .71 |
The following table breaks down the number of outstanding options with their corresponding contractual life as well as the exerciseable weighted average (WA), outstanding exercise price, number of vested options with the corresponding exercise price by price range.
Options Breakdown by Range at 3/31/2012
Outstanding | Exerciseable | |||||||||||||||||||||
Range | Outstanding Options |
Remaining Contractual Life |
WA Outstanding Exercise Price |
Vested Options |
WA Vested Exercise Price |
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$ | 0.41 to $1.19 | 479,526 | .23 | .45 | 479,526 | .45 | ||||||||||||||||
$ | 1.20 to $2.79 | 358,501 | 4.13 | 2.37 | 73,376 | 2.37 | ||||||||||||||||
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$ | .41 to $2.79 | 838,027 | 1.9 | 1.27 | 552,902 | .71 |
At March 31, 2012, exercisable options had aggregate intrinsic values of $1,363.
Income Taxes
Effective January 1, 2007, the Company adopted the provisions of FASB Accounting Standards Codification Topic 740-10-65, Accounting for Uncertainty in Income Taxes. The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Companys evaluation, no significant income tax uncertainties were identified.
5
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial statements include: the determination of the lower of cost or market adjustment for inventory; sales returns; the allowance for doubtful accounts; the recoverability of long-lived and intangible assets; the determination of deferred income taxes, including related valuation allowances; the accrual for actual, pending or threatened litigation, claims and assessments; and assumptions related to the determination of stock-based compensation
In an on-going basis, the Company reviews its outstanding customer receivables for collectability. Adjustments to the allowance account are made according to current knowledge. Additionally, management reviews the composition of its inventory no less than annually. Reserves are adjusted accordingly. On a quarterly basis, the Company also evaluates its ability to realize its deferred tax assets and whether or not a valuation allowance is necessary.
The Company has both Goodwill and other long-lived intangible assets which are not amortized. As prescribed by the FASB, the Company evaluates the carrying value of these assets for impairment. Significant economic changes may require the Company to recognize impairment. As of March 31, 2012, no impairment has been necessary.
3. | Business Segment Information |
The Company has two reportable segments as identified by information reviewed by the Companys chief operating decision makers (CODM) and is comprised of our CEO and SVP Finance of Dreams, Inc. The divisions whose customers are resellers of our goods have their results reflected in the manufacturing/distribution segment. The retail segment is made up of many locations for our inventory. Revenues are achieved by moving inventory through our sales channels to reach and expand our customer base. These channels include the Internet, stores and our catalogues. Hence, customers who are the end users of our goods have their results reflected in our retail segment.
The Manufacturing/Distribution segment represents the manufacturing and wholesaling of sports memorabilia products and acrylic display cases. Sales are handled primarily through in-house salespersons that sell to specialty retailers and other distributors in the United States. The Companys manufacturing and distributing facilities are located in the United States. The majority of the Companys products are manufactured in these facilities.
The Retail Operations segment is multi-channel and features numerous Internet sites, catalogues, kiosks, and some traditional brick and mortar stores:
Internet
The Companys e-commerce components feature FansEdge.com and ProSportsMemorabilia.com along with a complement of syndicated web sites including, but not limited to: www.shop.Bulls.com, www.jcp.com, and www.philadelphiaeagles.com. These e-commerce retail sites sell a diversified selection of sports licensed products and autographed memorabilia on the web. These e-commerce operations have provided for the fastest growing area of our retail segment.
Catalogues
The Company publishes and distributes a FansEdge catalogue, a Baseball Hall of Fame catalogue and a Philadelphia Eagles catalogue two times a year.
Brick and Mortar
As of March 31, 2012, the Company owned and operated five (5) Field of Dreams® stores offering a selection of sports & entertainment memorabilia and collectibles and ten (10) FansEdge stores offering an array of sports licensed products. The Company has multiple stores in the Chicago and Las Vegas markets.
All of the Companys revenue generated during the three months ended March 31, 2012 and March 31, 2011, was derived in the United States and all of the Companys assets are located in the United States.
Summarized financial information concerning the Companys reportable segments is shown in the following tables. Corporate related items, results of insignificant operations and income and expenses not allocated to reportable segments are included in the reconciliations to consolidated results table.
6
Segment information for the three month periods ended March 31, 2012 and March 31, 2011 was as follows:
Three Months Ended: |
Manufacturing/ Distribution |
Retail Operations |
Total | |||||||||
March 31, 2012 |
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Net sales |
$ | 3,562 | $ | 26,697 | $ | 30,259 | ||||||
Intersegment net sales |
(811 | ) | | (811 | ) | |||||||
Operating (loss) / income |
(106 | ) | 156 | 50 | ||||||||
Total assets |
$ | 18,988 | $ | 54,065 | $ | 73,053 | ||||||
March 31, 2011 |
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Net sales |
$ | 4,496 | $ | 20,224 | $ | 24,720 | ||||||
Intersegment net sales |
(1,217 | ) | 0 | (1,217 | ) | |||||||
Operating (loss) |
(168 | ) | (542 | ) | (710 | ) | ||||||
Total assets |
$ | 18,521 | $ | 37,615 | $ | 56,136 |
Reconciliation to consolidated amounts is as follows:
Three-Months Ended | ||||||||
3/31/12 | 3/31/11 | |||||||
Revenues: |
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Total revenues for reportable segment |
$ | 30,259 | $ | 24,720 | ||||
Other revenues |
74 | 28 | ||||||
Eliminations of intersegment |
(811 | ) | (1,217 | ) | ||||
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Total consolidated revenues |
$ | 29,522 | $ | 23,531 | ||||
Pre-tax (loss): |
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Total operating income / (loss) for reportable segments |
50 | (710 | ) | |||||
Other (loss)* |
(966 | ) | (1,294 | ) | ||||
Less: Interest expense |
177 | 124 | ||||||
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Total consolidated (loss) before taxes |
$ | (1,093 | ) | $ | (2,128 | ) |
* | These are unallocated costs and expenses that have not been allocated to the reportable segments. Some examples of these unallocated overhead costs which are consistent with the Companys internal accounting policies are executive salaries and benefits; corporate office occupancy costs; listing exchange fees, Board of Director and Committee meeting expenses, certain accounting/human resource support, professional fees, bank charges, certain insurance policy premiums, public relations/investor relations expenses. |
4. | Inventories |
The components of inventories are as follows:
March 31, 2012 |
December 31, 2011 |
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Raw materials |
$ | 366 | $ | 388 | ||||
Work in process |
80 | 75 | ||||||
Finished goods, net |
46,658 | 44,232 | ||||||
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Total |
$ | 47,104 | $ | 44,695 |
5. | Goodwill and Unamortized Intangible Assets |
In accordance with FASB Accounting Standards Codification Topic 350-20-35 Intangibles Goodwill and Other > Goodwill > Subsequent Measurement, the Company evaluates the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting units goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair value. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds it implied fair value.
7
The Companys evaluations of the carrying amount of goodwill were completed as of December 31, 2011 and resulted in no impairment losses. There has been no subsequent event that resulted in evaluation adjustments as of March 31, 2012.
6. | Acquisition of Business |
Upon the closing of an acquisition, management estimates the fair values of assets and liabilities, acquired and consolidates the acquisition as quickly as possible. However, it routinely takes time to obtain all of the pertinent information to finalize the acquired companys balance sheet and supporting schedules and to adjust the acquired companys accounting policies, procedures, books and records to the Companys standards. As a result, it may take several quarters before the Company is able to finalize those initial fair value estimates. Accordingly, it is not uncommon for initial estimates to be subsequently revised.
7. | Commitments and Contingencies |
The Company has a contract with an athlete which will require the Company to make minimum payments to this athlete during the remainder of 2012. The payments are in exchange for autographs and licensing rights on inventory items to be received in the future.
The Company leases its corporate offices, manufacturing, warehouse and distribution facilities along with its company-owned stores under operating leases with varying terms and lengths. Rent expense under these leases for the three months ended March 31, 2012 and March 31, 2011 were $1,399 and $1,359, respectively.
The Company leases certain computer and warehouse equipment under capital leases. The leases collectively require monthly payments of $47 and expire through 2014. Interest rates on capital leases range from 5% to 12%.
As a result of the Retail Contract transfer from CMS to Dreams, Inc. effective September 1, 2010, Dreams was required to post a $600 irrevocable standby letter of credit for the benefit of The University of Texas to comply with certain terms and conditions of the agreement. In addition, the Company is required to make quarterly payments of $150 towards an annual minimum royalty figure of $600.
8. | New Accounting Pronouncements |
A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.
9. | Line of Credit |
On December 23, 2011, Dreams, Inc. (the Company) and its subsidiaries (collectively the Debtors) closed on a $35,000 revolving credit facility with PNC Bank, while concurrently paying off its entire outstanding loan balance with its previous lender, Regions Bank. $35,000 will be available from August 1 to December 31 reducing to $30,000 on January 1 of every year. Also, the credit facility provides for an additional $5,000 seasonal over advance in order to support our projected growth. The revolving note (the Note) has a maturity date of December 23, 2014. The amount outstanding from time to time under the Note may not exceed the sum of: (i) 85% of the Borrowers eligible accounts receivable including eligible credit cards receivable (which are included in accounts receivable, net); plus (ii) up to the lesser of (x) 60% of eligible Borrowers inventory or (y) 90% of the net Borrowers orderly liquidation value of eligible inventory; minus (iii) any applicable reserves. The initial principal balance under the Note was $9,000, which the entire amount was used to pay-off its outstanding balance with its previous lender, Regions Bank.
Interest shall accrue on all outstanding amounts under the Note at the rate of LIBOR plus 2.25% per annum, and is due and payable monthly in arrears. The rate may further adjust based upon the Companys Fixed Charge Coverage Ratio and Seasonal Over-advances (up to $2,500 for three (3) months beginning in June and $5,000 for six (6) months beginning in September. Seasonal Over-advances will be priced at 50 basis points above the then applicable margin. The default rate of interest is the applicable rate plus 2% per annum. An unused line fee in the amount of 0.25% per annum is payable monthly in arrears based on the average daily unused portion of the facility. All outstanding principal, and any remaining outstanding interest, shall be paid in one lump sum on the maturity date.
The required Fixed Charge Coverage Ratio for the quarter ended March 31, 2012 is 1.10 to 1.00. The actual ratio was 2.87 to 1.00 and therefore, has been met for the quarter ended March 31, 2012.
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10. | Non-Controlling Interest |
Non-controlling interest represents the portion of equity that we do not own in the entity that we consolidate. We account for and report our non-controlling interest in accordance with the provisions under the Consolidation Topic of the FASB ASC 810. The Company has a 51% equity interest in The Comet Clothing Company, LLC, hence a 49% non-controlling interest. The Company has a controlling interest because of its management of The Comet Clothing Company, LLC.
As a result of our Asset Purchase Agreement with Pro-Star, Inc. effective December 26, 2006, Dreams received 86.5% of the Caesars Forum Shops Field of Dreams store; 89% of the Rio Hotel Field of Dreams store; 90.5% of the Smith & Wollensky Field of Dreams store (which has ceased operating in 2011); and 88.125% of the marketing venture known as Stars Live 365. Dreams will have an on-going obligation to make quarterly distributions on a pro-rata basis depending on the actual profitability of each of the three, now two operating stores and Stars Live 365.
11. | Subsequent Events |
In preparing the interim consolidated financial statements, the Company has evaluated, for the potential recognition or disclosure, events or transactions subsequent to the end of the most recent quarterly period through the date of issuance of the financial statements.
On April 16, 2012, the Company announced that it had entered into a definitive merger agreement with Fanatics, Inc. (Fanatics) whereby Fanatics will acquire the outstanding common stock of Dreams in a cash transaction. Concurrently, Dreams will be merged with Sweet Tooth Acquisition Corp., (Merger Sub) a wholly-owned subsidiary of Fanatics resulting in Dreams being the surviving entity as a wholly-owned subsidiary of Fanatics. The merger was unanimously approved by the Board of Directors and the transaction is expected to close upon receiving shareholder approval at its upcoming Special Shareholders Meeting scheduled for June 6, 2012.
The merger will become effective upon closing of the transaction at which time each share of Dreams common stock issued and outstanding immediately prior to the closing will be cancelled and converted into the right to receive $3.45 in cash, without interest (Merger Consideration). Upon closing, all such shares of Dreams common stock will no longer be outstanding and automatically be cancelled and each holder of Dreams Common Stock will cease to have any rights, except the right to receive the Merger Consideration. In addition, each option and warrant granted under any stock option plan, including the Companys 2006 Equity Incentive Plan or any other Company plan, agreement or arrangement, will be fully accelerated. Each former option and warrant holder will be entitled to receive cash equal to the total number of shares of Company common stock exercisable under the option and the excess, if any, of the offer price over the exercise price per share.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q under Managements Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such statements are indicated by words or phrases such as anticipates, projects, management believes, Dreams believes, intends, expects, and similar words or phrases. Such factors include, among others, the following: competition; seasonality; success of operating initiatives; new product development and introduction schedules; acceptance of new product offerings; franchise sales; advertising and promotional efforts; adverse publicity; expansion of the franchise chain; availability, locations and terms of sites for franchise development; changes in business strategy or development plans; availability and terms of capital including the continuing availability of our credit facility with PNC Bank or a similar facility with another financial institution; labor and employee benefit costs; changes in government regulations; and other factors particular to the Company.
Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements of Dreams may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to Dreams or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Dreams disclaims any obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Managements Overview
Dreams, Inc., headquartered in Plantation, Florida is a Utah Corporation which was formed on April 9, 1980, has evolved into a technology driven, vertically integrated, multi-channel retailer focused on the sports licensed products industry. This has previously been accomplished, in part, via organic growth and strategic acquisitions.
Specifically, we are engaged in multiple aspects of the licensed sports products and autographed memorabilia industry through a variety of distribution channels.
We generate revenues principally from:
| Our e-commerce component featuring www.FansEdge.com and others; (reported in retail segment) |
| Our web syndication sites; (reported in retail segment) |
| Our ten (10) company-owned FansEdge stores; (reported in retail segment) |
| Our five (5) company-owned Field of Dreams stores; (reported in retail segment) |
| Our catalogues; (reported in retail segment) |
| Our manufacturing/distribution of sports memorabilia products, custom acrylic display cases and framing; (reported in mfg/wholesale segment) |
| Our running of sports memorabilia /collectible trade shows; (reported in mfg/wholesale segment) |
| Our franchise program through the five (5) Field of Dreams franchise stores presently operating*; (reported in other income) and |
| Our representation and corporate marketing of individual athletes* (reported in other income). |
* | revenues not material to the overall consolidated results. |
Organic Growth (dollar amounts in thousands)
Key components of our organic growth strategy include building brand recognition; improving sales conversion rates both on our web sites and in our stores; continuing our execution of multi-channel retailing under our flagship brand, FansEdge; aggressively marketing our web syndication services, exploring additional distribution channels for our products; and cross pollinating corporate assets among our various operating divisions. Management believes that there remain significant benefits to cross pollinating the various corporate assets and leveraging the vertically integrated model that has been constructed over the years.
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In particular, we have had success with the marketing of our products on-line via FansEdge.com and the complement of each of our web properties. For the quarter ended March 31, 2012, the Internet division generated $23,003 in sales, up 37.0%, versus $16,788 in Internet sales generated in the first quarter in 2011. This remains the fastest growing area of the Company and will remain its primary focus. This Internet growth has re-defined our Company as we have transformed ourselves into a technology company, operating in the sports licensed products industry, generating a majority of our revenues via the eCommerce channel.
The Company has drawn on a complete spectrum of competencies it has developed over the years to support its flagship online brand, FansEdge. This has allowed the Company to leverage the investments made during the past several years by marketing a proven range of services to third parties that include; managed hosting, custom site design and development, customer service, order fulfillment, purchasing, inventory management, marketing, merchandising, and analytics and reporting. The Company calls the compilation of e-commerce services described above, Web Syndication and believes there are significant growth opportunities that exist in the marketplace. Our current web syndication portfolio consists of some eighty clients representing some of the best known brands and properties in the country, including JC Penney, the Chicago Bulls, Majestic Athletic, NBC Sports and the Philadelphia Eagles.
The Company currently operates ten (10) FansEdge stores. This was in support of our Multi-channel Retailing strategy; whereby we market a single brand via multiple channels. We are pleased with the results to date of our FansEdge brick & mortar stores. They have performed well during the slow economy as we believe they offer approachable price points for the consumer. They cross market with the on-line Fansedge.com site and benefit by a high-tech inter-active kiosk used in each of the FansEdge stores. Furthermore, we have begun to offer this suite of Multi-channel Retailing services to third parties who are seeking to add one or more distribution channels to their retail model.
Our proprietary eCommerce platform has also enabled us to fuel a state-of-the-art interactive Kiosk for ordering products. These Kiosks are in each of our FansEdge stores and are providing a unique shopping experience for our customers by allowing them to access the entire Company portfolio of more than 200,000 product offerings. In 2011, and continuing through our first quarter of 2012, we experienced a range of 10% to 20% lift in our store sales attributed to the Kiosk.
We believe this expansion of our revenue producing footprint will serve us well as we navigate our business models and look to distinguish ourselves from our competitors.
Objective
Our overall objective is twofold; to become the premier multi-channel retailer in the team licensed products industry under our FansEdge brand; and become the leading online syndicator for sports related properties.
Analysis
We review our operations based on both our financial results and various non-financial measures. Managements focus in reviewing performance begins with growth in sales, margin integrity and operating income. On the expense side, with a majority of our sales being achieved as an on-line retailer of licensed sports products, we spend a disproportionate amount of our operating expenses in internet marketing. Therefore, we continuously monitor the return on investment of these particular expenses. Non-financial measures which management reviews include: unique visitors to our web sites, foot traffic in our stores, sales conversion rates and average sold unit prices.
We believe the implementation of our Multi-channel Retailing strategy will strengthen our FansEdge brand in the marketplace, and that we are well positioned to capture increased activity of on-line retail purchases.
On the Mobile Channel front, we plan to continue to invest in various initiatives to leverage mobile opportunities to acquire customers online and offline, conduct mobile commerce, enhance the in-store experience and connect with our customers even when they are not shopping. Currently, our e-commerce platform is mobile capable and with revenues transacted from mobile devices growing exponentially, this is expected to become a more material part of our overall revenue stream. In the near future, we plan on releasing an enhanced mobile e-commerce experience that is fully optimized for intuitive shopping via a mobile device. Additionally, we plan to continue to expand our various mobile oriented marketing programs that we use to acquire new customers and stimulate repeat purchasing from existing programs. Currently, we use programs such as local search, text alerts and other mobile oriented promotions. We also plan to use mobile to enhance our in-store experience such as using QR codes to allow in-store shoppers to access customer reviews, quickly see what other teams we have available in a particular style and to quickly see what sizes we might have online that we may not have in the store.
We have recently added the ability to manufacture soft goods (apparel) within the organization and will seek to produce some of the items that will be featured on many of our online shops and our partners eCommerce sites. This should improve our overall gross margins within this segment. In addition, with our team providing game-day/stadium sales for the University of Texas, we are able to deliver a comprehensive retail solution to current and prospective clients that are looking for a provider who offers both eCommerce and in-stadium operations and merchandising.
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Historically, the fourth quarter of the fiscal year (October to December) has accounted for a greater proportion of our operating income than have each of the other three quarters of our fiscal year. This is primarily due to increased consumer buying activities as a result of the holiday season. We expect that we will continue to experience quarterly variations and operating results principally as a result of the seasonal nature of our industry. Management continues to seek ways to shift expenses from the non-holiday quarters to the busier holiday quarter in order to improve cash flow. Other factors also cause a significant fluctuation of our quarterly results, including the timing of special events, the general popularity of a specific team that plays in a championship or an individual athlete who enters their respective sports Hall of Fame, the amount and timing of new sales contributed by new web syndication accounts, new stores, the timing of personal appearances by particular athletes and general economic conditions. Additional factors may cause fluctuations in expenses, including the costs associated with the opening of new stores, the integration of acquired businesses and stores into our operations , the general health of the economy, and corporate expenses and capital needed to support our expansion and growth strategy.
Conclusion
We set ourselves apart from other companies with our diversified product and services line, our proprietary e-commerce platform, our plethora of sports leagues and celebrity licenses, as well as our relationships with sports leagues, agents and athletes. Management believes we can continue to capture market share on-line.
GENERAL
As used in this Form 10-Q we, our, us, the Company and Dreams refer to Dreams, Inc. and its subsidiaries unless the context requires otherwise.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial statements include: the determination of the lower of cost or market adjustment for inventory; sales returns; the allowance for doubtful accounts; the recoverability of long-lived and intangible assets; the determination of deferred income taxes, including related valuation allowances; the accrual for actual, pending or threatened litigation, claims and assessments; and assumptions related to the determination of stock-based compensation.
In an on-going basis, the Company reviews its outstanding customer receivables for collectability. Adjustments to the allowance account are made according to current knowledge. Additionally, management reviews the composition of its inventory no less than annually. Reserves are adjusted accordingly. On a quarterly basis, the Company also evaluates its ability to realize its deferred tax assets and whether or not a valuation allowance is necessary.
The Company has both Goodwill and other long-lived intangible assets which are not amortized. As prescribed by the FASB, the Company evaluates the carrying value of these assets for impairment. Significant economic changes may require the Company to recognize impairment. As of December 31, 2011, no impairment has been necessary. As of March 31, 2012 there have been no circumstances that would yield impairment.
Management believes that the following may involve a higher degree of judgment or complexity:
Collectibility of Accounts Receivable
The Companys allowance for doubtful accounts is based on managements estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be an amount sufficient to respond to normal business conditions. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact upon the Companys operations. The Companys current allowance for doubtful accounts is $24.
March 31, 2012 |
December 31, 2011 |
|||||||
Accounts receivable |
$ | 5,556 | $ | 11,614 | ||||
Allowance for doubtful accounts |
24 | 24 | ||||||
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|
|
|
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Accounts receivable, net |
$ | 5,532 | $ | 11,590 |
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Reserves on Inventories
The Company establishes a reserve based on historical experience and specific reserves when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to operations results when the estimated net realizable value of inventory items declines below cost. Management regularly reviews the Companys investment in inventories for declines in value. Adjustments are made to the reserve based on a number of factors, such as, players changing teams, falling out of favor with the public, incurring an injury, etc. These negative situations may impact valuation. However, dynamics that could increase inventory value, like the death of an athlete, do not result in writing up of inventory values. The Companys current reserve for inventory obsolescence is $463.
March 31, 2012 |
December 31, 2011 |
|||||||
Inventory |
$ | 47,567 | $ | 45,158 | ||||
Reserves for inventory obsolescence |
463 | 463 | ||||||
|
|
|
|
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Inventory, net |
$ | 47,104 | $ | 44,695 |
Income Taxes
Significant management judgment is required in developing the Companys provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. The Company evaluates quarterly its ability to realize its deferred tax assets and adjusts the amount of its valuation allowance, if necessary.
Goodwill and Unamortized Intangible Assets
In accordance with FASB Accounting Standards Codification Topic 350-20-35 Intangibles-Goodwill and Other > Goodwill > Subsequent Measure, the Company evaluates the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting units goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair value. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds it implied fair value.
The Companys evaluations of the carrying amount of goodwill were completed as of December 31, 2011 in accordance with Topic 350-20-35, resulted in no impairment losses. As of March 31, 2012, there was no impairment to goodwill.
Revenue Recognition
The Company recognizes retail (including e-commerce sales and web syndication sales) and wholesale/distribution revenues at the later of (a) the time of shipment or (b) when title passes to the customers, all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Retail revenues and wholesale/distribution are recognized at the time of sale. Return allowances, which reduce gross sales, are estimated using historical experience.
Management fee revenue related to the representation and marketing of professional athletes is recognized when earned and is reflected net of its related costs of sales. The majority of the revenue generated from the representation and marketing of professional athletes relates to services as an agent. In these arrangements, the Company is not the primary obligor in these transactions but rather only receives a net agent fee.
Revenues from industry trade shows are recognized at the time of the show when tickets are submitted for autographs or actual product purchases take place. In instances when the Company receives pre-payments for show autographs, the Company records these amounts as deferred revenue.
The Company had approximately $368 in orders not yet shipped as of March 31, 2012.
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Three Months Ended March 31, 2012 versus the Three Months Ended March 31, 2011
Revenue. Total revenues increased 25.4% to $29,522 for the three months ended March 31, 2012, compared to $23,531 for the three months ended March 31, 2011. This increase was attributed to considerably higher on-line sales. Online sales continue to represent the fastest growing area of the Company and will remain its primary focus.
Manufacturing/Distribution revenues decreased 20.7% to $3,562 for the three months ended March 31, 2012, compared to $4,496 for the three months ended March 31, 2011. Net revenues (after eliminating intercompany sales) decreased 16.1% to $2,751 for the three months ended March 31, 2012, from $3,279 for the three months ended March 31, 2011.
Retail channel revenues increased 32.0% to $26,697 for the three months ended March 31, 2012, from $20,224 for the three months ended March 31, 2011. The increase was driven by considerably higher revenues generated online.
| E-Commerce Our internet retail division revenues increased 37.0% to $23,003 during the first three months of 2012, versus $16,788 for the three months ended March 31, 2011. The increase is a result of our www.FansEdge.com and web syndication growth. |
| FansEdge stores Retail revenues generated through our ten (10) FansEdge stores increased 15.5% to $1,358 for the first three months of 2012, from $1,175 for the three months ended March 31, 2011 when we had nine (9) FansEdge stores operating. Same store sales were up 6.0% as we continue to make operational improvements and enhance our merchandise offerings and market our in-store kiosks. |
| Field of Dreams® stores Retail revenues generated through our five (5) company-owned Field of Dreams stores remained constant at $1,759 for the first three months of 2012, from $1,796 for the three months ended March 31, 2011. |
| Stadium Sales Retail revenues generated through stadium sales was $577 for the current period, up 24.0%, compared to $465 in stadium revenues for the first three months of 2011. |
Costs and expenses. Total cost of sales for the three months ended March 31, 2012, increased 23.0% to $15,837, versus $12,867 in the same period last year. The increase is attributed to higher overall sales. However, as a percentage of total sales, cost of sales was 53.6% for the three months ended March 31, 2012, versus 54.7% for the three months ended March 31, 2011.
Cost of sales of manufacturing/distribution products decreased 17.8% to $1,548 for the three months ended March 31, 2012, from $1,884 for the three months ended March 31, 2011. The decrease is a result of lower sales for this segment in the period. As a percentage of manufacturing/distribution revenues, cost of sales was 56.2%, versus 57.4% for the three months ended March 31, 2011. As a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were 66.2% for the three months ended March 31, 2012, compared to 69.0% for the three months ended March 31, 2011.
Cost of sales of retail products increased 30.1% to $14,289 for the three months ended March 31, 2012, from $10,983 for the three months ended March 31, 2011. The increase is a result of higher overall retail sales. As a percentage of total retail sales, costs were 53.5% for the three months ended March 31, 2012, versus 54.3% for the same period last year.
Operating expenses were up 15.4% at $13,880 for the three months ended March 31, 2012, compared to $12,026 for the three months ended March 31, 2011. The increase in operating expenses is a result of higher overall sales. As a percentage of sales, operating expenses were 47.0% for the three months ended March 31, 2012, compared to 51.1% for the three months ended March 31, 2011. During the first quarter of 2011, the Company accrued approximately $500 for a legal settlement and related expenses.
Interest expense, net. Net interest expense was $177 for the three months ended March 31, 2012, versus $124 for the three months ended March 31, 2011.
Provision for income taxes. The Company recognized an income tax benefit of $420 for the three months ended March 31, 2012, versus an income tax benefit of $856 for the three months ended March 31, 2011. Each quarter, the Company evaluates whether the realizability of its net deferred tax assets is more likely than not. Should the Company determine that a valuation reserve is necessary, it would have a material impact on the Companys operations. The Company has prepared an analysis based upon historical data and forecasted earnings projections to determine its ability to realize its net deferred tax asset. The Company believes that it is more likely than not that the net deferred tax asset will be realized. Therefore, the Company has determined that a valuation allowance was not necessary as of March 31, 2012 and March 31, 2011. The effective tax rate for both periods was approximately 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity during the three months ended March 31, 2012, are the cash flows generated daily from our operating subsidiaries, availability under our $35,000 senior revolving credit facility and available cash.
The balance sheet as of March 31, 2012 reflects working capital of $20,175 versus working capital of $20,911 at December 31, 2011. At March 31, 2012, the Companys cash was $684, compared to $1,860 at December 31, 2011. The Company is not negatively impacted by the cash balance of $684 as it has sufficient access to capital under its revolving credit facility with its senior lender. Net accounts receivable at March 31, 2012 were $5,532, compared to $11,590 at December 31, 2011.
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Use of Funds
Cash used in operations amounted to $12,315 for the three months ended March 31, 2012, compared to $11,581 cash used in operations during the same period of 2011.
Cash used in investing activities was $332 for the three months ended March 31, 2012, compared to $406 cash used in investing activities for the same period of 2011.
Cash provided by financing activities was $11,471 for the three months ended March 31, 2012, versus $11,757 cash provided by financing activities for the same period in 2011.
Summary
Management believes that future funds generated from our operations and available borrowing capacity will be sufficient to fund our debt service requirements, working capital requirements and our budgeted capital expenditure requirements for the current fiscal year.
Off-balance sheet arrangements
We have not created and are not a party to any special purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. Except as described herein, our management is not aware of any known trends or demands, commitments, events or uncertainties, as they relate to liquidity which could negatively affect our ability to operate and grow as planned, other than those previously disclosed.
NEW ACCOUNTING PRONOUNCEMENTS
A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Not required for smaller reporting companies.
Item 4. | Controls and Procedures. |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation as required by paragraph (b) of Rule 13a-15 and 15d-15 of the Exchange Act, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of March 31, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal controls over financial reporting that occurred during the first fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. | Legal Proceedings. |
Two purported class action lawsuits related to the merger were filed against Dreams, the members of Dreams board of directors, Fanatics and Merger Sub. The lawsuits seek to enjoin the merger or, if it is completed, to recover relief as determined by the applicable presiding court to be appropriate. Further information regarding each of these lawsuits is set forth below.
The two lawsuits were filed in the Circuit Court for the Seventeenth Judicial Circuit in and for Broward County, Florida. These lawsuits are styled as follows: Vinay Rallapalle, individually and on behalf of all others similarly situated, Plaintiff, v. Sam D. Battistone, Ross Tannenbaum, Dale Larsson, David Malina, Steven Rubin, Fanatics, Inc., Sweet Tooth Acquisition Corp. and Dreams, Inc., Defendants (filed on April 19, 2012); and Scott Kaplan, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. Sam D. Battistone, Dale E. Larsson, David Malina, Steven D. Rubin, Ross Tannenbaum, Dreams, Inc., Fanatics, Inc., and Sweet Tooth Acquisition Corp., Defendants (filed on April 23, 2012).
The amended class action complaint filed in the Rallapalle action alleges that the individual director defendants breached their fiduciary duties by (i) allegedly agreeing to sell Dreams without first taking steps to ensure adequate, fair and maximum consideration, (ii) allegedly engineering a transaction to benefit themselves and not the shareholders, (iii) allegedly failing to disclose material information to shareholders, and (iv) allegedly failing to protect the interests of Dreams minority shareholders. In the amended complaint, the plaintiffs also allege that Dreams, Fanatics and Merger Sub aided and abetted the alleged breaches of fiduciary duties by Dreams directors. The amended complaint seeks declaratory and injunctive relief, damages and attorneys fees and costs.
On May 1, 2012, the Kaplan lawsuit was voluntarily dismissed and, on May 3, 2012, the plaintiff in the Rallapalle action filed an amended class action complaint on behalf of himself and Kaplan.
On May 7, 2012, counsel for parties to the Rallapalle action entered into a memorandum of understanding outlining the terms of a settlement. The settlement is contingent on execution of a stipulation of settlement to be negotiated between the parties, court approval, class wide notice, and the closing of the Merger.
On May 7, 2012, a third lawsuit was filed in the Circuit Court for the Seventeenth Judicial Circuit in and for Broward County, Florida, styled Tom Perkins and Linda Matney, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. Dreams, Inc., Ross Tannenbaum, Sam Battistone, Dale Larsson, David Malina, Steven Rubin, Fanatics, Inc., and Sweet Tooth Acquisition Corp., Defendants. The class action complaint filed in the Perkins action alleges that the individual director defendants breached their fiduciary duties by (i) allegedly agreeing to sell Dreams without first taking steps to ensure adequate, fair and maximum consideration, (ii) allegedly engineering a transaction to benefit themselves and not the shareholders, (iii) allegedly failing to disclose material information to shareholders, and (iv) allegedly failing to protect the interests of Dreams minority shareholders. In the complaint, the plaintiffs also allege that Dreams, Fanatics and Merger Sub aided and abetted the alleged breaches of fiduciary duties by Dreams directors. The complaint seeks declaratory and injunctive relief, damages and attorneys fees and costs.
On May 11, 2012, plaintiffs in the Perkins action filed their Emergency Motion for a Preliminary Injunction and Motion to Consolidate Related Actions and Appoint Lead Plaintiffs and Lead Plaintiffs Counsel, seeking (1) a preliminary injunction hearing to enjoin a shareholder vote on the merger until additional disclosures are provided are provided; (2) the consolidation of the Perkins Action with the Rallapalle Action; (3) the appointment of the Perkins plaintiffs as Lead Plaintiffs; and (4) the appointment of the Perkins counsel as Lead Counsel. No hearing has yet been scheduled on the motion.
We are aware that a fourth lawsuit was filed against Dreams in the Circuit Court for the Seventeenth Judicial Circuit in and for Broward County, Florida. The Clerk of Courts docket reflects that the lawsuit is styled as follows: Wayne Schmertzler v. Dreams, Inc. (filed on May 5, 2012). Dreams has not been served with this lawsuit, and the nature of the claims asserted is thus unknown.
Dreams and Fanatics believe that these lawsuits are without merit.
Item 1A. | Risk Factors. |
See list of Risk Factors disclosed in Companys form 10-K filed with the S.E.C. on March 29, 2012.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults upon Senior Securities. |
None.
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Item 4. | Removed and Reserved |
None.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
No. |
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31.1 | Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.) | |
32.2 | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934 as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.) | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
* | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. |
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DREAMS, INC. | ||
By: | /s/ Ross Tannenbaum | |
Ross Tannenbaum, Chief Executive Officer, | ||
Principal Executive Officer |
May 15, 2012.
By: | /s/ Dorothy Sillano | |
Dorothy Sillano, Chief Financial Officer, | ||
Principal Accounting Officer |
18
Exhibit Index
Exhibit No. |
Description | |
31.1 | Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.) | |
32.2 | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934 as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.) | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
* | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. |
19
Exhibit 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 302
I, Ross Tannenbaum, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Dreams, Inc. (the Registrant); |
2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report. |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the period presented in this Quarterly Report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the Registrants disclosure controls and procedures presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the Registrants auditors and the audit committee of Registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: May 15, 2012 | /s/ Ross Tannenbaum | |
Ross Tannenbaum | ||
Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 302
I, Dorothy Sillano, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Dreams, Inc. (the Registrant); |
2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report. |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the Registrants disclosure controls and procedures presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of Registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: May 15, 2012 | /s/ Dorothy Sillano | |
Dorothy Sillano | ||
Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report of Dreams, Inc. (the Company) on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Ross Tannenbaum, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fully presents, in all material respects, the financial condition and results of operations of the Company.
By: | /s/ Ross Tannenbaum | |
Ross Tannenbaum | ||
Principal Executive Officer | ||
May 15, 2012 |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report of Dreams, Inc. (the Company) on Form 10-Q for the period ending March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Dorothy Sillano, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fully presents, in all material respects, the financial condition and results of operations of the Company.
By: | /s/ Dorothy Sillano | |
Dorothy Sillano | ||
Principal Financial Officer | ||
May 15, 2012 |
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Inventories
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2012
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Inventories [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories |
The components of inventories are as follows:
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