Notes to Consolidated Financial Statements
(Dollars in Thousands, except share and earnings per share amounts)
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1.
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Nature of Business and Summary of Significant Accounting Policies
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Description of Business
Dreams, Inc. and its
subsidiaries (collectively the “Company”) are principally engaged in the manufacture, distribution and sale of sports memorabilia products and acrylic display cases. The Company is also in the business of selling Field of Dreams
®
retail store franchises and operates retail stores and websites selling memorabilia and licensed sports products, as well as athlete representation and corporate marketing of individual
athletes. The Company’s customers are located throughout the United States of America. The nine months ended December 31, 2007 results are reflected in this transition report. The fiscal years ended March 31, 2007and March 31,
2006 are herein referred to as “fiscal 2007”and “fiscal 2006”, respectively.
Fiscal Year Change
Pursuant to a Consent Resolution of the Board of Directors dated September 12, 2007, the Company has changed its fiscal year end from March 31
to December 31. Management believes this will provide greater clarity to the investment community. As a result, the Company is filing this transitional report for the period of April 1, 2007 to December 31, 2007, on Form 10-K/T.
Principals of Consolidation
The accompanying consolidated audited financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material inter-company transactions and accounts have been eliminated in consolidation.
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.
Stock Split
The Company received approval from a majority of its shareholders on January 25,
2007 to effectuate a reverse stock split of its common shares. Consequently, the Board determined that a 1 for 6 reverse stock split would be effective on January 30, 2007. All share and per share amounts have been retroactively adjusted to
reflect this reverse stock split.
Accounts Receivable
The Company’s accounts receivable principally result from uncollected royalties from Field of
Dreams
®
franchisees and from credit sales to third-party customers from its wholesale operations and credit card transactions from the internet division. The Company’s allowance for
doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management is believed to be set at an amount sufficient to respond to
normal business conditions. Should such conditions deteriorate or any major credit customer default on its obligations to the Company, this allowance may need to be increased which may have an adverse impact on the Company’s operations. The
Company reviews its accounts receivable aging on a regular basis to determine if any of the receivables are past due. The Company writes off all uncollectible trade receivables against its allowance for doubtful accounts. As of December 31,
2007 and March 31, 2007, the allowance for doubtful accounts was $67 and $33, respectively.
Revenue Recognition
The Company recognizes retail (including e-commerce 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 revenues are recognized at the time
of sale.
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.
F-7
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.
F-8
Shipping and Handling Costs
Costs incurred for shipping and handling associated with a sale are included in cost of sales in the period when the sale occurred. Amounts billed to a
customer for shipping and handling is reported as revenue.
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
and included in operating expenses. For the nine months ended December 31, 2007, these expenses were $4.4 million. Additionally, these expenses were $3.4 million and $1.9 million in fiscal 2007, and fiscal 2006, respectively.
Inventories
Inventories, consisting
primarily of sports memorabilia products and acrylic cases, are valued at the lower of cost or market. Inventory value is determined using the specific identification and average cost methods.
Property and Equipment
Property and
equipment is stated at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the remaining 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.
Goodwill and Intangible Assets
In
June 2001, the Financial Accounting Standards Board approved the issuance of SFAS 142, “Goodwill and Other Intangible Assets”, which established accounting and reporting requirements for goodwill and other intangible assets. The standard
requires that all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged must be recognized as an asset apart from goodwill. Goodwill and
intangibles with indefinite lives are no longer amortized, but are subject to an annual assessment for impairment by applying a fair value based test.
The Company applied the provisions of SFAS 142 beginning on April 1, 2001 and during the years ended December 31, 2007 and March 31, 2007, and performed fair value based impairment tests on its goodwill
and other indefinite lived intangible assets and determined no impairment was necessary.
Long-Lived Assets
Long-lived assets and certain non-amortizable intangible assets to be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of such asset and eventual disposition.
Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of carrying amount or fair value less costs to sell.
F-9
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, pre paid expenses, accounts payable, accrued liabilities and deferred credits;
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 December 31, 2007 and March 31, 2007, the aggregate fair value of the Company’s notes payable and long-term debt approximated its carrying value.
Income Taxes
Income tax expense
includes United States and state income taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting and the tax basis of existing assets and liabilities per SFAS 109.
The tax rate used to determine the deferred tax assets and liabilities is the enacted tax rate for the year in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will
more likely than not be realized. In 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“Interpretation No. 48”) to account for uncertainty in income taxes recognized in
the Company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Refer to Note 11.
Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding during the year. Diluted EPS is computed by dividing net income by the sum of the weighted average number of common shares outstanding including the dilutive effect of
common stock equivalents. There was no dilutive effect of common stock equivalents in fiscal 2006 and fiscal 2005, as all of the outstanding stock options had exercise prices greater than the average fiscal 2006 stock price.
Potential common stock equivalents at December 31, 2007 were stock options to purchase 437,750 shares of common stock with exercise prices ranging
from $.60 to $2.75 per share.
Stock Compensation
On April 1, 2006, the Company adopted Statement of Financial Accounting Standards 123(R), Share-Based Payment. Accordingly, the Company is now recognizing share-based compensation expense for all awards
granted to employees, which is based on the fair value of the award on the date of grant. The Company adopted FAS No. 123(R) under the modified prospective transition method and, consequently, prior period results have not been
restated. Under this transition method, in fiscal 2007, the Company’s reported share-based compensation expense will include expense related to share-based compensation awards granted subsequent to April 1, 2006, which is based on the
grant date fair value estimated in accordance with the provisions of FAS No. 123(R), as well as any unrecognized compensation expense related to non-vested awards that were outstanding as of the date of adoption. Prior to April 1,
2006, the Company applied APB Opinion No. 25 “Accounting for Stock Issued to Employees” in accounting for its employee share-based compensation and applied FAS No. 123 “Accounting for Stock Issued to Employees” for
disclosure purposes only. Under APB 25, the intrinsic value method was used to account for share-based employee compensation plans and compensation expense was not recorded for awards granted with no intrinsic value. The FAS No. 123
disclosures include pro forma net earnings (loss) and earnings (loss) per share as if the fair value-based method of accounting had been used. Determining the appropriate fair value model and calculating the fair value of share-based
compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the share-based compensation awards, the Company’s common stock price volatility, and the rate of employee
forfeitures. The assumptions used in calculating the fair value of share-based compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result,
if factors change and the Company deems it necessary to use different assumptions, share-based compensation expense could be materially different from what has been recorded in the current period.
For the nine months ended December 31, 2007, the Company recorded $76 of pre-tax share-based compensation expense under FAS No. 123(R), as part
of operating expense in the Company’s Consolidated Statement of Operations. This expense was offset by a $30 deferred tax benefit for non-qualified share–based compensation.
F-10
Share-Based Compensation Awards
The following disclosure provides information regarding the Company’s share-based compensation awards, all of which are classified as equity awards in accordance with FAS No. 123(R): (Which the Company
adopted effective Fiscal Year 2007).
Stock Options
—The Company grants stock options to employees that allow them to purchase shares of the
Company’s common stock. Options may also be 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 and five years. There were 36,667 options granted during the nine months ended December 31, 2007 with a
weighted average issue price of $2.69. No options were granted during the fiscal year 2007, however, certain options awarded prior to March 31, 2006 vested during the year. Awards generally expire three to five years after the date of
grant.
During the nine months ended December 31, 2007, 24,166 options vested. The Total Weighted Average (TWA) of shares vested for the nine months
was 16,714. The TWA price vested during the period was $1.84.
As of December 31, 2007, there were 437,750 options outstanding with a weighted average
exercise price of $.94 Vested options totaled 332,246 with a weighted average exercise price of $.97. Total outstanding options that were “in the money” at December 31, 2007 were 401,083 with an average price per option of $.78. Of
those options, the vested “in the money” options totaled 309,080 with an average price of $.84 and the “in the money” unvested options totaled 92,003.
The following table summarizes the stock option activity from April 1, 2007 through December 31, 2007:
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Shares
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Exercise Price
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Weighted Avg.
Exercise Price
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April 1, 2007
|
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493,582
|
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$
|
.60 - $1.50
|
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$
|
.89
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Granted
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36,667
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$
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2.64 - $2.75
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$
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2.69
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Expired
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(3,166)
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$
|
.90
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$
|
.90
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Cancelled
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(5,000)
|
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$
|
.90
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$
|
.90
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Exercised
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(84,333)
|
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$
|
1.20
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$
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1.07
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December 31, 2007
|
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437,750
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$
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.60 - $2.75
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$
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.97
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F-11
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, and number of vested options with the corresponding exercise price by price range.
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[Outstanding]
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[Exerciseable]
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Range
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Outstanding
Options
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Remaining
Contractual
Life
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WA
Outstanding
Exercise
Price
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Vested
Options
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WA
Vested
Exercise
Price
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$0.60 to $1.19
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319,995
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3.2
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$
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.60
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227,992
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$
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.60
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$1.20 to $1.50
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81,088
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1.6
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$
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1.50
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81,088
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$
|
1.50
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$1.51 to $2.75
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36,667
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3.5
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$
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2.69
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24,166
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$
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2.66
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|
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$0.60 to $2.75
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437,750
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2.9
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$
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.94
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333,246
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$
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.97
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At December 31, 2007, exercisable options had aggregate intrinsic values of $408,320.
F-12
The fair value for prior year grants was estimated on the date of the grant using the Black-Scholes valuation model with
the following weighted-average assumptions for:
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year ended
March 31.
2006
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Expected Dividend Yield (1)
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N/A
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Expected Stock Price Volatility (2)
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94.00
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%
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Risk-Free Interest Rate (3)
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4.74
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%
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Expected Life in Years (4)
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3
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(1)
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The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts. The Company has not paid dividends in the past and is prohibited
from paying dividends without the consent of its secured lender.
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(2)
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The determination of expected stock price volatility for options granted was based on the Company’s historical common stock prices over a period commensurate with the expected
life of the option.
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(3)
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The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity as the expected life of the options.
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(4)
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The expected life in years for options is based on evaluations of historical and expected future employee behavior.
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Fiscal
2006
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Net income:
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As reported
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$
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2,549
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Pro forma
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$
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2,513
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Basic and diluted income per share:
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As reported
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$
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0.09
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Pro forma
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$
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0.09
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There was no stock-based employee compensation expense included in net income in fiscal 2006. The
above pro forma disclosures may not be representative of the effects on reported net earnings (loss) for future years as options vest over several years and the Company may continue to grant options to employees.
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.
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1.
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Nature of Business and Summary of Significant Accounting Policies
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NEW
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ACCOUNTING PRONOUNCEMENTS
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In December 2007, the FASB
issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards that will require noncontrolling
interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary to be initially measured at fair value. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008 and is to be applied prospectively, except for the presentation and disclosure
requirements which should be retrospectively applied. Early adoption of SFAS No. 160 is also prohibited. Accordingly, the Company will be required to adopt SFAS No. 160 as of January 1, 2009. Management does
not believe that the adoption of SFAS No. 160 will have a material effect on the Company’s consolidated results of operations, cash flows or financial position.
In December 2007, the FASB also issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which requires an acquirer to recognize in its financial statements as of
the acquisition date (i) the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, measured at their fair values on the acquisition date, and (ii) goodwill as the excess of
F-13
the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the
identifiable net assets acquired. Acquisition-related costs, which are the costs the acquirer incurs to effect a business combination, will be accounted for as expenses in the periods in which the costs are incurred and the services are received,
except that costs to issue debt or equity securities will be recognized in accordance with other applicable GAAP.SFAS No. 141(R) makes significant amendments to other Statements and other authoritative guidance to provide additional
guidance or to conform the guidance in that literature to that provided in SFAS No. 141(R). SFAS No. 141(R) also provides guidance as to what information is to be disclosed to enable users of financial statements to evaluate the
nature and financial effects of a business combination. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of
SFAS No. 141(R) will affect how the Company accounts for the acquisition of a business after December 31, 2008.
In February 2007, the FASB
issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to measure at fair value eligible
financial assets and liabilities that are not currently required to be measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item will be reported in current earnings at each
subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparison between the different measurements attributes the entity elects for similar types of assets and
liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company will not elect the fair value option available for those assets and liabilities
which are eligible under SFAS No. 159, and accordingly, there will be no impact on the Company financial position and results of operations attributable to SFAS No. 159.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement provides a single definition of fair value, a framework for measuring fair
value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies to those
previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to
measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. Dreams does not expect the adoption of SFAS No. 157 to have a material impact on its financial position, results of operations, or cash
flows.
In September 2006, the SEC Office of the Chief Accountant and Divisions of Corporation Finance and Investment Management released SAB
No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This guidance is effective for fiscal years ending after November 15, 2006. The
application of SAB No. 108 did not have any impact on our Consolidated Balance Sheet, Statement of Operations or Statement of Stockholders’ Equity for fiscal 2007.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation Number 48 (FIN 48), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement
No. 109.” The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The interpretation is effective for the first interim period for fiscal years beginning after December 15, 2006. Dreams has adopted FIN 48 and there
is no material impact on its financial condition, results of operations, cash flows or disclosures.
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.
Reclassifications
Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation.
F-14
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2.
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Acquisition of Businesses
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General Statement
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 company’s balance sheet and supporting schedules and to adjust the acquired company’s accounting
policies, procedures, books and records to the Company’s 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.
The Company considers the following transactions to be significant in nature but, not material to the business
overall.
Chicago Sun-Times Collectibles Show
Effective September 4, 2007, the Company purchased all of the rights, title and interests in the Chicago Sun-Times Collectibles Show from Sportsnews Productions, Inc. The Agreement grants the Company the
exclusive right to produce and operate the Chicago Sun-Times Collectibles Show from the date of the agreement in perpetuity and to receive all revenues and all other benefits and interests from those shows. As a result of the transaction, the
Company recorded intangible assets of approximately $1.4 million. The intangible assets consist of a five year non-compete agreement which management estimates to be valued at $150. The remaining amount has been recorded as non-amortizable rights as
management believes the asset has an indefinite useful life. In connection with the acquisition, a consulting agreement was executed with the president of the seller of the show for a term of five years.
Schwartz Sports
Effective
August 1, 2007, the Company entered into a stock purchase agreement with the shareholders of BKJ Consulting Corp., an Illinois corporation that owned and operated Schwartz Sports, a Chicago based sports memorabilia company. The Company acquired
100% of the outstanding shares of BKJ Consulting Corp. in exchange for 500,000 newly issued, restricted common shares of Dreams, Inc. The Company disclosed this transaction on a Form 8-K dated August 2, 2007. As a result of the acquisition, the
Company recorded approximately $1.8 million of inventory and $867 of Goodwill on its books. Additionally, $1.2 million in notes payable and $1.5 million in common stock or 682,128 restricted shares were issued to complete this transaction.
Florida Mall
Effective July 14, 2007, the Company entered into an asset purchase agreement with The
Pentagon Group of Orlando, Inc., a Florida corporation that owned and operated a franchised Field of Dreams
®
store in Orlando, Florida. The Company paid $50 at closing and provided a $50
one-year promissory note, without interest in return for approximately $50 in inventory and all lease-hold improvements and other tangible assets used in the operation. As a result of the acquisition, the Company recorded $6 of Goodwill.
M & S, Inc.
Effective June 16, 2007, the Company entered into an asset purchase agreement with M & S,
Inc. The agreement calls for the Company to acquire certain assets associated with the retail operations of existing Field of Dreams
®
stores at The Mall at Wellington Green, Sawgrass Mills
Mall, Town Center at Boca Raton, the PGA Gardens Mall (all located in South Florida) and Menlo Park in New Jersey. An executive of the Company is also a 25% owner of the selling group. The assets acquired consist of all inventory located at these
stores, all interests in the leases which have been or are to be assigned, all other tangible properties and assets used or held for use at the Field of Dreams stores, including equipment, furniture and fixtures and all intellectual property assets
of the Seller. However, leases associated with the PGA Gardens Mall and Menlo Park was not assumed by the Company. The purchase price was the assumption of debts and trade payables up to an equivalent amount of actual inventory which approximated
$450.
F-15
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3.
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Concentration of Credit Risk
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Cash and Cash
Equivalents
The Company maintains cash accounts in financial institutions that are guaranteed by the Federal Deposit Insurance
Corporation (“FDIC”) up to $100. At times, cash balances may be in excess of the amounts insured by the FDIC. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Accounts receivable
The Company believes that credit risk is limited due to the large number of entities comprising the Company’s customer base and the diversified industries in which the Company operates. The Company performs
certain credit evaluation procedures and does not require collateral. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers, and based upon factors surrounding the credit risk
of customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is limited.
Major Vendors
For the nine months
ended December 31, 2007, there were no major vendors. However, one of the Company’s vendors represented 13% of the total purchases for the year ended March 31, 2007.
The components of inventories as of:
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|
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December 31,
2007
|
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March 31,
2007
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Raw materials
|
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$
|
363
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$
|
302
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Work in process
|
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|
76
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|
|
108
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Finished goods, net
|
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23,880
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17,457
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Total
|
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$
|
24,319
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$
|
17,867
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The reserve for slow moving inventory was$270 at December 31, 2007and $227 at March 31,
2007
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5.
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Property and Equipment
|
The components of property
and equipment as of:
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|
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|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
|
Leasehold improvements
|
|
$
|
1,692
|
|
|
$
|
1,666
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|
Machinery and equipment
|
|
|
454
|
|
|
|
1,838
|
|
|
Office and other equipment and fixtures
|
|
|
1,085
|
|
|
|
1,966
|
|
|
Transportation equipment
|
|
|
216
|
|
|
|
77
|
|
|
Computer equipment and software
|
|
|
3,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,825
|
|
|
|
5,547
|
|
|
Less accumulated depreciation
|
|
|
(2,934
|
)
|
|
|
(2,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,891
|
|
|
$
|
3,504
|
|
|
|
|
|
|
|
|
|
|
|
F-16
|
6.
|
Goodwill and Other Intangible Assets
|
The changes
in the carrying amounts of goodwill are as follows:
|
|
|
|
|
|
|
|
Total
|
|
Balance – March 31, 2006
|
|
$
|
1,932
|
|
Acquisition of businesses
|
|
|
5,381
|
|
Adjustment to purchase price
|
|
|
184
|
|
|
|
|
|
|
Balance as of March 31, 2007
|
|
$
|
7,497
|
|
Acquisition of business
|
|
|
867
|
|
Adjustment to purchase price
|
|
|
363
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
8,727
|
|
|
|
|
|
The following table provides information about changes relating to intangible assets for the nine
months ended December 31, 2007 and in the year ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Weighted Avg.
Useful Life
|
|
Gross
Carrying Value
|
|
Accum.
Amortization
|
|
|
Net
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreement
|
|
5.4
|
|
$
|
325
|
|
|
(151
|
)
|
|
|
174
|
|
Other
|
|
2.2
|
|
|
78
|
|
|
(78
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403
|
|
|
(229
|
)
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
3,886
|
|
|
—
|
|
|
|
3,886
|
|
Franchise licenses
|
|
|
|
|
130
|
|
|
—
|
|
|
|
130
|
|
Other
|
|
|
|
|
1,275
|
|
|
—
|
|
|
|
1,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,291
|
|
|
|
|
|
|
5,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
5,694
|
|
$
|
(229
|
)
|
|
$
|
5,465
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
|
|
|
|
|
|
Weighted Avg.
Useful Life
|
|
Gross
Carrying Value
|
|
Accum.
Amortization
|
|
|
Net
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreement
|
|
7
|
|
$
|
175
|
|
|
(125
|
)
|
|
|
50
|
|
Other
|
|
2.2
|
|
|
78
|
|
|
(68
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253
|
|
|
(193
|
)
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
3,886
|
|
|
—
|
|
|
|
3,886
|
|
Franchise licenses
|
|
|
|
|
130
|
|
|
—
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4, 016
|
|
|
—
|
|
|
|
4,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
4,269
|
|
$
|
(193
|
)
|
|
$
|
4,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the nine months ended December 31, 2007 was $35. For the fiscal
years 2007 and 2006, it was $59 and $71, respectively.
F-17
At December 31, 2007, the
Company had a revolving line of credit with a financial institution which allowed the Company to borrow up to $15 million for working capital purposes based on eligible accounts receivable and inventories. The net availability as of
December 31, 2007 was $15.0 million, which consisted of $12.2 million in inventory and $2.8 million in accounts receivables. The balance outstanding on the loan as of March 1, 2008 was $8.5_ million resulting in the excess availability of
$6.5 million as of March 1, 2008. The line of credit carries a floating annual interest rate at prime minus .75 basis points or fixed at 30 day Comerica costs of funds plus 1.50%. As of March 1, 2008 the interest rate on the loan was
5.25%. The line of credit is collateralized by the Company’s assets. The advanced rates as of December 31, 2007 were 80% for eligible accounts receivables and 60% for inventories. The Company also has a $3 million “Acquisition
Line” with Comerica Bank of which the entire amount was available at December 31, 2007. The Loan Security Agreement also requires that certain financial performance covenants be met. These covenants include a fixed charge coverage ratio
and minimum tangible net worth. Interest expense associated with the line of credit for the nine months ended December 31, 2007 was $643, and for the twelve months ended March 31, 2007 was $494.
Accrued liabilities consisted
of the following at:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
March 31,
2007
|
|
Payroll costs (including bonuses and commissions)
|
|
$
|
777
|
|
$
|
271
|
|
Additional purchase consideration due FansEdge
|
|
|
—
|
|
|
474
|
|
Professional fees
|
|
|
50
|
|
|
66
|
|
Accrued royalties
|
|
|
630
|
|
|
121
|
|
Other trade accruals
|
|
|
943
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,400
|
|
$
|
1,164
|
|
|
|
|
|
|
|
|
Notes payable consists of the
following at:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
March 31,
2007
|
|
Note payable, unsecured, due November 2007, monthly payments of $50,000, no stated interest rate
|
|
$
|
—
|
|
$
|
440
|
|
Note payable, unsecured, due October 2007, monthly payments of $10,000, no stated interest rate
|
|
|
—
|
|
|
68
|
|
Note payable to seller of Field of Dreams store; unsecured, due December 2009, monthly payments of $5,822 including interest at 7% annually.
$50,000 balloon payment due at end
|
|
|
181
|
|
|
226
|
|
Note payable, unsecured, due February 2011, monthly payments $7,320 including interest at 6.0% annually
|
|
|
252
|
|
|
312
|
|
Note payable, unsecured, due July 2008, monthly payments of $4,167, no stated interest rate
|
|
|
29
|
|
|
—
|
|
Note payable, unsecured, due January 2011, monthly payments of $8,247, including interest at 6% annually
|
|
|
276
|
|
|
—
|
|
Note payable, unsecured, due August 2012, with interest at 7%. There are no monthly payments due. Can be redeemed after 1 year
|
|
|
80
|
|
|
—
|
|
Note payable, unsecured, due August 2012, with interest at 7%. There are no monthly payments due. Can be redeemed after 3
years
|
|
|
220
|
|
|
—
|
|
Note payable, unsecured, due August 2012, with interest at 7%. There are no monthly payments due. Can be redeemed after 3
years
|
|
|
100
|
|
|
—
|
|
Note payable, unsecured, due August 2012, with interest at 7%. There are no monthly payments due. Can be redeemed after 1 year
|
|
|
50
|
|
|
—
|
F-18
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
|
Notes payable, unsecured, due August 2012, with interest at 7%. There are no monthly payments due. Can be redeemed after 3
years
|
|
|
200
|
|
|
|
—
|
|
|
Note payable, unsecured, due August 2012, with interest at 7%. There are no monthly payments due. Can be redeemed after 3
years
|
|
|
518
|
|
|
|
—
|
|
|
Note payable, unsecured, due February 2008, with no stated interest rate
|
|
|
30
|
|
|
|
—
|
|
|
Note payable, unsecured, due April 2012, with no stated interest rate. Payments made annually now and until maturity between $100,000 and
$300,000
|
|
|
975
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,911
|
|
|
|
1,046
|
|
|
Less current portion
|
|
|
(712
|
)
|
|
|
(667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,199
|
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on the notes for the nine months ended December 31, 2007 was $30, and for the twelve months
ended March 31, 2007 was $16.
For notes that have no stated interest rates, the Company has imputed a rate of 6%.
F-19
Common Stock:
As
of December 31, 2007 and March 31, 2007, the Company had 100,000,000 and 100,000,000 shares authorized and 37,702,523 and 36,952,945 common shares issued and outstanding.
Preferred Stock:
As of December 31, 2007 and March 31, 2007, the Company had 10,000,000 shares authorized and -0- preferred shares issued
and outstanding for both periods.
Stock Split
The Company received approval from a majority of its shareholders on January 25, 2007 to effectuate a reverse stock split of its common shares. Consequently, the Board determined that a 1 for 6 reverse stock
split would be effective on January 30, 2007. All share and per share amounts have been retroactively adjusted to reflect this reverse stock split.
Stock Options:
The following table summarizes information about the stock options outstanding:
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
Shares
|
|
|
Wtd. Avg.
Exercise Price
|
|
Outstanding at March 31, 2005
|
|
656,094
|
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
Granted
|
|
400,000
|
|
|
|
.60
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
Expired/Canceled
|
|
(250,000
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
806,094
|
|
|
|
.84
|
|
Granted
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
(308,332
|
)
|
|
|
.85
|
|
Expired/Canceled
|
|
(4,166
|
)
|
|
|
.60
|
|
Less fractional shares as a result of 1 for 6 reverse stock split
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
493,582
|
|
|
$
|
.85
|
|
Granted
|
|
36,667
|
|
|
|
2.69
|
|
Exercised
|
|
(84,333
|
)
|
|
|
1.20
|
|
Expired/Canceled
|
|
(8,166
|
)
|
|
|
.90
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
437,750
|
|
|
|
.97
|
Options exercisable as of December 31, 2007, March 31, 2007 and 2006, were 332,246,
396,079 and 606,093, respectively. The weighted average fair value of options granted during the nine months ended December 31, 2007 was $.97 and for fiscal 2007 was $.90, and for fiscal 2006 was $.24 per share.
F-20
The components of the income tax
provision (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months
December 31,
2007
|
|
Fiscal 2007
|
|
Fiscal 2006
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal tax expense/ (benefit)
|
|
$
|
452
|
|
$
|
85
|
|
$
|
10
|
|
State tax expense/ (benefit)
|
|
|
30
|
|
|
2
|
|
|
2
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal tax expense/ (benefit)
|
|
|
93
|
|
|
301
|
|
|
1,361
|
|
State tax expense/ (benefit)
|
|
|
48
|
|
|
81
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
623
|
|
$
|
469
|
|
$
|
1,762
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income taxes are as follows:
Deferred Tax Asset (Liability):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months
December 31,
2007
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
27
|
|
|
$
|
13
|
|
|
$
|
39
|
|
|
Inventory reserve
|
|
|
109
|
|
|
|
90
|
|
|
|
86
|
|
|
Inventory capitalization adjustment
|
|
|
344
|
|
|
|
157
|
|
|
|
66
|
|
|
Accrued expenses
|
|
|
165
|
|
|
|
85
|
|
|
|
138
|
|
|
Insurance reimbursement
|
|
|
—
|
|
|
|
(53
|
)
|
|
|
(1,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
292
|
|
|
|
(1,071
|
)
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
42
|
|
|
|
21
|
|
|
|
15
|
|
|
Federal and states NOL carry-forward
|
|
|
194
|
|
|
|
444
|
|
|
|
1,919
|
|
|
Capital loss carry-forward
|
|
|
187
|
|
|
|
187
|
|
|
|
187
|
|
|
Alternative Minimum Tax credit
|
|
|
49
|
|
|
|
126
|
|
|
|
51
|
|
|
Charitable contributions
|
|
|
—
|
|
|
|
11
|
|
|
|
5
|
|
|
Depreciation and amortization
|
|
|
(1,968
|
)
|
|
|
(1,820
|
)
|
|
|
(1,447
|
)
|
|
Less valuation allowance
|
|
|
(187
|
)
|
|
|
(187
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,683
|
)
|
|
$
|
(1,218
|
)
|
|
$
|
543
|
|
SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets reported, if
based on the weight of evidence, it is more likely than not that some portion or the entire deferred tax asset will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation
allowance of $187, $187 and $187 as of December 31, 2007, March 31, 2007 and March 31, 2006, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the
valuation allowance for the current fiscal year is $0.
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB
No. 109, “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 derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Company’s evaluation of the implementation of FIN 48, no significant
income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the year ended December 31, 2007. The tax years subject to examination by the taxing authorities are the years
ended December 31, 2007, March 31, 2007 and March 31, 2006.
In May 2007, the FASB issued FASB Staff Position
(“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for purpose of recognizing previously
unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operation.
F-21
The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense for
the nine months ended December 31, 2007 and for the years ended March 31, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months
December 31,
2007
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Tax at U.S. statutory rate
|
|
34
|
%
|
|
34
|
%
|
|
34
|
%
|
|
State taxes, net of federal benefit
|
|
6
|
|
|
6
|
|
|
6
|
|
|
Non-deductible items
|
|
1
|
|
|
1
|
|
|
—
|
|
|
Other
|
|
(1
|
)
|
|
(8
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
%
|
|
33
|
%
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 the company will use all federal net operating loss carryforwards. The
Company has state net operating loss carryforwards of approximately $3.3 million which expires by 2025.
F-22
The Company participates in a
401 (k) defined contribution plan (the “Plan”) under Section 401 (k) of the Internal Revenue Code. The Plan is available to all employees over the age of 21 with at least one year of service and 1,000 hours worked. Eligible
participants may contribute up to 50% of their pretax earnings. Participants are immediately vested. The Company does not contribute to the Plan.
|
13.
|
Commitments and Contingencies
|
Operating Leases
As of December 31, 2007, the Company leases office, warehouse and retail space under operating leases. The leases expire over the
next seven years and some contain provisions for certain annual rental escalations. One of the Company’s leases requires the Company to pay percentage rent based on the revenues of the company-owned stores. Total percentage based rent payments
were $33 for the nine months ended December 31, 2007, $50 in fiscal 2007 and $59 in fiscal 2006.
The future aggregate minimum annual
lease payments under the Company’s noncancellable operating leases are as follows:
|
|
|
|
|
|
Calendar Year
|
|
|
|
2008
|
|
$
|
5,061
|
|
2009
|
|
|
4,120
|
|
2010
|
|
|
2,924
|
|
2011
|
|
|
2,328
|
|
2012
|
|
|
2,693
|
|
Thereafter
|
|
|
4,171
|
|
|
|
|
|
|
Total minimum lease commitments
|
|
$
|
21,297
|
Rent expense charged to operations for the nine months ended December 31, 2007, fiscal 2007
and fiscal 2006 were $2.9 million, $2.3 million and $2.2 million, respectively.
Capital Leases
The Company has entered into a capital lease for office equipment. The lease requires monthly payments aggregating $1,902 and expire in 2012. The interest
rate on this capital lease is 5%.
Future minimum payments required under the capital leases consist of the following as of
December 31, 2007:
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
2008
|
|
$
|
23
|
|
|
2009
|
|
|
23
|
|
|
2010
|
|
|
23
|
|
|
2011
|
|
|
23
|
|
|
2012
|
|
|
17
|
|
|
Total
|
|
|
108
|
|
|
Less Amount representing interest
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
Present Value of net minimum lease payments
|
|
$
|
93
|
|
F-23
Future Contractual Payments to Athletes
As of December 31, 2007 the Company had several agreements with athletes to provide autographs in the future and the rights to produce and sell
certain products. The autographs are received by the Company as a part of inventory products and re sold throughout the Company’s distribution channels. The future aggregate minimum payments to athletes under contractual agreements are as
follows:
|
|
|
|
|
|
Calendar Year
|
|
|
|
2008
|
|
$
|
1,418
|
|
2009
|
|
|
1,319
|
|
2010
|
|
|
305
|
|
2011
|
|
|
236
|
|
2012
|
|
|
15
|
|
|
|
|
|
|
|
|
$
|
3,293
|
F-24
FansEdge Earnout
In October 2003, the Company purchased 100% of the outstanding common stock of Fansedge Incorporated (“Fansedge”) The purchase agreement stipulates that the prior shareholders of Fansedge are entitled to
additional consideration based on 25% of the earnings before interest and taxes (“EBIT”) of Fansedge each year for a period of four years from the date of the acquisition. The amounts earned for the years ended as of March 31, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
$
|
472
|
|
$
|
393
|
|
$
|
170
|
|
$
|
95
|
|
*
|
There are no further payments required as the term of the purchase agreement has expired.
|
|
14.
|
Related Party Transactions
|
Effective June 16, 2007, the Company entered into an asset purchase agreement with M & S, Inc. The agreement calls for the Company to acquire certain assets associated with the retail operations of existing
Field of Dreams
®
stores at The Mall at Wellington Green, Sawgrass Mills Mall, Town Center at Boca Raton, the PGA Gardens Mall (all located in South Florida) and Menlo Park in New Jersey. An
executive of the Company is also a 25% owner of the selling group. The assets acquired consist of all inventory located at these stores, all interests in the leases which have been or are to be assigned, all other tangible properties and assets used
or held for use at the Field of Dreams stores, including equipment, furniture and fixtures and all intellectual property assets of the Seller. The purchase price is the assumption of debts and trade payables up to an equivalent amount of actual
inventory which approximates $450.
At March 31, 2007, the Company had an accrued earn-out obligation to the former shareholders of
FansEdge per the stock purchase agreement of October, 2003. One of the former shareholders of FansEdge is a named executive officer. The officer’s share of the earn-out distribution for fiscal year 2007 is approximately $307. Contractually,
this is the final year of the earn-out arrangement between Dreams and the former shareholders of FansEdge.
On January 12, 2005, the Company entered into a licensing agreement with Pro Stars, Inc., a corporation in which the Company’s chairman of the board was an executive officer. Under the terms of the
agreement, the Company received a 10% licensing fee on the revenues generated from our 365 live marketing concepts which we licensed to Pro Stars, Inc. The license fees received were $327 and $350 in fiscal 2007 and fiscal 2006, respectively.
Effective December 26, 2006, the Company bought back the majority interest in the 365 Live marketing concept from Pro Stars, Inc., via an asset purchase agreement. On December 26, 2006, the Company completed its asset purchase agreement
with Pro Stars, Inc., a company in which the current Chairman was an executive officer. The assets acquired under the agreement included; (i) a majority equity interest in four entities that operated three Las Vegas based Field of Dreams
®
stores (ii) up to $2 million of inventory used in the stores, (iii) substantially all other assets used by the Seller in the operation of the Business and (iv) a marketing
venture known as “Stars Live 365”. In January 2007, the Chairman resigned his positions with Pro-Stars, Inc.
|
15.
|
Franchise Information
|
The Company 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 most recent amendment to the licensing agreement, the Company pays USL one percent of each company-owned and franchise unit’s gross sales, with a minimum annual royalty of $100. The Company pays
royalties to USL of $5 for each new franchised unit opened and one percent of each franchised unit’s gross sales. This $5 fee is not an advance against royalties. At December 31, 2007, the Company had 10 units owned by franchisees and had
17 company-owned units.
The Company is required to indemnify USL for certain losses and claims, including those based on defective
products, violation of franchise law and other acts and omissions by the Company. The Company is required to maintain insurance coverage of $3.0 million per single incident. The coverage is current as of December 31, 2007 and names USL as the
insured party.
The license agreement expires in December 2010. The agreement may be
renewed for additional five-year terms, provided that the Company is in compliance with all aspects of the agreement. If the Company fails to comply with the license requirements of the agreement, either during the initial term or during an option
term, the agreement may be terminated by USL. Termination of the license agreement would eliminate the Company’s right to use the Field of Dreams
®
service mark. Such determination
could have a material adverse effect on the Company’s franchise and retail operations.
F-25
The Company franchise activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months
December 31,
2007
|
|
|
March 31,
2007
|
|
|
March 31,
2006
|
|
|
In operation at period end
|
|
10
|
|
|
16
|
|
|
19
|
|
|
as a result of the following activity:
|
|
—
|
|
|
|
|
|
|
|
|
Opened during the period
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Closed during the period
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Acquired by franchisee during the period
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Acquired by corporate during the period
|
|
(6
|
)
|
|
(4
|
)
|
|
(1
|
)
|
F-26
|
16.
|
Business Segment Information
|
The Company has two
reportable segments as identified by information reviewed by the Company’s chief operating decision maker: the Manufacturing/Distribution segment and the Retail Operations 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 Company’s manufacturing and distributing facilities are located in the United States. The majority of the
Company’s products are manufactured in these facilities.
The Retail Operations segment is comprised of traditional brick and mortar
and Internet:
Brick and Mortar
As of December 31, 2007, the Company owned and operated 17 Field of Dreams
®
stores offering a selection of sports & entertainment memorabilia and collectibles. The Company has multiple stores in the south Florida and Las Vegas markets. The Company is opening
its prototype FansEdge store in Chicago in April 2008.
Internet
The Company’s e-commerce components feature FansEdge.com and ProSportsMemorabilia.com along with a complement of athlete web sites including, but not
limited to;
www.peterose.com
,
www.danmarino.com
, and
www.dickbutkus.com
.
These e-commerce retailers 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.
All of the Company’s revenue generated during the nine months ended December 31, 2007, fiscal 2007 and fiscal 2006, was derived in the United States and all of the Company’s assets are located in the
United States.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables.
Corporate related items, results of insignificant operations and income and expenses not allocated to reportable segments are included in the reconciliations to consolidated results table.
F-27
Segment information for the nine months ended December 31, 2007 and fiscal years ended March 31, 2007 and 2006
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended:
|
|
Manufacturing/
Distribution
|
|
|
Retail
Operations
|
|
|
Total
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
17,423
|
|
|
$
|
45,049
|
|
|
$
|
62,472
|
|
|
Intersegment net sales
|
|
|
(3,869
|
)
|
|
|
(53
|
)
|
|
|
(3,922
|
)
|
|
Operating earnings
|
|
|
2,030
|
|
|
|
2,711
|
|
|
|
4,741
|
|
|
Total assets
|
|
|
17,097
|
|
|
|
25,725
|
|
|
|
42,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended:
|
|
Manufacturing/
Distribution
|
|
|
Retail
Operations
|
|
Franchise
Operations
|
|
|
Total
|
|
|
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
18,138
|
|
|
$
|
39,371
|
|
$
|
896
|
|
|
$
|
58,405
|
|
|
Intersegment net sales
|
|
|
(3,026
|
)
|
|
|
0
|
|
|
(86
|
)
|
|
|
(3,112
|
)
|
|
Operating earnings
|
|
|
1,255
|
|
|
|
2,471
|
|
|
179
|
|
|
|
3,905
|
|
|
Total assets
|
|
|
11,593
|
|
|
|
18,883
|
|
|
82
|
|
|
|
30,558
|
|
|
March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
18,796
|
|
|
$
|
25,095
|
|
$
|
836
|
|
|
$
|
44,727
|
|
|
Intersegment net sales
|
|
|
(2,565
|
)
|
|
|
0
|
|
|
(38
|
)
|
|
|
(2,603
|
)
|
|
Operating earnings
|
|
|
2,236
|
|
|
|
1,288
|
|
|
386
|
|
|
|
3,910
|
|
|
Total assets
|
|
|
15,381
|
|
|
|
7,172
|
|
|
101
|
|
|
|
22,654
|
|
Reconciliation to consolidated amounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 mths ended
December 31,
2007
|
|
|
FY2007
|
|
|
FY2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
$
|
62,472
|
|
|
$
|
58,405
|
|
|
$
|
44,727
|
|
|
Other revenues
|
|
|
1,152
|
|
|
|
667
|
|
|
|
606
|
|
|
Eliminations of intersegment revenues
|
|
|
(3,922
|
)
|
|
|
(3,112
|
)
|
|
|
(2,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
59,702
|
|
|
$
|
55,960
|
|
|
$
|
42,730
|
|
|
Pre-tax earnings / (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings for reportable segments
|
|
$
|
4,741
|
|
|
$
|
3,905
|
|
|
$
|
3,910
|
|
|
*Other (loss) / income
|
|
|
(2,619
|
)
|
|
|
(1,928
|
)
|
|
|
855
|
|
|
Interest expense
|
|
|
(707
|
)
|
|
|
(528
|
)
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before income taxes
|
|
$
|
1,415
|
|
|
$
|
1,449
|
|
|
$
|
4,311
|
|
|
*
|
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 Company’s internal accounting policies are executive salaries and benefits; corporate office occupancy costs; professional fees, bank charges; certain insurance policy premiums and public relations/investor relations expenses.
|
F-28
On June 28, 2006, the
Company received a net settlement payment of $3.68 million, all of which is included in Accounts receivable as of March 31, 2006. After consideration of the insurance deductible as a result of hurricane damage, the Company recognized $3.6
million of other income in the fiscal 2006 consolidated statement of operations. The Company anticipates minimal expenditures for repairs and replacement related costs in the future.
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; and 88.125% of the marketing venture known as “Stars Live 365”. The Company records 100% of the revenues generated from these operations and then records a “minority interest expense” representing the limited
partners’ earned pro-rata share of the actual profits. The minority interest expense at December 31, 2007 was approximately $27 and is included in accrued liabilities at year end. 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 stores and Stars Live 365.
Effective
August 29, 2007, the Company bought back 6.5% interest in the Caesars Forum Shops Field of Dreams store from an individual for $40. As a result, the Company’s interest in the Caesars store is now 93%.
|
19
.
|
Valuation and Qualifying Accounts
|
We maintain an
allowance for doubtful accounts that is recorded as a contra asset to our accounts receivable balance. The following table sets forth the change in each of those reserves for the nine months ended December 31, 2007 and the year ended
March 31, 2007.
|
|
|
|
|
|
|
|
|
Allowance for
accounts receivable
|
|
|
Balance as of March 31, 2007
|
|
$
|
33
|
|
|
Provision
|
|
|
49
|
|
|
Write offs
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
67
|
|
On February 8, 2008.
Dreams, Inc. announced that its Board of Directors has authorized the repurchase of up to $1,000,000 of the Company’s common stock when market prices make repurchases advantageous.
F-29
NINE MONTHS ENDED DECEMBER 31, 2007 QUARTERLY FINANCIAL INFORMATION
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*December 31,
2007
|
|
|
September 30,
2007
|
|
|
June 30,
2007
|
|
|
Net Sales
|
|
$
|
36,570
|
|
|
$
|
12,584
|
|
|
$
|
10,548
|
|
|
Cost of Goods Sold
|
|
|
20,630
|
|
|
|
6,947
|
|
|
|
5,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
15,940
|
|
|
|
5,637
|
|
|
|
5,049
|
|
|
Operating Expenses
|
|
|
11,477
|
|
|
|
6,684
|
|
|
|
6,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income/(Loss)
|
|
|
4,463
|
|
|
|
(1,047
|
)
|
|
|
(1,143
|
)
|
|
Other Income (Expenses)
|
|
|
(27
|
)
|
|
|
(38
|
)
|
|
|
(45
|
)
|
|
Interest Expense
|
|
|
277
|
|
|
|
194
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
4,159
|
|
|
|
(1,279
|
)
|
|
|
(1,425
|
)
|
|
Provision (Benefit) for income taxes
|
|
|
1,711
|
|
|
|
(496
|
)
|
|
|
(552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
2,448
|
|
|
$
|
(783
|
)
|
|
$
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share, basic
|
|
$
|
0.07
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
Earnings (loss) per common share, diluted
|
|
$
|
0.07
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
Weighted Average shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,328,962
|
|
|
|
37,203,417
|
|
|
|
36,958,391
|
|
|
Diluted
|
|
|
37,596,089
|
|
|
|
37,491,410
|
|
|
|
37,287,900
|
|
|
*
|
The Company’s business is seasonal and it generates a considerable portion of its revenues during the holiday quarter ending December 31. Therefore, quarterly operating
results are not necessarily indicative of the results that may be expected for the full fiscal year.
|
F-30
FISCAL 2007 QUARTERLY FINANCIAL INFORMATION
(unaudited)
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2007
|
|
|
*December 31,
2006
|
|
September 30,
2006
|
|
|
June 30,
2006
|
|
|
Net Sales
|
|
$
|
14,626
|
|
|
$
|
24,853
|
|
$
|
8,557
|
|
|
$
|
7,924
|
|
|
Cost of Goods Sold
|
|
|
8,658
|
|
|
|
13,929
|
|
|
4,700
|
|
|
|
4,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
5,968
|
|
|
|
10,924
|
|
|
3,857
|
|
|
|
3,413
|
|
|
Operating Expenses
|
|
|
6,562
|
|
|
|
7,411
|
|
|
4,229
|
|
|
|
3,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income/(Loss)
|
|
|
(594
|
)
|
|
|
3,513
|
|
|
(372
|
)
|
|
|
(413
|
)
|
|
Other Income (Expenses)
|
|
|
(42
|
)
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Interest Expense
|
|
|
138
|
|
|
|
104
|
|
|
134
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(Loss) Before Taxes
|
|
|
(774
|
)
|
|
|
3,409
|
|
|
(506
|
)
|
|
|
(565
|
)
|
|
Provision (Benefit) for income taxes
|
|
|
(327
|
)
|
|
|
1,328
|
|
|
(202
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(447
|
)
|
|
$
|
2,081
|
|
$
|
(304
|
)
|
|
$
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share, basic
|
|
$
|
(.01
|
)
|
|
$
|
0.06
|
|
$
|
(.01
|
)
|
|
$
|
(.01
|
)
|
|
Earnings (loss) per common share, diluted
|
|
$
|
(.01
|
)
|
|
$
|
0.06
|
|
$
|
(.01
|
)
|
|
$
|
(.01
|
)
|
|
Weighted Average shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
36,744,642
|
|
|
|
33,045,843
|
|
|
29,683,787
|
|
|
|
29,683,787
|
|
|
Diluted
|
|
|
36,744,642
|
|
|
|
33,045,843
|
|
|
29,683,787
|
|
|
|
29,683,787
|
|
|
*
|
The Company’s business is seasonal and it generates a considerable portion of its revenues during the holiday quarter ending December 31. Therefore, quarterly operating
results are not necessarily indicative of the results that may be expected for the full fiscal year.
|
F-31
FISCAL 2006 QUARTERLY FINANCIAL INFORMATION
(unaudited)
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2006
|
|
|
*December 31,
2005
|
|
September 30,
2005
|
|
|
June 30,
2005
|
|
|
Net Sales
|
|
$
|
11,537
|
|
|
$
|
18,263
|
|
$
|
6,878
|
|
|
$
|
6,055
|
|
|
Cost of Goods Sold
|
|
|
7,882
|
|
|
|
9,885
|
|
|
3,483
|
|
|
|
3,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,655
|
|
|
|
8,378
|
|
|
3,395
|
|
|
|
2,848
|
|
|
Operating Expenses
|
|
|
4,911
|
|
|
|
5,661
|
|
|
3,539
|
|
|
|
3,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income/(Loss)
|
|
|
(1,256
|
)
|
|
|
2,717
|
|
|
(144
|
)
|
|
|
(204
|
)
|
|
Other Income (Expenses)
|
|
|
3,657
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Interest and Taxes
|
|
|
2,401
|
|
|
|
2,717
|
|
|
(144
|
)
|
|
|
(204
|
)
|
|
Interest Expense
|
|
|
115
|
|
|
|
102
|
|
|
83
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(Loss) Before Taxes
|
|
|
2,286
|
|
|
|
2,615
|
|
|
(227
|
)
|
|
|
(358
|
)
|
|
Provision (Benefit) for income taxes
|
|
|
951
|
|
|
|
1,046
|
|
|
(91
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
1,335
|
|
|
$
|
1,569
|
|
$
|
(136
|
)
|
|
$
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share, basic
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
$
|
(0.00
|
)
|
|
$
|
(.01
|
)
|
|
Earnings (loss) per common share, diluted
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
$
|
(0.00
|
)
|
|
$
|
(.01
|
)
|
|
Weighted Average shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,683,787
|
|
|
|
29,683,787
|
|
|
29,683,787
|
|
|
|
20,542,174
|
|
|
Diluted
|
|
|
29,683,787
|
|
|
|
29,683,787
|
|
|
29,683,787
|
|
|
|
20,542,174
|
|
|
*
|
The Company’s business is seasonal and it generates a considerable portion of its revenues during the holiday quarter ending December 31. Therefore, quarterly operating
results are not necessarily indicative of the results that may be expected for the full fiscal year.
|
F-32