<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) JULY 18, 2001
------------------------
DREAMLIFE, INC.
(Exact Name of Registrant as Specified in Charter)
<Table>
<Caption>
DELAWARE 0-15586 52-1373960
(State or Other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
888 SEVENTH AVENUE, 13TH FLOOR, NEW YORK, NY 10011
(Address of Principal Executive Offices) (Zip Code)
</Table>
------------------------
Registrant's telephone number, including area code (212) 887-6869
425 WEST 15TH STREET, SUITE 3R, NEW YORK, NEW YORK 10011
(Former Name or Former Address, if Changed Since Last Report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
Audited financial statements of Discovery Toys, Inc., a California
corporation, ("DT") for the years ended December 31, 2000 and 1999 and the
Independent Auditor's Report are included as part of this Form 8-K/A as
attachment 7(a)(1) and are incorporated herein by reference.
Unaudited financial statements of DT for the six month periods ended
June 30, 2001 and 2000 are included as part of this Form 8-K/A as attachment
7(a)(2) and are incorporated herein by reference.
(b) Pro Forma Financial Information
Pro Forma consolidated financial statements of dreamlife, inc. including the
following, which give effect to the reverse acquisition of DT by
dreamlife, inc., are included as part of this Form 8-K/A as attachment 7(b) and
are incorporated herein by reference:
Description of the Transaction;
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30,
2001; and
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2001 and the Year ended December 31, 2000.
(c) Exhibits
<Table>
<Caption>
EX. NO. DESCRIPTION
- ------- ------------------------------------------------------------
2.1 Stock Purchase Agreement dated as of July 18, 2001, among
dreamlife, inc., Discovery Toys, Inc. and the Discovery
Toys, Inc. shareholders named therein(1)
2.2 Note Exchange Agreement dated as of July 18, 2001, between
dreamlife, inc. and CYL Development Holdings, LLC(1)
3.1(ii) Amended and Restated By-laws(1)
4.1 Registration Rights Agreement dated as of July 18, 2001,
among dreamlife, inc. and the Discovery Toys, Inc.
shareholders named therein(1)
4.2 Termination Agreement dated July 18, 2001, among dreamlife,
inc., Anthony J. Robbins, Robbins Research International
Inc. and CYL Development Holdings, LLC(1)
10.1 Modification to Peter A. Lund Offer Letter dated July 18,
2001, between dreamlife, inc. and Peter A. Lund(1)
10.2 Amendment to Content Provider and License Agreement dated as
of July 10, 2001 among Anthony J. Robbins, Robbins Research
International Inc. and dreamlife, inc.(1)
99.1 Press release of dreamlife, inc. dated July 18, 2001(1)
</Table>
- ------------------------
(1) Previously filed as identically numbered exhibit to the Company's
Form 8-K/A dated July 18, 2001 and filed with the Securities and Exchange
Commission on August 1, 2001.
<Page>
SIGNATURE
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.
<Table>
DREAMLIFE, INC.
Dated: December 17, 2001 By: /s/ JACK HOOD
-----------------------------------------
Jack Hood
CHIEF FINANCIAL OFFICER AND TREASURER
</Table>
<Page>
ATTACHMENT 7(A)(1)
DISCOVERY TOYS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
Financial Statements (restated):
Independent Auditors' Report.............................. A-1
Consolidated Balance Sheets at December 31, 2000 and
1999.................................................... A-2
Consolidated Statements of Operations for the year ended
December 31, 2000 and the period from January 15, 1999
to December 31, 1999.................................... A-3
Consolidated Statements of Stockholders' Equity for the
year ended December 31, 2000 and the period from
January 15, 1999 to December 31, 1999................... A-4
Consolidated Statements of Cash Flows for the year ended
December 31, 2000 and the period from January 15, 1999
to December 31, 1999.................................... A-5
Notes to Consolidated Financial Statements................ A-6-A-15
</Table>
<Page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Discovery Toys, Inc.
We have audited the accompanying consolidated balance sheets of Discovery
Toys, Inc. (a California corporation) (the "Company") as of December 31, 2000
and 1999 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 2000 and
the period from January 15, 1999 to December 31, 1999. These consolidated
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the financial position
of Discovery Toys, Inc. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for the year ended December 31, 2000 and the
period from January 15, 1999 to December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As indicated in Note 2, the Company restated its 2000 and 1999 financial
statements.
/s/ Comyns, Smith, McCleary LLP
Lafayette, California
March 16, 2001, except for Notes 2 and 15,
which are as of December 7, 2001.
A-1
<Page>
DISCOVERY TOYS, INC.
CONSOLIDATED BALANCE SHEETS (AS RESTATED)
<Table>
<Caption>
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
ASSETS
Current assets:
Cash...................................................... $10,927,000 $10,500,000
Accounts receivable, net.................................. 435,000 467,000
Inventory................................................. 4,079,000 3,845,000
Prepaid expenses and other current assets................. 363,000 644,000
----------- -----------
Total current assets........................................ 15,804,000 15,456,000
----------- -----------
Property and equipment, net................................. 968,000 1,382,000
Other assets................................................ 52,000 57,000
----------- -----------
Total assets................................................ 16,824,000 16,895,000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... 1,795,000 1,706,000
Accrued liabilities....................................... 4,597,000 4,299,000
Line of credit............................................ 1,250,000 1,250,000
----------- -----------
Total current liabilities................................... 7,642,000 7,255,000
----------- -----------
Deferred revenues........................................... 1,681,000 774,000
Note payable................................................ 2,950,000 2,605,000
Negative goodwill, net...................................... 4,199,000 4,724,000
----------- -----------
16,472,000 15,358,000
----------- -----------
Commitments (Note 7)
Stockholders' equity:
Common stock, $0.10 par value; 491,400 shares authorized,
475,020 and 486,486 issued and outstanding at
December 31, 2000 and 1999.............................. 48,000 49,000
Paid-in capital........................................... 743,000 756,000
Retained earnings (deficit)............................... (439,000) 732,000
----------- -----------
Total stockholders' equity.................................. 352,000 1,537,000
----------- -----------
Total liabilities and stockholders' equity.................. $16,824,000 $16,895,000
=========== ===========
</Table>
See accompanying notes to financial statements.
A-2
<Page>
DISCOVERY TOYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED)
<Table>
<Caption>
PERIOD FROM
YEAR ENDED JANUARY 15, 1999 TO
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -------------------
Sales...................................................... $40,131,000 $39,673,000
Cost of sales.............................................. 24,190,000 23,407,000
----------- -----------
Gross profit............................................... 15,941,000 16,266,000
OPERATING EXPENSES:
Sales and marketing...................................... 6,940,000 6,497,000
General and administrative............................... 9,606,000 9,334,000
Amortization of negative goodwill........................ (525,000) (525,000)
----------- -----------
Operating profit (loss).................................... (80,000) 960,000
----------- -----------
OTHER INCOME (EXPENSE):
Interest income.......................................... 436,000 206,000
Interest expense......................................... (480,000) (424,000)
Other income (expense), net.............................. 457,000 (10,000)
----------- -----------
413,000 (228,000)
----------- -----------
INCOME BEFORE INCOME TAXES................................. 333,000 732,000
INCOME TAX PROVISION....................................... 6,000 --
----------- -----------
NET INCOME................................................. $ 327,000 $ 732,000
=========== ===========
</Table>
See accompanying notes to financial statements.
A-3
<Page>
DISCOVER TOYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AS RESTATED)
<Table>
<Caption>
COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
-------- -------- -------- ----------- -----------
Carry-over equity of minority
shareholder at January 15, 1999....... 49,140 $ 5,000 $801,000 $ -- $ 806,000
Transfer of common stock to Acquiror on
January 15, 1999...................... 442,260 44,000 (44,000) -- --
Repurchase and retirement of common
stock................................. (4,914) -- (1,000) -- (1,000)
Net income.............................. -- -- -- 732,000 732,000
------- ------- -------- ----------- -----------
Balance at December 31, 1999............ 486,486 49,000 756,000 732,000 1,537,000
Issuance of common stock................ 3,276 -- 3,000 -- 3,000
Repurchase and retirement of common
stock................................. (14,742) (1,000) (16,000) -- (17,000)
Dividends............................... -- -- -- (1,498,000) (1,498,000)
Net income.............................. -- -- -- 327,000 327,000
------- ------- -------- ----------- -----------
Balance at December 31, 2000............ 475,020 $48,000 $743,000 $ (439,000) $ 352,000
======= ======= ======== =========== ===========
</Table>
See accompanying notes to financial statements.
A-4
<Page>
DISCOVERY TOYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)
<Table>
<Caption>
PERIOD FROM
YEAR ENDED JANUARY 15, 1999 TO
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -------------------
Cash Flows From Operating Activities:
Net income................................................ $ 327,000 $ 732,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 443,000 106,000
Provision for doubtful accounts......................... 137,000 95,000
Non cash expense for compensation....................... 3,000 --
Amortization of discount on note payable................ 176,000 176,000
Amortization of negative goodwill....................... (525,000) (525,000)
Changes in:
Accounts receivable................................... (105,000) 25,000
Inventory, net........................................ (234,000) 980,000
Prepaid expenses and other current assets............. 281,000 9,000
Deposits and other assets............................. 5,000 --
Accounts payable...................................... 89,000 (26,000)
Accrued expenses...................................... 467,000 2,758,000
Deferred revenues..................................... 907,000 774,000
----------- -----------
Net cash provided by operating activities................... 1,971,000 5,104,000
----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (29,000) (1,247,000)
----------- -----------
Net cash used in investing activities....................... (29,000) (1,247,000)
----------- -----------
Cash Flows From Financing Activities:
Payment for repurchase of common stock.................... (17,000) (1,000)
Payment of common stock dividends......................... (1,498,000) --
Proceeds from line of credit.............................. -- 1,250,000
----------- -----------
Net cash (used in) provided by financing activities......... (1,515,000) 1,249,000
----------- -----------
Net Increase In Cash........................................ 427,000 5,106,000
Cash At Beginning Of Year................................... 10,500,000 5,394,000
----------- -----------
Cash At End Of Year......................................... $10,927,000 $10,500,000
=========== ===========
Supplemental Disclosures
Cash paid during the year for:
Interest................................................ $ 285,000 $ 79,000
Income taxes............................................ $ 4,000 $ 5,000
=========== ===========
</Table>
See accompanying notes to financial statements.
A-5
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY--Discovery Toys, Inc. (the "Company"), is a California
corporation and a multi-level marketer of approximately 200 products including
toys, games, books, and software through a network of approximately 30,000
independent educational consultants in the United States and Canada. Lane
Nemeth, a former daycare director, who recognized the need for high quality
educational toys in the market place, founded the Company in 1978. The Company's
principal offices are located in Livermore, California, and its geographic
markets primarily encompass the United States and Canada.
The Company uses a sales force of independent sales representatives to
distribute products directly to consumers. This technique uses catalogs
developed by the Company and live product demonstrations given at hostess
parties to promote product sales. The Company uses a multi-level marketing plan
to provide career opportunities to parents and others who are recruited as
educational consultants while providing them the flexibility of being an
independent sales representative.
Products are developed and designed in-house or sourced from an independent
designer or vendor. Product is sourced domestically as well as from Asia and
Europe. Products are tested to ensure educational quality, play value,
durability and safety. Products are also categorized by age level with a focus
to grow a child's natural interests, developmental level, and evolving learning
style.
Products are distributed from the Company's highly automated warehouse
facility in Livermore, California. Orders from educational consultants are
received via phone, fax, mail and internet, fulfilled from inventory by its
automated line, and shipped to the educational consultants or party hostess for
final distribution to the consumer.
Prior to January 15, 1999, the Company was a wholly owned subsidiary of Avon
Products, Inc. ("Avon"). On January 15, 1999, in accordance with the terms of a
Stock Transfer Agreement, Avon transferred 90% of the outstanding stock of the
Company to a new shareholder group. No consideration was paid in connection with
the transfer. Immediately prior to the transfer, Avon contributed $3.8 million
in additional working capital to the Company, forgave $6.9 million in inter-
company debt, and provided financing to the Company in the amount of
$3.5 million (Note 5).
As a result of the significant change of ownership that occurred on
January 15, 1999, a new basis of accounting was established. Accordingly, the
estimated fair values of assets acquired and liabilities assumed were recorded
as follows (in millions):
<Table>
Estimated fair value of net tangible assets acquired........ $ 7.4
Less: consideration paid.................................... (0.0)
-----
Excess of estimated fair value of assets acquired over
purchase consideration.................................... $ 7.4
=====
Reduction in recorded value of long-lived assets (fixed
assets)................................................... $ 2.1
Negative goodwill........................................... 5.3
-----
$ 7.4
=====
</Table>
Negative goodwill is being amortized using the straight-line method over a
10-year life.
Separate audited financial statements were not prepared in accordance with
generally accepted accounting principles for the Company during the period it
was wholly owned by Avon. Thus, predecessor financial data is not presented in
these financial statements as such data could not now be provided without
unreasonable effort and expense.
A-6
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS--The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, and such differences could be material and affect the results of
operations reported in future periods.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION--The accompanying
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, Discovery Toys--Canada. All material inter-company
accounts and transactions have been eliminated in consolidation.
The Company uses a calendar year-end for financial reporting periods.
CURRENCY TRANSLATION--The Company uses the U.S. dollar as its functional
currency. Foreign currency assets and liabilities are re-measured into the U.S.
dollar functional currency using end-of-period exchange rates for monetary
assets and liabilities and historical exchange rates for non-monetary assets and
liabilities. Gains and losses from remeasurement of monetary assets and
liabilities are included in net earnings. Foreign currency revenues and expenses
are remeasured at average exchange rates in effect during each period.
REVENUE RECOGNITION--Revenue from product sales is recognized upon shipment,
which is when legal title and risk of loss are transferred to the Company's
independent sales consultants.
The Company's independent sales consultants have limited rights to return
product orders, and the Company records provisions for estimated returns and
warranty costs at the time revenue is recognized based on historical experience.
Actual returns were not significant during 1999 or 2000.
The Company maintains an incentive bonus plan in which all independent
consultants participate. Under the plan, consultants earn awards based on team
sales performance and other benchmarks. Awards are determined and accrued for on
a monthly basis, and are reflected as a reduction of revenues in the period the
awards are earned. Awards under the incentive bonus plan were $7,545,000 and
$7,577,000 for 2000 and 1999, respectively.
The Company provides coupons to buyers of its products and hostess
volunteers that can be used towards the purchase of Company products. When
coupons are provided in conjunction with the sale of products, the Company
allocates the sales proceeds between the fair values of the products and the
value of the coupon based on estimated redemption rates. Amounts attributable to
the value of the coupon are deferred until the earlier of redemption of the
coupon or expiration occurs. When coupons are provided as incentives to hostess
volunteers, the Company accrues the value of the coupon based on estimated
redemption rates as a sales and marketing expense.
SHIPPING AND HANDLING COSTS--In October 2000, the Emerging Issues Task Force
issued EITF 00-10, "Accounting for Shipping and Handling Revenues and Costs",
which requires fees billed to customers associated with shipping and handling to
be classified as revenue, and costs associated with shipping and handling to be
either classified as cost of sales or disclosed in the notes to the financial
statements. The Company records shipping and handling fees billed to customers
as revenue included in net sales. Costs associated with shipping and handling
activities are comprised of outbound freight and associated direct labor costs,
and are recorded in cost of goods sold.
A-7
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEASONALITY--The Company operates within a highly seasonal industry whereby
approximately 50% of its sales are earned during the months of October through
December.
INVENTORY--Inventory primarily includes finished products purchased from
contract manufacturers and is stated at the lower of weighted average cost or
market.
PROPERTY AND EQUIPMENT--Property and equipment are stated at historical
cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets ranging from three to five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company measures its financial
assets and liabilities in accordance with generally accepted accounting
principles. The estimated fair value of the Company's note payable was
approximately 87% of par or $2,569,000 at December 31, 2000. The estimated fair
value of all other financial instruments at December 31, 2000 approximated cost.
IMPAIRMENT OF LONG-LIVED ASSETS--In the event that facts and circumstances
indicate that the cost of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down is required. If
required, the write-down would be determined based on the excess of the cost
over the fair value of the asset.
SEGMENTS--The Company has adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting financial and descriptive information about an enterprise's
operating segments in its annual financial statements and selected segment
information in its interim financial reports. Reclassification of comparative
financial statements or financial information for earlier periods is required
upon adoption of SFAS No. 131. The Company operates in one industry segment, the
marketing and sale of educational products, and, in accordance with SFAS
No. 131, only enterprise wide disclosures have been provided. See Note 12 of
Notes to Consolidated Financial Statements.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to
conform with the current year's presentation.
2. RESTATEMENT
In connection with the business combination discussed in Note 15, certain
amounts reported on the Company's previously issued financial statements as of
and for the periods ended December 31, 2000 and 1999 have been restated or
reclassified in order to conform to accounting principles generally
A-8
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTATEMENT (CONTINUED)
accepted in the United States and accounting principles required by the
Securities and Exchange Commission. These restatements and reclassifications are
summarized as follows:
<Table>
<Caption>
STOCKHOLDERS' NET
EQUITY INCOME
------------- ---------
December 31, 1999--as previously reported................... $7,500,000 $ 335,000
Recapitalization of original acquisition from Avon
Products, Inc........................................... (6,190,000) --
Elimination of pre-acquisition activities (from
January 1, 1999 through January 14, 1999)............... -- 170,000
Reduction of depreciation expense related to
recapitalization........................................ 300,000 300,000
Amortization of negative goodwill......................... 525,000 525,000
Deferral of revenue under merchandising and promotion
agreement............................................... (484,000) (484,000)
Amortization of note payable discount..................... (176,000) (176,000)
Reduction of income tax expense........................... 62,000 62,000
---------- ---------
December 31, 1999--as restated.............................. $1,537,000 $ 732,000
========== =========
December 31, 2000--as previously reported................... $6,156,000 $ 171,000
Adjustments carried over from 1999........................ (5,963,000) --
Reduction of depreciation expense related to
recapitalization........................................ 300,000 300,000
Amortization of negative goodwill......................... 525,000 525,000
Deferral of revenue under merchandising and promotion
agreement............................................... (203,000) (203,000)
Accrued compensation and related expenses................. (225,000) (225,000)
Amortization of note payable discount..................... (176,000) (176,000)
Other..................................................... (62,000) (65,000)
---------- ---------
December 31, 2000--as restated.............................. $ 352,000 $ 327,000
========== =========
</Table>
RECLASSIFICATIONS
Certain reclassifications to previously reported 1999 and 2000 amounts have
been made in order to conform to accounting principles required by the
Securities and Exchange Commission, to conform with the presentation of
financial statements to be filed for subsequent periods and as a result of
certain restated amounts. Significant reclassifications are as follows:
Additional revenues of $9,626,000 and $9,398,000, and additional cost of
sales of $10,334,000 and $9,705,000 for the periods ended December 31,
2000 and 1999, respectively, for certain sales activities including
shipping and handling revenues and costs, previously reported on a net
basis as a component of operating expenses.
Management elected early adoption of EITF Issue No. 00-25, VENDOR INCOME
STATEMENT CHARACTERIZATION OF CONSIDERATION PAID TO A RESELLER OF THE
VENDOR'S PRODUCTS. As a result, a reduction of revenues of $7,545,000 and
$7,577,000 was recorded for the periods ended December 31, 2000 and 1999,
respectively, for awards paid to independent consultants under the
Company's incentive bonus program. Such payments were previously
reflected as a component of operating expenses.
A-9
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTATEMENT (CONTINUED)
An increase in general and administrative expenses of $492,000 and
$396,000 for the periods ended December 31, 2000 and 1999, respectively,
for management fees that were previously reflected in other income
(expense).
3. BALANCE SHEET COMPONENTS:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
ACCOUNTS RECEIVABLE, NET:
Accounts receivable.................................. $ 846,000 $ 741,000
Allowance for doubtful accounts and sales returns.... 411,000 274,000
---------- ----------
Net accounts receivable.......................... $ 435,000 $ 467,000
========== ==========
INVENTORY:
Finished goods....................................... $3,855,000 $3,590,000
Supplies............................................. 224,000 255,000
---------- ----------
Net inventory.................................... $4,079,000 $3,845,000
========== ==========
PROPERTY AND EQUIPMENT, NET:
Machinery and equipment.............................. $ 403,000 $ 394,000
Computer equipment and software...................... 1,455,000 1,435,000
Leasehold improvements............................... 34,000 34,000
---------- ----------
Total property and equipment......................... 1,892,000 1,863,000
Less accumulated depreciation........................ (924,000) (481,000)
---------- ----------
Net property and equipment......................... $ 968,000 $1,382,000
========== ==========
ACCRUED LIABILITIES:
Accrued compensation--sales consultants.............. $1,842,000 $1,645,000
Accrued compensation and related expenses............ 629,000 270,000
Sales and use taxes payable.......................... 414,000 587,000
Deferred revenues, current portion................... 393,000 194,000
Other................................................ 1,319,000 1,603,000
---------- ----------
Total accrued liabilities........................ $4,597,000 $4,299,000
========== ==========
</Table>
4. BANK LINE OF CREDIT
In 1999, the Company entered into a line of credit arrangement with a bank
providing for advances up to $5,000,000. Outstanding advances may not exceed
specified percentages of eligible accounts receivable and inventory as defined
in the agreement. Outstanding borrowings bear interest at a variable rate, which
is generally related to the bank's borrowing rate plus 2%. The line of credit
expires in May 2002 and requires that certain covenants be met. The Company was
in compliance with all covenants at December 31, 2000. Borrowings under the line
of credit are secured by substantially all of the assets of the Company. At
December 31, 2000 and 1999 outstanding borrowings were $1,250,000 and the
effective interest rates were 11% and 10%, respectively.
A-10
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTE PAYABLE
On January 15, 1999, in accordance with the Avon Stock Transfer Agreement,
the Company received $3,500,000 in exchange for an unsecured note payable to
Avon due on January 15, 2006. The note bears interest at 4.64% per annum payable
at maturity. The Company determined that the market rate of interest at which it
could borrow similar funds was approximately 10.75% per annum at January 15,
1999. As a result, the note payable was recorded net of a discount of $1,227,000
that will be amortized into interest expense over the life of the note. At
December 31, 1999, the note payable balance of $2,605,000 includes a remaining
unamortized discount on the note of $1,051,000 and accrued interest payable of
$156,000. At December 31, 2000, the note payable balance of $2,950,000 includes
a remaining unamortized discount on the note of $875,000 and accrued interest
payable of $325,000.
6. EQUITY TRANSACTIONS
In January 1999, the purchasers of Discovery Toys resold 226,044 shares of
newly acquired Common Stock to certain key employees for nominal consideration.
Of these shares, 24,570 shares sold to one employee were subject to vesting
restrictions that lapsed on June 30, 1999, and the remaining 201,474 shares were
fully vested. The Company's stock was deemed by the Company to have no value at
the time of the transfer, and the Company did not record compensation expense as
a result of the transfer.
In October 1999, the Company repurchased 4,914 shares of Common Stock from a
former employee at the stock's deemed fair value of approximately $1,000.
In January 2000, the Company issued a total of 3,276 fully vested shares of
Common Stock to two employees for consideration of $1 per employee. The Company
recorded $3,000 in compensation expense as a result of these transactions.
In June 2000, the Company repurchased 14,742 shares of Common Stock from a
former employee at the stock's deemed fair value of $17,000.
In February, July and November 2000, the Company paid dividends totaling
$1,498,000 to holders of its Common Stock.
7. OPERATING LEASES
The Company leases its office facilities under the terms of an operating
lease, which calls for monthly lease payments of $62,000 through February 2004.
Subsequent monthly lease payments will be adjusted to market rates as determined
in accordance with the lease terms. The lease expires in February 2014. Rental
expense totaled $756,000 and $762,000 in 2000 and 1999, respectively.
The Company leases certain other vehicles and equipment used in its
operations under non-cancelable operating lease agreements expiring from 2000
through 2003. The leases generally provide that the Company pays taxes,
insurance, maintenance and certain other operating expenses. Vehicle and
equipment rental expenses totaled $94,000 and $96,000 in 2000 and 1999,
respectively.
A-11
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OPERATING LEASES (CONTINUED)
Future minimum lease payments for non-cancelable operating leases at
December 31, 2000 are as follows:
<Table>
2001........................................................ $ 787,000
2002........................................................ 777,000
2003........................................................ 766,000
2004........................................................ 739,000
2005........................................................ 739,000
Thereafter.................................................. 6,036,000
----------
$9,844,000
==========
</Table>
8. CONCENTRATION OF CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of amounts receivable from independent sales
consultants. The Company extends credit in the normal course of business to its
independent sales consultants and performs credit evaluations of financial
condition as deemed necessary. Generally, no collateral is required from its
independent sales consultants. Credit losses, if any, have been within
management's expectations and are provided for in the financial statements.
The Company maintains demand deposits with financial institutions with
credit risk, in the normal course of business, to meet their operating needs.
The Company's credit risk lies with the exposure to loss of uninsured demand
deposits in the event of nonperformance by these financial institutions. At
December 31, 2000, balances on deposit with financial institutions exceeded
federally insured limits by $11,893,000.
9. MERCHANDISING AND PROMOTION AGREEMENT
The Company entered into a merchandising and promotion agreement effective
November 1, 1999 with a prominent internet retailer. The original term of the
agreement is 62 months. The Company received payments of $1,000,000 in 1999 and
$1,500,000 in 2000 per the terms of the agreement. Due to recent financial
difficulties faced by the internet retailer, the Company does not expect to
receive a remaining payment of $500,000 due in November 2001 under this
agreement. The Company is recognizing revenue under the agreement on a pro rata
basis over the remaining life of the agreement from the dates the individual
payments are received. Other income of $394,000 and $32,000 was recognized in
2000 and 1999, respectively. At December 31 2000 and 1999, the Company had
recorded deferred revenue of $2,074,000 and $968,000, respectively under the
agreement.
A-12
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
Income before income taxes consisted of the following:
<Table>
<Caption>
2000 1999
-------- --------
United States........................................... $161,000 $548,000
Foreign................................................. 172,000 184,000
-------- --------
Total................................................. $333,000 $732,000
======== ========
</Table>
The income tax provision consists of the following:
<Table>
<Caption>
2000 1999
-------- --------
Current:
State..................................................... $6,000 $ --
Canadian.................................................. -- --
------ ------
Total current............................................... 6,000 --
====== ======
Deferred:
Federal................................................... -- --
------ ------
Total deferred.............................................. -- --
------ ------
Total....................................................... $6,000 $ --
====== ======
</Table>
The following table reconciles the federal statutory tax rate to the
effective tax rate of the provision for income taxes:
<Table>
<Caption>
2000 1999
-------- --------
Federal statutory income tax rate........................... 34.0% 34.0%
State income taxes.......................................... 1.8 --
Amortization of goodwill.................................... (53.6) (24.4)
Change in valuation allowance............................... 5.9 (17.8)
Amortization of discount and other.......................... 13.7 8.2
----- -----
Effective tax rate.......................................... 1.8% 0.0%
===== =====
</Table>
Deferred tax assets and liabilities are summarized as follows:
<Table>
<Caption>
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
Net operating loss carryforwards............ $ 761,000 $ 465,000
Accrued compensation and accrued vacation... 173,000 --
Deferred revenue............................ 429,000 387,000
Accumulated depreciation and amortization... 162,000 686,000
Reserves.................................... 322,000 400,000
Capitalized overhead-inventory.............. 124,000 196,000
Incentive commitments....................... 343,000 238,000
Valuation allowance......................... (2,314,000) (2,372,000)
----------- -----------
Total....................................... $ -- $ --
=========== ===========
</Table>
A-13
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The Company's net operating loss carryforwards included as a deferred tax
asset above are approximately $1.9 million and $1.1 million for 2000 and 1999,
respectively. These operating loss carryforwards will expire between 2019 and
2020 if not utilized. For federal and state tax purposes, a portion of the
Company's net operating loss carryforwards may be subject to certain limitations
on utilization in case of change in ownership as defined by federal and state
tax law.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases for
financial reporting purposes. In addition, future tax benefits, such as net
operating loss carryforwards, are recognized to the extent that realization of
such benefits is more likely than not. The Company has assessed its ability to
realize future tax benefits, and concluded that as a result of its history of
losses, it is more likely than not, that such benefits will not be realized.
Accordingly, the Company has recorded a full valuation allowance against its
deferred tax assets.
11. RELATED PARTY TRANSACTIONS
The Company has management consulting services agreements with two separate
companies, each of which has common ownership with Discovery Toys. Pursuant to
the terms of the first agreement, the Company pays annual management fees of
$225,000. The Company had accrued unpaid fees under this agreement of $225,000
on both December 31, 2000 and 1999. Pursuant to the terms of the second
agreement, the Company incurred management fee expenses of $492,000 and $396,000
in 2000 and 1999, respectively. These agreements may be extended or terminated
at will.
The Company receives management services from a member of its Board of
Directors who is also a shareholder, and pays annual fees of $75,000 for these
services.
12. REVENUES BY PRODUCT AREA AND GEOGRAPHIC AREA
REVENUES BY PRODUCT FAMILIES--The Company markets and sells educational toys
and other educational products within one industry segment. No one customer
accounted for more than 10% of the Company's consolidated annual revenues in
fiscal 1999 or 2000.
A summary of the Company's revenues by product is as follows:
<Table>
<Caption>
2000 1999
----------- -----------
Revenues:
Educational toys................................. $34,982,000 $33,008,000
Books............................................ 3,630,000 5,117,000
Educational software............................. 1,400,000 1,775,000
Shipping revenues................................ 6,338,000 6,196,000
Independent sales consultant commissions......... (7,545,000) (7,577,000)
Other............................................ 1,326,000 1,154,000
----------- -----------
Total............................................ $40,131,000 $39,673,000
=========== ===========
</Table>
GEOGRAPHIC INFORMATION--Revenues from sales outside the United States
amounted to 4.5% and 5.2% of total revenues for 2000 and 1999, respectively.
Foreign revenues were primarily generated from
A-14
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. REVENUES BY PRODUCT AREA AND GEOGRAPHIC AREA (CONTINUED)
customers in Canada. The Company had identifiable assets used in connection with
foreign operations of approximately $31,000 and $71,000 as of December 31, 2000
and 1999, respectively.
13. RETIREMENT PLAN
The Company sponsors a 401(k) salary deferral plan ("401(k) Plan") covering
substantially all employees of the Company. Contributions to the 401(k) Plan are
in the form of employee salary deferral contributions, which may be matched by
the Company up to a specific limit. The 401(k) Plan also provides for
discretionary profit sharing contributions as determined on an annual basis at
the discretion of the Company's Board of Directors. The Company's expense
incurred during 2000 in connection with the 401(k) Plan was $14,000. The Company
made $27,000 in matching contributions to the 401(k) Plan in 2000 and no profit
sharing contributions.
14. VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO AND WRITE- END OF
OF PERIOD EXPENSE OFFS PERIOD
---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful accounts and sales
returns........................................ $ 274,000 $360,000 $223,000 $ 411,000
Deferred tax asset valuation
Allowance...................................... $2,372,000 $ -- $ 58,000 $2,314,000
PERIOD ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts and sales
returns........................................ $ 362,000 $278,000 $366,000 $ 274,000
Deferred tax asset valuation
Allowance...................................... $1,989,000 $383,000 $ -- $2,372,000
</Table>
15. SUBSEQUENT EVENT
On July 18, 2001, dreamlife, inc. ("dreamlife") acquired all of the
outstanding capital stock of the Company pursuant to a Stock Purchase Agreement
dated as of July 18, 2001, by and among dreamlife, the Company and the holders
of all of the issued and outstanding capital stock of the Company (the
"Discovery Toys Stockholders"). The Company will operate as a wholly owned
subsidiary of dreamlife. Pursuant to the Stock Purchase Agreement, dreamlife
issued an aggregate of 33,772,143 shares of common stock to the stockholders of
the Company in exchange for all of the issued and outstanding shares of capital
stock of the Company. The consideration paid by dreamlife for the acquisition of
the Company was determined through arms-length negotiation by the management of
dreamlife and the majority stockholders of the Company. Subsequent to the
acquisition, the Company's Stockholders hold a majority of the voting interests
in dreamlife. As dreamlife, inc. is a public shell, the transaction will be
accounted for as a recapitalization of the Company.
A-15
<Page>
ATTACHMENT 7(A)(2)
DISCOVERY TOYS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
Financial Statements:
Consolidated Balance Sheet as of June 30, 2001
(Unaudited)............................................. B-1
Consolidated Statements of Operations for the six month
periods ended June 30, 2001 and 2000 (Unaudited)........ B-2
Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 2001 (Unaudited).............. B-3
Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2001 and 2000 (Unaudited)........ B-4
Notes to Consolidated Financial Statements................ B-5-B-7
</Table>
<Page>
DISCOVERY TOYS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<Table>
<Caption>
JUNE 30, 2001
-------------
ASSETS
Current assets:
Cash........................................................ $ 545,000
Accounts receivable, net.................................... 808,000
Inventory................................................... 4,348,000
Prepaid expenses and other current assets................... 1,079,000
-----------
Total current assets........................................ 6,780,000
-----------
Property and equipment, net................................. 882,000
Other assets................................................ 51,000
-----------
Total assets................................................ $ 7,713,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable............................................ $ 1,215,000
Accrued liabilities......................................... 2,951,000
Line of credit............................................ 1,553,000
-----------
Total current liabilities................................... 5,719,000
-----------
Note payable................................................ 3,123,000
Negative goodwill........................................... 3,937,000
-----------
12,779,000
-----------
Commitments
Stockholders' equity (deficit):
Common stock, $0.10 par value; 491,400 shares authorized,
425,880 issued and outstanding............................ 43,000
Paid-in capital (deficit)................................... (5,109,000)
Retained earnings (deficit)................................. --
-----------
Total stockholders' equity (deficit)........................ (5,066,000)
-----------
Total liabilities and stockholders' equity (deficit)........ $ 7,713,000
===========
</Table>
See accompanying notes to financial statements.
B-1
<Page>
DISCOVERY TOYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
Sales....................................................... $14,677,000 $13,606,000
Cost of sales............................................... 8,816,000 8,710,000
----------- -----------
Gross profit................................................ 5,861,000 4,896,000
----------- -----------
OPERATING EXPENSES:
Sales and marketing....................................... 2,649,000 2,378,000
General and administrative................................ 4,707,000 4,603,000
Amortization of negative goodwill......................... (262,000) (262,000)
----------- -----------
Operating (loss)............................................ (1,233,000) (1,823,000)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................................... 162,000 219,000
Interest expense.......................................... (454,000) (316,000)
Other income, net......................................... 2,056,000 298,000
----------- -----------
1,764,000 201,000
INCOME (LOSS) BEFORE INCOME TAXES........................... 531,000 (1,622,000)
INCOME TAX PROVISION (BENEFIT).............................. (7,000) --
----------- -----------
NET INCOME (LOSS)........................................... $ 538,000 $(1,622,000)
=========== ===========
</Table>
See accompanying notes to financial statements.
B-2
<Page>
DISCOVERY TOYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
-------- -------- ----------- --------- -----------
Balance at December 31, 2000........... 475,020 $48,000 $ 743,000 $(439,000) $ 352,000
Repurchase of common stock--Avon....... (49,140) (5,000) (1,451,000) -- (1,456,000)
Dividends.............................. -- -- (4,401,000) (99,000) (4,500,000)
Net income............................. -- -- -- 538,000 538,000
------- ------- ----------- --------- -----------
Balance at June 30, 2001............... 425,880 $43,000 $(5,109,000) $ -- $(5,066,000)
======= ======= =========== ========= ===========
</Table>
See accompanying notes to financial statements.
B-3
<Page>
DISCOVERY TOYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 538,000 $(1,622,000)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 222,000 230,000
Provision for doubtful accounts......................... 28,000 23,000
Amortization of negative goodwill....................... (262,000) (262,000)
Amortization of discount on note payable................ 173,000 173,000
Changes in:
Accounts receivable................................... (401,000) 268,000
Inventory, net........................................ (269,000) 476,000
Prepaid expenses and other current assets............. (716,000) (239,000)
Deposits and other assets............................. 1,000 3,000
Accounts payable...................................... (580,000) (772,000)
Accrued expenses...................................... (1,646,000) (1,061,000)
Deferred revenues..................................... (1,681,000) 603,000
Other................................................. -- (28,000)
------------ -----------
Net cash provided by (used in) operating activities......... (4,593,000) (2,208,000)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property and equipment.......... -- --
Purchases of property and equipment....................... (136,000) (14,000)
------------ -----------
Net cash used in investing activities....................... (136,000) (14,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends...................................... (4,500,000) (500,000)
Proceeds from line of credit.............................. 303,000 --
Payments for repurchase of shares......................... (1,456,000) (17,000)
------------ -----------
Net cash (used in) provided by financing activities......... (5,653,000) (517,000)
------------ -----------
NET INCREASE (DECREASE) IN CASH............................. (10,382,000) (2,739,000)
CASH AT BEGINNING OF PERIOD................................. 10,927,000 10,500,000
------------ -----------
CASH AT END OF PERIOD....................................... $ 545,000 $ 7,761,000
============ ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest................................................ $ 63,000 $ 66,000
Income taxes............................................ 5,000 --
============ ===========
</Table>
See accompanying notes to financial statements.
B-4
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Discovery Toys, Inc.
include the accounts of Discovery Toys, Inc. (a California corporation) and its
wholly-owned subsidiary (together, the "Company") and have been prepared
pursuant to the rules of the Securities and Exchange Commission for Quarterly
reports on Form 10-Q and do not include all of the information and footnotes
required by generally accepted accounting principles in the United States of
America. These statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December 31,
2000 included in the accompanying Form 8-K/A.
In the opinion of management, all adjustments considered necessary for a
fair presentation have been included consisting only of normal recurring
accruals. Operating results for the six-month period ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2001.
Certain reclassifications have been made to the prior period presentations
in order to conform to the current presentation.
2. DREAMLIFE INC. REVERSE ACQUISITION
On July 18, 2001, dreamlife, inc. ("dreamlife") acquired all of the
outstanding capital stock of the Company pursuant to a Stock Purchase Agreement
dated as of July 18, 2001, by and among dreamlife, the Company and the holders
of all of the issued and outstanding capital stock of the Company (the
"Discovery Toys Stockholders"). The Company will operate as a wholly owned
subsidiary of dreamlife. Pursuant to the Stock Purchase Agreement, dreamlife
issued an aggregate of 33,772,143 shares of common stock to the stockholders of
the Company in exchange for all of the issued and outstanding shares of capital
stock of the Company. The consideration paid by dreamlife for the acquisition of
the Company was determined through arms-length negotiation by the management of
dreamlife and the majority stockholders of the Company. Subsequent to the
acquisition, the Company's Stockholders hold a majority of the voting interests
in dreamlife. As dreamlife, inc. is a public shell, the transaction is accounted
for as a recapitalization of the Company. Accordingly, the pro forma disclosures
required by APB No. 16 are not presented.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, "Business Combinations",
and Statement No. 142, "Goodwill and Other Intangible Assets". Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company has adopted the provisions of Statement 141 as of July 1, 2001
and will adopt Statement 142 effective January 1, 2002. When Statement 142 is
adopted, remaining unamortized
B-5
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
negative goodwill must be written off as the cumulative effect of a change in
accounting principle. As a result, the Company expects to record a benefit of
approximately $3.7 million on January 1, 2002 resulting from the write-off of
negative goodwill. The Company does not believe there will be any additional
impact from the implementation of these statements on the Company's financial
statements.
In August 2001, the FASB also issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement, which is effective
for fiscal years beginning after December 15, 2001, addresses financial
accounting and reporting for the impairment of long-lived assets, excluding
goodwill and intangible assets, to be held and used or disposed of. The Company
does not expect the implementation of this standard to have a significant effect
on its results of operations or financial condition.
4. INVENTORY
<Table>
INVENTORY:
Finished goods.............................................. $4,020,000
Supplies.................................................... 328,000
----------
$4,348,000
==========
</Table>
5. BORROWINGS
In June 2001, the Company amended its line of credit agreement to extend the
maturity date of the agreement to May 2003 and increase the amount which can be
borrowed by $1,250,000 from June 2001 through December 2001.
In June 2001, the Company amended its note payable agreement with Avon to
accelerate the maturity date of the note. Under the amended note agreement,
principle and related accrued interest will be due in June 2003. The remaining
unamortized discount on the note payable at June 30, 2001 of $787,000 will be
amortized into interest expense over the remaining term of the note.
The line of credit agreement and the Avon note contain restrictions that
prohibit Discovery Toys from making advances to the dreamlife entity to cover
its corporate overhead and operating expenses.
6. EQUITY TRANSACTIONS
On June 28, 2001, the Company redeemed the shares of its common stock held
by Avon Products, Inc. in exchange for $1,456,000.
On June 29, 2001, the Company made a cash distribution to holders of the
Company's common stock in the aggregate amount of $4,500,000.
7. MERCHANDISING AND PROMOTION AGREEEMENT
The Company entered into a merchandising and promotion agreement effective
November 1, 1999 with an internet retailer. The original term of the agreement
was 62 months. The Company received payments of $1,000,000 in 1999 and
$1,500,000 in 2000 per the terms of the agreement. In 2001, the agreement was
terminated as a result of the bankruptcy of the internet retailer. As a result,
the
B-6
<Page>
DISCOVERY TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. MERCHANDISING AND PROMOTION AGREEEMENT (CONTINUED)
remaining unearned revenue of $2,074,000 was recognized as other income during
the quarter ended March 31, 2001.
B-7
<Page>
ATTACHMENT 7(B)
DREAMLIFE, INC. AND DISCOVERY TOYS, INC.
INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
Description of the Transaction.............................. C-1
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of June 30, 2001.......................................... C-2
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the Six Months Ended June 30, 2001 and the
Year Ended December 31, 2000.............................. C-3
</Table>
<Page>
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS OF DREAMLIFE, INC.
AND DISCOVERY TOYS, INC.
Effective July 18, 2001, the shareholders of Discovery Toys, Inc.
("Discovery Toys") gained control of dreamlife, inc. ("dreamlife") pursuant to a
reverse merger resulting from a Stock Purchase Agreement dated July 18, 2001
(the "Purchase Agreement"). Pursuant to the Stock Purchase Agreement, dreamlife
issued an aggregate of 33,772,143 shares of common stock to the stockholders of
Discovery Toys in exchange for all of the issued and outstanding shares of
capital stock of Discovery Toys. The consideration paid by dreamlife for the
acquisition of Discovery Toys was determined through arms-length negotiation by
the management of dreamlife and the majority stockholders of Discovery Toys.
Subsequent to the acquisition, the Discovery Toys Stockholders hold a
majority of the voting interests in dreamlife. Accordingly, this transaction
will be treated as a reverse acquisition under which, for accounting purposes,
Discovery Toys is deemed to be the acquiring entity and dreamlife is deemed to
be the acquired entity. Under these accounting principles the post-merger
dreamlife financial statements represent Discovery Toys on a historical basis
consolidated with the results of operations of post-merger dreamlife from the
effective date of the merger. Because dreamlife is effectively a non- operating
public shell, the merger has been treated as a recapitalization of Discovery
Toys, with no goodwill recorded.
The unaudited pro forma condensed financial statements of Discovery Toys are
based upon the historical financial statements of Discovery Toys and dreamlife,
after giving effect to their merger. These unaudited pro forma condensed
financial statements are not necessarily indicative of the financial position
and results of operations that would have been attained had the transactions
actually taken place at the date indicated and do not purport to be indicative
of the effects that may be expected to occur in the future.
The accompanying unaudited pro forma condensed financial statements
illustrate the acquisition's effect on Discovery Toy's financial position and
results of operations. The unaudited pro forma condensed combined balance sheet
as of June 30, 2001 is based on the historical balance sheets of Discovery Toys
and dreamlife and assumes the merger took place on that date. The unaudited pro
forma condensed statements of operations for the six months ended June 30, 2001
and the year ended December 31, 2000 are based on the historical statements of
operations of Discovery Toys adjusted to include certain historic dreamlife
expenses of $1.2 million per year expected to continue subsequent to the merger.
These expenses relate to existing dreamlife facilities and equipment to be used
by the combined entity and dreamlife personnel that will continue to be employed
by the combined entity. As there are no continuing operations of dreamlife on a
pro forma basis, the pro forma financial statements do not include dreamlife's
historical results of operations except for the expenses noted above.
C-1
<Page>
DREAMLIFE, INC. AND DISCOVERY TOYS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<Table>
<Caption>
PRO FORMA
DISCOVERY TOYS DREAMLIFE ADJUSTMENTS DREAMLIFE
JUNE 30, 2001 JUNE 30, 2001 (SEE NOTES) JUNE 30, 2001
-------------- ------------- ------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 545,000 $ 1,557,000 $ 2,102,000
Accounts receivable, net.................................. 808,000 -- 808,000
Inventory................................................. 4,348,000 -- 4,348,000
Prepaid expenses and other current assets................. 1,079,000 15,000 (250,000)(4) 844,000
----------- ------------ -----------
Total current assets...................................... 6,780,000 1,572,000 8,102,000
----------- ------------ -----------
Property and equipment, net............................... 882,000 558,000 (347,000)(1) 1,093,000
Other assets.............................................. 51,000 89,000 140,000
----------- ------------ -----------
Total assets.............................................. 7,713,000 2,219,000 9,335,000
----------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... 1,215,000 419,000 1,634,000
Accrued liabilities....................................... 2,951,000 1,768,000 (1,460,000)(3) 3,259,000
Line of credit............................................ 1,553,000 -- 1,553,000
Notes payable............................................. -- 2,400,000 (2,400,000)(2) --
----------- ------------ -----------
Total current liabilities................................. 5,719,000 4,587,000 6,446,000
----------- ------------ -----------
Note payable.............................................. 3,123,000 -- 3,123,000
Accrued liability......................................... -- -- 3,000,000 (3) 3,000,000
Negative goodwill......................................... 3,937,000 -- 3,937,000
----------- ------------ -----------
12,779,000 4,587,000 16,506,000
----------- ------------ -----------
Commitments
Stockholders' equity (deficit):
Common Stock:
Par value $0.10 Discovery Toys; $0.01 dreamlife; Discovery
Toys--491,400 shares authorized, 425,880 shares issued
and outstanding; dreamlife--100,000,000 authorized,
42,368,351 shares issued; Pro forma--56,132,098 shares
outstanding............................................. 43,000 423,000 95,000 (4) 561,000
Treasury stock, 22,408,396 dreamlife shares at cost....... -- -- --
Paid-in capital........................................... (5,109,000) 36,259,000 (38,882,000)(4) (7,732,000)
Deferred compensation..................................... -- (137,000) 137,000 (4) --
Retained earnings (deficit)............................... -- (38,913,000) 38,913,000 (4) --
----------- ------------ -----------
Total stockholders' equity (deficit)...................... (5,066,000) (2,368,000) (7,171,000)
----------- ------------ -----------
Total liabilities and stockholders' equity (deficit)...... $ 7,713,000 $ 2,219,000 $ 9,335,000
=========== ============ ===========
</Table>
NOTES TO CONDENSED CONSOLIDATED BALANCE SHEET
(1) To revalue certain fixed assets to their estimated fair values based on
Discovery Toy's intended use of such assets.
(2) To reflect the cancellation of a $2.4 million promissory note in exchange
for 2.4 million dreamlife shares, which occurred in connection with the
Purchase Agreement.
(3) To accrue additional employment related liability incurred in connection
with the Purchase Agreement.
(4) To reflect the recapitalization of the surviving entity including estimated
transactions costs of $250,000.
C-2
<Page>
DREAMLIFE, INC. AND DISCOVERY TOYS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED MONTHS ENDED
JUNE 30, 2001(1) DECEMBER 31, 2000(1)
---------------- --------------------
SALES....................................................... $14,677,000 $40,131,000
COST OF SALES............................................... 8,816,000 24,190,000
----------- -----------
Gross profit................................................ 5,861,000 15,941,000
OPERATING EXPENSES:
Sales and marketing....................................... 2,649,000 6,940,000
General and administrative................................ 5,307,000 10,806,000
Amortization of negative goodwill......................... (262,000) (525,000)
----------- -----------
Operating loss.............................................. (1,833,000) (1,280,000)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................................... 162,000 436,000
Interest expense.......................................... (454,000) (480,000)
Other income, net......................................... 2,056,000 457,000
----------- -----------
1,764,000 413,000
----------- -----------
LOSS BEFORE INCOME TAXES.................................... (69,000) (867,000)
INCOME TAX PROVISION (BENEFIT).............................. (7,000) 6,000
----------- -----------
NET LOSS.................................................... (62,000) (873,000)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE:
Historical................................................ (0.13) (1.81)
Proforma.................................................. -- (0.02)
BASIC AND DILUTED SHARES USED IN COMPUTATIONS:
Historical................................................ 475,000 483,000
Proforma.................................................. 56,132,000 56,132,000
=========== ===========
</Table>
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) The unaudited pro forma condensed statements of operations for the six
months ended June 30, 2001 and the year ended December 31, 2000 are based on
the historical statements of operations of Discovery Toys adjusted to
include certain historic dreamlife expenses of $1.2 million per year
expected to continue subsequent to the acquisition. These expenses relate to
existing dreamlife facilities and equipment to be used by the combined
entity and dreamlife personnel that will continue to be employed by the
combined entity. As there are no continuing operations of dreamlife on a pro
forma basis, the pro forma financial statements do not include dreamlife's
historical results of operations except for the expenses noted above.
(2) Historical net loss per share is calculated by dividing the net loss for the
respective period by the historical average outstanding common shares of
Discovery Toys.
(3) Pro Forma net loss per share is calculated by dividing the net loss for the
respective period by the Pro Forma average outstanding common shares that
would be outstanding if the acquisition had occurred on January 1, 2000.
C-3
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
2.1 Stock Purchase Agreement dated as of July 18, 2001, among
dreamlife, inc., Discovery Toys, Inc. and the Discovery
Toys, Inc. shareholders named therein(1)
2.2 Note Exchange Agreement dated as of July 18, 2001, between
dreamlife, inc. and CYL Development Holdings, LLC (1)
3.1(ii ) Amended and Restated By-laws(1)
4.1 Registration Rights Agreement dated as of July 18, 2001,
among dreamlife, inc. and the Discovery Toys, Inc.
shareholders named therein(1)
4.2 Termination Agreement dated July 18, 2001, among dreamlife,
inc., Anthony J. Robbins, Robbins Research International
Inc. and CYL Development Holdings, LLC(1)
10.1 Modification to Peter A. Lund Offer Letter dated July 18,
2001, between dreamlife, inc. and Peter A. Lund(1)
10.2 Amendment to Content Provider and License Agreement dated as
of July 10, 2001 among Anthony J. Robbins, Robbins Research
International Inc. and dreamlife, inc.(1)
99.1 Press release of dreamlife, inc. dated July 18, 2001(1)
</Table>
- ------------------------
(1) Previously filed as identically numbered exhibit to the Company's
Form 8-K/A dated July 18, 2001 and filed with the Securities and Exchange
Commission on August 1, 2001.