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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ______________
COMMISSION FILE NUMBER 1-13160
DYCAM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4202424
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9414 ETON AVENUE, CHATSWORTH, CALIFORNIA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE (818) 998-8008
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO ___.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
AT MARCH 10, 1997, THERE WERE OUTSTANDING 3,120,836 SHARES OF THE COMMON
STOCK OF REGISTRANT, AND THE AGGREGATE MARKET VALUE OF THE SHARES HELD ON THAT
DATE BY NON-AFFILIATES OF THE REGISTRANT, BASED ON THE CLOSING PRICE ($.50 PER
SHARE) OF THE REGISTRANT'S COMMON STOCK ON THE AMERICAN STOCK EXCHANGE, INC. ON
MARCH 10, 1997, WAS $513,105. FOR PURPOSES OF THIS COMPUTATION, IT HAS BEEN
ASSUMED THAT THE SHARES BENEFICIALLY HELD BY DIRECTORS AND OFFICERS OF
REGISTRANT WERE "HELD BY AFFILIATES"; THIS ASSUMPTION IS NOT TO BE DEEMED TO BE
AN ADMISSION BY SUCH PERSONS THAT THEY ARE AFFILIATES OF REGISTRANT.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S PROXY STATEMENT RELATING TO ITS 1997 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III AND THIS
ANNUAL REPORT.
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DYCAM INC.
CROSS-REFERENCE SHEET
The following items in Part III of Registrant's Annual Report on Form 10-
KSB for its fiscal year ended December 31, 1996 are incorporated herein by
reference to Registrant's Proxy Statement and appear therein under the section
headings indicated below:
<TABLE>
<CAPTION>
Item Form Heading Section Heading
- ----------------------------- ----------------------- -----------------------
<S> <C> <C>
9. Directors' Executive Proxy Statement -
Officers, Promoters Election of Directors
and Control Persons; - Information with
Compliance With respect to Nominees,
Section 16(a) of the Directors and
Exchange Act Executive Officers
10. Executive Compensation Proxy Statement -
Management -
Compensation of
Executive Officers
11. Security Ownership of Proxy Statement -
Certain Beneficial Principal Stockholders
Owners and Management
12. Certain Relationships Proxy Statement -
and Related Management - Certain
Transactions Relationships and
Related Transactions
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PART I
Certain statements made in this Form 10K which are not historic facts
constitute forward looking statements within the meaning of the Securities
Reform Act of 1995. Such forward looking statements involve risks and
uncertainties and, in some cases, are based upon various factors beyond Dycam's
control. These risks and uncertainties include, among other things, the ability
of Styles on Video to continue to service its outstanding indebtedness owed to
Dycam, the market reception for digital cameras in general and Dycam's products
specifically, the impact of competition from other companies in the digital
camera industry, developments which may render Dycam's products and services
obsolete or less attractive, Dycam's ability to finance growth from its working
capital, and its ability to obtain third party financing if its working capital
is not sufficient to meet its needs. Furthermore, Styles on Video and Hasco
International ("Hasco"), have entered into a definitive agreement under which
substantially all of the assets of Forever Yours are to be purchased by Hasco.
Concurrently with the closing of this asset purchase transaction, Dycam and
Hasco will enter into a 3 year agreement under which Dycam will receive
quarterly payments for continuing camera maintenance and development services,
and camera lease payments from certain leased camera payment obligations assumed
by Hasco. Payment of deferred license fees due Dycam from Forever Yours is
expected to be satisfied from the proceeds of the Forever Yours sale. This
transaction and the continuing agreement with Hasco may result in substantially
lower revenues to Dycam than would have been realized under the original
agreements with Forever Yours.
The company believes that its existing cash balances, the payments due under the
intercompany loan, payments of the accrued license fees and receivables from the
sale of Forever Yours, and cash flow from operations will be sufficient to meet
its cash requirements through September 1997, after which time it may be
required to raise additional capital. In addition, to the extent Dycam
experiences growth in the future, or its cash flow from operations is less than
anticipated, Dycam may be required to obtain additional sources of cash. The
ability of the Company to raise additional funds and ultimately achieve positive
operating cash flow is uncertain and, therefore, this raises doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern and do not include any adjustments that might result from the
outcome of this uncertainty.
ITEM 1. DESCRIPTION OF BUSINESS.
Dycam Inc. ("Dycam"), a Delaware Corporation formed in 1988, designs,
manufactures, distributes, and sells digital cameras and associated hardware and
software products primarily for use with personal computers. Ultimately serving
the same purpose as a film camera or camcorder; digital cameras are designed to
capture and preserve digital pictures for future use or reference. These digital
pictures can be displayed, saved, transmitted, printed, or incorporated into
electronic documents by computer. Products currently being sold by Dycam include
battery powered (portable) and stationary digital cameras, digital camera
subsystems and modules, various electronic camera accessories, and both
commercial and proprietary software for digital camera management. Dycam also
offers sophisticated editing, formatting, storage, and printing software, and
provides software integration tools to third parties who wish to utilize Dycam
products in their own systems. Additionally, Dycam provides engineering services
in order to design electronic photography systems that meet a customer's unique
imaging needs, and also licenses the rights to manufacture and sell digital
cameras which use Dycam technology.
Dycam was incorporated in Delaware in 1988 and has been providing
standardized and custom designed digital imaging solutions to a variety of
customers and markets since 1991. Dycam was acquired by Styles on Video, Inc., a
Delaware corporation ("Styles") in February 1994. Effective June 21, 1994, Dycam
effected an underwritten Rights Offering of 1,000,000 shares of its Common
Stock. From and after the close of the Rights Offering, Styles owned
approximately 61% of Dycam's common stock.
BUSINESS STRATEGY
As a result of strategic alliances, value added distribution, and its own
continuing research and development efforts, Dycam has developed a product line
of standard and custom digital cameras as well as supporting software and
accessory products which can be used to augment the capabilities of such
cameras. The standard product line affords Dycam's customers the opportunity to
select a digital camera and accessory package which is appropriate for the
general purpose needs of the customer. Dycam's standard product strategy is to
continue to participate in the growth of this market segment by facilitating the
use of general purpose digital cameras, and selling a range of Dycam branded
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and third party digital camera products, software, and accessories. Since the
fourth quarter of 1994, Dycam has elected to reorient its market strategy and to
de-emphasize internally developed standard products in favor of purchased
standard products wherever possible. To this end, in July 1995, Dycam announced
the availability of the Model 10-C, a 640 X 480 color digital camera with power
zoom lens and removable memory cards. This product, built to Dycam specification
by a major camera manufacturer, is intended to provide a solution for the
professional markets requiring the use of images with documentation such as
property appraisal, insurance claims, and law enforcement, and has been well
received. Although Dycam continues to believe that, where a clear cost and
performance advantage can be shown, many customers within the targeted
industries will prefer Dycam branded products in order to economically provide a
range of digital camera products suitable for specific industry applications,
Dycam has expanded its support for the resale of digital camera products
manufactured and branded by third parties such as Kodak and Sony. Although Dycam
will continue to provide standard products and expects such standard product
sales to grow, its internal development resources will be largely focused on the
provision of specialty imaging solutions.
The custom product line enables Dycam to work closely with certain customers
(including its strategic partners) to design products that combine custom built
digital cameras with specialized software, hardware, or packaging in order to
satisfy a particular business opportunity. Dycam's custom product strategy is to
design and market application specific digital camera products or systems that
are suited to the needs of customers whose operations benefit from the capture,
storage, and delivery of digital images, and Dycam intends to focus its custom
product resources on providing these imaging solutions to its customers and
strategic partners.
TECHNOLOGY AND INDUSTRY OVERVIEW
Digital photography combines electronic photography with computer
technology to capture, create, alter, store and display digital images. In
digital photography, the image is created by light passing through the lens of
the digital camera and landing on a photosensitive silicon detector, typically a
charge-coupled device ("CCD"). The CCD is an analog semiconductor device
primarily comprised of discrete pixel elements, the number of which determine
the resolution of the captured image. When a picture is taken, the digital
camera's electronics convert the analog image captured in the CCD to a digital
form which can be adjusted, compressed, and conveyed to the camera's memory,
hard drive or other storage medium. The digital image can be downloaded to a
personal computer and can be manipulated or enhanced using imaging software. A
hard copy of the image can be printed using any standard printer attached to the
computer.
Although digital cameras are currently used primarily by business
professionals and early technology adopters, industry experts believe that
digital cameras will become an increasingly common accessory for the personal
computer./1/ Digital cameras eliminate many of the time delays and costs
associated with conventional and instant film photography by eliminating the
need for film purchases, chemical processing, and the costs associated
therewith. Thus, with digital cameras, images can be taken and processed within
seconds and, if desired, retaken on the spot. Moreover, digital photographs can
be easily incorporated into computer generated forms and records, yielding a
more aesthetically pleasing computer generated product and potentially lowering
documentation costs.
PRODUCTS AND CUSTOM DESIGN
PRODUCTS
Dycam was founded in 1988 to provide improved methods of using electronic
photography with computers and is a leader in the design and development of
digital cameras. Dycam introduced one of the first low cost digital cameras in
1991 and today manufactures, distributes, and markets several models. Most of
Dycam's branded cameras are programmable and contain control software that
allows them to be programmed from the host computer to perform specific
functions. Each camera can also, to varying degrees, be custom-ordered and
configured to the customer's specifications. All of Dycam's internally designed
cameras can be made modem-compatible and can be used with accessory lenses or
custom optics. The ability to use custom optics, accessory lenses, and filters
allows the camera to produce desired results in many different applications.
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/1/ An industry report entitled Digital Still Photography in Business
-------------------------------------
Information Management published by The Concord Consulting Group in September,
- ----------------------
1995.
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Each of Dycam's branded portable digital camera models operates in
essentially the same manner. The photographer merely points and shoots at the
image he wishes to capture; exposure, focus and flash are all automatic. Except
for Dycam's modular digital cameras (described below) which can utilize the
power source of the computer to which they are attached or other external power
sources, Dycam's cameras are battery powered and rechargeable. Depending on
desired image quality and memory configuration, up to several hundred pictures
at a time can be captured and stored in the camera. These pictures can be
downloaded immediately or at the convenience of the user to a host computer.
Dycam offers both color and gray-scale cameras. Color cameras are appropriate,
for example, for taking pictures of people and other subjects where color is an
important component of the picture. Where color is not a necessity (or where,
for example, the production of a color hard copy of the image is not possible
due to the lack of a color output device), the gray-scale camera is preferable,
because a gray-scale camera produces a higher resolution image at the same pixel
count than does the color camera. In addition, the cameras are capable of
storing in excess of twice as many gray-scale images as color images, because
gray-scale images may be more efficiently compressed.
Once a picture has been taken, the image can be downloaded into a personal
computer by connecting the camera to one of the computer's standard I/O ports,
typically a serial port. Images can also be downloaded into a computer from a
remote location by modem. Once the necessary software (provided with the camera)
is loaded into the host computer and the image has been downloaded, the image
can be displayed on the computer's monitor. Using image editing and formatting
software, the user can then edit and manipulate the image on the screen by
cropping, enlarging, removing defects and adding text. The resulting image can
be stored and hard copy prints produced using a variety of commercially
available printers.
Dycam also provides software support for its branded cameras, including
basic applications that load, display, edit, print and save images for DOS,
Windows and Macintosh environments. Dycam markets image editing software which
has the ability to resize, balance, and enhance the images produced by its
cameras. Dycam also markets more sophisticated formatting software which allows
users to stitch or add text to the digital photographic image as well as
incorporate such image in reports and other texts. Additionally, Dycam develops
unique software packages which allow its various cameras to be utilized for
individualized customer-mandated functions.
The Modular Digital Camera. Dycam's first modular digital camera, known as
the Gator, was developed and manufactured as a joint effort by Dycam, IBM and
the University of Florida and introduced in September 1993. See "- Strategic
Alliances." Since that time, Dycam's modular digital camera designs have evolved
considerably, and have become the primary vehicle for Dycam's custom engineering
work. Dycam's modular digital cameras can be easily reconfigured or adapted for
use with a variety of optical systems, computer interfaces, and power supplies
and are versatile enough to stand alone, function as a component of a system, or
attach to notebook, tablet and desktop computers. When attached directly to a
computer the modular cameras can utilize the host computer's power supplies (or
an optional battery pack), display functions, and memories, and can be
externally mounted on or embedded in a notebook or tablet computer. As the
camera is pointed at the desired subject, a smaller-sized image is displayed on
the computer's screen. For standalone applications, a digital to video subsystem
and standard video monitor can be used to preview images. When the user is
satisfied with the image, he or she may take a full size picture. Dycam
manufactures and markets both gray-scale and color versions of the modular
camera, which retail for between $495 and $1,995 depending upon resolution and
features.
The Model 3 Digital Cameras. The Model 3 was introduced in 1992, and
represents the second generation of gray-scale digital camera developed and
manufactured by Dycam. The Model 3XL, which has increased battery capacity and
more image memory than the Model 3, is capable of taking and storing up to 500
pictures on a single battery charge. A color filter system is available for use
with both the Model 3 and Model 3XL, which filter system provides 24 bit color
images with very good quality. However, the color filter system is only
appropriate for capturing still life images using a tripod in that it
essentially operates by taking three separate pictures with red, green and blue
filters, which pictures are then combined by software to create one image. The
Model 3 sells for a list price of approximately $695 and the Model 3XL sells for
a list price of approximately $895; such prices include the camera, Macintosh,
DOS or Windows software, host adapter, cables and battery charger. The Model 3
and Model 3XL cameras are primarily designed for sale to end-users who do not
require a great deal of custom modifications to their cameras.
The Model 4 Digital Cameras. The Model 4 was introduced in October 1993,
and represents the second generation of 24 bit color digital cameras developed
and manufactured by Dycam. Like the Model 3 and Model 3XL, the Model 4 and the
Model 4XL are pocket sized and self-contained with a digital image output of 496
by 365 pixels. The Model 4 is capable of taking up to 100 pictures and storing
between 8 and 24 pictures on a single battery charge.
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The Model 4XL is capable of taking and storing up to 300 pictures in a single
battery charge. The Model 4 sells for a list price of approximately $795 and the
Model 4XL sells for a list price of approximately $995; such prices include the
camera, Macintosh, DOS or Windows imaging software, host adapter, cables and
battery charger. This camera is also designed for and marketed to the end-user
who does not require a great deal of custom modifications to their camera.
Model 10-C Camera. In July 1995, Dycam introduced a 640 X 480 24 bit color
digital camera with power zoom lens and removable flash memory cards
manufactured to the Company's specifications by a third party. This product is
intended to provide a solution for the professional markets requiring the use of
images with documentation such as property appraisal, insurance claims, and law
enforcement, and has been well received. The retail price of the basic camera is
$699 and a variety of accessories are offered. In the February 6, 1996 issue of
PC Magazine, competing against products such as the Kodak DC-40, Logitech
Fotoman Pixtura, Casio QV-10, Chinon ESC-3000, and Apple Quicktake 150, the
Dycam Model 10-C won the prestigious PC Magazine Editors Choice award for
digital cameras selling at less than $1,000. Although Dycam continues to sell
the Model 10-C, the Company is actively searching for a follow-on product to
serve this market segment.
Accessory Products. Dycam continues to offer a variety of accessory
products designed to fulfill the needs of the digital photographer. These
products include Flash Memory cards, carrying cases, editing software, portable
power supplies, cable adapters , a portable desk stand which connects the camera
to the host computer and a complement of lenses. Accessory lenses, which can be
attached to either the standard lens or the variable focus lenses, include
telephoto, wide angle, and close-up lenses. These lenses range in price from $89
for a wide angle or telephoto lens to $159 for a super close-up lens kit which
includes 3 lenses.
PRODUCT DEVELOPMENT ACTIVITIES
During 1996 Dycam expended approximately $551,000 on product development
and engineering activities. Approximately 10% of such moneys were devoted to the
development of products which were intended to be sold into standard markets,
including the Model 10-C product. Approximately 50% of such moneys were devoted
to the development of products for use by Dycam's strategic partners, including
the development of an improved Forever Yours, Inc. ("Forever Yours") imaging
system. The remaining product development funds were devoted to the following
projects:
Enhanced Modular Camera. Since the first quarter of 1995, Dycam has devoted
its primary modular camera product development activities to software
enhancements, custom versions of the existing products, and the development of
higher resolution models. Development of a 640 X 480 resolution grayscale
modular camera was completed during the fourth quarter of 1996, and Dycam
expects that this camera will retail for between $595 and $1,995, depending on
the camera's configuration. Development of a color version of the 640 X 480
modular camera is expected to be completed in the second half of 1997, and
higher resolution grayscale and color versions are in the planning stages.
Model 5 and Model 6 Cameras. During 1996 Dycam continued development of the
next generation of the Model 3 and Model 4 cameras, the Model 5 gray-scale
camera and the Model 6 color camera. These cameras are intended to offer a
higher level of component integration, a lower level of power consumption and
resolution which is comparable to the Model 3 and Model 4 cameras. During the
fourth quarter of 1996 Dycam consolidated the development of these cameras with
the Model 5v and Model 6v platform cameras as discussed further below.
PCMCIA Camera. Dycam continues to research the feasibility of developing a
camera which would attach to mobile computers and various accessories via a
PCMCIA interface. The PCMCIA interface was established by an industry
association, the Personal Computer Memory Card International Association, to
provide a universal slot for optional functions on mobile computers, including
connectivity, additional memory, modems and other purposes.
Model 5v and Model 6v Cameras. During 1996 Dycam continued development of
enhanced versions of the Model 5 and Model 6 camera platforms to include video
output, allowing images captured by these cameras to be directly displayed on a
television or video monitor. Images (including real time images) can be
captured and displayed anywhere that a television or video monitor is available,
with no need for a host computer. Additionally, the images can be stored either
on digital or video recording media. This camera platform is designed for
general purpose and specialty applications, including security or surveillance
purposes, that require both digital and video output capability. Dycam
anticipates that the development of certain specialized versions of these
cameras will be completed in 1997.
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Model 7v and Model 8v Cameras. The battery powered Model 7v grayscale and
Model 8v color camera platforms will feature the integration and improved
performance of the Model 5v/6v line but will use the enhanced CCD currently
being developed for use in the modular camera platform. Dycam cannot predict
when Model 7v and Model 8v cameras will be available.
ADC Cameras. During 1995 Dycam developed a specialized digital camera
(Agricultural Digital Camera or ADC) and supporting software combination which
allows the user to perform visible and near visible light spectrum band ratio
analysis, an emerging science for determining the relative health of vegetation
and for improving the management of water resources, pesticides, and fertilizers
with agricultural crops. The ADC product was the result of ongoing product
development and research activity with the United States Department of
Agriculture ("USDA") and certain Universities.
Multi-detector cameras. During 1996 Dycam developed a three detector (3
CCD) optical assembly for use with its modular digital camera platforms. The
addition of this capability to the modular camera platforms has the potential to
expand the applications served by Dycam's custom products, particularly where
multi-spectral or high quality digital imaging is required. Dycam is currently
conducting field trials of multi-detector digital cameras with certain customers
and anticipates that development of a platform suitable for industrial or
scientific imaging will be completed in the first half of 1997.
CUSTOM SERVICES
Dycam believes its primary strength lies in its ability to facilitate the
use of both standard and custom digital cameras in a wide range of digital
imaging applications. This is often accomplished by providing expertise and
engineering services to parties who desire additional features, functions, or
modifications to existing camera designs. Dycam has focused its custom design
work on customers who have the potential to develop new markets, or where the
application yields technology that Dycam's management feels has long term value.
Dycam believes that its custom design work will help to open new markets for
Dycam's products. Past customers have included IBM and the University of Florida
for whom Dycam developed the first version of its modular digital camera;
Northern Telecom for whom Dycam developed software to facilitate the use of
digital images in low cost teleconferencing systems; Insurance Auto Auctions for
which Dycam developed a variable focus optical assembly; and McQue for which
Dycam developed a "ruggedized" (i.e., weather and tamper resistant) version of
the Model 3 Camera for use in McQue's remote surveillance systems. Dycam is
currently engaged or has recently completed custom projects for the following
clients:
Forever Yours. Dycam has developed a digital camera and imaging system for
Forever Yours, a subsidiary of Styles, which is designed to be used for taking
pictures of newborn babies. This product is a dedicated digital camera system
designed for use in hospital environments, which produces digital images for
transfer to a remote production site. This system allows the system's operators
to rapidly and efficiently produce low cost customized images on high quality
color photographic paper. See "Related Party Transactions." Styles and Hasco
International ("Hasco") the leading domestic provider of hospital newborn
photography services, have entered into a definitive agreement under which all
of the assets of Forever Yours are to be purchased by Hasco. Concurrent to the
closing of this asset purchase transaction, Dycam and Hasco will enter into a 3
year agreement under which Dycam will receive quarterly payments for continuing
camera maintenance and development services, and camera lease payments from
certain leased camera payment obligations assumed by Hasco. This transaction and
the continuing agreement with Hasco may result in substantially lower revenues
to Dycam than would have been realized under the original agreements with
Forever Yours.
USDA. Dycam has developed a camera system for the USDA which can be
installed in field equipment, small aircraft, or RPV's (Remotely Piloted
Vehicles) for use with a low cost imaging system designed to augment satellite
images and field data in order to better manage water and agricultural
resources. If this product gains wide scale acceptance it may improve the
quality and timeliness of providing low cost information services to the farming
community.
Aquila Technologies Group, Inc. ("Aquila"). Aquila is a specialty
technology organization that serves the government and defense industry. Dycam
designs and manufactures specialized digital cameras for Aquila.
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Other. Dycam has designed and manufactured products for a German company,
which products are primarily used in surveillance and observation activities. In
addition, Dycam has developed software for use with digital cameras for a major
camera manufacturer.
STRATEGIC ALLIANCES
Dycam believes that the opportunities presented by the digital camera
industry warrant the use of strategic alliances. Historically, Dycam has entered
into strategic alliances to help defray Dycam's research and development costs
and to help Dycam market its products. Dycam has established the following
strategic alliances.
Forever Yours. Forever Yours was established to provide competitively
priced rapidly produced digital photographic images of newborn infants. Forever
Yours uses digital photography and an on or off site imaging system to take
pictures of newborns in hospitals. Such photographs may be enhanced with the
display of the infant's name, date of birth, birth weight and any other
information the mother desires to include. In the second quarter of 1995, Dycam
entered into an agreement with Forever Yours relating to the digital camera
system used in Forever Yours's operations. Under its arrangement with Forever
Yours, Dycam was to receive revenues from camera sales and leases to Forever
Yours, as well as a royalty of 7.5% of Forever Yours's sales. Styles and Hasco
International ("Hasco"), have entered into a definitive agreement under which
all of the assets of Forever Yours are to be purchased by Hasco. Concurrent to
the closing of this asset purchase transaction, Dycam and Hasco will enter into
a 3 year agreement under which Dycam will receive quarterly payments for
continuing camera maintenance and development services, and camera lease
payments from certain leased camera payment obligations assumed by Hasco.
Payment of deferred license fees due Dycam from Forever Yours is expected to be
satisfied from the proceeds of the Forever Yours sale. This transaction and the
continuing agreement with Hasco may result in substantially lower revenues to
Dycam than would have been realized under the original agreements with Forever
Yours.
University of Florida Research Foundation. In June 1993, Dycam entered into
an agreement with the University of Florida, a non-profit, tax-exempt
organization, pursuant to which the University of Florida helped to fund the
development of the first generation of Dycam's modular digital camera. Pursuant
to this agreement, which terminated on August 31, 1993, the University of
Florida paid Dycam a development fee for the development of a mobile computing
camera for use in videoconferencing. Dycam also worked with the University of
Florida in connection with the adaptation of compass information with images
produced by digital cameras. Dycam is obligated to pay the University of Florida
a royalty of 10% of software sales which incorporate the technology developed as
part of this project.
Aquila. Aquila is a specialty technology organization that serves
government and the defense industry. Aquila obtained a license from Dycam to use
and manufacture cameras based upon Dycam's technology for incorporation in
Aquila-manufactured products. Pursuant to this agreement, Aquila is required to
pay Dycam a royalty of $250 for each camera sold. To date, Aquila has not
exercised its technology rights, choosing instead to purchase products which are
manufactured to its specifications by Dycam.
Dycam may from time to time enter into other strategic alliances with these
or new strategic partners. Such strategic alliances may involve the development
of new products or the marketing or distribution of its existing products.
MARKETING AND SALES
Dycam has traditionally focused its marketing efforts primarily on the
licensing of its digital camera technology assets to others, and on direct sales
of digital cameras manufactured by the Company or purchased from third parties
for resale. The Company believes that digital photography is a core enabling
technology that allows visual communication and documentation to be more
efficiently accomplished through both printed and electronic media. However,
effective applications of the technology are dependent upon the successful
marriage of computer and camera technologies in a manner which either improves
an existing system or opens new business opportunities. In order to enhance the
Company's presentation and sales of its products and services, Dycam has
recently hired a new Vice President of Sales and Marketing who has been
chartered with developing markets and customers that the Company can effectively
serve with its technology assets and digital camera products. The Company
believes that it may benefit from the increased demand for digital cameras and
related technology services, and intends to significantly increase its
visibility in the marketplace, with the goal of realizing increased sales.
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During 1996, digital cameras for the first time achieved a level of maturity and
performance sufficient to facilitate wholesale replacement of film based methods
of capturing images, and the use of digital photography became commonplace in
many professional and business applications. Approximately 35 new digital
cameras were introduced in 1996 to the business professional and consumer
markets, and several large multi-national consumer electronics and photographic
products companies introduced their first digital cameras. While Dycam continues
to sell Dycam branded products, in order to economically provide a range of
digital camera products suitable for specific industry applications and avoid
competing with companies having far greater financial resources, the Company has
expanded its support for the resale of digital camera products manufactured and
branded by third parties such as Kodak and Sony. Dycam continues to use its
technical competencies and the knowledge gained in 1995 and 1996 to pin-point
specific companies which may require its specialty services and to identify new
market opportunities. Although Dycam will continue to provide standard products
and expects such standard product sales to grow, its internal development
resources will be largely focused on the provision of more specialized imaging
solutions.
DOMESTIC MARKET
During 1996, Dycam's direct sales of cameras and other products accounted
for approximately $2,236,000 in revenues (approximately 91% of total revenues),
an increase of 34% over direct sales of $1,673,000 in 1995. Dycam currently
offers for sale the Model 3, Model 3XL, Model 4, Model 4XL, Model 10-C, a wide
range of standard digital cameras manufactured by third parties, and various
modular cameras. The Model 3 camera was first sold in the second quarter of
1992. The Model 4 and modular cameras were both introduced in the fourth quarter
of 1993. The Model 3XL and Model 4XL were both introduced in the third quarter
of 1994. Dycam has sold approximately 8,000 digital cameras since the
introduction of the its original digital camera, and licensees have sold
approximately 50,000 additional cameras. In addition to its direct marketing
efforts, Dycam also sells its camera products through resellers and value added
resellers (such as The Programmers Shop, a technical mail order catalog for
scientists and engineers), which sales accounted for approximately $250,000 in
revenues (approximately 11% of total camera sales). During 1996, Dycam performed
custom engineering work for several customers, which resulted in revenues of
$203,000 (approximately 8% of Dycam's total revenues), an increase of 500%
compared to such revenues of $34,000 in 1995.
Additionally, Dycam has licensed the right to use its technology to
Logitech and Forever Yours. Under its arrangement with Logitech, Dycam granted
Logitech the nonexclusive right to manufacture and sell digital cameras
utilizing Dycam's technology. The camera marketed by Logitech as the Fotoman
Plus was Logitech's version of Dycam's Model 3 camera.. Under its arrangement
with Forever Yours, Dycam was to receive revenues from camera sales and leases
as well as license fees of 7.5% of Forever Yours's sales. For the year ended
December 31, 1996, Dycam had revenues of approximately $16,000 (less than 1% of
total revenues) derived from the Forever Yours license arrangement and an
additional $159,000 in deferred license fees which were not recognized. In 1995
there were $23,000 in revenues related to the Forever Yours arrangement.
Furthermore, Styles on Video and Hasco International ("Hasco") the leading
domestic provider of hospital newborn photography services, have entered into a
definitive agreement under which substantially all of the assets of Forever
Yours are to be purchased by Hasco. Concurrent with the closing of this asset
purchase transaction, Dycam and Hasco will enter into a 3 year agreement under
which Dycam will receive quarterly payments for continuing camera maintenance
and development services, and camera lease payments from certain leased camera
payment obligations assumed by Hasco. Payment of the deferred license fees due
Dycam from Forever Yours is expected to be satisfied from the proceeds of the
Forever Yours sale. This transaction and the continuing agreement with Hasco may
result in substantially lower revenues to Dycam than would have been realized
under the original agreements with Forever Yours.
INTERNATIONAL MARKETS
International sales accounted for approximately $415,000 and $205,000, or
approximately 17% and 12% of Dycam's revenues respectively, for the years ended
1996 and 1995. International sales have resulted from OEM agreements between
Dycam and computer industry resellers located in Australia, Germany, Japan,
Sweden, Denmark, and the United Kingdom. Pursuant to these agreements, the
resellers purchase Dycam's products at a substantial discount and have no
minimum sales requirements.
9
<PAGE>
ADVERTISING AND PROMOTION
Dycam has traditionally relied on word of mouth advertising, press
releases, and favorable reviews of its products in trade publications to promote
its products. During the second half of 1994, Dycam substantially expanded its
advertising and promotional activities. These expanded efforts were targeted
towards potential customers of the Model 3 and Model 4 in those industries in
which Dycam perceived the greatest need for the products (e.g., property
appraisal and insurance claims). Dycam has advertised its products in various
trade journals and government publications. Dycam also made substantial
revisions its promotional materials. During 1996, Dycam attended six trade
shows, primarily targeted at specialized industries. Dycam's products were also
represented at CeBit, the largest international computer industry trade fair, by
Dycam's German OEM reseller. Dycam expended approximately $120,000 on
advertising and promotional activities in 1996, an increase of 18% when compared
to the $102,000 expended in 1995. Its current advertising and promotional
strategy is directed towards identifying and developing relationships with
potential customers who have a need for specific digital imaging solutions,
although sales of the standard products has indicated that sales increases may
be generated by advertising in selected wide distribution computer publications,
which may be due to the general emergence of the digital camera market and
increased consumer awareness of the technology.
MANUFACTURING
Dycam relies on outside contract electronic subassembly manufacturers to
perform the majority of subassembly work related to its in-house produced
cameras Currently, this electronic subassembly work is conducted by a
manufacturer located near Dycam's headquarters. Dycam believes however, that
there are several alternative manufacturers capable of performing this function
to Dycam specifications. Dycam's manufacturing operations consist of final
assembly (including the integration of Dycam's proprietary software), testing,
and quality control. The majority of the components used in Dycam's cameras are
purchased from outside vendors. Certain digital camera components and assemblies
used by the Company, including standard digital cameras private labeled for the
Company, are sole sourced and must be ordered up to four months in advance to
assure timely delivery. A strategic inventory of such components and assemblies
is maintained by the Company, however, any disruptions in delivery or in the
relationships with suppliers of such components could cause substantial delays
in the Company's camera production activities. The Company believes that its
relations with its strategic suppliers are good.
CUSTOMER SUPPORT AND SERVICE
Dycam is committed to providing timely, high quality technical support,
which Dycam believes is an important component of maintaining customer
satisfaction. Although Dycam offers no formal training in the use of its
cameras, one of Dycam's employees, who is a trained software engineer, devotes
all of his time to customer support related activities, including telephonic
support relating to camera operation. Each camera sold by Dycam comes with a 180
to 365 day standard limited warranty. During 1996 Dycam serviced or replaced
less than 5% of its cameras which were under warranty. Dycam attempts to
complete all repairs or send out replacement products within 72 hours of the
receipt of the defective product by Dycam. The Model 3, Model 3XL, Model 4 and
Model 4XL batteries need to be replaced approximately every 24-36 months.
COMPETITION
Dycam faces substantial competition in the design, distribution,
manufacture and sale of digital cameras. The market for digital photography
products is only beginning to emerge, and Dycam expects that competitors with
substantially greater financial, technical, distribution and other resources
will attempt to dominate the various segments of this market. Dycam believes
that the digital photography market will be divided into three basic segments:
(i) custom products, (ii) document quality and consumer products (standard
products) and (iii) professional products.
The custom products market segment consists of products which are custom
engineered to meet the unique image capturing needs of specific clients. Dycam
believes that it is the only major manufacturer of digital cameras which devotes
and intends to continue to devote a substantial portion of its resources to the
production of custom products, and which is dedicated solely to providing
digital cameras and digital imaging services. Dycam believes that its experience
in custom designing cameras and imaging solutions for its customers will allow
it to effectively compete in this market segment. Nevertheless, there can be no
assurance that the other companies who manufacture digital cameras will not
establish custom products divisions or that other specialty camera companies
will not emerge.
10
<PAGE>
The document quality and consumer products (standard products) market
segment consists of products which produce images which offer substantially less
resolution than the images produced by traditional film cameras. Nevertheless,
the images captured by products in this market segment are of sufficient quality
to be used in lieu of traditional film photographs for documentation (e.g.,
appraisal reports, insurance adjusters' reports, personnel records, referring
physician reports, newsletters and general databasing) and snap-shot purposes,
and total industry sales of products designed to serve these markets increased
substantially in 1996. Dycam's major competitors in this market segment include
Apple, Canon, Kodak, Casio, Fuji, Olympus, Ricoh, Sony, and Epson, all of which
announced new products in this market segment during 1996. Although Dycam's
Model 10-C cameras, which compete in this market, have been highly rated in
independent editorial reviews, there can be no assurance that competitive
pressures will not result in further price reductions or other developments in
the market segments in which Dycam competes. Consequently, there can be no
assurance that Dycam will continue to compete effectively or that its products
under development will continue to be competitive in this market segment. In
order to continue to effectively serve the standard products market for digital
cameras, Dycam has determined that it is in the best interests of the Company to
either private label commercially available products or resell products
manufactured by third parties.
The professional products market segment consists of products which produce
images with resolution comparable or superior to traditional film cameras. The
products in this category are primarily designed to meet the needs of
professional or studio photographers and currently includes Digital SLR products
from Kodak, Canon, Nikon, Fuji, Minolta, and Sony. Kodak's DCS series of
Professional Digital Cameras, which retail for $7,500 to $27,000 and are
currently used primarily by photojournalists and professional photographers, are
capable of quickly capturing high resolution color images and are good examples
of this class of product. Digital Camera Backs such as those offered by Leaf and
Dicomed, attach to the back of a large format camera and produce extremely high
resolution color images; however, due to the lengthy image capture time required
by these devices they are only useful for photographing still images. While
Dycam does not presently intend to internally develop products to compete in
this market segment, it will continue to add value to the above products and
others to satisfy business opportunities in the professional segment.
COMPETING TECHNOLOGIES
Although Dycam believes that digital photography is the wave of the future,
digital cameras today compete with film photography, camcorders, digital
camcorders, and still video cameras. Current competition also comes from
alternative techniques for capturing an image and bringing the image into the
computer such as flatbed scanners and hand scanners. Scanners can be expensive
and complicated to use; however, they are capable of producing very high quality
images. A "frame grabber" or "digitizer" is a board that may be installed in a
computer to digitize a video image produced by a camcorder or still video
camera. The resulting image is typically of relatively poor quality, however
inexpensive versions sell for less than $200. Digital camcorders offer a
combination of motion pictures and the capability of recording digital stills on
analog tape, or connecting directly to a computer, but they are expensive,
physically large, and complex when compared to digital still cameras. Kodak
produces the Kodak Photo CD system which provides a mechanism for converting
analog images (film) into digital images for storage on compact discs. Dycam
believes that the Photo CD technology presents too many obstacles for the
typical consumer because it requires not only the time and expense of film
processing, but the further problem of locating a photo processor that has the
expensive equipment required to copy the images to the CD. It is, however, a
good solution for the commercial distribution of digital images, and business
use has been increasing. Despite the various disadvantages of these alternative
methods of image capture, there can be no guarantee that digital photography
will gain widespread consumer acceptance.
PATENTS AND PROPRIETARY RIGHTS
Dycam relies on a combination of patent, copyright, trademark protection
and non-disclosure agreements to protect its proprietary rights. Dycam is the
assignee of United States Patent 5,249,053, which covers certain technologies
related to filmless digital cameras with selective image compression. In
addition, Dycam has filed applications for several patents on the design of its
camera, including applications covering camera flash and sequential color
technologies; however, no assurance can be given that any such patents will be
issued. Dycam also has domestic and international protection under copyright law
for certain specialized components and software included in its cameras. Dycam
regards the non-patented and non-copyrighted technology and know-how related to
its products as proprietary trade secrets and attempts to protect them with
confidentiality agreements with its employees and
11
<PAGE>
confidentiality provisions in its employee handbook and its various agreements
with licensees and customers. Confidentiality agreements, however, may be
difficult to enforce, and, despite the precautions Dycam has taken, it may be
possible for third parties to copy aspects of Dycam's products or, without
authorization, to obtain and use information which Dycam regards as proprietary.
Dycam believes that the technical and creative skills and expertise of its
technical staff and marketing and management personnel are more critical to
Dycam's success than patent, copyright or trademark protection.
EMPLOYEES
At December 31, 1996 Dycam employed 20 persons, three of whom were engaged
in management and administration, six of whom were engaged in research and
development, six of whom were engaged in manufacturing and production and five
of whom were engaged in sales and marketing. None of Dycam's employees are
represented by a collective bargaining agreement. Dycam believes its relations
with its employees are good.
ITEM 2. PROPERTIES.
In April 1995, Dycam moved its principal executive offices and
manufacturing facilities to 9414 Eton Avenue, Chatsworth, California 91311. The
premises are approximately 15,000 square feet and are held under a lease which
expires on January 31, 1998. The rental payments under this lease in 1996 were
approximately $8,500 per month. Dycam believes that its new premises are
sufficient for its current needs. For the year ended December 31, 1996, Dycam
had net lease costs of approximately $102,000.
ITEM 3. LEGAL PROCEEDINGS.
As of March 20, 1996, there were no material pending legal proceedings to
which Dycam was a party or to which any of its properties were subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on September 11,
1996. The following are the results of the voting on the proposals submitted to
stockholders at the annual meeting.
Proposal No. 1 - Election of Directors. The following individuals
were elected as directors:
<TABLE>
<CAPTION>
Name For Withheld
<S> <C> <C>
John Edling 2,809,070 42,811
George Ismael 2,808,970 42,911
James Alexiou 2,809,270 42,611
Ann Graham Ehringer 2,809,270 42,611
Barry Porter 2,807,070 44,811
Marshall Geller 2,807,070 44,811
</TABLE>
Proposal No. 2 - The proposal to amend the Company's 1994 Stock Incentive
Plan was approved.
For: 2,043,461 Against: 60,366 Abstain: 16,155
Proposal No. 3 - The proposal to adjust the exercise price of certain
option grants was approved.
For: 2,747,284 Against: 62,403 Abstain: 26,535
Proposal No. 4 - The proposal to ratify the selection of Corbin and Wertz
as the Company's independent auditors for the year ended December 31, 1995 was
approved.
For: 2,822,153 Against: 10,593 Abstain: 19,135
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since July 18, 1995, Dycam's Common Stock has been traded on the American
Stock Exchange, Inc. under the symbol, "DYC". The following table sets forth the
range of high and low last sale prices per share for the Common Stock as quoted
on the American Stock Exchange, Inc. for the periods indicated.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
Year Ended December 31, 1997
First Quarter (through March 12, 1997) 7/8 7/16
Year Ended December 31, 1996
First Quarter 1-3/8 1/2
Second Quarter 1-3/8 11/16
Third Quarter 1-1/8 7/16
Fourth Quarter 3/4 7/16
</TABLE>
At March 12, 1997, there were approximately 79 beneficial holders of record
of Dycam's Common Stock.
Dycam has not paid cash dividends in its Common Stock and does not
anticipate that it will do so in the near future. The present policy of Dycam is
to retain earnings to finance the development of its operations.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Dycam commenced operations in April 1988, and was incorporated in Delaware
on July 7, 1988. Dycam became a wholly owned subsidiary of Styles on February 7,
1994. Effective June 21, 1994, Dycam effected an underwritten Rights Offering of
1,000,000 shares of its Common Stock. From and after the close of the Rights
Offering, Styles owned approximately 61% of Dycam's common stock. Since its
inception, Dycam's business has been the design, manufacture and sale of digital
cameras and associated hardware and software products primarily for use with
personal computers. Substantially all of Dycam's revenues are derived from sales
of digital cameras and supporting software and accessory products, technology
licensing fees, and contract engineering work.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Dycam's revenues are derived from the sale of digital cameras and
supporting software and accessory products, contract engineering, and technology
licensing fees. Dycam's revenues for the year ended December 31, 1996 were
$2,455,000, an increase of $716,000 or 41% from revenues of $1,739,000 for the
year ended December 31, 1995. The increase in revenue was primarily associated
with increased camera sales. Revenues from camera sales were $2,236,000 (91% of
total revenue) in 1996 as compared to $1,673,000 in 1995 (96% of total
revenues). License fees from the Forever Yours agreement were approximately
$176,000 in 1996 with $16,000 recognized and $160,000 deferred and accrued under
a 12 month revenue deferral agreement entered into in April 1996. The deferred
license revenues due Dycam from Forever Yours are expected to be satisfied from
the proceeds of the sale of Forever Yours to Hasco International. Revenues from
contract engineering in 1996 were $203,000 (8% of total revenues) as compared to
$34,000 (2% of total revenues) in 1995.
Dycam intends to continue to pursue its standard product strategy by
facilitating the use of general purpose digital cameras, and selling a range of
Dycam branded and third party digital cameras products, software, and
accessories to selected targeted markets. Dycam, however, will continue to
increase its efforts in the custom product line to exploit the opportunities to
design products that combine custom built digital cameras with specialized
software, hardware or packaging in order to satisfy an identified business
opportunity. During 1996, Dycam devoted a substantial portion of its resources
to pursuing custom and contract engineering business with the goal of generating
future sales. One example of this strategy is Dycam's relationship with Forever
Yours. The core element of the Forever Yours camera system is a specialized
digital camera subsystem engineered and produced by Dycam under an exclusive
contract with Forever Yours. In addition to the sale of cameras to Forever
Yours, Dycam's arrangement with Forever Yours provides that, in exchange for
certain development and maintenance services, Dycam is entitled to a 7.5%
royalty on all Forever Yours sales. Subsequent to the sale of Forever Yours to
Hasco International, such fees will be fixed at $25,000 per quarter for 12
quarters, after which time Dycam's service obligations expire and no further
license fees will be paid by Hasco. However, Dycam believes arrangements such as
its Forever Yours agreement and the ongoing agreement with Hasco International
may lead to additional contract engineering revenues and custom camera sales
opportunities.
Gross profits are comprised of revenues less direct costs of products and
services. Gross profits as a percentage of revenues decreased to 26% in 1996,
compared to 33% in the year ended 1995, primarily due to increased leased camera
amortization of $86,000 (4% of revenues), inventory writedowns and reserves of
approximately $171,000 (8% of revenues), and declines in the average sale price
of standard digital camera products. Gross margins on the standard products have
come under increasing pressure as the market becomes more competitive, and may
continue to remain at the lower levels or decline if Dycam's custom products
business does not substantially increase its contribution to Dycam's revenues.
Selling, general and administrative expenses consist of administrative
expenses at Dycam headquarters, the salaries of corporate officers and sales
personnel, advertising and promotion, accounting, legal and other professional
expenses, rent, and occupancy costs. Selling, general and administrative
expenses increased $74,000 for the year ended 1996 to $1,214,000 (49% of
revenues) from $1,140,000 (66% of revenues) for 1995. The increase resulted
primarily from increased sales and marketing expenditures in the 1996 period,
increased legal and professional costs, and increased insurance expenses. Dycam
took steps throughout 1996 to control these expenditures.
Dycam had goodwill amortization of $278,000 for the year ended December 31,
1996.
14
<PAGE>
Product research and development expenses decreased $203,000 to $551,000
(22% of revenues) in 1996 compared to $754,000 (43% of revenues) in 1995. This
decrease in expenditures is largely attributable to reduced staffing levels and
reduced expenses associated with the completion of certain product development
activities including, the camera developed in conjunction with Forever Yours.
Dycam believes that continuing research and development is essential to
maintaining its competitive position, and expects to continue to expend funds in
this area.
Inventories decreased by $304,000 to $394,000 at December 31, 1996 when
compared to December 31, 1995, primarily as a result of the increase in camera
shipments, including the Forever Yours camera system, continuing sales of older
products from inventory, and inventory write-offs and reserves of approximately
$171,000 related to excess materials and aged products. The acceptance and
success of the Forever Yours business and the related purchase and management of
said business by Hasco International is not yet assured, and if unsuccessful may
result in lower than anticipated revenues for the Company and a write down of
the carrying value of that unique inventory associated with the Forever Yours
camera system, which at December 31, 1996 was valued at approximately $50,000.
Certain digital camera components and assemblies used by the Company, including
standard digital cameras private labeled for the Company, must be ordered up to
four months in advance to assure timely delivery. A strategic inventory of such
components and assemblies is maintained by the Company, however, any disruptions
in delivery or in the relationships with suppliers of such components could
cause delays in the Company's camera production activities. The Company believes
that its relations with its strategic suppliers are good.
The net loss per common share was ($0.42) for the year ended 1996 compared to
net loss of ($0.43) for the year ended 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Dycam had cash and short-term investments on hand of
$590,000, down $784,000 from $1,374,000 at December 31, 1995.
Accounts receivable, net of allowance for doubtful accounts of $5,000,
increased $15,000 during the year ended December 31, 1996.
Accounts receivable from a subsidiary of Styles increased $107,000 during
the year ended December 31, 1996.
Camera equipment related to operating leases to Forever Yours, increased by
$147,000 during the year ended 1996. Such camera equipment will be depreciated
over the life of the leases.
Current liabilities increased by $38,000 to $237,000, primarily as a result
of increases in accrued payroll expenses and tax accruals.
Dycam's working capital at December 31, 1996 was $1,024,000 a decrease of
$1,001,000 when compared to $2,025,000 at December 31, 1995. Working capital
decrease was primarily the result of net losses of $1,307,000. The current ratio
at December 31, 1996 was 5.3 to 1 compared to 11.2 to 1 at December 31, 1995.
Dycam does not have any long term indebtedness and does not currently
maintain any credit facilities.
In December 1994 Dycam made a secured loan of $500,000 to Styles. Dycam
determined that it was in the best interests of Dycam and its shareholders that
it make this loan, which enabled Styles to continue funding Forever Yours, and
thus the development and manufacture of the Forever Yours digital camera by
Forever Yours and Dycam. In January 1995 Dycam approved an additional secured
loan of $500,000 to Styles. The two loans were memorialized in a single note
bearing interest at the Bank of America NS&TA prime rate plus two percentage
points and was payable interest only for seven months with the entire principal
balance plus accrued and unpaid interest thereon due and payable on September 1,
1995. Dycam subsequently extended the maturity date of the note to December 31,
1998, and fixed the interest rate at 10% per year. All interest payments have
been timely paid. The note is secured by 1,916,667 shares of Dycam's Common
Stock owned by Styles. If Styles is unable to satisfy its obligations under the
note, Dycam may not be repaid and will exercise its right to acquire the
1,916,667 shares of Dycam Common Stock owned by Styles.
Since the closing of the Rights Offering, Dycam has expended approximately
$4,300,000 of the moneys raised in that offering, which amount includes the
above-referenced $1,000,000 secured loan to Styles. Commencing in the
15
<PAGE>
second quarter of 1994, Dycam embarked on a program to market and sell its
standard digital camera products to select markets. Although Dycam was able to
generate short term increases in sales in these markets, it has determined that
a large market does not currently exist for its standard digital camera systems.
Consequently, during the first quarter of 1995, Dycam decided to de-emphasize
the sale of its internally designed standard products and concentrate its
efforts on custom product development, value added distribution of standard
digital cameras produced by others for Dycam, sales of standard digital cameras
produced by third parties, and cooperative ventures. These cooperative ventures
include Dycam's ongoing relationship with Forever Yours, for whom Dycam has
developed a digital imaging system designed for taking photographs of newborn
infants.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
DYCAM INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report....................................................... 18
Balance Sheet at December 31, 1996................................................. 19
Statements of Operations for the Years Ended December 31, 1996 and 1995............ 20
Statements of Stockholders' Equity for the Years Ended December 31, 1996 and 1995.. 21
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995............ 22
Notes to Financial Statements for the Years Ended December 31, 1996 and 1995....... 23
</TABLE>
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Dycam Inc.
We have audited the accompanying balance sheet of Dycam Inc. ("Dycam") as of
December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1996. These financial statements are the responsibility of Dycam's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dycam Inc. as of December 31,
1996, and the results of its operations and its cash flows for each of the years
in the two-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered substantial
recurring losses from operations, has an accumulated deficit, and is subject to
certain contingencies that raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
CORBIN & WERTZ
Irvine, California
March 6, 1997
18
<PAGE>
DYCAM INC.
BALANCE SHEET
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 590,000
Accounts receivable, net of allowance for
doubtful accounts of $5,000 98,000
Accounts receivable from a subsidiary
of Styles 139,000
Inventory, net 394,000
Prepaid expenses and other 40,000
---------
Total current assets 1,261,000
Property and equipment, net 439,000
Goodwill, net of accumulated amortization
of $805,000 4,749,000
Deposits 18,000
---------
$ 6,467,000
=========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable $ 134,000
Accrued payroll and related expenses 79,000
Accrued expenses 24,000
----------
Total current liabilities 237,000
----------
Commitments
Stockholders' equity
Preferred stock, par value $0.001, 1,000,000
shares authorized, no shares issued
Common stock, par value $.01, 19,000,000
shares authorized, 3,120,836 shares
issued and outstanding 31,000
Additional paid-in capital 10,710,000
Note receivable from Styles (1,000,000)
Accumulated deficit (3,511,000)
----------
Total stockholders' equity 6,230,000
----------
$ 6,467,000
----------
</TABLE>
See Accompanying Notes to Financial Statements
19
<PAGE>
<TABLE>
<CAPTION>
DYCAM INC.
STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1996 and 1995
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Camera sales $ 2,236,000 $ 1,673,000
Contract engineering fees 203,000 34,000
License fees 16,000 32,000
----------- -----------
Total revenues 2,455,000 1,739,000
----------- -----------
Cost of revenues, including depreciation and
amortization of $131,000 and $19,000 in 1996
and 1995 respectively:
Camera sales 1,696,000 1,157,000
Contract engineering 132,000
----------- -----------
Total cost of revenues 1,828,000 1,157,000
----------- -----------
Gross profit 627,000 582,000
----------- -----------
Operating expenses:
Selling, general and administrative 1,214,000 1,140,000
Research and development 551,000 754,000
Depreciation and amortization 317,000 322,000
----------- -----------
Total operating expenses 2,082,000 2,216,000
----------- -----------
Loss from operations (1,455,000) (1,634,000)
Interest income, net 149,000 213,000
----------- -----------
Loss before extraordinary item and income taxes (1,306,000) (1,421,000)
Provision for income taxes (1,000) (1,000)
----------- -----------
Loss before extraordinary item (1,307,000) (1,422,000)
Forgiveness of debt, net of tax of $0 70,000
----------- -----------
Net loss $ (1,307,000) $ (1,352,000)
=========== ===========
Weighted average shares of common
stock outstanding 3,120,836 3,120,836
=========== ===========
Net loss per share $ (.42) $ (.43)
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
20
<PAGE>
<TABLE>
<CAPTION>
DYCAM INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1996 and 1995
Common Stock Additional
Paid-in Note Receivable Accumulated Stockholders
Shares Amount Capital from Styles Deficit Equity
------ ------ --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 3,120,836 $ 31,000 $10,710,000 $(1,000,000) $ (852,000) $8,889,000
Net loss -- -- -- -- (1,352,000) (1,352,000)
-------- ------- ------- ------- ----------- ----------- ----------
Balance,
December 31, 1995 3,120,836 $ 31,000 $10,710,000 $(1,000,000) $(2,204,000) $7,537,000
Net loss -- -- -- -- (1,307,000) (1,307,000)
-------- ------- ------- ------- ----------- ----------- ----------
Balance,
December 31, 1996 3,120,836 $ 31,000 $10,710,000 $(1,000,000) $(3,511,000) $6,230,000
========= ======= ========== =========== =========== ==========
See Accompanying Notes to Financial Statements
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
DYCAM INC.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1996 and 1995
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,307,000) $(1,352,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 170,000 63,000
Amortization of goodwill 278,000 278,000
Allowance for doubtful accounts (56,000)
Provision for inventory obsolescence 171,000
Changes in operating assets and
liabilities:
Accounts receivable (15,000) 25,000
Accounts receivable from a
subsidiary of Styles (107,000) (32,000)
Inventory 133,000 (89,000)
Prepaid expenses and other
current assets (3,000) (1,000)
Accounts payable 14,000 (84,000)
Accounts payable to Styles (129,000)
Accrued payroll and related expenses 14,000 (11,000)
Accrued expenses 10,000 (49,000)
----------- -----------
Net cash used in operating activities (642,000) (1,437,000)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (157,000) (381,000)
Note receivable from Styles (500,000)
Deposits 15,000 (23,000)
----------- -----------
Net cash used in investing activities (142,000) (904,000)
----------- -----------
Net decrease in cash and cash
equivalents (784,000) (2,341,000)
Cash and cash equivalents,
beginning of year 1,374,000 3,715,000
----------- -----------
Cash and cash equivalents,
end of year $ 590,000 $ 1,374,000
=========== ===========
Supplemental disclosure of cash flow
information -
Cash paid during the year for:
Interest $ -- $ --
=========== ===========
Income taxes $ -- $ 1,000
</TABLE>
See Note 6 for supplemental disclosure of noncash transactions.
See Accompanying Notes to Financial Statements
22
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
General
- -------
Dycam Inc. ("Dycam"), a Delaware corporation, was incorporated in June 1988.
Dycam maintains its operating facilities in Chatsworth, California. Dycam
designs and develops digital cameras and associated hardware and software
products primarily for use with personal computers. Dycam also performs
engineering and consulting services for unrelated third parties. Dycam is owned
61% by Styles on Video, Inc., a publicly traded Delaware corporation ("Styles").
Basis of Presentation
- ---------------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has suffered
substantial recurring losses from operations and has an accumulated deficit as
of December 31, 1996. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continuation as a going
concern is dependent on its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain profitable operations. The Company's
operating plan for calendar year 1997 includes increased sales, higher margins
on certain segments of the custom products and licensing business, reduced
expenses as a percentage of revenues, collections of receivables due from a
subsidiary of Styles from the proceeds of the sale of such subsidiary, and
improved cash flows sufficient to cover the Company's financing needs. There can
be no assurance that the Company will be successful in these regards. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Cash and Cash Equivalents
- -------------------------
Dycam considers investments with a maturity of three months or less when
purchased to be cash equivalents.
Inventory
- ---------
Inventory is stated at the lower of cost or market (net realizable value), cost
being determined on the first-in, first-out method. Inventory consists of
cameras and camera components, image editing software and camera accessories.
Such net realizable value is based on forecasts for sales of the Company's
products in the ensuing years. The industry in which the Company operates is
characterized by rapid technological advancement and change. Should demand for
the Company's products prove to be significantly less that anticipated, the
ultimate realizable value of the Company's inventories could be substantially
less than the amount shown on the accompanying consolidated balance sheet.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are expensed as
incurred. When property and equipment are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts. Gains
or losses from retirements and disposals are credited or charged to income.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. The useful lives range from five to seven
years.
23
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Included in property and equipment is camera equipment held under lease to a
subsidiary of Styles in the amount of $348,000. Equipment under operating leases
is recorded at cost, net of accumulated depreciation. Such camera equipment is
being depreciated over four years. See subsequent events (Note 10).
Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation of such assets over their remaining
lives can be recovered through projected undiscounted cash flows. The amount of
impairment, if any, is measured based on projected undiscounted cash flows and
is charged to operations in the period in which such impairment is determined by
management.
Capitalized Software Development Costs
- --------------------------------------
Dycam accounts for software development costs in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed". As a result, software
development costs incurred after the establishment of technological feasibility
are capitalized and later amortized to cost of revenues on a product-by-product
basis at the greater of the amount computed using the ratio of current gross
revenues for a product to the total of current and anticipated future gross
revenues or the straight-line method over the remaining estimated economic life
of the product. Generally, an original estimated economic life of five years is
assigned to capitalized software development costs. During the years ended 1996
and 1995, no software development costs have been capitalized.
Goodwill
- --------
On February 7, 1994, the Company merged with a wholly-owned subsidiary of Styles
and the Company became a wholly-owned subsidiary of Styles. This acquisition was
accounted for under the purchase method with the purchase price allocated among
the assets acquired and on the basis of their estimated fair values. The excess
of $5,554,000 of the total acquisition cost over the net assets acquired and
liabilities assumed was allocated to goodwill. In accordance with Staff
Accounting Bulletin No. 54, the financial statements of the Company as of
February 7, 1994 have been adjusted to "push down" the Styles cost of acquiring
the common stock of the Company. Accordingly, the goodwill amount was pushed
down to the Company and the Company's accumulated deficit at the date of merger
was eliminated. The goodwill is amortized on a straight line basis over the
expected periods to be benefited. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected undiscounted
future cash flows. The amount of goodwill impairment, if any, is measured based
on projected undiscounted future cash flows and is charged to operations in the
period in which goodwill impairment is determined by management. Goodwill is
being amortized on a straight line basis over the expected 20 year life. During
each of the years ended December 31, 1996 and 1995, the Company recorded
$278,000 of amortization expense. At December 31, 1996, no impairment of
goodwill was determined by management.
24
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Revenue Recognition
- -------------------
Revenue from camera sales is recognized upon shipment of products. Contract
engineering fees are recognized when the service is performed. Approximately
$160,000 in certain license fee revenues from a subsidiary of Styles have been
deferred and will be recognized when received. All other license fee revenue is
recognized when earned. Revenue from camera equipment leased to a subsidiary of
Styles is included in camera sales and is being recognized when earned (see Note
4).
Advertising
- -----------
The Company reports the costs of all advertising as expense in the period in
which those costs are incurred. Advertising expense was approximately $102,000
and $120,000 for the years ended December 31, 1996 and 1995 respectively.
Income Taxes
- ------------
Dycam accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109").
Statement 109 requires the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates or tax status is recognized in income
in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Stock Options and Warrants
- --------------------------
During 1995, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation," which defines a fair value based method of accounting for stock
based compensation. However, SFAS 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to employees using
the intrinsic method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method of
accounting as defined in SFAS 123 had been applied. The Company has elected to
account for its stock based compensation to employees under APB 25.
Limitation on Dividends
- -----------------------
Pursuant to state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its stockholders
as a result of working capital and its accumulated deficits as of December 31,
1996.
25
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Loss Per Common Share
- ---------------------
Loss per common share has been computed on the weighted average number of common
and equivalent shares outstanding. Primary and fully diluted net loss per share
are approximately the same. Dycam has granted certain options (see Note 8) which
have been treated as common share equivalents in calculating net loss per share,
unless antidilutive.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") 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 financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The Company has financial instruments whereby the fair market value of the
financial instrument could be different than that recorded on a historical basis
in the accompanying balance sheet. The Company's financial instruments consist
of its cash and cash equivalents, accounts receivable and accounts receivable
from a subsidiary of Styles, note receivable from Styles, and accounts payable.
The carrying amounts of the Company's financial instruments generally
approximate their fair market value at December 31, 1996. The fair market value
of the note receivable from Styles and accounts receivable from a subsidiary of
Styles were not readily determinable as market comparables are not readily
available for like instruments.
Reclassifications
- -----------------
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
NOTE 2 - CONCENTRATIONS
- -----------------------
Concentration of Credit Risk
- ----------------------------
Financial investments which potentially expose Dycam to a concentration of
credit risk as defined by Statement of Financial Accounting Standards No. 105,
consist primarily of cash and cash equivalents, accounts receivable, accounts
receivable from a subsidiary of Styles and note receivable from Styles. Dycam
places its cash and cash equivalents with high credit quality institutions but,
at times, has amounts in one institution which significantly exceed the
federally insured limit of $100,000. Concentration of credit risk with respect
to trade receivables is limited due to the diversity of Dycam's customer base.
Generally, Dycam does not require collateral or other security to support
customer receivables. Management consistently monitors the financial condition
of its customers to reduce the risk of loss.
Major Customers/Vendors
- -----------------------
International sales accounted for approximately $415,000 or approximately 17% of
Dycam's revenues for the year ended December 31, 1996,
26
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 2 - CONCENTRATIONS, continued
- ----------------------------------
No customer accounted for more than 10% of camera sales for the years ended
December 31, 1996 or 1995.
A subsidiary of Styles accounted for 100% of the license fee revenues for the
year ended December 31, 1996 (see Note 4). One customer accounted for 28% of the
license fee revenues for the year ended December 31, 1995.
A subsidiary of Styles accounted for 72%, of total contract engineering fees for
the year ended December 31, 1996.
Dycam purchased materials from one vendor for $756,000 and $160,000, which
represented 50% and 16% of all materials purchased during the years ended
December 31, 1996 and 1995, respectively. The Company had accounts payable to
one vendor representing 52% of total accounts payable as of December 31, 1996.
NOTE 3 - INVENTORY
- ------------------
The components of inventory at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Raw Materials $ 265,000
Work-in-progress 106,000
Finished goods 23,000
--------
$ 394,000
========
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
Note Receivable from Styles
- ---------------------------
On December 14, 1994, Dycam loaned to Styles $500,000. On January 25, 1995,
Dycam loaned an additional $500,000 to Styles. Styles signed an amended and
restated promissory note dated January 25, 1995 for the full $1,000,000 note,
bearing interest at 2% above a bank's prime rate, interest payable monthly, with
a maturity date of September 1, 1995. Dycam subsequently extended the maturity
date of the note to December 31, 1998, and fixed the interest rate at 10%. The
interest is payable monthly.
The Note is secured by a pledge of 1,916,667 shares of the common stock of Dycam
owned by Styles. Interest income of $100,000 and $106,000 respectively is
included in the accompanying 1996 and 1995 statement of operations related to
the Styles loan, all of which was received as of December 31, 1996. The note
receivable has been reflected as an offset to stockholders' equity in the
accompanying statements of stockholders' equity.
Accounts Payable to Styles
- --------------------------
At December 31, 1994, Dycam owed $129,000 to Styles for expenses paid by Styles
on behalf of the Company, which were due on demand. This amount was repaid
during January 1995.
Accounts Receivable From Subsidiary of Styles
- ---------------------------------------------
Included in accounts receivable at December 31, 1996 is approximately $139,000
due from a subsidiary of Styles. The Company expects receipt of such receivable
upon the closing of the Styles subsidiary sale (see Note 10).
27
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 4 - RELATED PARTY TRANSACTIONS, continued
- ----------------------------------------------
Revenues
- --------
Included in the accompanying 1996 and 1995 statement of operations under camera
sales are $191,000 and $39,000, respectively, of revenues related to camera
equipment leased to a subsidiary of Styles.
Included in the accompanying 1996 and 1995 statement of operations under
contract engineering, are $146,000 and none, respectively, of revenues related
to camera equipment leased to a subsidiary of Styles.
Included in the accompanying 1996 and 1995 statement of operations under license
fees, are $16,000 and $23,000, respectively, of revenues related to camera
equipment leased to a subsidiary of Styles.
The following is a schedule by year of total minimum lease payments to be
received on operating leases:
Years Ending
December 31,
------------
1997 $255,000
1998 287,000
1999 229,000
2000 9,000
--------
Total minimum lease payments to be received $780,000
========
See subsequent events (Note 10)
NOTE 5 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment at December 31, 1996 consists of the following:
Machinery and equipment $ 293,000
Camera equipment 348,000
Office equipment 109,000
---------
750,000
Less: accumulated depreciation (311,000)
---------
$ 439,000
28
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 6 - COMMITMENTS
- --------------------
Facilities Leases
- -----------------
In March 1995, the Company entered into two new operating leases for its
facilities that expire in January, 1998.
The minimum annual future rental commitments under the facility leases are as
follows:
<TABLE>
<CAPTION>
Years Ending
December 31,
-----------
<C> <S>
1997 $ 106,000
1998 9,000
--------
$ 115,000
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 was $102,000 and
$66,000, respectively.
Employment Agreement
- --------------------
On December 20, 1996, the Company entered into an employment agreement contract
with one key employee for a three year term which expires December 31, 1999. The
agreement calls for annual compensation to be paid of $120,000 a year for each
of the three years. Pursuant to the employment agreement, the Company issued
90,000 stock options that vest 8.33% per calendar quarter starting the first
quarter of 1997. Additional, the Company issued 60,000 stock options to the
employee that vest 8.33% per calendar quarter if certain conditions are met.
401(k) Plan
- -----------
Dycam has a 401(k) plan for its employees which went into effect August 1, 1994.
All individuals already employed by Dycam on that date were considered eligible
for the plan. Individuals employed subsequent to that date are eligible upon
completing two months of service with Dycam. In accordance with the terms of the
plan, employees may contribute up to 15% of their pretax earnings to the plan,
up to the annual maximum allowed by law. Dycam can make a discretionary
contribution of up to 6.0% of the employee's pretax earnings. Dycam's
contribution for the years ended December 31, 1996 and 1995 was approximately
$27,000 and $26,000, respectively.
29
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 7 - INCOME TAXES
- ---------------------
Dycam's tax provisions for the years ended December 31, 1996 and 1995 represent
the state minimum taxes only, and differ from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to loss before income taxes as a
result of the following:
1996 1995
-------- --------
Computed "expected" tax benefit $(444,000) $(483,000)
Increase in income taxes resulting from:
Goodwill amortization not deductible
for income tax purposes 95,000 95,000
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated
to income tax benefit 349,000 388,000
State income taxes 1,000 1,000
-------- --------
$ 1,000 $ 1,000
======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 1996 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 2,000
Warranty reserves 4,000
Inventory reserves 95,000
Compensated absences due to accrual
for financial reporting purposes 14,000
Net operating loss carryforwards 893,000
Tax credit carryforwards 59,000
----------
Total deferred tax assets 1,067,000
Less valuation allowance (1,067,000
----------
Net deferred tax assets $ -
==========
</TABLE>
As of December 31, 1996, Dycam had net tax operating loss carryforwards of
approximately $2,409,000 for federal tax purposes which expire through 2011. As
of December 31, 1996, Dycam had net tax operating loss carryforwards of
approximately $1,202,000 for state tax purposes which expire through 2001.
In general, section 382 of the Internal Revenue Code includes provisions which
may limit the amount of net operating loss carryforwards and other tax
attributes that may be used annually in the event that a greater than 50%
ownership change (as defined) takes place in any three year period. Such
limitations can result in the loss of net operating loss carryforwards.
30
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 8 - STOCK OPTIONS
- ----------------------
During 1994, Dycam adopted a stock incentive plan (the 1994 Plan) pursuant to
which there are 850,000 shares of common stock reserved for issuance (subject to
stockholder approval as to 500,000 of these shares). At December 31, 1994,
options to purchase 646,000 shares of common stock were outstanding under the
plan at $4.00 per share. Stock options as to 646,000 shares were granted at or
above the estimated fair market value at the date of grant and vest 33% per year
over a three year period as to 346,000 of the options and over one year as to
300,000 of the options. These options expire in the year 2004. On January 25,
1995, Dycam repriced its 646,000 options outstanding under the 1994 plan to
$2.31, the estimated fair market value of the Company's common stock at that
date. Such repricing was subsequently ratified at the Company's annual meeting
held October, 1996. During 1995, 300,000 of these options expired upon the
resignation of an employee.
During 1994, Dycam also granted options outside of the 1994 Plan to purchase
56,079 and 100,000 shares of common stock at $3.21 and $4.00 per share,
respectively. These stock options were granted at or above the estimated fair
market value at the date of grant, vested immediately, and expire in the year
2004.
Option activity for the years ended December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
Non-
Qualified 1994 Outside Exercise
Stock Plan Plan Plan Price
---------- ------ ------ -------
<S> <C> <C> <C>
Options outstanding at
January 1, 1995
646,000 156,079 $3.21 - $4.00
Options expired (300,000) $2.31
--------- -------- ------- -------------
Options outstanding at
December 31, 1995 346,000 156,079 $2.31 - $4.00
========= ======== ======= =============
Options expired --- --- $2.31
--------- --------- ------- -------------
Exercisable at
December 31, 1995 115,000 156,079 $2.31 - $4.00
========= ======== ======= =============
Options outstanding
at December 31, 1996 346,000 156,079 $2.31 - $4.00
========= ======== ======= =============
Exercisable at
December 31, 1996 230,782 156,079 $2.31 - $4.00
========= ======== ======= =============
</TABLE>
31
<PAGE>
DYCAM INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 9 - FORGIVENESS OF DEBT
- ----------------------------
During 1995, a law firm forgave approximately $70,000 of debt owed to them,
which was reflected as an extraordinary item in the 1995 statement of
operations, net of tax of $0.
NOTE 10 - SUBSEQUENT EVENTS
- ---------------------------
On December 13, 1996, Styles signed a letter of intent to sell substantially all
of the net assets of the subsidiary of Styles that leases the cameras. The buyer
is a competitor of the subsidiary of Styles in the newborn hospital photographic
business. Effective January 31, 1997, Styles executed definitive agreements with
the buyer for the sale, which is expected to close in April, 1997.
At the closing, the subsidiary of Styles and Dycam will terminate their existing
contractual relationships involving the use of the subsidiary of Styles of
Dycam's cameras, software, and other supporting goods and services, and the
buyer and Dycam will enter into a Dycam Master Agreement (the "Dycam Master
Agreement") with respect to the assumption of the subsidiary's digital camera
lease obligations to Dycam, the leasing by the buyer of additional Dycam digital
cameras, and a royalty-free license of certain digital camera technology by
Dycam to the buyer, certain hardware and software support services to be
provided by Dycam for a three-year period commencing on the closing date and
certain additional terms. Under the Dycam Master Agreement, the buyer will be
required to pay Dycam specified leasehold payments for leased cameras, a
$300,000 fee (payable quarterly over a three-year period) for the support
services, and the cost of certain hardware upgrades.
Styles has agreed to deliver to the buyer an option permitting the buyer to
purchase from shares owned by Styles that number of shares of Dycam common stock
equal to 4.9% of the outstanding shares of the common stock of Dycam on the
closing date (approximately 152,921 shares as of January 31, 1997). The exercise
price of this three year option to be granted to the buyer will be equal to the
average closing price for Dycam common stock during the period from January 31,
1997 through the closing date.
The sale is subject to the approval of the shareholders of Styles. Styles
expects to receive the requisite approval of its stockholders at a meeting
planned to be held in April 1997.
On December 20, 1996, the Company entered into an employment agreement contract
with one key employee for a three year term which expires December 31, 1999
(see Note 6).
32
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF DYCAM
Information regarding directors and executive officers of Dycam
will appear in the Proxy Statement of the Annual Meeting of
Stockholders and is incorporated herein by this reference. The
Proxy Statement will be filed with the SEC within 120 days
following December 31, 1996.
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the
Proxy Statement for the Annual Meeting of Stockholders and is
incorporated herein by this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial
owners and management will appear in the Proxy Statement for the
Annual Meeting of Stockholders and is incorporated herein by this
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related
transactions will appear in the Proxy Statement for the Annual
Meeting of Stockholders and is incorporated herein by this
reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See attached Exhibit Index.
(b) Reports on Form 8-K:
None.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 31st day of March,
1997.
DYCAM INC.
(Registrant)
By: /s/ John A. Edling
----------------------------
John A. Edling
Its: Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John A. Edling Chairman of the Board, Chief March 31, 1997
- ---------------------------- Executive Officer, President,
John A. Edling Treasurer and Secretary
(Principal Executive Officer and
Principal Accounting Officer)
/s/ George Ismael Vice President of Engineering March 31, 1997
- ---------------------------- and Director
George Ismael
/s/ James Alexiou Director March 31, 1997
- ----------------------------
James Alexiou
/s/Ann Graham Ehringer Director March 31, 1997
- ----------------------
Ann Graham Ehringer
/s/ Marshall Geller Director March 31, 1997
- ----------------------------
Marshall Geller
/s/ Barry Porter Director March 31, 1997
- ------------------------------
Barry Porter
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Sequential
No. Document Page No.
- ------- -------- ----------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Dycam Inc.(2)........................................
3.2 Amended and Restated Bylaws of Dycam Inc.(2)..................................................
4.1 Dycam Inc. Specimen Stock Certificate(3)......................................................
10.3 Development Master Agreement, dated March 11, 1993, by and between Dycam Inc.
and International Business Machines Corporation; and Task Order Number
One, dated March 11, 1993, and Task Order Number Two, dated June 1, 1993,
related thereto(1)............................................................................
10.4 License Agreement, dated December 9, 1990, by and between Dycam Inc. and
Logitech, Inc.(1).............................................................................
10.5 Restated License Agreement, effective as of June 15, 1993, by and between
Dycam Inc. and Logitech, Inc.(1)..............................................................
10.6 Research Agreement, dated as of June 30, 1993, by and between Dycam Inc. and
University of Florida Research Foundation(1)..................................................
10.7 Form of Dycam Inc. Authorized Reseller Agreement(1)...........................................
10.8 Form of Dycam Inc. Associate Agreement(1).....................................................
10.9 Form of Dycam Inc. Authorized International Distribution Agreement(1).........................
10.10 United States Patent No. 4,074,324 for Instant Electronic Camera, filed July 14,
1975, listing Jon S. Barrett as the Inventor(1)...............................................
10.11 United States Patent No. 5,249,093 for Filmless Digital Camera With Selective
Image Compression, filed August 7, 1992, listing Jaswant R. Jain as the Inventor(1)...........
10.12 Letter Agreement, dated August 11, 1993, by and between Styles on Video, Inc.
and Dycam Inc.(1).............................................................................
10.13 Employment Agreement by and between Dycam Inc. and John Edling(2).............................
10.14 Employment Agreement by and between Dycam Inc. and George Ismael(2)...........................
10.15 Form of Non-Compete Agreement by and between Styles on Video, Inc.,
Dycam Inc. and various stockholders of Dycam Inc.(1)..........................................
10.16 Form of Standstill Agreement by and between Styles on Video, Inc.
and various stockholders of Dycam Inc.(1).....................................................
10.17 Form of Option Agreement by and between Dycam Inc. and various
Dycam Inc. stockholders(1)....................................................................
10.18 Letter Agreement, dated November 4, 1993, by and among Styles on Video, Inc.
Dycam Inc. and George Ismael(1)...............................................................
10.19 Form of Agreement and Certificate of Merger Merging Dycam Acquisition Corp.
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
with and into Dycam Inc.(2)...................................................................
10.20 Dycam Inc. Employee Handbook, dated May 25, 1993(2)...........................................
10.21 1994 Stock Incentive Plan of Dycam Inc.(2)....................................................
10.22 Letter Agreement, dated January 25, 1995, by and between Styles on Video, Inc.
and Dycam Inc. (4)............................................................................
10.23 Amended and Restated Promissory Note, dated January 25, 1995, made by
Styles on Video, Inc. in favor of Dycam Inc. (4)..............................................
10.24 Sublease Agreement, dated November 15, 1994, by and between Edwards and Lock
Management Corporation as Sublessor and Dycam Inc. as Sublessee for
property located at 9414 Eton Avenue, Chatsworth, California 91311 (4).......................
10.25 Lease Agreement, dated December 7, 1994, by and between Northpark Industrial
as Lessor and Dycam Inc. as Lessee for property located at 9414 Eton
Avenue, Chatsworth, California 91311 (4).....................................................
21.1 List of Subsidiaries of Dycam Inc. ...........................................................
23.1 Consent of Corbin & Wertz ....................................................................
- -----------------------
(1) Incorporated by reference from Styles on Video, Inc.'s Registration Statement on Form S-4 as filed with the
SEC on January 4, 1994.
(2) Incorporated by reference from Dycam Inc.'s Registration Statement on Form SB-2 as filed with the SEC on
May 3, 1994.
(3) Incorporated by reference from Amendment No. 3 to Dycam Inc.'s Registration Statement of Form SB-2 as
filed with the SEC on June 17, 1994.
(4) Incorporated by reference from Dycam Inc.'s 1994 form 10-KSB as filed with the SEC on April 15, 1995.
</TABLE>
36
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF DYCAM INC.
None
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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</TABLE>
