<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11836
STYLES ON VIDEO, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 95-4389082
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
667 Rancho Conejo Blvd.
Newbury Park, California 91320
(Address of Principal Executive Offices)
(805) 375-0996
(Issuer's Telephone Number, Including Area Code)
101 Hodencamp Road
Thousand Oaks, California 91360
(Former Name, Former Address and Fiscal Year, if Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 [ ]
Concurrent with the filing of this Report on Form 10-QSB/A, the registrant is
filing all previously filed reports required to be filed under
Section 13 or 15(d) of the Exchange Act as of February 28, 1997.
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Common Stock, $0.001 Par Value 8,852,759 shares as of March 21, 1997
Transitional Small Business Disclosure Format (Check One)
Yes [ ] No [X]
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STYLES ON VIDEO, INC.
RESTATED CONSOLIDATED BALANCE SHEETS (NOTE (1))
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,692,000 $4,361,000
Accounts receivable, less allowance of $386,000 and
$510,000 at September 30, 1995 and December 31,
1994, respectively 316,000 184,000
Loan receivable from stockholder - 450,000
Income taxes receivable 327,000 1,256,000
Inventories 1,038,000 1,215,000
Prepaid expenses and other current assets 335,000 325,000
---------- -----------
Total current assets 3,708,000 7,791,000
Property and equipment, net 812,000 614,000
Long-term receivables, less allowance of $577,000
at September 30, 1995 and December 31, 1994 10,000 44,000
Goodwill, net of accumulated amortization of $458,000
and $249,000 at September 30, 1995 and December
31, 1994,respectively 5,096,000 5,305,000
Other assets 117,000 49,000
---------- -----------
Total assets $9,743,000 $13,803,000
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,599,000 $1,192,000
Accrued expenses 521,000 274,000
Customer advances 868,000 868,000
Advance from stockholder 48,000 200,000
Note payable - short-term 300,000 -
Current portion of long-term obligations 125,000 -
----------- -----------
Total current liabilities 3,461,000 2,534,000
Note payable 167,000 250,000
Other long-term liabilities 72,000 94,000
Minority interests in consolidated subsidiaries 1,197,000 1,471,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.001; 1,000,000 shares
authorized; none issued - -
Common stock, par value $.001; 10,000,000 shares
authorized; 4,505,000 shares issued and outstanding
at September 30, 1995 and December 31, 1994 4,000 4,000
Additional paid-in capital 16,137,000 16,137,000
Accumulated deficit (11,295,000) (6,687,000)
----------- -----------
Total stockholder's equity 4,846,000 9,454,000
----------- -----------
Total liabilities and stockholder's equity $9,743,000 $13,803,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
STYLES ON VIDEO, INC.
RESTATED CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE (1))
For the three and nine months ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
1995 1994 1995 1994
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues
Systems and related software sales $ 437,000 $ 1,130,000 $ 2,267,000 $ 3,259,000
Camera sales 400,000 337,000 1,207,000 849,000
Other revenues 237,000 42,000 368,000 577,000
----------- ----------- ----------- -----------
Total revenues 1,074,000 1,509,000 3,842,000 4,685,000
Cost of revenues, excluding depreciation and
amortization
Cost of systems and software sold 93,000 503,000 1,110,000 1,508,000
Cost of camera sales 260,000 109,000 823,000 356,000
Other costs 78,000 - 122,000 42,000
----------- ----------- ----------- -----------
Total cost of revenues 431,000 612,000 2,055,000 1,906,000
----------- ----------- ----------- -----------
Gross profit 643,000 897,000 1,787,000 2,779,000
Operating expenses
Selling, general and administrative 1,656,000 1,650,000 5,756,000 5,211,000
Research and development 241,000 152,000 704,000 387,000
Depreciation and amortization 107,000 98,000 301,000 232,000
----------- ----------- ----------- -----------
Total operating expenses 2,004,000 1,900,000 6,761,000 5,830,000
----------- ----------- ----------- -----------
Loss from operations (1,361,000) (1,003,000) (4,974,000) (3,051,000)
Interest income, net of interest expense 52,000 47,000 113,000 88,000
Other expense (7,000) - (17,000) -
Minority interests in net losses of consolidated
subsidiaries 128,000 41,000 274,000 65,000
----------- ----------- ----------- -----------
Loss before income taxes (1,188,000) (915,000) (4,604,000) (2,898,000)
Provision (benefit) for income taxes (1,000) (58,000) 4,000 14,000
----------- ----------- ----------- -----------
Net loss $(1,187,000) $ (857,000) $(4,608,000) $(2,912,000)
=========== =========== =========== ===========
Net loss per common share $(.26) $(.19) $(1.02) $(.71)
=========== =========== =========== ===========
Weighted average common shares outstanding
4,505,000 4,492,000 4,505,000 4,082,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
STYLES ON VIDEO, INC.
RESTATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE (1))
For the nine months ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-in Accumulated Stockholders'
No. of Shares Par Value Capital Deficit Equity
------------- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 4,505,000 $4,000 $16,137,000 $ (6,687,000) $ 9,454,000
Net loss - - - (1,833,000) (1,833,000)
--------- ------ ----------- ------------ -----------
Balance, March 31, 1995 4,505,000 4,000 16,137,000 (8,520,000) 7,621,000
Net loss - - - (1,588,000) (1,588,000)
--------- ------ ----------- ------------ -----------
Balance, June 30, 1995 4,505,000 4,000 16,137,000 (10,108,000) 6,033,000
Net loss - - - (1,187,000) (1,187,000)
--------- ------ ----------- ------------ -----------
Balance, September 30, 1995 4,505,000 $4,000 $16,137,000 $(11,295,000) $ 4,846,000
========= ====== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
STYLES ON VIDEO, INC.
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE (1))
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------
September 30, 1995 September 30, 1994
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,608,000) $(2,912,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 301,000 232,000
Provision for bad debts - 1,227,000
Minority interest in consolidated subsidiaries (274,000) (65,000)
Changes in operating assets and liabilities:
Accounts receivable (132,000) (307,000)
Income taxes receivable 929,000 (176,000)
Inventories 177,000 (597,000)
Prepaid expenses and other current assets (10,000) (74,000)
Long-term receivables and other assets (34,000) 142,000
Accounts payable and accrued expenses 654,000 175,000
Customer advances - 243,000
Income taxes payable - 6,000
----------- -----------
Net cash used in operating activities (2,997,000) (2,106,000)
Cash flows from investing activities:
Purchase of property and equipment (248,000) (621,000)
Increase in intangibles - (290,000)
Minority interest investment in subsidiary - 165,000
Acquisition of business, net of cash acquired - 25,000
----------- -----------
Net cash used in investing activities (248,000) (721,000)
Cash flows from financing activities:
Repayment of loan receivable from stockholder 450,000 214,000
Repayment of advance from stockholder (152,000) (50,000)
Proceeds from note payable - short-term 300,000 -
Repayment on capital lease obligations (22,000) -
Proceeds received from common stock issuances upon
exercise of stock options - 1,386,000
Net proceeds received from issuance of common stock
of subsidiary - 5,197,000
----------- -----------
Net cash provided by financing activities 576,000 6,747,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,669,000) 3,920,000
Cash and cash equivalents, beginning 4,361,000 2,107,000
----------- -----------
Cash and cash equivalents, ending $ 1,692,000 $ 6,027,000
=========== ===========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the year for:
Income taxes $ - $ 182,000
Interest $ 17,000 $
-
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
(1) General
(A) This amendment is required to correct an accounting error contained in
previously reported operating results for the three and nine month periods ended
September 30, 1995. The accompanying unaudited restated consolidated financial
statements of Styles on Video, Inc. ("SOV") and subsidiaries, (collectively,
"the Company") for the three and nine month periods ended September 30, 1995,
which correct this error, have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and in
accordance with the instructions to Form 10-QSB. Accordingly, these restated
consolidated financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation of the
financial results for the three and nine month periods ended September 30, 1995
have been included. The restatement adjustment was made to reverse the
allocation of a subsidiary's losses to the minority interest in the case in
which the losses applicable to the minority interest in the subsidiary exceeded
the minority interest in the equity capital of the subsidiary. The consolidated
results of operations for the three and nine months ended September 30, 1995 are
not necessarily indicative of the results to be expected for the full year. In
February 1995, there was a complete change in the senior management and key
accounting personnel of the Company. As a consequence of this change in
personnel, certain individuals are no longer available to provide information
which the company's current management believes may be necessary to confirm the
accuracy of the Company's 1994 quarterly financial position and results of
operations. The Company's financial position and results of operations as of
September 30, 1995, and for the three and nine months then ended, are based upon
the best information which was reasonably available to the Company's current
management. For more complete information, including a discussion of various
factors that may affect the future financial position and results of operations
of the Company, refer to the Company's Report on Form 10-KSB for the year ended
December 31, 1994, as filed with the Commission on March 29, 1996; and the
Company's Reports on Form 10-QSB/A for the quarterly periods ended March 31,
1995 and June 30, 1995, the Company's Report on Form 10-KSB for the year ended
December 31, 1995, and the Company's Reports on Form 10-QSB for the quarterly
periods ended March 31, 1996, June 30, 1996, and September 30, 1996, which were
filed with the U.S. Securities and Exchange Commission on March 24, 1997.
(b) The September 30, 1995 quarterly operating results have been restated
for the following item:
<TABLE>
<S> <C>
Net loss for the three months ended September 30, 1995,
as previously reported $(1,051,000)
Restatement adjustment:
Adjust minority interest (136,000)
------------
Net loss for the three months ended September 30, 1995, as restated $(1,187,000)
============
</TABLE>
6
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
(2) Related Party Transactions
(a) Loan receivable from stockholder - In 1994 the Company loaned to H.J.
Meyers & Co. ("Meyers & Co."), the underwriter for the Company's initial public
offering (and of which Harold J. Meyers, a former SOV board member, was
chairman), $648,000 (the "Warrant Loan") so that Meyers & Co. might exercise
certain common stock purchase warrants which it was issued in connection with
the Company's initial public offering. At December 31, 1994, Meyers & Co. owed
the Company $450,000 on the Warrant Loan, including accrued interest at the rate
of six percent per annum, net of a discount of $123,000. The Warrant Loan was
collateralized by 62,000 shares of SOV common stock held by Meyers & Co. Meyers
& Co. repaid the Warrant Loan, which was originally due March 31, 1995, in April
1995.
(b) Advance from stockholder - In December 1994, the Company received a
$200,000 advance from Mr. de Vreese, its former Chief Executive Officer.
Approximately $150,000 was repaid during the three months ended March 31, 1995
and approximately $50,000 continued to remain outstanding as of December 31,
1995.
(c) Accrued expenses - From August 1, 1995 to October 15, 1995, eight FYI
employees, including the CEO, CFO, COO, three Vice-Presidents and two other
employees, agreed to defer 100% of their salaries to improve FYI's cash flow and
provide funds needed for operations as negotiations were occurring for other
bridge and permanent financing which occurred in the last quarter of 1995.
(3) Subsequent Events
(a) Financing Transactions - During 1995, the Company entered into a
series of transactions with Multinational Trading Corp., a Florida corporation
("MTC") and International Digital Investors, L.P., a Delaware limited
partnership ("IDI"), for the purpose of raising capital to fund the Company's
continued operations. MTC and IDI are companies with overlapping yet not
identical management. The Chief Executive Officer of IDI's corporate general
partner, was appointed CEO of the Company after the series of transactions
described below which gave IDI a majority of seats on the Company's Board of
Directors. Upon exercise of warrants and conversion of Series A Preferred Stock,
IDI will own approximately 40 percent of the Company's outstanding common stock
on a fully diluted basis.
In September 1995, SOV and FYI received short-term bridge financing of
$300,000 from MTC. In October 1995, MTC made additional advances of $75,000 to
the Company. The Company repaid the $375,000, plus interest accrued thereon and
transaction fees, with a portion of the $3,000,000 it received from IDI in the
transaction described immediately below.
In November 1995, pursuant to the Note and Preferred Stock Purchase
Agreement (the "Agreement") SOV and FYI (the "Companies") issued to IDI
$2,950,000 in 10% Senior Notes due June 30, 1998 (the "Notes"). Additionally,
SOV issued to IDI 500 shares of 10% Senior Series A Convertible Preferred Stock
(the "Preferred Stock") for $50,000. Pursuant to the Agreement, SOV also issued
to IDI common stock purchase warrants entitling IDI to purchase shares of SOV's
common stock
7
<PAGE>
STYLES ON VIDEO, ONC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
equivalent to 40 percent of the fully diluted common shares outstanding on
November 20, 1995. The exercise price of the warrants is $1.12 per warrant,
which represents the estimated consolidated per share book value per issued and
outstanding share of the Company on the date of the Agreement. The warrants may
be exercised at any time prior to November 20, 2005.
The Notes bear interest at the rate of ten percent per annum, payable
monthly, and provide for principal payments of $500,000 on March 31, June 30,
September 30 and December 31, 1997 and March 31, 1998. The remaining $450,000
in principal is due and payable on June 30, 1998. The Notes are subject to
mandatory redemption (in whole or in part) by the Companies, at par, in certain
circumstances: (a) should the Companies recover any monies pursuant to their
claims against Kellogg & Andelson (see "Legal Proceedings") the Companies are
obligated to use up to 75 percent of the proceeds from any such recovery for
redemption of the Notes; and (b) should the Companies issue any equity or sell
or otherwise dispose of certain assets, the Companies are obligated to use 100
percent of the proceeds from such transactions for redemption of the Notes.
Holders of the Notes have a put right enabling them to cause the Companies to
repurchase the Notes, at par, in the event of a sale, merger, change of control
or the public offering of securities involving SOV or FYI.
Substantially all of the assets of the Companies are pledged as collateral
on the Notes, except for the 1,916,667 shares of common stock of Dycam owned by
SOV which collateralize the $1,000,000 note payable to Dycam, and the holder of
the Notes has the right to foreclose on such assets or take other protective
measures upon the occurrence of an event of default under the Agreement which is
not timely cured or waived. Pursuant to the Agreement, the Companies are
subject to various restrictive covenants, including limitations on the
incurrence of additional indebtedness, capital expenditures, investments,
transactions with affiliates, and consolidation, merger and sale of assets. The
Companies also must satisfy certain financial tests during the term of the
Agreement, including the maintenance of certain mandatory net worth and earnings
levels. Compliance with the terms of the Agreement is determined at the end of
each calendar quarter. The failure to comply with the restrictive covenants or
pass the financial tests will constitute an event of default under the
Agreement. At December 31, 1995, the Companies were not in compliance with
certain financial covenants of the Agreement, however, a waiver of these
violations was obtained from IDI.
Use of the funds under the Agreement is limited to the repayment of the MTC
bridge financing obtained in 1995 and related accrued interest, transaction
costs relating to the Agreement, and the furtherance of the Company's business
plans, specifically the expansion of FYI's business. Pursuant to the Agreement,
up to $500,000 of the funds are available to SOV. The Agreement was amended in
March 1996 to increase the funds available to SOV from $500,000 to $750,000.
Pursuant to the Agreement, the Company issued 500 shares of Preferred Stock
to IDI at $100 per share. The holders of shares of Preferred Stock are entitled
to receive dividends of $10 per share prior to the distribution of any dividends
to the holders of SOV common stock. Dividends on the Series A Preferred Stock
will accrue whether or not declared by the Board of Directors of the Company.
The Preferred Stock is subject to optional redemption by SOV, at a redemption
price of $100 per share plus any accrued dividends. In the event of a change of
control (as defined in the Agreement) SOV must
8
<PAGE>
SYLES ON VIDEO, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
offer to redeem the Preferred Stock. The Preferred Stock is convertible at any
time, in whole or in part, into shares of SOV's common stock, at a per share
conversion price equal to the higher of the current market or book value of the
common stock at the date of conversion. As long as none of the common stock
warrants issued pursuant to the Agreement have been exercised, the holders of
the Preferred Stock, voting as a class, are entitled to elect four of the
Company's seven directors.
Pursuant to the Agreement, IDI also received certain registration rights
with respect to the warrants, the shares of common stock issuable upon
conversion of the Preferred Stock and the shares of common stock issuable upon
exercise of the warrants. FYI and SOV have guaranteed each other's obligations
under the Agreement.
(b) Wind-down of Certain Operations - In January 1996 the Company's Board
of Directors, together with the Company's current management, determined that it
was in the best interest of the Company and its stockholders to eliminate the
Company's hairstyle and beauty imaging and franchising operations. The Company
has commenced the wind-down of SOV's hairstyle and beauty imaging operations and
SSI. In connection with the wind-down of SOV's hairstyle and beauty imaging
operations, SOV has ceased the marketing and sales of its hairstyle and beauty
imaging systems, and has terminated the employment of all employees involved in
the marketing and sales of such systems. SOV continues to sell access disks
(software required to continue operating certain SOV hairstyle and beauty
imaging systems, which permits the user to conduct a specific number of imaging
sessions). SOV intends to continue to sell access disks for the foreseeable
future as it winds down and attempts to sell its hairstyle and beauty imaging
operations. In March 1996, SOV reduced its total number of employees to three.
All SSI employees have been terminated and the Company has entered into
discussions with SSI's eighteen Area Developers regarding the cancellation of
their Area Development Agreements in exchange for consideration primarily
consisting of canceling the Area Developers' notes payable to SSI and of the
issuance of access disks to the Area Developers by SSI.
Although there can be no assurances, management does not expect to incur
substantial liability with respect to the wind-down or sale of SOV's hairstyle
and beauty imaging operations or the wind-down of SSI. After eliminating all of
SOV's current operations, the Company expects to retain SOV as a holding Company
for the Company's remaining operating subsidiaries, Dycam and FYI.
(4) Contingencies
(a) Stockholder class action and derivative lawsuits - The Company has
entered into a settlement of a class action lawsuit which was filed against the
Company and certain of its officers and directors in December 1994 as well as a
shareholders' derivative lawsuit which named the directors and certain of the
officers of the Company. Pursuant to the terms of the settlement, the Company
has agreed to deliver to the plaintiff class warrants to purchase 750,000 shares
of the Company's common stock and has recorded a promissory note in the
principal amount of $250,000 at December 31, 1994, payable in three equal
installments on July 1, 1996, January 1, 1997 and July 1, 1997 at 9% interest.
The exercise
9
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
price of the warrants will be determined by the trading price of the Company's
common stock nine months following the date on which trading in the stock
resumes (the price will be the average closing price of the last twenty trading
days in that nine-month period). The warrants will have a five-year life and
are redeemable by the Company at any time for $5 per warrant. Also as part of
the settlement, the Company's director and officer liability insurance carriers
agreed to pay $2,250,000. In the derivative case, Guy de Vreese, the former
Chairman and Chief Executive Officer of the Company, agreed to surrender 250,000
shares of the Company's common stock held by him and to the cancellation of
options for 150,000 shares of the Company's common stock held by him. The
shares surrendered by Mr. de Vreese will be distributed to the class plaintiffs
and the options will be cancelled. The settlement is subject to notice to the
class members and final approval by the District Court.
(b) Durian - On October 20, 1995, Durian Technologies, Inc. and Durian
Finance (collectively, "Durian") filed a complaint against Styles on Video, Inc.
for breach of contract, fraud and negligent representation in connection with
financing arrangements with Durian for the benefit of Styles on Video, Inc. and
seeks an accounting and declaratory relief. Durian also seeks an unspecified
amount of damages. Styles on Video, Inc. responded to the complaint in January
1996. Styles on Video, Inc. intends to vigorously defend the lawsuit and assert
appropriate counterclaims.
(c) Leaper - On February 10, 1995, Thomas D. Leaper ("Leaper") the
Company's former Chief Operating Officer and Chief Financial Officer, filed a
complaint against SOV for breach of contract, emotional distress and wrongful
termination. Leaper seeks an unspecified amount of general and special damages.
The Company responded to the complaint by moving to compel arbitration of all of
Leaper's claims. The motion was granted in September of 1995. Leaper has not yet
initiated arbitration.
(d) Lawsuit against the Company's former independent accountants - On
January 22, 1996, the Company filed a lawsuit against its former independent
accountants, the accounting firm of Kellogg & Andelson, along with individual
accountants James Walters, William Wall, Frederick Flax, and Thomas Leaper, who
also served as the Company's former Chief Operating Officer and Chief Financial
Officer (collectively, "K&A"). The lawsuit asserts claims for professional
negligence, breach of contract and breach of fiduciary duty against these
defendants arising out of the services rendered by K&A in connection with the
Company's 1993 year-end audit and 1994 quarterly reports. The Company seeks
compensatory damages in excess of $54 million, as well as punitive damages.
(e) Lawsuit against FYI competitor - On March 8, 1996, FYI filed a lawsuit
against its major competitor, HASCO Inc. The lawsuit asserts, among other
things, claims for unreasonable restraint of trade, monopolistic practices,
unfair competition, trade libel, and false and misleading advertising. FYI
seeks compensatory damages in excess of $10 million, as well as punitive damages
and injunctive relief.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the Company's Report
on Form 10-KSB for the year ended December 31, 1994 which was filed with the
Commission on March 29, 1996; and the Company's Reports on Form 10-QSB/A for the
quarterly periods ended March 31, 1995 and June 30, 1995, the Company's Report
on Form 10-KSB for the year ended December 31, 1995, the Company's Reports on
Form 10-QSB for the quarterly periods ended March 31, 1996, June 30, 1996, and
September 30, 1996, which were filed with the Commission on March 24, 1997. the
information contained in the Company's Reports on Form 10-KSB for the years
ended December 31, 1994 and 1995, the Company's Reports on Form 10-QSB/A for the
quarterly periods ended March 31, 1995 and June 30, 1995, and the Company's
Reports on Form 10-QSB for the quarterly periods ended March 31, 1996, June 30,
1996, and September 30, 1996 provides additional discussion of the Company's
current financial position and results of operations, including a discussion of
various factors that may affect the future financial position and results of
operations of the Company. Reference should also be made to the disclosure
relating to certain limitations on available information set forth on Note (1)
to the consolidated financial statements contained in this report. Results of
operations include Dycam's operating results from January 1, 1994, as Dycam's
operating results from January 1, 1994 to the date of acquisition on February 7,
1994 are not significant.
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis are forward looking
statements that involve risks and uncertainties and are based upon judgments
concerning various factors that are beyond the Company's control. For
information regarding potential factors that could affect the Company's future
results and financial condition, refer to the section entitled "Factors That May
Affect Future Results and Financial Condition "contained in Item 6 -
Management's Discussion and Analysis or Plan of Operation of the Company's
Reports on Form 10-KSB for the fiscal years ended December 31, 1994 and 1995
which were filed with the Commission on March 29, 1996, and March 24, 1997,
respectively.
Three months ended September 30, 1995 compared to the three months ended
- ------------------------------------------------------------------------
September 30. 1994
- -------------------
Revenues
- --------
The following table summarizes the Company's revenues for the three months
ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1995 September 30, 1994
------------------ ------------------
Percentage of Percentage of
Revenues Company Revenues Revenues Company Revenues
----------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Consolidated $1,074,000 100% $1,509,000 100%
SOV 526,000 49 1,130,000 75
Dycam 416,000 39 379,000 25
FYI 129,000 12 - -
SSI 3,000 - - -
</TABLE>
11
<PAGE>
. Consolidated Operations. As detailed below, in January 1996, the Company
elected to wind down its hairstyle and beauty imaging and franchising
operations. The Company intends to focus its resources on its operating
subsidiaries, FYI and Dycam. After the wind-down is completed, SOV intends
to operate solely as a holding company. The Company believes that its
future revenues and growth will be derived from the operations of its
subsidiaries.
. Styles on Video. Revenues from sales of SOV's imaging systems ("Systems"),
software, and related products for the three months ended September 30, 1995
decreased $604,000, or 53%, compared to the three months ended September 30,
1994. The total number of Systems sold in the three months ended September
30, 1995 decreased approximately 79% compared to the three months ended
September 30, 1994. The Company introduced and promoted its lower priced
beauty imaging system, the Electric Hair System, in the third quarter of
1995. However, this product was not ready for shipment until the final days
of the quarter, resulting in the shipment of only one such system during the
third quarter (an additional 27 Electric Hair Systems were shipped in the
final quarter of 1995). The Company believes that the introduction of the
Electric Hair System at its lower price point, combined with a decline in
Redken relations, contributed to the decline in sales of SOV's other beauty
imaging system. Total sales of software and support products such as blank
video tape cassettes, print paper, peripherals and promotional materials
decreased for the three months ended September 30, 1995 compared to the
three months ended September 30, 1994, Throughout 1995, SOV's revenues
declined compared to revenues in 1994. The Company believes that the
continued decline in sales is due to the general lack of market interest in
SOV's existing products at their current price points, the reduction of
marketing efforts, and the damage done to the Company's reputation as a
result of the halt in the trading of the Company's common stock and the
class action lawsuit brought against the Company. Consequently, the Company
has decided to eliminate its SOV line of business. In January 1996, the
Company commenced the wind-down of this line of business and is attempting
to sell its hairstyle and beauty imaging operations. The Company
anticipates that the SOV line of business will generate only a minimal
portion of the Company's revenues in 1996, an no revenues in later years.
. Dycam. Dycam's revenues are derived from sales of digital cameras and
supporting software and accessory products, technology licensing fees, and
contract engineering work. Dycam's total revenues for the three months
ended September 30, 1995 increased $37,000 or 10%, compared to the three
months ended September 30, 1994. The increase in revenue was primarily
associated with the increase in camera sales net of the reduction of
contract engineering fees. Revenues from camera sales were $400,000 (96% of
Dycam's revenue) in the three months ended September 30, 1995 compared to
$337,000 (89% of Dycam's revenues) for the three months ended September 30,
1994. Dycam believes that the increase in camera revenues is attributed to
the general emergence of the digital camera market as a whole. Revenues
from contract engineering were $6,000 (1% of Dycam's revenues) for the three
months ended September 30, 1995 compared to $38,000 (10% of Dycam's
revenues) for the three months ended September 30, 1994. The reduction in
contract engineering revenues was due to the existence of certain projects
in process during the three months ended September 30, 1994 which were
substantially completed by the end of 1994. Dycam believes that the pursuit
of contract engineering work presents a substantial opportunity for revenue
growth in future periods and intends to devote a substantial portion of its
resources to this area. Revenues from license fees were $10,000 (2% of
Dycam's revenues) for the three months ended September 30, 1995 compared to
$4,000 (1% of Dycam's revenues) for the three months ended September 30,
1994. Dycam's arrangement with
12
<PAGE>
Logitech provided that Logitech would make a one-time royalty payment of
approximately $1,000,000 in 1993, and thereafter pay Dycam a .5% royalty fee
on future sales of the licensed product. Subsequent to December 31, 1994,
Logitech informed the Company that it had ceased to manufacture the camera
for which it held a license and as a consequence revenues from this license
will cease as soon as Logitech exhausts its current supplies of the subject
product. The Company believes that, beginning the first quarter of 1996, a
substantial portion of Dycam's revenues will be from revenues derived from
the sale of cameras to, and licensing revenue from, FYI. The core element
of the FYI camera system is a specialized digital camera subsystem
engineered and produced by Dycam under an exclusive contract with FYI. In
addition to the sale of cameras to FYI, Dycam's arrangement with FYI
provides that, in exchange for certain development and maintenance services,
Dycam is entitled to a 7.5% royalty on all FYI sales.
. FYI. FYI's revenues are derived from sales of newborn baby photographs and
ancillary products. Since its first sales in March 1995, revenues have
consistently grown each month as the customer base has increased to over 50
hospital accounts by December 31, 1995. The Company has devoted significant
marketing efforts and financial resources to the development and growth of
the FYI business and intends to continue to devote substantial efforts and
resources to FYI's growth. Based on FYI's growth in 1995, its competitively
priced products and its emphasis on service, the Company believes that the
FYI business will continue to grow in 1996 and provide a significant portion
of the Company's future consolidated revenues.
. SSI. SSI's revenues are primarily derived from the sale of franchises. The
first SSI franchises were sold during the last quarter of 1994. SSI has not
sold any franchises since January 1995 and its Uniform Franchise Operating
Circular has not been updated. The Company has decided to eliminate the SSI
line of business. The Company anticipates that the SSI line of business
will generate only a minimal portion of the Company's revenues in 1996, and
no revenues in later years.
Gross Profit
- ------------
Gross profit is comprised of revenues less direct costs and expenses. The
following table summarizes the Company's gross profit for the three months ended
September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1995 September 30, 1994
------------------ ------------------
Gross Profit as Gross Profit as
Gross Profit Percentage of Percentage of
------------ Revenues Gross Profit Revenues
-------- ------------ --------
<S> <C> <C> <C> <C>
Consolidated $643,000 60% $897,000 59%
SOV 433,000 82 627,000 55
Dycam 156,000 38 270,000 71
FYI 51,000 40 - -
SSI 3,000 100 - -
</TABLE>
13
<PAGE>
. Styles on Video. Gross profit increased for the three months ended
September 30, 1995 compared to the three months ended September 30, 1994
primarily due to an increase in the proportion of software sales compared to
System sales. Additional quantities of software were purchased by customers
during the three months ended September 30, 1995 in anticipation of a 50%
price increase on August 15, 1995. Software sales have gross profit margins
of approximately 98%. SOV's average gross profit on System sales is
approximately 52%. The Company believes that the remainder of the variance
in gross profit is due to inaccuracies and inconsistent methodology in the
cost accounting system and shrinkage which were present in 1994. The
Company did not detect these inaccuracies until after the end of its 1994
fiscal year. During the three months ended March 31, 1995, the Company took
steps to correct the inaccuracies by performing quarterly physical inventory
counts, as opposed to previously performed annual counts, and standardizing
its cost accounting methodology. Additionally, improved purchasing,
requisition and tracking procedures were implemented and standardized in the
first quarter of 1995 with the change in senior management and key
accounting personnel. In June 1995 physical security over inventories was
improved at the Company's new facilities.
. Dycam. Gross profit for the three months ended September 30, 1995 decreased
compared to the three months ended September 30, 1994 primarily as a result
of the increase in the percentage of revenue derived from camera sales.
Such sales have a lower margin than sales of supporting software, licenses
and custom contract engineering. Moreover, Dycam lowered its average camera
sales prices which adversely affected Dycam's gross profit.
. FYI. FYI recognized its first sales in March 1995. FYI's gross profit is
expected to increase as FYI emerges from its start-up phase of operations.
. SSI. There are no significant direct costs associated with the sale of
franchises.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses consist of administrative
expenses, the salaries of corporate officers, office staff and sales personnel,
advertising and promotion, accounting, legal and other professional expenses and
rent and occupancy costs. They exclude depreciation and amortization, which are
stated separately.
The following table summarizes the Company's selling, general and administrative
expenses for the three months ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1995 September 30, 1994
------------------ ------------------
Percentage of Percentage of
Expenses Revenues Expenses Revenues
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Consolidated $1,656,000 154 $1,650,000 109%
SOV 631,000 120 1,189,000 105
Dycam 292,000 70 275,000 73
FYI 703,000 545 186,000 -
SSI 30,000 1,000 - -
</TABLE>
14
<PAGE>
. Styles on Video. Selling, general and administrative expenses of SOV for
the three months ended September 30, 1995 decreased $558,000, or 47%, from
the three months ended September 30, 1994, and represented 38% of the
Company's total selling, general and administrative expenses. Salaries and
benefits decreased $257,000, or 54%, to $218,000 for the three months ended
September 30, 1995 as compared to $475,000 for the three months ended
September 30, 1994. Marketing and advertising decreased $146,000, or 78%,
for the three months ended September 30, 1995 compared to the three months
ended September 30, 1994 primarily due to steps taken to reduce costs,
including reducing the design and number of advertisements placed and
limiting the number of trade shows attended. Bad debt expense decreased
$430,000 in the three months ended September 30, 1995 compared to the three
months ended September 30, 1994 due to reduced requirements for additional
reserves. Legal fees increased $77,000, or 241 % in the three months ended
September 30, 1995 compared to the three months ended September 30, 1994 due
to costs related to increased legal matters. SOV made efforts to reduce
selling, general and administrative expenses throughout 1995. The total
personnel employed by SOV was reduced from 54 employees on January 1, 1995
to 10 employees by December 31, 1995. During 1995, SOV moved from its
facility in Canoga Park, California to a shared facility with FYI in Newbury
Park, California. Certain members of the Company's management team divided
their time between SOV and FYI to reduce costs and maximize resources.
Additional reductions were made in SOV's advertising and marketing costs as
a consequence of cutbacks in the design and placement of advertisements and
attendance at trade shows. Despite the steps taken to reduce costs, SOV's
selling, general and administrative costs continued to exceed its gross
profits on a monthly basis throughout 1995.
In January 1996, the Company decided to discontinue the SOV line of
business. During the wind-down of the SOV line of business, selling, general
and administrative expenses related to such operations will continue to exceed
the gross profit derived therefrom. The Company intends to reduce SOV's
expenses to a minimal level consistent with those of a holding company. In
furtherance of this goal, in January 1996 SOV made significant additional
reductions in its workforce, and ultimately plans to eliminate the majority of
its employees.
. Dycam. Selling, general and administrative expenses for the three months
ended September 30, 1995 increased $17,000, or 6% for the three months ended
September 30, 1994 and represented 18% of the Company's total selling,
general and administrative expenses. The increase resulted primarily from
an increase in Dycam's employee base. Other increased costs include
increased insurance premiums upon renewal of a D&O policy, rent and
occupancy expenses due to the move to a new facility, net of decreased legal
and professional fees.
. FYI. Selling, general and administrative expenses for the three months
ended September 30, 1995 represented 42% of the Company's total selling,
general and administrative expenses. Salaries and benefits increased
$275,000, or 289%, to $370,000 for the three months ended September 30, 1995
compared to $95,000 in the three months ended September 30, 1994 due to the
addition of staff to accommodate growth. FYI continued to add personnel in
the last quarter of 1995 and had 39 full-time and 15 part-time employees at
December 31, 1995. FYI intends to continue to add personnel in 1996 based
on projected growth. Marketing and travel costs were $125,000 for the three
months ended September 30, 1995 compared to $12,000 for the three months
ended September 30, 1994. High levels of marketing and travel costs are
expected to continue for the foreseeable future as FYI introduces itself to
the marketplace and builds and operates its business. Together salaries and
benefits and marketing and travel costs accounted for
15
<PAGE>
approximately 72% of total general and administrative expenses incurred by
FYI during the three months ended September 30, 1995.
. SSI. Selling, general and administrative expenses of SSI for the three
months ended September 30, 1995 represented 2% of the Company's total
selling, general and administrative expenses. Costs were primarily
comprised of salaries. The Company took steps towards the reduction of
SSI's expenditures in 1995. As of December 31, 1995, there were no direct
employees at SSI and marketing costs were reduced to zero. In January 1996,
the Company decided to eliminate and commenced the wind-down of the SSI line
of business.
Research and Development
- ------------------------
Consolidated research and development expenses for the three months ended
September 30, 1995 were $241,000 (22% of consolidated revenues), an increase of
$89,000, or 59%, compared to $152,000 (10% of consolidated revenues) for the
three months ended September 30, 1994.
. Styles on Video. Research and development expenses for the three months
ended September 30, 1995 were $49,000, an increase of $47,000, or 2350%,
compared to the three months ended September 30, 1994 and represented 20% of
the Company's research and development expenses. The costs related
primarily to the development of the Electric Hair System, a hairstyle and
beauty imaging system. SOV's product development activities ceased in
January 1996 with the Company's decision to eliminate the SOV line of
business.
. Dycam. Research and development expenses for the three months ended
September 30, 1995 were $190,000 (46% of Dycam's revenues), an increase of
$78,000, or 70%, from $112,000 (30% of Dycam's revenues) for the three
months ended September 30, 1994, and represented 79% of the Company's total
research and development expenses. Dycam's research and development
expenses were attributable to the addition of employees dedicated to product
development activities. During the three months ended September 30, 1995,
Dycam introduced and began shipments of two new versions of its modular
digital cameras primarily assigned for use in security and observation
stations. Dycam believes that continuing research and development is
essential to maintaining its competitive position, and expects to continue
to expend similar levels of funds in this area.
. FYI. Research and development expenses for the three months ended September
30, 1995 were $2,000 compared to $38,000 for the three months ended
September 30, 1994, and represented less than 1% of the Company's total
research and development expenses. FYI's research and development
activities were carried out in conjunction with related activities at Dycam.
Research and development expenses represent FYI's share of new product
development activities associated with the design and manufacture of the
prototype digital camera and system for the photography of newborn babies at
hospitals. FYI believes that continuing research and development is
essential to maintaining its long-term competitive position and to grow its
business and expects to continue to expend significant funds in this area.
. SSI. There were no research and development expenses associated with SSI's
operations.
16
<PAGE>
Nine months ended September 30, 1995 compared to the nine months ended September
- --------------------------------------------------------------------------------
30, 1994
- --------
Revenues
- --------
The following table summarizes the Company's revenues for the nine months
ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1994
-------------------------------- ---------------------------------
Percentage of Percentage of
Revenues Company Revenues Revenues Company Revenues
-------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Consolidated $3,842,000 100% $4,685,000 100%
SOV 2,384,000 62 3,286,000 70
Dycam 1,245,000 32 1,399,000 30
FYI 177,000 5 - -
SSI 36,000 1 - -
</TABLE>
. Consolidated Operations. As detailed below, in January 1996, the Company
elected to wind down its hairstyle and beauty imaging and franchising
operations. The Company intends to focus its resources on its operating
subsidiaries, FYI and Dycam. After the wind-down is completed, SOV intends
to operate solely as a holding company. The Company believes that its
future revenues and growth will be derived from the operations of its
subsidiaries.
. Styles on Video. Revenues from SOV's sales for the nine months ended
September 30, 1995 decreased $902,000, or 27% compared to the nine months
ended September 30, 1994. The Company believes that the continued decline
in sales is due to the general lack of market interest in SOV's existing
products at their current price point, a decline in relations with Redken,
the reduction of marketing efforts, and the damage done to the Company's
reputation as a result of the halt in the trading of the Company's common
stock and the class action lawsuit brought against the Company. Sales of
Systems and software declined in 1995 compared to their 1994 levels. The
Company has decided to eliminate its SOV line of business. In January 1996,
the Company commenced the wind-down of this line of business and is
attempting to sell its hairstyle and beauty imaging system operations. The
Company anticipates that the SOV line of business will generate only a
minimal portion of the Company's revenues in 1996, and no revenues in later
years.
. Dycam. Dycam's revenues for the nine months ended September 30, 1995
decreased $154,000, or 11% compared to the nine months ended September 30,
1994. The decrease in revenue was primarily associated with the reduction
of license fees from Logitech, and the reduction in contract engineering
fees, net of an increase in camera sales. Revenues from camera sales were
$1,207,000 (97% of Dycam's revenue) in the nine months ended September 30,
1995 compared to $849,000 for the nine months ended September 30, 1994 (61%
of Dycam's revenues). Dycam believes that the increase in camera revenues
is attributable to the general emergence of the digital camera market as a
whole. Revenues from contract engineering were $21,000 (2% of Dycam's
revenues) in the nine months ended September 30, 1995 compared to $340,000
in the
17
<PAGE>
nine months ended September 30, 1994 (24% of Dycam's revenues). The
reduction in contract engineering revenues was due to the existence of
certain projects during the nine months ended September 30, 1994 which were
substantially completed by the end of 1994. Dycam believes that the pursuit
of contract engineering work presents a substantial opportunity for future
revenue growth and intends to devote a substantial portion of its resources
to this area. License fees under the agreement with Logitech accounted for
$8,000 in revenue in the nine months ended September 30, 1995 and $210,000
in the nine months ended September 30, 1994. Dycam's arrangement with
Logitech provided that Logitech would make a one-time royalty payment of
approximately $1,000,000 in 1993, and thereafter pay Dycam a .5% royalty fee
on future sales of the licensed product. Subsequent to December 31, 1994,
Logitech informed the Company that it had ceased to manufacture the camera
for which it held a license and as a consequence revenues from this license
will cease as soon as Logitech exhausts its current supplies of the subject
product. The Company believes that, beginning the first quarter of 1996, a
substantial portion of Dycam's revenues will be from revenues derived from
the sale of cameras to, and licensing revenue from, FYI. The core element
of the FYI digital imaging system is a specialized digital camera subsystem
engineered and produced by Dycam under an exclusive contract with FYI. In
addition to the sale of cameras to FYI, Dycam's arrangement with FYI
provides that, in exchange for certain development and maintenance services,
Dycam is entitled to a 7.5% royalty on all FYI sales.
. FYI. FYI's revenues were $177,000 for the nine months ended September 30,
1995 and represented 5% of the Company's total revenues. Since its first
revenues in March 1995, revenues have consistently grown each month as the
customer base has increased to over 50 hospital accounts by December 31,
1995. The Company has devoted significant marketing efforts and financial
resources to the development and growth of the FYI business and intends to
continue to devote substantial efforts and resources to FYI's growth. Based
on its growth in 1995, its competitively priced products, and its emphasis
on service, the Company believes that the FYI business will continue to grow
in 1996 and provide a significant portion of the Company's future
consolidated revenues.
. SSI. SSI's revenues are primarily derived from the sale of franchises. The
first SOV franchises were sold during the last quarter of 1994. SSI has not
sold any franchises since January 1995 and its Uniform Franchise Operating
Circular has not been updated. The Company has decided to eliminate and
commenced the wind-down of the SSI line of business. The Company
anticipates that the SSI line of business will generate only a minimal
portion of the Company's revenues in 1996, and no revenues in later years.
18
<PAGE>
Gross Profit
- ------------
The following table summarizes the Company's gross profit for the nine
months ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1994
-------------------------------- --------------------------------
Gross Profit as Gross Profit as
Percentage of Percentage of
Gross Profit Revenues Gross Profit Revenues
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Consolidated $1,787,000 47% $2,779,000 59%
SOV 1,274,000 53 1,778,000 54
Dycam 422,000 34 1,001,000 72
FYI 55,000 31 - -
SSI 36,000 100 - -
</TABLE>
. Styles on Video. The reduction in gross profit for the nine month period
ended September 30, 1995, compared to the nine month period ended September
30, 1994 was primarily due to write-offs of inventory in 1995. The Company
believes that the remainder of the variance in gross profit is due to
inaccuracies and inconsistent methodology in the cost accounting system and
shrinkage which were present in 1994. The Company did not detect these
inaccuracies until after the end of its 1994 fiscal year. The Company took
steps to correct the inaccuracies by performing quarterly physical inventory
counts, as opposed to previously performed annual counts, and standardizing
its cost accounting methodology in the first quarter of 1995. Improved
purchasing, requisition and tracking procedures were implemented and
standardized in the first quarter of 1995 with the change in senior
management and key accounting personnel. In addition, in June 1995,
physical security over inventories was improved at the Company's new
facilities.
. Dycam. Gross profit decreased for the nine month period ended September 30,
1995 compared to the nine month period ended September 30, 1994 primarily as
a result of the increase in the percentage of revenue derived from camera
sales. Such sales have a lower margin than sales of supporting software,
licenses, and custom contract engineering. Moreover, Dycam lowered its
average camera sales prices and incurred high start-up costs in material and
labor associated with initial shipments of new products, all of which
adversely affected Dycam's gross profit.
. FYI. FYI recognized its first sales in March 1995. FYI's gross profit is
expected to increase as FYI emerges from its start-up phase of operations.
. SSI. There are no significant direct costs associated with the sale of
franchises.
19
<PAGE>
Selling, General and Administrative
- -----------------------------------
The following table summarizes the Company's selling, general and
administrative expenses for the nine months ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1994
------------------------------ ----------------------------
Percentage of Percentage of
Expenses Revenues Expenses Revenues
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Consolidated $5,756,000 150% $5,211,000 111%
SOV 2,576,000 108 4,385,000 133
Dycam 897,000 72 528,000 38
FYI 1,895,000 1,071 298,000 -
SSI 388,000 1,078 - -
</TABLE>
. Styles on Video. Selling, general and administrative expenses for the nine
months ended September 30, 1995 decreased $1,809,000, or 41%, compared to
the nine months ended September 30, 1994, and represented 45% of the
Company's total selling, general and administrative expenses. Salaries and
benefits decreased $213,000, or 16%, to $1,087,000 for the nine months ended
September 30, 1995 compared to $1,300,000 for the nine months ended
September 30, 1994 due to a decrease in the average number of employees at
all levels in all departments. Marketing and advertising decreased
$376,000, or 72%, to $143,000 in the nine months ended September 30, 1995
compared to $519,000 for the nine months ended September 30, 1994 due to
cost reduction efforts. Bad debt expense decreased $1,263,000 to zero in
the nine months ended September 30, 1995 compared to the nine months ended
September 30, 1994 as the result of large reserves required in the nine
months ended September 30, 1994 that did not recur in the nine months ended
September 30, 1995. Legal expenses increased $164,000, or 95%, to $337,000
for the nine months ended September 30, 1995 compared to $173,000 for the
nine months ended September 30, 1994 due to costs related to increased legal
matters.
. In January 1996, the Company decided to discontinue the SOV line of
business. During the wind-down of the SOV line of business, selling,
general and administrative expenses related to such operations will continue
to exceed the gross profit derived therefrom. The Company intends to reduce
SOV's expenses to a minimal level consistent with those of a holding
company. In furtherance of this goal, in January 1996 SOV made significant
additional reductions in its workforce, and ultimately plans to eliminate
the majority of its employees associated with the SOV line of business.
. Dycam. Selling, general and administrative expenses for the nine months
ended September 30, 1995 increased of $369,000, or 70%, from the nine months
ended September 30, 1994 and represented 16% of the Company's total selling,
general and administrative expenses. The increase resulted from increased
sales and marketing expenditures incurred in connection with Dycam's attempt
to penetrate new markets, and an increase in Dycam's employee base. Other
increases include increased insurance premiums upon renewal of a D&O policy,
and rent and occupancy expenses due to the move to a new facility.
20
<PAGE>
. FYI. Selling, general and administrative expenses increased $1,597,000, or
536% from the nine months ended September 30, 1994 and represented 33% of
the Company's total selling, general and administrative expenses. Salaries
and benefits for the nine months ended September 30, 1995 were $1,089,000
compared to $163,000 for the nine months ended September 30, 1994. Salaries
and benefits increased due to the addition of staff to accommodate growth.
FYI continued to add personnel in 1995 and had 39 full-time and 15 part-time
employees at December 31, 1995. FYI intends to continue to add personnel in
1996 based on projected growth. Marketing and travel costs were $350,000 for
the nine months ended September 30, 1995 compared to $16,000 for the nine
months ended September 30, 1994. High levels of marketing and travel costs
are expected to continue for the foreseeable future as FYI introduces itself
to the marketplace and builds and operates its business. Together salaries
and benefits and marketing and travel costs accounted for 76% of total
general and administrative expenses incurred by FYI for the nine months
ended September 30, 1995.
. SSI. Selling, general and administrative expenses of SSI for the nine
months ended September 30, 1995 represented 7% of the Company's total
selling, general and administrative expenses. Costs primarily included
salaries of $132,000, legal and professional expenses of $36,000,
advertising and marketing expenses of $122,000, and travel of $78,000
associated with the franchising effort. The Company took steps towards the
reduction of SSI's expenditures in 1995. As of December 31, 1995, direct
employees at SSI and marketing costs were reduced to zero. In January 1996,
the Company decided to eliminate and commenced the wind-down of the SSI line
of business.
Research and Development
- ------------------------
Consolidated research and development expenses for the nine months ended
September 30, 1995 were $704,000 (18% of consolidated revenues), an increase of
$317,000, or 82%, as compared to $387,000 (8% of consolidated revenues) for the
nine months ended September 30, 1994.
. Styles on Video. Research and development expenses for the nine months
ended September 30, 1995 were $56,000 (2% of SOV's revenues), an increase of
$31,000, or 124%, compared to $25,000 (less than 1% of SOV's revenues) for
the nine months ended September 30, 1994, and represented 8% of the
Company's research and development expenses. These costs related primarily
to the development of the Electric Hair System, a hairstyle and beauty
imaging system. SOV's product development activities ceased in January 1996
with the Company's decision to eliminate the SOV line of business.
. Dycam. Research and development expenses for the nine months ended
September 30, 1995 were $579,000 (47% of Dycam's revenues), an increase of
$263,000, or 83%, compared to $316,000 (23% of Dycam's revenues) for the
nine months ended September 30, 1994, and represented 82% of the Company's
total research and development expenses. Dycam's research and development
expenses were attributable to the addition of new employees dedicated to new
product development activities. Dycam believes that continuing research and
development is essential to maintaining its competitive position, and
expects to continue to expend similar levels of funds in this area.
. FYI. Research and development expenses for the nine months ended September
30, 1995 were $69,000 (39% of FYI's revenues), an increase of $23,000 or
50%, compared to $46,000 for the nine months ended September 30, 1994, and
represented 10% of the Company's total research and
21
<PAGE>
development expenses. FYI's research and development activities were
carried out in conjunction with related activities at Dycam. FYI's costs
were attributable to FYI's share of new product development activities
associated with the design and manufacture of the prototype digital camera
and system for the photography of newborn babies at hospitals. FYI believes
that continuing research and development is essential to maintaining its
long-term competitive position, and expects to continue to expend
significant funds in this area.
Depreciation and Amortization
- -----------------------------
The Company's depreciation and amortization expenses consist primarily of
the amortization of goodwill which resulted from the Company's acquisition of
Dycam. Such goodwill is being amortized over a twenty year term at the rate of
$23,000 per month. Depreciation and amortization expense for the nine months
ended September 30, 1995 was $301,000, an increase of $69,000 from $232,000, or
30%, for the nine months ended September 30, 1994. The increase resulted
primarily from increased goodwill amortization costs, and depreciation of fixed
assets acquired by SOV, Dycam and FYI during the nine months ended September 30,
1995.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1995, the Company relied
primarily upon cash on hand, cash received from sales, and intercompany
advances, net of partial repayment of loans from stockholders to finance its
cash operating losses and the expansion of FYI. FYI's capital expenditures were
financed in part by capital leases.
At September 30, 1995, the Company had consolidated cash and cash
equivalents of $1,692,000, a decrease of $2,669,000 from $4,361,000 at December
31, 1994. The Company's working capital at September 30, 1995 was $247,000, a
decrease of $5,010,000 when compared to $5,257,000 at December 31, 1994.
Working capital reduction was primarily the result of a reduction in cash used
in operations. The current ratio at September 30, 1995 was 1.1 to 1 compared to
3.1 to 1 at December 31, 1994.
. Styles on Video. SOV's cash and cash equivalents at September 30, 1995 were
$43,000, down $536,000 from $579,000 at December 31, 1994. Accounts receivable
decreased $152,000, primarily due to reserves established for potentially
uncollectible balances. Income taxes receivable decreased $929,000 due to SOV's
receipt of income tax refunds. Inventories decreased $411,000 due to reductions
of product on hand to improve cash flow, sales of product, and write-offs and
disposals of obsolete inventory. Loan receivable from stockholder decreased
$450,000 due to repayment. Prepaid expenses increased $117,000 primarily due to
prepayments and recording of the annual D&O premium with a corresponding offset
of the unpaid balance to accrued expenses. Accounts payable increased $324,000
due to measures taken to preserve limited cash. Accrued expenses increased
$94,000 due to the recording of the annual D&O insurance premium liability.
Advance from stockholder decreased $152,000 due to partial repayment. SOV's
working capital at September 30, 1995 was ($1,546,000) compared to $1,164,000 at
December 31, 1994. The current ratio was .4:1 at September 30, 1995 compared to
1.6:1 at December 31, 1994. The working capital reduction was primarily the
result of a decrease in cash which was used in operations to fund losses, net of
intercompany advances, the receipt of income tax refunds, and net stockholder
advances. SOV continued to use cash to fund cash operating losses throughout
1995.
22
<PAGE>
In January 1995, Dycam made an additional secured loan of $500,000 to SOV.
This advance together with an earlier advance of $500,000 was made pursuant to a
secured promissory note which was originally due in September 1995 and later
extended until December 1998. The purpose of the loan was to enable SOV to
continue funding FYI, and thus the development and manufacture of the FYI
digital camera by FYI and Dycam. During the nine months ended September 30,
1995, SOV used cash to fund continued losses and advances to SSI and FYI. In
November 1995, total advances to FYI outstanding of $2,700,000 were contributed
by the Company to FYI capital.
In September 1995, SOV and FYI received bridge financing of $300,000 from
MTC, pursuant to a short-term financing agreement (the "Bridge Financing").
Additional advances of $75,000 were made pursuant to the Bridge Financing in
October 1995. In November 1995, SOV, FYI and IDI entered into the Agreement.
Pursuant to the Agreement, IDI invested $3,000,000 in SOV and FYI. In
consideration for such investment, SOV and FYI issued 10% secured notes in the
original principal amount of $2,950,000 with interest payable monthly, and
quarterly principal payments of $500,000 commencing March 31, 1997. In
addition, SOV issued $50,000 worth of 10% Senior Series A Convertible Preferred
Stock, $100 par value. Moreover, the Agreement requires the Company to issue
sufficient warrants so that when they are exercised, IDI would control 40% of
the Company's common stock on a fully diluted basis. FYI received net proceeds
of $2,307,000 from the $3,000,000 financing, after repayment of the Bridge
Financing, its associated interest, and transaction fees. Pursuant to the
Agreement, as amended in March 1996, funds totaling $750,000 are available to
SOV, of which approximately $550,000 had been advanced to SOV by FYI as of March
15, 1996. The remaining funds are to be used for the furtherance of FYI's
expansion. At December 31, 1995, the Company was not in compliance with certain
of the Agreement's financial covenants, however, the Company has obtained a
waiver of these violations from IDI. The Company may require additional
covenant relief in the future. There can be no assurance that IDI will grant a
waiver for any future noncompliance. If defaults occur in future periods, and
necessary waivers are not obtained, and the Company's assets securing the
Agreement are taken in satisfaction of the amounts due pursuant to the
Agreement, and no excess remains, funds will not be available to meet SOV's
obligations, including, without limitation, the repayment of a $1,000,000 note
owed to Dycam. For additional information, see "Notes to Consolidated Financial
Statements -- Subsequent Events."
In 1995, SOV entered into a settlement of Class Action and Derivative
lawsuits, whereby SOV agreed to deliver to the plaintiff class warrants to
purchase 750,000 shares of the Company's Common Stock and a $250,000 promissory
note payable in three equal semi-annual installments commencing July 1996. In
addition, SOV anticipates receiving refunds of previously paid income taxes of
approximately $340,000 in 1996.
On April 5, 1994, SOV purchased 80% of the outstanding stock of FYI, a newly
formed corporation which engages in the newborn baby photography business, for
cash consideration of $100,000. The 20% of FYI stock not purchased by SOV is
currently held by FYI's President. In November 1995, FYI's President entered
into negotiations with SOV relating to the exchange of his entire interest in
FYI for consideration consisting of shares of SOV's common stock. No assurance
can be made, however, that such negotiations will be successfully concluded.
In January 1996, the Company decided to discontinue SOV's hairstyle and
beauty imaging operations. During the wind-down of these operations, the
Company anticipates that SOV's operating activities will continue to use cash
and that its minimal cash balance will continue to decline. Since the last
quarter of 1995, the Company has successfully negotiated significant discounts
of certain of its accounts payable balances, and intends to negotiate a
reduction in its remaining accounts payable. No
23
<PAGE>
guarantee, however, can be made that the Company will be able to successfully
negotiate reductions on its remaining outstanding accounts payable.
In March 1996, the Company entered into negotiations with IDI for additional
financing. No assurances can be given that the financing will occur or will be
sufficient to cover the Company's operating shortfalls. In addition, the
Company believes that the net cash impact of a settlement of the K&A gain
contingency and the Durian loss contingency, more fully described in the Notes
to Consolidated Financial Statements, will be positive. No assurance, however,
can be given that a net positive result will be achieved. If (a) a net negative
result is achieved with respect to the K&A and Durian matters, (b) management
cannot achieve its operating plan because of sales shortfalls or other
unfavorable events, or (c) the financing under negotiation is not consummated or
proves insufficient to cover the shortfalls, SOV may find it necessary to
further reduce its levels of expenditures or undertake other such actions as may
be appropriate, and may be otherwise unable to achieve its goals or continue its
operations.
. Dycam. At September 30, 1995, Dycam had cash and short-term investments on
hand of $1,573,000, down $2,142,000 from $3,715,000 at December 31, 1994. The
decrease was primarily a result of cash operating losses, an increase in notes
receivable from SOV of $500,000, an increase in inventories to support the FYI
digital camera project, and increases in accounts receivable and in fixed
assets, and a decrease in an intercompany payable to SOV. Current liabilities
at September 30, 1995 decreased by $219,000 from December 31, 1994 to $253,000,
primarily as a result of a $34,000 decrease in accounts payable and a $129,000
decrease of an intercompany payable that was repaid to SOV. Intercompany
payables are eliminated from the Consolidated Balance Sheets upon consolidation.
Dycam's working capital at September 30, 1995 was $3,591,000, a decrease of
$849,000 when compared to $4,440,000 at December 31, 1994. The working capital
reduction was primarily the result of cash operating losses, the repayment of
current liabilities and advances to SOV of $500,000. The current ratio at
September 30, 1995 was 15.2 to 1 compared to 10.4 to 1 at December 31, 1994.
Since the closing of its rights offering in 1994, Dycam has expended a
substantial portion of the $4,976,000 raised, including advancing $1,000,000 to
SOV pursuant to a secured loan originally due in September 1995 and later
extended to December 1998. The purpose of the advance was to provide funds for
the operation and expansion of FYI. All interest payments pursuant to the note
have been made in a timely fashion by SOV. If the Company defaults on the
Agreement described above, and IDI exercises its rights, Dycam may not be repaid
and will be entitled to receive back the 1,916,667 shares of Dycam's common
stock owned by SOV.
Dycam believes that its existing cash balances and cash flow from operations
will be sufficient to meet its cash requirements through at least 12 months
following March 29, 1996. In addition, to the extent Dycam experiences growth
in the future, or its cashflow from operations is less than anticipated, Dycam
may be required to obtain additional sources of cash, or scale back its
operating and research and development expenses to a level sustainable under
such situations.
. FYI. At September 30, 1995, FYI had cash and short-term investments on hand
of $75,000. During the nine months ended September 30, 1995, FYI relied
primarily upon advances from SOV and revenues from sales of $177,000 to finance
its operations and expansion. In November 1995, total advances from SOV to FYI
of $2,700,000 were contributed to FYI capital. Additionally, certain capital
expenditures have been financed by capital leases which have a three year term
and provide for the purchase of the equipment at the end of the lease term.
FYI's revenues commenced in March 1995 and
24
<PAGE>
were at a level consistent with the Company's expectations of revenues during
FYI's start-up phase. FYI's revenues are expected to contribute an increasing
amount of cash to fund future operations.
Capital expenditures related primarily to the acquisition of equipment for
FYI's production facility and office. FYI financed non-related party equipment
purchases of $96,000, $40,000 and $43,000 in December 1994, June 1995 and
October 1995, respectively, with capital lease obligations. FYI's working
capital at September 30, 1995 was $(550,000). The current ratio at September
30, 1995 was .3:1 compared to .4:1 at September 30, 1994. FYI's current ratio
is a result of the planned timing of requests for advances from SOV on an as-
needed basis.
As described above, in September 1995, SOV and FYI received financing of
$300,000 from MTC, pursuant to the Bridge Financing. Additional advances of
$75,000 were made pursuant to the Bridge Financing in October 1995. In November
1995, SOV, FYI and IDI entered into the Agreement. FYI received net proceeds of
$2,307,000 from the $3,000,000 financing, after repayment of the Bridge
Financing, its associated interest, and transaction fees. Pursuant to the
transaction, as amended in March 1996, up to $750,000 of the funds are available
to SOV, of which approximately $550,000 had been advanced to SOV as of March 15,
1996. As discussed above, the Company was not in compliance with certain of the
IDI Agreement's financial covenants at December 31, 1995, however, the Company
has obtained a waiver of these violations from IDI.
FYI expects that working capital requirements and capital additions in
fiscal 1996 will continue to be funded through a combination of cash on hand,
cash receipts from product sales, and capital leases, and additional financing
from IDI which is currently being negotiated. FYI no longer relies on or
receives advances from SOV or Dycam to fund operations. FYI anticipates that
its operating and research and development activities in fiscal 1996 will
continue to use cash. To the extent FYI experiences unplanned levels of growth
in the future, or if cash flow from operations is less than anticipated, or if
the financing under negotiation is not consummated or proves insufficient to
cover the shortfalls, FYI may be required to obtain additional financing, scale
back its marketing and research and development activities to a level
sustainable under such circumstances, or undertake other such actions as may be
appropriate, and may be otherwise unable to achieve its goals or continue its
operations.
. SSI. At September 30, 1995, SSI had cash and short term investments on hand
of $1,000, its only current asset. From April 1994 (inception) to December 31,
1994, SSI relied primarily upon advances from SOV to finance its operations and
roll out, although SSI had some limited cash receipts from the sale of
franchises.
SSI's working capital at September 30, 1995 was ($29,000). The current
ratio was .03: 1. For the nine months ended September 30, 1995, SSI primarily
relied on advances of approximately $162,000 from SOV and franchise fee income
of $36,000 to fund cash operating losses.
SSI continued to use cash in operations during the last quarter of 1995,
primarily as a result of continued cash operating losses. SSI stopped the sale
of franchises in January 1995 and SSI is no longer marketing the sale of
franchises or updating its Uniform Franchising Offering Circular. SSI no longer
has any employees, and any corporate administrative matters are handled by SOV
on behalf of SSI. In January 1996, the Company decided to eliminate and
commenced the wind-down of the SSI line of business and expects cash provided
and used by SSI to comprise a minimal portion of the Company's cash flow in
1996, and none in later years.
25
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings - Incorporated by reference from Styles on Video,
Inc.'s Reports Form 10-KSB for the fiscal years ended December 31, 1995
and 1994 filed with the Commission on March 24, 1997 and March 29,
1996, respectively.
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders - None
Item 5 Other Information- None
Item 6 Exhibits and Reports on Form 8-K
Exhibit No. Document
- ----------- --------
27.1 Financial Data Schedule
26
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant,
Styles on Video, Inc., caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ K. Eugene Shutler Chairman of the Board
--------------------- and Chief Executive March 21, 1997
K. Eugene Shutler Officer (Principal
Executive Officer)
/s/ Nancy H. Galgas Chief Financial Officer
- ---------------------- (Principal Accounting March 21, 1997
Nancy H. Galgas Officer and Secretary)
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,692,000
<SECURITIES> 0
<RECEIVABLES> 702,000
<ALLOWANCES> 386,000
<INVENTORY> 1,038,000
<CURRENT-ASSETS> 3,708,000
<PP&E> 812,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,743,000
<CURRENT-LIABILITIES> 3,461,000
<BONDS> 239,000
0
0
<COMMON> 4,000
<OTHER-SE> 4,842,000
<TOTAL-LIABILITY-AND-EQUITY> 9,743,000
<SALES> 3,842,000
<TOTAL-REVENUES> 3,842,000
<CGS> 2,055,000
<TOTAL-COSTS> 2,055,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (113,000)
<INCOME-PRETAX> (4,878,000)
<INCOME-TAX> 4,000
<INCOME-CONTINUING> (4,608,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,608,000)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> 0
</TABLE>
