<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 MARCH 31, 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]
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STYLES ON VIDEO, INC.
RESTATED CONSOLIDATED BALANCE SHEETS (NOTE (1))
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,813,000 $ 4,361,000
Accounts receivable, less allowance of $431,000 and
$510,000 at March 31, 1995 and December 31, 1994,
respectively 190,000 184,000
Loan receivable from stockholder 330,000 450,000
Income taxes receivable 1,194,000 1,256,000
Inventories 1,124,000 1,215,000
Prepaid expenses and other current assets 235,000 325,000
----------- -----------
Total current assets 5,886,000 7,791,000
Property and equipment, net 644,000 614,000
Long-term receivables, less allowance of $577,000
at March 31, 1995 and December 31, 1994 40,000 44,000
Goodwill, net of accumulated amortization of $318,000
and $249,000 at March 31, 1995 and December 31,
1994, respectively 5,236,000 5,305,000
Other assets 102,000 49,000
----------- -----------
Total assets $11,908,000 $13,803,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,309,000 $ 1,192,000
Accrued expenses 290,000 274,000
Customer advances 868,000 868,000
Advance from stockholder 50,000 200,000
Current portion of long-term obligations 29,000 -
----------- -----------
Total current liabilities 2,546,000 2,534,000
Note payable 250,000 250,000
Other long-term liabilities 62,000 94,000
Minority interests in consolidated subsidiaries 1,429,000 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 March 31, 1995 and December 31, 1994 4,000 4,000
Additional paid-in capital 16,137,000 16,137,000
Accumulated deficit (8,520,000) (6,687,000)
----------- -----------
Total stockholder's equity 7,621,000 9,454,000
----------- -----------
Total liabilities and stockholder's equity $11,908,000 $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 months ended March 31, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1995 1994
------------ ------------
Revenues
<S> <C> <C>
Systems and related software sales $ 987,000 $ 1,052,000
Camera sales 405,000 334,000
Other revenues 47,000 253,000
------------ ------------
Total revenues 1,439,000 1,639,000
Cost of revenues, excluding depreciation and amortization
Cost of systems and software sold 592,000 489,000
Cost of camera sales 347,000 157,000
Other costs 4,000 42,000
------------ ------------
Total cost of revenues 943,000 688,000
------------ ------------
Gross profit 496,000 951,000
Operating expenses
Selling, general and administrative 2,066,000 2,110,000
Research and development 204,000 106,000
Depreciation and amortization 98,000 52,000
------------ ------------
Total operating expenses 2,368,000 2,268,000
------------ ------------
Loss from operations (1,872,000) (1,317,000)
Interest income (expense), net (3,000) 20,000
Minority interests in net losses of consolidated subsidiaries 42,000 -
------------ ------------
Loss before income taxes (1,833,000) (1,297,000)
Provision for income taxes - 69,000
------------ ------------
Net loss $(1,833,000) $(1,366,000)
============ ============
Net loss per common share $(.41) $(.39)
============ ============
Weighted average shares of common stock outstanding 4,505,000 3,521,000
============ ============
</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 three months ended March 31, 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
========= ====== =========== =========== ===========
</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>
Three months ended
---------------------------------
March 31, 1995 March 31, 1994
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,833,000) $(1,366,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 98,000 52,000
Provision for bad debts - 792,000
Minority interest in consolidated subsidiaries (42,000) -
Changes in operating assets and liabilities:
Accounts receivable (6,000) (72,000)
Income taxes receivable 62,000 (169,000)
Inventories 91,000 (12,000)
Prepaid expenses and other current assets 90,000 134,000
Long-term receivables and other assets (49,000) 37,000
Accounts payable and accrued expenses 133,000 231,000
Customer advances - 105,000
Income taxes payable - 69,000
----------- -----------
Net cash used in operating activities (1,456,000) (199,000)
Cash flows from investing activities:
Purchase of property and equipment (59,000) (48,000)
Acquisition of business, net of cash acquired - 165,000
----------- -----------
Net cash provided by (used in) investing activities (59,000) 117,000
Cash flows from financing activities:
Repayment of loan receivable from stockholder 120,000 -
Repayment of advance from stockholder (150,000) -
Payment on capital lease obligation (3,000) (50,000)
Proceeds from issuance of common stock by subsidiary - 137,000
Net proceeds received from common stock issuances upon
exercise of stock options - 587,000
----------- -----------
Net cash provided by (used in) financing activities (33,000) 674,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,548,000) 592,000
Cash and cash equivalents, beginning 4,361,000 2,107,000
----------- -----------
Cash and cash equivalents, ending $ 2,813,000 $ 2,699,000
=========== ===========
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid during the year for:
Income taxes $ - $ 165,000
Interest $ 3,000 $ -
</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
March 31, 1995
(Unaudited)
(1) General
(a) THIS AMENDMENT IS REQUIRED TO CORRECT AN ACCOUNTING ERROR CONTAINED IN
PREVIOUSLY REPORTED OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED MARCH 31,
1995. THE ACCOMPANYING UNAUDITED RESTATED CONSOLIDATED FINANCIAL STATEMENTS OF
STYLES ON VIDEO, INC. ("SOV") AND SUBSIDIARIES (COLLECTIVELY, THE "COMPANY") FOR
THE THREE MONTH PERIOD ENDED MARCH 31, 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 MONTHS
ENDED MARCH 31, 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 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 MONTHS ENDED MARCH 31, 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
MARCH 31, 1994, AND FOR THE THREE 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 JUNE 30, 1995
AND SEPTEMBER 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 March 31, 1995 quarterly operating results have been restated for
the following item:
<TABLE>
<S> <C>
Net loss for the three months ended March 31, 1995, as $(1,566,000)
previously reported
Restatement adjustment:
Adjust minority interest ( 267,000)
-----------
Net loss for the three months ended March 31, 1995, as restated $(1,833,000)
===========
</TABLE>
6
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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.
(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 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.
7
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
(Unaudited)
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 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.
8
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
(Unaudited)
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 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
9
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
(Unaudited)
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 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 JUNE 30, 1995 AND SEPTEMBER 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 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, AND THE COMPANY'S REPORTS ON FORM 10-
QSB/A FOR THE QUARTERLY PERIODS ENDED JUNE 30, 1995 AND SEPTEMBER 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 March 31, 1995 compared to the three months ended March 31,
- ------------------------------------------------------------------------------
1994 Revenues
- -------------
The following table summarizes the Company's revenues for the three months
ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
------------------ ------------------
Percentage of Percentage of
Company Company
Revenues Revenues Revenues Revenues
------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Consolidated $1,439,000 100% $1,639,000 100%
SOV 1,004,000 70 1,079,000 66
Dycam 408,000 28 560,000 34
FYI 4,000 - - -
SSI 23,000 2 - -
</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 imaging systems ("Systems"),
software, and related products for the three months ended March 31, 1995
decreased $75,000, or 7 %, compared to the three months ended March 31,
1994. The overall decrease in sales was the result of a decline in sales of
software and support products, net of an increase in Systems sales. The
total number of Systems sold in the three months ended March 31, 1995
increased solely due to the sale of 29 Redken Systems in March 1995
following the introduction of the Redken System at a trade show. The number
of SOV Video Maker Systems sold decreased 31 % for the three months ended
March 31, 1995 compared to the three months ended March 31, 1994 as a result
of the Company's introduction of the Redken System which competes in the
Redken salon market with the SOV Video Maker System, the general lack of
market interest in SOV's existing products at their current price point, the
reduction of marketing efforts, 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 beauty and hairstyle imaging 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 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 March 31, 1995 decreased $152,000, or 27%, compared to the three
months ended March 31, 1994. The decrease in revenue was primarily
associated with the reduction of license fees. License fees under an
agreement with Logitech accounted for $3,000 in revenue for the three months
ended March 31, 1995 and $199,000 for the three months ended March 31, 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. Future royalties from Logitech
will be minimal and will terminate as soon as Logitech exhausts its current
inventory of the licensed product. Revenues from camera sales were $405,000
(99% of Dycam's revenues) for the three months ended March 31, 1995 compared
to $334,000 (60% of Dycam's revenues) for the first three months of 1994.
Dycam believes that the increase in camera revenues is attributed to the
general emergence of the digital camera market as a whole. Although Dycam
derived no revenues from contract engineering work during the three months
ended March 31, 1995, Dycam believes that the pursuit of this type of work
presents a substantial opportunity for revenue growth in future periods and
intends to devote a substantial portion of its resources to this area. The
Company believes that, beginning the first quarter of 1996, a substantial
portion of Dycam's revenues will be derived from the sales 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
12
<PAGE>
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 and has
commenced the wind-down of the SSI line of business. The Company
anticipates that the SSI line of business will generate 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
March 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
------------------ ------------------
Gross Profit as Gross Profit as
Percentage of Percentage of
Gross Profit Revenues Gross Profit Revenues
------------------ --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Consolidated $496,000 34% $951,000 58%
SOV 412,000 41 590,000 55
Dycam 61,000 15 361,000 64
FYI - - - -
SSI 23,000 100 - -
</TABLE>
. Styles on Video. SOV's gross profit decreased for the three month period
ended March 31, 1995 compared to the three month period ended March 31, 1994
primarily due to inventory write-offs during the three months ended March
31, 1995. The Company believes that variance in gross profit was also 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
13
<PAGE>
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 March 31, 1995 decreased
compared to the three months ended March 31, 1994 as a result of a greater
percentage of Dycam's overall revenue being 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 experienced high start-up costs in material and labor
associated with the initial shipments of new products, including the FYI
digital camera system, all of which adversely affected Dycam's gross profit.
. FYI. FYI recognized its first sales in March 1, 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 March 31, 1995
and 1994:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
------------------ ------------------
Percentage of Percentage of
Expenses Revenues Expenses Revenues
------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Consolidated $2,066,000 144% $2,110,000 129%
SOV 906,000 90 2,025,000 188
Dycam 330,000 81 85,000 15
FYI 534,000 13,350 - -
SSI 296,000 1,287 - -
</TABLE>
. Styles on Video. Selling, general and administrative expenses of SOV for
the three months ended March 31, 1995 decreased $1,119,000, or 55%, from the
three months ended March 31, 1994, and represented 44% of the Company's
total selling, general and administrative expenses. Salaries and benefits
increased $46,000 for the three months ended March 31, 1995 compared to the
three months ended March 31, 1994 due to an increase in the number of
employees at all levels in all departments. However, SOV's personnel was
reduced by 27 persons (50%) in the three months ended March 31, 1995 when
compared to the immediately preceding quarter. Marketing and advertising
decreased $41,000 compared to the three months ended March 31, 1994 due to
steps taken to reduce costs including reducing the design and number of
14
<PAGE>
advertisements placed and trade shows attended. Bad debt expense decreased
$792,000 in the three months ended March 31, 1995 compared to the three
months ended March 31, 1994. The Company's high level of bad debt expense
for the first quarter of 1994 was primarily due to the establishment of
nonrecurring reserves for potentially uncollectible receivables, including a
reserve for a $450,000 note receivable from Image Marketing SV, a
Corporation organized under the laws of Belgium. SOV made efforts to reduce
selling, general and administrative expenses throughout 1995. The total
personnel employed by SOV was reduced 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 further cut backs
on 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 profit 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 March 31, 1995 increased $245,000, or 288%, compared to the three
months ended March 31, 1994 and represented 16% of the Company's total
selling, general and administrative expenses. The increase resulted
primarily from increased sales and marketing expenditures in connection with
Dycam's efforts to penetrate new markets, an increase in Dycam's employee
base, including the employment of two high level executive officers during
the three months ended March 31, 1995, and increased administrative expenses
associated with Dycam's status as a public entity.
. FYI. Selling, general and administrative expenses for the three months
ended March 31, 1995 represented 26 % of the Company's total selling,
general and administrative expenses. FYI's general and administrative
expenses for the three months ended March 31, 1995 primarily included
salaries and benefits of $345,000, and travel and marketing costs of $76,000
associated with introducing the start-up company to the marketplace. FYI
continued to add personnel in 1995 to accommodate growth and had 39 full-
time and 15 part-time employees at December 31, 1995. FYI intends to
continue to add staff in 1996 based on projected growth. High levels of
travel and marketing costs continued through 1995 and are expected to
continue for the foreseeable future as FYI introduces itself to the
marketplace and builds and operates its business.
. SSI. Selling, general and administrative expenses of SSI for the three
months ended March 31, 1995 represented 14% of the Company's total selling,
general and administrative expenses. SSI's costs primarily include salaries
of $75,000, legal and professional fees of $46,000, marketing and
advertising of $75,000, and travel expenses of $79,000 associated with the
franchising effort. The Company took steps towards the reduction of SSI's
expenditures in 1995. As of December 1995, there are no direct employees at
SSI and marketing costs have been reduced to zero. In January 1996, the
Company decided to eliminate the SSI line of business.
15
<PAGE>
Research and Development
- ------------------------
Consolidated research and development expenses for the three months ended
March 31, 1995 were $204,000 (14% of consolidated revenues), an increase of
$98,000, or 92%, compared to $106,000 (6% of consolidated revenues) for the
three months ended March 31, 1994. The increase is primarily attributable to
Dycam.
. Styles on Video. SOV did not incur any research and development expenses
during the first quarter of 1995 compared to $4,000 for the first quarter of
1994. SOV incurred total research and development costs of approximately
$56,000 during 1995 related 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 March
31, 1995 were $199,000 (49% of Dycam's revenues), an increase of $97,000 or
95%, from $102,000 (18% of Dycam's revenues) for the three months ended
March 31, 1994 and represented 98% of the Company's total research and
development expenses. Dycam's research and development expenses are
attributable to the addition of employees dedicated to 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 three months ended March 31,
1995 were $5,000, and represented 2% of the Company's total research and
development expenses. FYI's research and development activities during the
three months ended March 31, 1995 were carried out in conjunction with
related activities at Dycam. FYI's research and development expenses for
the three months ended March 31, 1995 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.
. SSI. There were no research and development expenses associated with SSI's
operations.
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 three months
ended March 31, 1995 was $98,000, an increase of $46,000 from $52,000 for the
three months ended March 31, 1994. The increase resulted primarily from
increased goodwill amortization costs, and depreciation of fixed assets acquired
by SOV, Dycam and FYI during the three months ended March 31, 1995.
Liquidity and Capital Resources
- -------------------------------
During the three months ended March 31, 1995, the Company relied primarily
upon cash on hand, cash received from sales, intercompany advances, net of
partial repayment of loans from
16
<PAGE>
stockholders, and the receipt of an income tax refund of $62,000 to finance its
cash operating losses and the expansion of FYI. Additionally, FYI's capital
expenditures were financed in part by a capital lease.
At March 31, 1995, the Company had consolidated cash and cash equivalents of
$2,813,000, a decrease of $1,548,000 from $4,361,000 at December 31, 1994. The
Company's consolidated working capital was $3,340,000 at March 31, 1995, a
decrease of $1,917,000 compared to $5,257,000 at December 31, 1994. Working
capital reduction was primarily the result of cash used in operations. The
current ratio at March 31, 1995 was 2.3 to 1 compared to 3.1 to 1 at December
31, 1994.
. Styles on Video. SOV's cash and cash equivalents at March 31, 1995 were
$363,000, down $216,000 from $579,000 at December 31, 1994. Income taxes
receivable decreased $62,000 due to SOV's receipt of an income tax refund.
Inventories decreased $132,000 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 $120,000 due to repayment. Accounts
payable increased $104,000 due to measures taken to preserve limited cash.
Advance from stockholder decreased $150,000 due to partial repayment. SOV's
working capital at March 31, 1995 was $478,000, a decrease of $686,000 compared
to $1,164,000 at December 31, 1994. The working capital reduction was primarily
the result of cash used in operations, net of intercompany and related party
notes and advances. SOV continued to use cash to fund cash operating losses
throughout 1995.
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 three months ended March 31, 1995,
SOV used cash to fund continued losses and advances to SSI of $250,000 and to
FYI of $459,000. In November 1995, total advances to FYI outstanding of
$2,700,000, including $1,567,000 advanced in 1995, were contributed by the
Company to FYI capital.
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. 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 will 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, up to
$750,000 of the funds 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 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,
17
<PAGE>
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 Forever
Yours, Inc. ("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 these operating activities will continue to use cash
and that its cash balances in fiscal 1996 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 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 March 31, 1995, Dycam had cash and short-term investments on hand
of $2,439,000, down $1,276,000 from $3,715,000 at December 31, 1994. The
decrease primarily reflects cash operating losses for the period, an increase in
notes receivable from SOV of $500,000, an increase in inventories to support the
FYI digital camera project, increased accounts receivable, and an increase in
fixed assets.
Current liabilities at March 31, 1995 decreased by $130,000 from December 31,
1994 to $342,000 primarily as a result of 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
March 31, 1995 was $3,854,000, a decrease of $586,000 when compared to
$4,440,000 at December 31, 1994. The working capital reduction was primarily
the result of cash operating losses and the repayment of current liabilities.
The current ratio at March 31, 1995 was 12.3 to 1 compared to 10.4 to 1 at
December 31, 1994.
18
<PAGE>
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, 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 which secure the $1,000,000 note payable to Dycam.
Dycam believes that its existing cash balances and cash flow from operations
will be sufficient to meet its cash requirements through at least twelve months
following March 29, 1996. In addition, to the extent Dycam's 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 a situation.
. FYI. At March 31, 1995, FYI had cash and short-term investments on hand of
$10,000, down $56,000 from $66,000 at December 31, 1994. FYI relied primarily
upon advances of $459,000 from SOV in the three months ended March 31, 1995 to
finance its operations and expansion. In November 1995, the advances were
contributed to FYI's Capital by SOV. Additionally, certain capital expenditures
were financed in part by a capital lease which has a three year term and
provides for the purchase of the equipment at the end of the lease term. FYI
revenues commenced in March 1995 and were $4,000 for that month, consistent with
the Company's expectations of revenues during FYI's start-up phase.
The decrease in cash for the three months ended March 31, 1995 primarily
reflects cash losses for the period, net of advances from SOV, capital
expenditures, and intangibles related to patent and trademark activity. FYI
financed non-related party equipment purchases of $96,000, $40,000 and $43,000,
respectively, in December 1994, June 1995 and October 1995 with capital lease
obligations. FYI's working capital at March 31, 1995 was $12,000. The current
ratio at March 31, 1995 was 1.06 to 1, compared to 1.98 to 1 at December 31,
1994.
As described above, in September 1995, SOV and FYI received bridge 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
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. FYI believes that it will reduce its cash shortfalls each
month as revenues increase with anticipated growth. It is not possible to
predict the actual growth rate. 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
19
<PAGE>
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 March 31, 1995, SSI had cash and short term investments on hand of
$1,000, its only current asset. SSI's working capital at March 31, 1995 was
$(4,000). The current ratio at March 31, 1995 was .2 to 1, compared to 2.83 to
1 at December 31, 1994. For the three months ended March 31, 1995, SSI
primarily relied on advances of approximately $250,000 from SOV and franchise
income of $23,000 to fund cash operating losses.
SSI continued to use cash in operations during 1995, primarily as a result
of continued cash operating losses. SSI stopped the sale of franchises in
January 1995 and is no longer marketing the sale of franchises or updating its
Uniform Franchising Offering Circular. As of December 31, 1995, SSI no longer
has any employees, and all corporate administrative matters are handled by SOV
on behalf of SSI. In January 1996, the Company decided to eliminate the SSI
line of business and expects cash provided and used by SSI to comprise only a
minimal portion of the Company's cash flow in 1996, and none in later years.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings - (1)
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
<TABLE>
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by reference from Styles on Video, Inc.'s Annual Reports on
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.
21
<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 Officer March 21, 1997
K. Eugene Shutler (Principal Executive Officer)
/s/ Nancy H. Galgas Chief Financial Officer
- ---------------------- (Principal Accounting Officer March 21, 1997
Nancy H. Galgas and Secretary)
22
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 2,813,000
<SECURITIES> 0
<RECEIVABLES> 621,000
<ALLOWANCES> 431,000
<INVENTORY> 1,124,000
<CURRENT-ASSETS> 5,886,000
<PP&E> 644,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,908,000
<CURRENT-LIABILITIES> 2,546,000
<BONDS> 312,000
0
0
<COMMON> 4,000
<OTHER-SE> 7,617,000
<TOTAL-LIABILITY-AND-EQUITY> 11,908,000
<SALES> 1,439,000
<TOTAL-REVENUES> 1,439,000
<CGS> 943,000
<TOTAL-COSTS> 943,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> (1,875,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,833,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,833,000)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> 0
</TABLE>
