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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ______________
Commission File Number: 1-11836
STYLES ON VIDEO, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 95-4389082
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
667 RANCHO CONEJO BOULEVARD, NEWBURY PARK, CALIFORNIA 91320
(Address of Principal Executive Offices) (Zip Code)
(805) 375-0996
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on which Registered
COMMON STOCK NONE
Securities registered under Section 12(g) of the Exchange Act:
NONE
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 .
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Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]
Issuer's revenues for its year ended December 31, 1996 were $2,614,000.
At March 27, 1997, the day immediately preceding the filing of the
Registrant's Report on Form 10-KSB for the year ended December 31, 1996, there
were outstanding 8,852,759 shares of the Common Stock of Registrant of which
4,359,332 shares were held by non-affiliates. Trading of the Registrant's
Common Stock on the American Stock Exchange was halted on December 27, 1994 and
has not resumed. Consequently, it is not possible to determine the value of
shares held by non-affiliates of the Registrant. For purposes of this
computation, it has been assumed that the shares beneficially held by directors
and officers of the Registrant were "held by affiliates"; this assumption is not
to be deemed to be an admission by such persons that they are affiliates of the
Registrant.
Transitional Small Business Disclosure Format? Yes No X .
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Styles on Video, Inc. ("SOV") and its subsidiaries (collectively, the
"Company") currently produce and distribute color digital cameras together with
related software and support products and services, and operate a hospital
newborn baby portrait service. Historically, SOV has been known primarily for
the production and distribution of turnkey hairstyle and beauty-related computer
imaging systems.
The Company was incorporated in May 1992 as a wholly-owned subsidiary of New
Image Industries, Inc. ("New Image"). From January 1, 1992 until the
incorporation of the Company on May 20, 1992, the Company's business was
conducted by New Image. This business consisted primarily of product
development activities, the development of a marketing strategy for the SOV
Video-Maker System, a turnkey haircare computer imaging system, and the
establishment of a marketing organization. On March 29, 1993, New Image
distributed all of the common stock of the Company held by New Image to its
stockholders (the "Distribution") on the basis of one share of common stock of
the Company for each five shares of New Image common stock held by a
stockholder. Immediately following the Distribution, the Company effected a
rights offering (the "Rights Offering") pursuant to which each Company
stockholder received, for each share of the Company's common stock held, the
right to purchase one share of the Company's common stock for $6.00 per share.
Upon completion of the Distribution and the Rights Offering, the Company became
a publicly-owned company. On October 14, 1993, the Company effected a 3 for 2
stock split in the form of a stock dividend.
On February 7, 1994, the Company acquired Dycam Inc. ("Dycam"), which
designs, develops and manufactures digital cameras for use with computers. In
July 1994, the Company completed an underwritten rights offering of 1,000,000
shares of Dycam's common stock (the "Dycam Offering"). As of the date hereof,
the Company owns approximately 61 percent of the shares of outstanding common
stock of Dycam.
On April 5, 1994, the Company acquired 80% of the outstanding stock of
Forever Yours, Inc. ("FYI"), a corporation which engages in the hospital newborn
baby photography business.
On April 25, 1994, the Company established Styles Servicing, Inc. ("SSI"), a
wholly-owned subsidiary, to offer franchises to operate its hairstyle imaging
systems.
During the fourth quarter of 1994, the Company's stock price declined 78%,
from a high closing price of $12.75 on October 21, 1994 to a closing price of
$2.81 on December 27, 1994. In mid-December 1994 several suits were filed
against the Company and members of its Board of Directors by its stockholders,
alleging violations of the federal securities laws. The suits were settled in
April 1995 and received final approval by the District Court in July 1996. See
"Legal Proceedings."
Trading of the Company's common stock on the American Stock Exchange, Inc.
(the "AMEX"), which had commenced on April 8, 1993, was halted on December 27,
1994, and has not resumed. On July 18, 1996, the AMEX determined to remove the
Company's common stock from listing and registration thereon effective August 2,
1996. There is currently no active public trading market for any outstanding
security of the Company. Dycam's common stock remains separately traded on the
AMEX.
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In late December 1994, the Company began to take steps to address its
problems. On December 28, 1994, the Company hired Charles Plumb, a specialist
in turnaround situations, to serve as the Company's acting President and to
develop and implement a plan designed to restore confidence in the Company.
During the term of Mr. Plumb's engagement, Guy de Vreese, the Company's initial
Chief Executive Officer, continued to serve in that capacity. In February 1995,
Mr. Plumb resigned his engagement with the Company. Concurrently with Mr.
Plumb's departure, the Company's Board of Directors sought and obtained Mr. de
Vreese's resignation. In late February 1995, the Board of Directors asked Dana
I. Arnold, President of FYI, to become Acting Chief Executive Officer of the
Company. Mr. Arnold served in such capacity through November 1995.
The Company's new management spent the remainder of 1995 operating the
Company while evaluating and accounting for the causes of the Company's 1993 and
1994 financial irregularities. In May 1995, the Company engaged Coopers &
Lybrand L.L.P. ("C&L") to serve as the outside accountants for the Company's
1994 fiscal year. During the course of their work, management and C&L
discovered various accounting irregularities in previously reported operating
results for 1993 and the first three quarters of 1994. To adjust for these
irregularities, the Company has filed certain amended reports on Form 10-KSB/A
and Form 10-QSB/A with the Securities and Exchange Commission (the "SEC")
pursuant to which it has restated its financial statements as of and for the
year ended December 31, 1993 and for the quarterly periods ended March 31, June
30, and September 30, 1994.
During the latter part of 1994 and throughout 1995 and 1996, the Company's
primary source of operating funds, in addition to cash on hand, was loans
received from various affiliated and non-affiliated parties. In December 1994,
Dycam made a secured loan of $500,000 to the Company, followed by an additional
$500,000 advance in January 1995. The loans totaling $1,000,000 are secured by
1,916,667 shares of Dycam's stock owned by SOV. See "Certain Relationships and
Related Party Transactions." In September 1995, the Company and FYI received
bridge financing of $300,000 from Multinational Trading Corp., a Florida
corporation ("MTC"). MTC made additional advances of $75,000 in October 1995.
In November 1995, the Company, FYI and International Digital Investors, L.P., a
Delaware limited partnership ("IDI") entered into a Note and Preferred Stock
Purchase Agreement (the "1995 Agreement"). Pursuant to the 1995 Agreement, in
consideration for its $3,000,000 investment in the Company, IDI received
warrants for the Company's common stock which would amount to forty percent of
the Company's outstanding common stock if exercised, a secured note for
$2,950,000, and $50,000 in convertible preferred stock. In May 1996, the
Company, FYI and IDI entered into an additional Note and Preferred Stock
Purchase Agreement (the "1996 Agreement"). Pursuant to the terms of the 1996
Agreement, in consideration for its additional investment in the Company, IDI
received additional warrants for the Company's Common Stock, a secured note for
up to $1,200,000, and $50,000 in convertible preferred stock. Together with the
warrants received pursuant to the 1995 Agreement, IDI had warrants amounting to
seventy-five percent of the Company's outstanding common stock on a fully
diluted basis, if exercised. From September 1996 through January 1997, the
Company and FYI received bridge financing of $927,000 pursuant to a $977,000
Bridge Note.
On January 15, 1997, the Company, FYI and IDI entered into several agreements
(the "January 1997 Agreements") which provided for the issuance of 4,347,427
shares of its Common Stock to IDI in exchange for all of the 1995 Warrants and
for 1996 Warrants with respect to 1,867,029 shares of Common Stock. IDI remains
the holder of 1996 Warrants for 51,419,199 shares of Common Stock. The Company
also issued a Series D Warrant (the "Series D Warrant") to IDI which is
exercisable for up to 61,803,805 shares of the Company's Common Stock at an
exercise price of $.075 per share. The Series D Warrants are contingent upon
the occurrence of a proposed reverse stock split. If the reverse
stock split is approved and the Company and IDI complete the second exchange of
securities described below, then the Series D Warrants will not be exercisable.
However, if the reverse stock split is not approved by April 15, 1997,
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then the Series D Warrants may be exercised by IDI prior to November 20, 2005.
If the proposed reverse stock split is approved by the stockholders, the Company
intends to complete a second exchange of securities with IDI pursuant to which
the Company will issue an additional 39,342,461 (pre-reverse split) shares of
its Common Stock to IDI in exchange for all of the remaining 1996 Warrants with
respect to 51,419,199 (pre-reverse split) shares of the Company's Common Stock,
together with the surrender of the Series D Warrants. After the second security
exchange, IDI would continue to hold 500 shares of the Company's Series A
Preferred and 500 shares of the Company's Series B Preferred, as well as
43,689,888 (pre-reverse split) shares of the Company's Common Stock, equivalent
to 67% of the shares anticipated to be outstanding on the planned date of the
second exchange, April 15, 1997.
In conjunction with the IDI financings, IDI acquired the right to elect the
majority of the Company's Board of Directors. See "Certain Relationships and
Related Party Transactions." Subsequent to IDI's 1995 investment, Jeffrey A.
Safchik, the President of IDI's general partner, was elected as the Company's
Chief Executive Officer and Chairman of the Board. Mr. Safchik served in such
capacity through July 1996.
In January 1996 the Company's Board of Directors determined that it was in
the best interests of the Company and its stockholders to eliminate the
Company's hairstyle and beauty imaging systems operations, as well as its
franchising operations. The Company promptly commenced the wind-down of SOV's
hairstyle and beauty imaging systems operations and SSI's operations. SOV has
ceased the marketing and sales of its hairstyle and beauty imaging systems, and
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) and those
ancillary products which are currently part of its inventory, and acts as a
holding company for the Company's remaining operating subsidiaries, Dycam and
FYI. 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 systems
operations.
All SSI employees have been terminated and, during 1996, the Company 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. As of August 31, 1996,
the Company has entered into cancellation agreement with fifteen of SSI's Area
Developers.
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 systems operations, or of SSI's operations.
Effective January 31, 1997, SOV and FYI entered into an agreement to sell the
FYI business to Hasco International, Inc. ("Hasco") Hasco operates First Foto,
a competitor of FYI in the hospital newborn photography business. In January
and February 1997, FYI borrowed a total of $360,000 from Hasco pursuant to a
loan agreement whereby Hasco will lend to FYI up to a total of $540,000 prior to
the closing. The proceeds of the FYI sale, net of transaction costs and
satisfaction of FYI's obligations (excluding its indebtedness to IDI), will not
be sufficient to fully repay the Company's and FYI's obligations to IDI, or to
fully satisfy the Company's other liabilities to its creditors. The FYI Sale
is expected to close in April 1997, subject to the approval of the Company's
stockholders and other customary terms and conditions.
As discussed in the Report of Independent Accountants, which is included in
Item 7 -- Financial Statements of this Report, the Company has suffered
recurring losses from operations, has an accumulated deficit, and faces certain
contingencies that raise doubt about its ability to continue as a going concern.
The Company's ability to continue as a going concern will depend upon the
success achieved by Dycam and a
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number of other factors, many of which are beyond the Company's control. For a
discussion of liquidity and management's plans, see Note 2 in Notes to
Consolidated Financial Statements included elsewhere in this report. For
information regarding potential factors that may affect the future business,
operating results and financial condition of the Company, see "Management's
Discussion and Analysis or Plan of Operation -- Factors That May Affect Future
Results and Financial Condition."
The current business and operations of the Company and its subsidiaries are
discussed below.
SOV PRODUCTS
The Company's original business primarily consisted of the sale of computer-
based imaging systems designed to show customers what they look like "wearing"
various hairstyles. Throughout 1993 and 1994, the Company's primary product was
the video based SOV Video-Maker System. In the fourth quarter of 1994, the
Company began development work on a hairstyle imaging system, the Redken System,
which was created for use in Redken-owned hair salons. In 1995, the Company
began development work on a related hairstyle imaging system, the Electric Hair
System, a lower cost version of the Redken System. During 1994, the Company
also worked on the Tryuson System, an imaging system designed for use by optical
retailers which allows the consumer to use the computer to "try on" different
styles of eyeglasses. Additionally in late 1994, the Company began development
of a poster printing system, the Big Picture. The Company abandoned its plans
for the Big Picture in early 1995. In addition to its hairstyle imaging
systems, SOV marketed various ancillary products, including blank video tapes,
promotional materials, and access discs which are necessary for the operation of
the SOV Video Maker and Electric Hair Systems. Throughout 1994 and 1995, SOV's
systems and products sales yielded only a low sales volume. The low sales
volume and margins on the systems sales did not justify expenditures on their
continued promotion, manufacture or distribution. In January 1996 the Company
promptly began the orderly termination of SOV's hairstyle and beauty imaging
systems business. SOV intends to sell only access disks (which have high
margins), and those ancillary products which are currently part of its
inventory, and will expend no additional monies in the development, marketing or
sales of existing or new SOV hairstyle and beauty imaging products. See
"Marketing and Sales."
DYCAM PRODUCTS AND SERVICES
Dycam introduced one of the first digital cameras in 1991 and today assembles
and markets several models of digital cameras. Dycam also provides extensive
software support for its cameras. These include basic applications that load,
display and save images for DOS, Windows, and MacIntosh computers. Dycam also
produces image editing software which has the ability to enlarge, reduce, frame
and tone the images produced by its cameras. Additionally, Dycam develops
unique software packages which allow various digital cameras to be utilized for
individualized client-mandated functions.
Current Products.
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The Modular Digital Cameras. Dycam's first modular digital camera, known as
the Gator, was developed as a joint effort among Dycam, IBM and the University
of Florida Research Foundation and introduced in September 1993. Since that
time, Dycam's modular digital camera designs have evolved considerably, and have
become the primary vehicle for Dycam's custom engineering work. Dycam's modular
digital cameras can be easily reconfigured or adapted for use with a variety of
optical systems, computer interfaces and power supplies, and are versatile
enough to stand alone, function as a component of a system, or attach to
notebook, tablet and desktop computers. As the camera is pointed at the desired
subject, a smaller-sized image is displayed on the computer's screen. For stand
alone applications, a digital to video subsystem and standard video monitor can
be used to preview images. When the user is satisfied
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with the image, he or she may take a full size picture. Dycam manufactures and
markets both gray scale and color versions of the modular camera which retail
for between $495 and $1,995.
The Model 3 Digital Cameras. The Model 3 was introduced in 1992, and
represents the second generation of gray-scale digital cameras developed by
Dycam. The Model 3XL, which has increased battery capacity and more image
memory than the Model 3, is capable of taking and storing up to 500 pictures on
a single battery charge. A color filter system is available for use with both
the Model 3 and Model 3XL, which provides 24 bit color images with very good
quality. The Model 3 sells for a list price of approximately $695 and the Model
3XL sells for a list price of approximately $895; such prices include the
camera, MacIntosh, DOS or Windows imaging software, host adapter, cables and
battery charger.
The Model 4 Digital Camera. The Model 4 was introduced in October 1993 and
represents the second generation of color digital camera developed by Dycam.
The Model 4 is pocket sized and self-contained. The Model 4 currently sells for
a list price of approximately $795, which includes the camera, Macintosh, DOS or
Windows imaging software, host adaptor, cables and battery charger. Dycam also
sells the Model 4XL digital camera, a variant of the Model 4 digital camera,
with additional features, including increased memory. The Model 4XL currently
sells for a list price of approximately $995.
The Model 10-C Camera. The Model 10-C was introduced in July 1995. A color
digital camera with a power zoom lens and removable memory cards, it is intended
to provide a solution for professional markets requiring the use of images with
documentation such as property appraisal, insurance claims and law enforcement.
The retail price of the basic camera is $999, and a variety of accessories are
offered. In the February 6, 1996 issue of PC Magazine, competing against
products such as the Kodak DC-40, Logitech Fotoman Pixtura, Casio QV-10, Chinon
ESC-3000, and Apple Quicktake 150, the Dycam Model 10-C won the prestigious PC
Magazine Editors Choice award for digital cameras selling at less than $1,000.
Although Dycam continues to sell the Model 10-C, the Company is actively
searching for a follow on product to serve this market segment.
Accessory Products. Dycam continues to offer a variety of accessory products
designed to fulfill the needs of the digital photographer. These products
include flash memory cards, carrying cases, editing software, portable power
supplies, cable adapters, a portable desk stand which connects the camera to the
host computer, and a complement of lenses. The lenses range in price from $89
for a wide angle or telephoto lens to $159 for a super close-up lens kit which
includes 3 lenses.
Product Development Activities. Dycam's product development activities are
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centered around the development of more highly integrated standard and custom
cameras, as well as lower cost cameras. Dycam is currently working on the
development of the following products:
Enhanced Modular Camera. Since the first quarter of 1995, Dycam has devoted
its primary product development activities to software enhancements, custom
versions of the existing products, and the development of higher resolution
models. Certain versions of this camera have been completed, while others
remain in development. Dycam expects that cameras in this line will retail for
between $695 and $1,995, depending on the camera's configuration. Development
of a color version of the 640 X 480 modular camera is expected to be completed
in the second half of 1997, and higher resolution grayscale and color versions
are in the planning stages.
Model 5 and Model 6 Cameras. During 1996, Dycam continued the development of
the next generation of cameras, the Model 5 gray-scale camera and the Model 6
color camera. These cameras are intended to offer a higher level of component
integration, a lower level of power consumption and resolution
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which is comparable to the Model 3 and Model 4 cameras. During the fourth
quarter of 1996, Dycam consolidated the development of these cameras with the
Model 5v and Model 6v platform cameras.
Model 5v and Model 6v Cameras. During 1996 Dycam continued development of
enhanced versions of the Model 5 and Model 6 camera platforms to include video
output, allowing images captured by these cameras to be directly displayed on a
television or video monitor. Images (including real time images) can be
captured and displayed anywhere that a television or video monitor is available,
with no need for a host computer. Additionally, the images can be stored either
on digital or video recording media. This camera platform is designed for
general purpose and specialty applications, including security or surveillance
purposes, that require both digital and video output capability. Dycam
anticipates that the development of certain specialized versions of these
cameras will be completed in 1997.
PCMCIA Camera. Dycam is researching the feasibility of developing a camera
which can attach to mobile computers via a PCMCIA card. The PCMCIA card was
established by an industry association, the Personal Computer Memory Card
International Association, to provide a universal slot for optional functions on
mobile computers, including connectivity, additional memory, modems and other
purposes.
Model 7v and Model 8v Cameras. The battery powered Model 7v grayscale and
Model 8v color cameras will feature the integration and improved performance of
the Model 5v and Model 6v line but will use the enhanced CCD chips currently
being developed for use in the modular camera platform. Dycam cannot predict
when Model 7v and Model 8v cameras will be available.
ADC Cameras. During 1995, Dycam developed a specialized digital camera
(Agricultural Digital Camera or ADC) and supporting software combination which
allows the user to perform visible and near visible light spectrum band ratio
analysis, an emerging science for determining the relative health of vegetation
and for improving the management of water resources, pesticides, and fertilizers
with agricultural crops. The ADC product was the result of ongoing product
development and research activity with the United States Department of
Agriculture ("USDA") and certain Universities.
Multi-detector cameras. During 1996 Dycam developed a three detector (3CCD)
optical assembly for use with its modular digital camera platforms. The
addition of this capability to the modular camera platforms has the potential to
expand the applications served by Dycam's custom products, particularly where
multi-spectral or high quality digital imaging is required. Dycam is currently
conducting field trials of multi-detector digital cameras with certain customers
and anticipates that development of a platform suitable for industrial or
scientific imaging will be completed in the first half of 1997.
Custom Services. In 1994 and the early part of 1995, Dycam shifted its focus
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away from the pursuit of custom and contract engineering projects towards direct
camera sales, and Dycam's camera sales increased during both 1994 and 1995. In
1996, Dycam continued to sell standard camera products, and sales again
increased. Dycam, however, believes that its primary strength lies in its
ability to facilitate the use of both standard and custom digital cameras in a
wide range of digital imaging applications. This is often accomplished by
providing expertise and engineering services to parties who desire additional
features, functions and modifications to existing camera designs. Dycam has
focused its custom design work on customers who have the potential to develop
new markets, or where the application yields technology that Dycam's management
believes has long-term value. Dycam is currently engaged in custom project work
for a variety of customers. Dycam has helped to develop a digital camera and
imaging system for FYI, a subsidiary of the Company, which is designed to be
used for taking pictures of newborn babies. This product is a dedicated digital
camera system designed for use in hospital environments, which produces digital
images for transfer to a remote production site. This system allows the
system's operators to rapidly
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and efficiently produce customized, text enhanced images on high quality color
photographic paper. See "Certain Relationships and Related Party Transactions."
FYI PRODUCTS
Portraits.
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FYI's primary products are photographic portraits of newborn infants taken
while the infant is still in the hospital. FYI currently offers four main
packages of portraits, which range in price from $21.95 to $54.95. Each package
features a varied selection of items which may include 5" x 7" photos, 3.5" x 5"
photos, wallet-size photos, postcards, a BabySafe (described below) booklet with
I.D. photo, and/or a "Celebration of Life" certificate. In addition, FYI offers
personalized birth announcements (at typical prices of eight for $14.95) which
can be customized with the infant's photo and a message from the parents, and
customized postcards (at a typical price of eight for $12.95).
BabySafe.
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BabySafe is a photographic identification program developed by FYI. Newborn
infants in most hospitals which FYI serves are photographed with FYI's digital
camera and such infants' photographic image is stored in the FYI electronic
archive system. When and if necessary, with the parents' authorization, the
image of the infant can be made immediately available to the appropriate
authorities. FYI provides this service to interested parents at most hospitals
which FYI serves, regardless of whether they purchase an FYI photo package.
SSI
SSI was established in April 1994 to facilitate the sale of franchises for
the operation of SOV Video-Maker Systems. SSI sold no franchises after January
1995. In early 1996 the Company terminated SSI's operations.
MANUFACTURING AND ELECTRONIC IMAGING PROCESSING
SOV. In connection with the termination of the SOV hairstyle and beauty
---
imaging business, the Company has terminated the employment of all employees
involved in the assembly, marketing and sales of such systems. The Company does
not intend to manufacture hairstyle or beauty imaging systems in the future.
Dycam. Dycam relies on outside electronic subassembly manufacturers to
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perform the majority of the subassembly work related to its camera. Currently,
this electronic subassembly is conducted by a manufacturer located near Dycam's
headquarters. Dycam, however, believes that there are several manufacturers
capable of performing this function. Dycam's manufacturing operations consist
of final assembly (including the integration of proprietary software), testing
and quality control. The majority of the components used in the Dycam cameras
are purchased from outside vendors. Certain digital camera components and
assemblies used by Dycam, including standard digital cameras private labeled for
Dycam, are sole sourced and must be ordered up to four months in advance to
assure timely delivery. A strategic inventory of such components and assemblies
is maintained by Dycam, however, any disruptions in delivery or in the
relationships with suppliers of such components could cause substantial delays
in Dycam's camera production activities. Dycam believes that its relations with
its strategic suppliers are good.
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FYI.
---
Camera Assembly. FYI relies upon Dycam and third party manufacturers to
perform the electronic subassembly of its cameras and fabricate the FYI system
housings. Final assembly, testing and quality control inspections of the FYI
system are performed by Dycam. With the exception of certain proprietary
components for which FYI owns all necessary molds and tools, all components used
in the FYI System are off-the-shelf components for which there are multiple
sources of supply. FYI's equipment meets relevant FCC certification Class A
Device standards, and ETL (Electronic Testing Labs, Inc.) standards, which are
equivalent to UL (Underwriters Laboratory) and ANSI (American National Standards
Institute) standards and complies with local regulations regarding safety
standards for electrical equipment in a hospital environment.
Image Processing. The photographic images which form the basis of FYI's
products are taken at hospital rooms and nurseries and then transmitted to FYI's
Newbury Park, California facilities for processing. The image processing
facility (the "Facility") is highly automated and currently operates 7 days a
week, up to 24 hours per day. The principal items of equipment used in the
Facility are powerful personal computers which are linked with the modems and
data storage equipment required for electronic image processing. The Facility's
hardware equipment is assembled from off-the-shelf systems which are readily
available at reasonable cost. The Facility has the ability to expand its
production capacity at any time by adding additional hardware equipment. The
software used in the Facility, which handles not only image processing but also
supports FYI's accounting department, was developed by FYI's in-house
engineering team. The software allows the on-site hospital camera to transmit
to the Facility's central computer system all data necessary for the service
technicians to receive and manipulate the images necessary to produce FYI's
finished photographic product, store these images in the archival system, and
interface with FYI's accounting department.
MARKETING AND SALES
SOV. In connection with the termination of the SOV imaging systems business,
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the Company has ceased all marketing and sales efforts related to SOV's
hairstyle and beauty imaging systems and terminated the employment of all
employees involved in the marketing and sales of such systems.
Dycam Digital Cameras. Historically, Dycam has focused its marketing efforts
---------------------
on licensing its technology to third parties and, to a lesser extent, on direct
sales of its cameras. As a consequence of the monies raised in the Dycam
Offering, during the second half of 1994 Dycam greatly expanded its direct sales
marketing efforts. Dycam anticipated that it would be able to sell various
standardized camera products to those industries which require a high volume of
photographic documentation (i.e., real estate appraisal, law enforcement,
insurance claims adjustment, oil and gas exploration and government). To that
end, Dycam contacted independent software developers and value added resellers
who service those industries to help determine the imaging needs and special
requirements of such industries. As a consequence of such contacts, Dycam
developed its Model 3XL and model 4XL cameras to service the needs of the real
estate appraisal industry. During the final quarter of 1994, Dycam found that,
although its new marketing strategy was generating interest in its products,
only modest sales were being achieved. After reviewing its sales performance,
Dycam determined that, in most cases, the targeted industries are not yet
technologically mature enough to absorb Dycam's products on a wholesale basis
because such absorption requires extensive training and additional computer
technology. In light of such determination, Dycam elected to reorient its
marketing strategy and to de-emphasize internally developed standard products in
favor of purchased standard products wherever possible. To this end, in July
1995, Dycam announced the availability of the Model 10-C, a 640 X 480 color
digital camera with power zoom lens and removable memory cards. This product,
built to Dycam's specifications by a major camera manufacturer, is intended to
provide a solution
9
<PAGE>
for the professional markets requiring the use of images with documentation such
as property appraisal, insurance claims, and law enforcement. The Model 10-C has
been well received. During 1996 approximately 35 new digital cameras were
introduced to the business professional and consumer markets, and several large
multi-national consumer electronics and photographic products companies
introduced their first digital cameras. Dycam continues to believe that, where a
clear cost and performance advantage can be shown, many customers within the
targeted industries will prefer Dycam branded products. However, in order to
economically provide a range of digital camera products suitable for specific
industry applications, Dycam has expanded its support for the resale of digital
camera products manufactured and branded by third parties such as Kodak and
Sony. Dycam continues to use the knowledge gained in 1995 and 1996 to pin-point
specific companies which may require Dycam's specialty services. Although Dycam
will continue to provide standard products and expects such standard product
sales to grow, its internal development resources will be largely focused on the
provision of specialty imaging solutions.
Domestic Market. During 1996, Dycam's direct sales of cameras and other
products accounted for an increase of 34% over direct sales in 1995. Dycam
currently offers for sale the Model 3, Model 3XL, Model 4, Model 4XL, Model 10-
C, a wide range of standard digital cameras manufactured by third parties, and
modular cameras. Dycam has sold approximately 8,000 digital cameras since the
introduction of its initial digital camera. In addition to its direct marketing
efforts, Dycam also sells its camera products through resellers and value added
resellers (such as The Programmer's Shop, a technical mail order catalog for
scientists and engineers). During 1996, Dycam performed custom engineering work
for several customers.
Additionally, Dycam licensed the right to use its technology to Logitech and
FYI. Under its arrangement with Logitech, Dycam granted Logitech the
nonexclusive right to manufacture and sell digital cameras utilizing Dycam's
technology. The camera marketed by Logitech as the Fotoman Plus was Logitech's
version of Dycam's Model 3 camera. The arrangement provided for certain up-
front royalty payments and continuing royalties equal to .5% of sales. For the
year ended December 31, 1996, Dycam had revenues of approximately $1,000.
Logitech has informed Dycam that it has ceased production of the Fotoman Plus
and as a consequence Dycam's royalty stream will cease as soon as Logitech's
remaining inventory is sold. In the second quarter of 1995, Dycam entered into
an agreement with FYI relating to the digital camera used in FYI's operations.
Under its arrangement with FYI, Dycam is to receive revenues from camera sales
to FYI, as well as a royalty of 7.5% of FYI's sales. At the closing of the FYI
Sale, FYI and Dycam will terminate their existing contractual relationships and
Dycam will enter into a Dycam Master Agreement with Hasco. See "Certain
Relationships and Related Party Transactions."
International Markets. During 1996, Dycam's international sales accounted
for approximately $415,000 (approximately 20% of Dycam's total revenues).
International sales have resulted from OEM agreements between Dycam and computer
industry resellers located in Australia, Germany, Japan, Sweden, Denmark, and
the United Kingdom. Pursuant to these agreements, the resellers purchase
Dycam's products at a substantial discount and have no minimum sales
requirements.
Forever Yours, Inc. FYI's first sales occurred in March 1995. Effective
-------------------
January 31, 1997, the Company and FYI executed definitive agreements to sell
substantially all of the assets, together with the assumption of certain
liabilities, of FYI to Hasco. Hasco operates First Foto, a competitor of FYI in
the hospital newborn infant photographic business. The FYI Sale is expected to
close in April 1997, subject to the approval of the Company's stockholders and
other customary terms and conditions.
Direct Sales Strategy. FYI employs a multi-pronged marketing strategy to
solicit hospital accounts in the United States. FYI delivers its marketing
materials to industry decision makers through national and regional trade shows,
direct mail, and personal sales visits at hospitals throughout the country.
FYI's marketing materials emphasize FYI's status as the first new major
competitor in the industry in roughly three
10
<PAGE>
decades and the speed and cost advantages offered by FYI's digital technology.
As of January 1996, FYI sales representatives had personally contacted more than
1,200 hospitals and had exposed more than 2,000 hospitals to FYI through trade
show opportunities. The baby portrait industry currently serves more than 3,000
hospitals. Because industry contracts generally have a maximum term of 36
months, FYI believes in excess of as many as 1,000 hospitals annually may be
able to switch to a new service provider if supplied with the appropriate
information and opportunity.
Acquisition Strategy. In addition to its direct marketing strategy, FYI
believes that its business can be expanded through the acquisition of small to
medium size firms currently engaged in the newborn baby portrait industry. As
part of its initial marketing efforts FYI acquired the right to install its
systems in those hospitals which had contractual relationships with a baby photo
service operated by Jack West ("Jack West Service"). This arrangement provides
FYI with access to six hospitals in exchange for an ongoing commission to the
Jack West Service.
SSI. SSI has not sold any franchises since January 1995, and its Uniform
---
Franchise Operating Circular has not been updated. Since the last quarter of
1995 it has had no employees. In January 1996 the Company decided to eliminate
SSI and has commenced the final wind-down of its operations.
ADVERTISING AND PROMOTION
SOV. During the year ended December 31, 1994, the Company promoted the sale
---
of imaging systems through advertising in trade publications, attendance at
trade shows and telemarketing. During 1995, SOV made substantial reductions in
its advertising and promotional expenditures. In connection with the wind-down
of SOV's hairstyle and beauty imaging systems operations, the Company has
eliminated all remaining employees involved in the advertising and promotion of
SOV's hairstyle and beauty imaging systems.
Dycam. Dycam has traditionally relied on word of mouth advertising, press
-----
releases, and favorable reviews of its products in trade publications to promote
its products. During the second half of 1994, Dycam substantially expanded its
advertising and promotional activities. These expanded efforts were targeted
towards potential customers of the Model 3 and Model 4 in those industries in
which Dycam perceived the greatest need for the products (e.g. property
appraisal and insurance claims). Dycam has advertised its products in various
trade journals and government publications. Dycam also made substantial
revisions to its promotional materials. During 1996, Dycam attended several
trade shows, including COMDEX, the largest domestic computer trade fair. Dycam's
products were also represented at CeBit, the largest international computer
industry trade fair, by Dycam's German OEM reseller. Its current advertising and
promotional strategy is directed towards identifying and developing
relationships with potential customers who have a need for specific digital
imaging solutions although recent sales of the standard products has indicated
that sales increases may be generated by advertising in selected wide
distribution computer publications, which may be due to the general emergence of
the digital camera market and increased consumer awareness of the technology.
FYI. FYI promotes its system and services via attendance at trade shows,
---
promotional visits to hospitals, and follow-up marketing presentations and
demonstrations. The Company has produced several brochures which explain the
FYI program in detail and include color photographs of the digital camera system
and full-color examples of customized infant portraits. Certain of FYI's
promotional materials have been produced in both English and Spanish language
versions.
SSI. The Company promoted SSI via advertising in magazines oriented towards
---
entrepreneurs and by franchise trade shows. In January 1996, the Company began
the orderly termination of SSI's operations.
11
<PAGE>
TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE
SOV. All systems purchased from SOV included a training manual or tape.
---
Since the third quarter of 1995 the majority of the systems sold by SOV included
a 90 day parts and labor standard limited warranty. Prior to that time, systems
sold by SOV included a one-year standard limited warranty. In connection with
the wind-down of SOV's hairstyle and beauty imaging systems operations, SOV
eliminated all warranty services relating to its products in 1996.
Dycam. Dycam is committed to providing timely, high quality technical
-----
support, which Dycam believes is an important component of maintaining customer
satisfaction. Although Dycam offers no formal training in the use of its
cameras, one of Dycam's employees, who is a trained software engineer, devotes
his time to customer support related activities, including telephonic support
relating to camera operation. Each camera sold by Dycam comes with a 180-365
day standard limited warranty. During 1996, Dycam serviced or replaced less
than 5% of its cameras which were under warranty. Dycam attempts to complete
all repairs or send out replacement products within 72 hours of the receipt of
the defective product by Dycam. The Model 3, 3XL, 4, and 4XL camera batteries
require replacement approximately every 24-36 months.
FYI. FYI's staff continually monitors and evaluates camera performance and
---
recommends service action when required. Many simple camera service functions
(such as an exchange of the camera head) can be performed by hospital staff.
More complex maintenance or repair functions are performed by Dycam, the
manufacturer of the FYI Camera System, which has entered into a long-term
production and service relationship agreement with FYI which should assure
continuing production of the system and availability of field service and
support. At the closing of the FYI Sale, FYI and Dycam will terminate their
existing contractual relationships and Dycam will enter into a Dycam Master
Agreement with Hasco. See "Certain Relationships and Related Party
Transactions."
GOVERNMENTAL REGULATION
Dycam. Dycam cameras are covered by a Federal Communications Commission
-----
Grant of Equipment Authorization for Class A and Class B Computing Device
Peripherals which pertains to radio emissions from electronic products.
Applications for such grants are made on a voluntary basis.
FYI. FYI does not believe that its business is subject to a material level
---
of governmental regulation. FYI's equipment meets relevant FCC certification
Class A Device standards, and Electronic Testing Labs, Inc. standards, which are
equivalent to UL (Underwriter's Laboratory) and ANSI (American National
Standards Institute) standards, and complies with local regulations regarding
safety standards for electrical equipment in the hospital environment.
SSI. In implementing its 1994 franchising strategy and its concurrent
---
establishment of SSI, the Company became subject to Federal Trade Commission
("FTC") regulations which regulate the offer and sale of franchises and business
opportunities. The FTC's Trade Regulation Rule on Franchising (the "FTC Rule")
requires that the Company furnish prospective franchisees with an offering
circular containing information proscribed by the FTC Rule. The Company
prepared an offering circular, which the Company believed was in compliance with
the FTC Rule, for delivery to prospective purchasers of the marketing program.
SSI's offering circular has not been updated and SSI has not sold any franchises
since the first quarter of 1995. In January 1996, the Company began the orderly
termination of SSI's operations.
PATENTS AND PROPRIETARY RIGHTS
12
<PAGE>
SOV. The Company has been issued a registered trademark on the names "Styles
---
on Video" and "Tryuson" and has applied for such protection for the name
"Cosmo." No assurance can be given that such trademark will be issued. The
Company intends to take all steps necessary to cause any trademarks it is issued
to have a perpetual existence, although the Company believes any such trademarks
have limited value.
Dycam. Dycam relies on a combination of patent, copyright and trademark
-----
protection and non-disclosure agreements to protect its proprietary rights.
Dycam is the assignee of United States Patent 5,249,093, which covers certain
technologies related to filmless digital cameras with selective image
compression. In addition, Dycam has filed applications for several patents on
the design of its camera, including applications covering camera flash and
sequential color technologies; however, no assurance can be given that any such
patents will be issued. Dycam also has domestic and international protection
under copyright law for certain of the specialized components and software
included in its cameras. Dycam regards its non-patented and non-copyrighted
technology and know-how related to its products as proprietary trade secrets and
attempts to protect them with confidentiality agreements with its employees,
confidentiality provisions in its employee handbook, and its various agreements
with licensees and customers. Despite these precautions, however, it may be
possible for third parties to copy aspects of Dycam's products or to obtain and
use without authorization information which Dycam regards as proprietary. The
Company believes that the technical and creative skills and expertise of Dycam's
technical staff and marketing and management personnel are more critical to
Dycam's success than patent, copyright or trademark protection.
FYI. FYI has applied for a trademark for the name "Forever Yours" and the
---
"Forever Yours" design, which features a stork with a baby portrait suspended
from its beak. FYI has been challenged on its trademark application by Hasco,
its largest competitor, which claims to use the name Forever Yours in connection
with a baby photo project in Canada. The terms of the FYI Sale to Hasco provide
that upon closing this claim will be dismissed. In addition, FYI has received a
trademark for the name "BabySafe", its unique archiving baby imaging system.
FYI has also applied for a patent for its digital camera system for infant
photography; however, no assurance can be given that such patent will be issued.
FYI regards its non-patented and non-copyrighted technology and know-how related
to its products as proprietary trade secrets and attempts to protect them with
confidentiality agreements with its employees and confidentiality provisions in
its employee handbook and its various agreements with licensees and customers.
Despite these precautions, however, it may be possible for third parties to copy
aspects of FYI's products or, without authorization, to obtain and use
information which FYI regards as proprietary. FYI believes that the technical
and creative skills and expertise of its technical staff and marketing and
management personnel are more critical to its success than patent, copyright or
trademark protection.
COMPETITION
Dycam. Dycam faces substantial competition in the design, manufacture and
-----
sale of digital cameras. The market for digital photography products is only
beginning to emerge and Dycam expects that a number of competitors with
substantially greater financial, technical, distribution and other resources
will attempt to dominate the various segments of this market. Dycam believes
that the digital photography market will be divided into three basic segments:
(i) custom products (ii) document quality and consumer products and (iii)
professional products.
The custom products market segment consists of products which are custom
engineered to meet the unique image capturing needs of specific clients. Dycam
believes that it is the only major manufacturer of digital cameras which devotes
and intends to continue to devote a substantial portion of its resources to the
production of custom products and that it is the only company in the marketplace
today which is dedicated only to marketing digital cameras and providing digital
imaging services. Dycam believes that its experience in custom designing
cameras and imaging solutions for a variety of applications will allow it to
compete
13
<PAGE>
effectively in this market segment. Nevertheless, there can be no assurance that
the other major digital camera companies will not establish custom products
divisions or that no other specialty camera companies will emerge.
The document quality and consumer products (standard products) market segment
consists of products which produce images offering substantially less resolution
than the images produced by traditional film cameras. Nevertheless, the images
captured by products in this market segment are sufficiently legible to be used
in lieu of traditional film photographs for documentation (e.g., appraisal
reports, insurance adjusters' reports, personnel records, referring physician
reports, newsletters and general databasing) and snap-shot purposes. Total
industry sales of products designed to serve these markets increased
substantially in 1996. Dycam's major competitors in this market segment include
Apple, Canon, Kodak, Casio, Fuji, Olympus, Sony, Epson and Ricoh, all of which
announced new products in this segment during 1996. Although Dycam's Model 10-C
cameras, which compete in this market, have been highly rated in independent
editorial reviews, there can be no assurance that competitive pressures will not
result in further price reductions or other developments in the market segments
in which Dycam competes. Consequently, there can be no assurance that Dycam
will continue to compete effectively or that its products under development will
continue to be competitive in this market segment. In order to continue to
effectively serve the standard products market for digital cameras, Dycam has
determined that it is in the best interests of the Company to either private
label commercially available products or resell products manufactured by third
parties.
The professional products market segment consists of products which produce
images with resolution comparable or superior to traditional film cameras. The
products in this category are primarily designed to meet the needs of
professional or studio photographers and currently includes Digital SLR products
from Kodak, Canon, Nikon, Fuji, Minolta, and Sony. Kodak's DCS series of
Professional Digital Cameras, which retail for $7,500 to $27,000 and are
currently used primarily by photojournalists and professional photographers, are
capable of quickly capturing high resolution color images and are a good example
of this class of product. Digital Camera Backs such as those offered by Leaf
and Dicomed, attach to the back of a large format camera and produce extremely
high resolution color images; however, due to the lengthy image capture time
required by these devices they are only useful for photographing still images.
While Dycam does not presently intend to internally develop products to compete
in this market segment, it will continue to add value to the above products and
others to satisfy business opportunities in the professional segment.
Although Dycam believes that digital photography is the wave of the future,
digital cameras today compete with film photography, camcorders, digital
camcorders, and still video cameras. Current competition also comes from
alternative techniques for capturing an image into the computer such as flatbed
scanners and hand scanners. Scanners can be expensive and complicated to use;
however, they are capable of producing very high quality images. A "frame
grabber" or "digitizer" is a board that may be installed in a computer to
digitize a video image produced by a camcorder or still video camera. The
resulting image is typically of relatively poor quality, with inexpensive
versions selling for less than $200. Digital camcorders offer a combination of
motion pictures and the capability of recording digital stills on analog tape,
or connecting directly to a computer, but they are expensive, physically large,
and complex when compared to digital still cameras. Kodak produces the Kodak
Photo CD system which provides a mechanism for converting analog images (film)
into digital images for storage on compact discs. Dycam believes that the Photo
CD technology presents too many obstacles for the typical consumer because it
requires not only the time and expense of film processing, but the further
problem of locating a photo processor that has the expensive equipment required
to copy the images to the CD. It is, however, a good solution for the
commercial distribution of digital images, and business use has been increasing.
Despite the various disadvantages of these alternative methods of image capture,
there can be no guarantee that digital photography will gain widespread consumer
acceptance.
14
<PAGE>
FYI. The hospital newborn portrait industry is currently dominated by three
---
large firms, each of which has a national presence and both a substantially
greater number of hospital installations and a longer history in the industry
than FYI. These national firms are Hasco of St. Louis which serves hospitals in
the United States and Canada with estimated total annual births in excess of 2.5
million, Hospital Baby Portraits, Inc. of Port Chester, NY, which serves
hospitals with estimated total annual births of approximately 400,000, and
Hospital Baby Picture Service of Aliquippa, PA, which serves hospitals with
total annual births of approximately 200,000. Approximately 50 smaller firms
across the country serve one or more hospitals in their local community.
In the hospital newborn photo industry, a hospital typically enters into an
exclusive photo service agreement with one portrait company. The majority of
such contracts are for a 12 month period, although some may extend up to 36
months or more. Most such agreements contain automatic renewal clauses.
In most instances, the three larger baby portrait services offer mothers a
standard package consisting of pictures of various sizes which is mailed to the
mother's home within two to three weeks after the picture is taken. The smaller
firms often offer a more individualized range of packages. The portrait firm
typically pays the hospital or its auxiliary a commission of approximately 20
percent to 40 percent on the net sales generated by the portrait program.
FYI believes that all of the other firms in the industry are primarily
utilizing traditional photographic methods. In many instances, the camera
equipment being used by firms in the industry today is the same type of
equipment that was used in the 1960s. In contrast, FYI uses digital cameras
which enable the photographs to be transmitted immediately via high-speed modem
from the hospital room or nursery to FYI's image processing lab, thus allowing
FYI to deliver its products within 48 hours of the image having been taken.
Hasco, FYI's primary competitor, has announced it has entered into a purchasing
agreement with Kodak to develop digital systems in competition with FYI. Hasco
has introduced digital camera equipment on a limited basis at hospitals it
serves.
FYI believes that its competitive position within the hospital newborn
portrait industry is determined as much by trends in the general retail
photography industry as it is by the actions of any of its competitors.
Specifically, two developments have altered the retail consumer's perception of
the photography market in recent years: first, as high quality technically
superior cameras have become more widely accessible and easier to use by the
novice photographer, individual consumers have acquired greater confidence in
their own ability to capture satisfactory photographs without relying on a
professional photographer; and second, the widespread proliferation of 30-minute
or one-hour retail developing facilities has, FYI believes, drastically reduced
the amount of time that the typical consumer is willing to wait to view the
results of any photograph, whether taken personally or professionally.
Accordingly, FYI believes that the ability of parents to bring their own camera
into the hospital and take relatively satisfactory photographs of their infant,
which they can view the same day, has rendered the prospect of paying roughly
$30 to an infant portrait service for the right to receive similar photos two to
three weeks later significantly less attractive. FYI believes that these trends
highlight the importance of a two to three day turnaround it is able to offer to
parents and also mean that the customized options made possible by its digital
technology represent an important element of added value which the consumer is
unable to provide on his or her own.
FYI believes that its digital photography system provides it with several
other competitive advantages, which include the following: the system's
simplicity enables parents to become involved in the photography process (in
some cases actually taking the pictures themselves); and because hospital staff
are able to immediately see the results of the photography, they are likely to
be more involved in and committed to the sale of the photos. The FYI program
also includes two marketing innovations: "Speedy's Card Shoppe," a section in
the order catalog offering custom birth announcements, and post cards, featuring
the newborn
15
<PAGE>
baby's image surrounded by unique designs and/or customized messages from the
parents; and the "BabySafe" program, which stores newborn images for one year
and provides a national database of baby images for use by law enforcement
authorities should the need arise.
While FYI believes that its digital photography process affords it
competitive advantages allowing it to offer significantly faster delivery and a
greater variety of customized imprinting options, there can be no assurance that
FYI's competitors or a new entrant into the industry will not adopt the same
technology and thereby reduce or eliminate FYI's digital technology advantages,
or that FYI will be able to successfully exploit its opportunities. FYI,
however, believes that its competitive advantage is dependent on its commitment
to provide superior service to the hospitals it serves, and to provide
innovative competitively priced products to its photographic customers, which
includes but is not solely dependent on its digital technology.
EMPLOYEES
As of January 31, 1997, the Company had sixty-two full-time employees. Of
this number, one was employed by SOV, twenty were employed by Dycam and forty-
one were employed by FYI. In addition, FYI had eighty-eight part-time
employees. Neither the Company nor any of its subsidiaries has had a work
stoppage and no employees are represented by a collective bargaining agreement.
The Company believes that its relations with its employees are good.
16
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's (excluding Dycam) principal executive offices and manufacturing
facilities are located at 667 Rancho Conejo Boulevard, Newbury Park, California
91320. The premises are approximately 12,000 square feet and are held under a
lease which expires on May 31, 2000. The rental payments under this lease are
approximately $9,000 per month. From January 1996 through April 1996, FYI
maintained its executive offices to 101 Hodencamp Road, Thousand Oaks,
California 91360, pursuant to a month-to-month lease with rental payments of
approximately $1,000 per month, after which time it relocated its executive
offices to 667 Rancho Conejo Boulevard, Newbury Park, CA 91320. See "Certain
Relationships and Related Party Transactions". The Company believes that its
facilities are sufficient for its current needs. For the year ended December
31, 1996, the Company (excluding Dycam) had facilities lease costs of
approximately $91,000.
Dycam's principal executive offices and manufacturing facilities are located
at 9414 Eton Avenue, Chatsworth, California 91311. The premises are
approximately 15,000 square feet and are held under a lease which expires on
January 31, 1998. The rental payments under this lease are approximately $7,000
per month. Dycam believes that its new premises are sufficient for its current
needs. For the year ended December 31, 1996, Dycam had lease costs of
approximately $102,000.
Effective January 31, 1997, the Company and FYI executed definitive
agreements with Hasco International, Inc. ("Hasco") to sell substantially all of
the net assets of FYI to Hasco (the "FYI Sale"). In connection with the FYI
Sale, Hasco and FYI will enter into a sublease pursuant to which Hasco will
sublet FYI's principal operating facility in Newbury Park, California from the
date of the closing through December 31, 1998. The rental payments under the
sublease will be approximately equal to FYI's occupancy costs under the primary
lease agreement during that period. The primary lease agreement expires May 31,
2000. The Company intends either to negotiate an early termination of the lease
with the landlord or to seek a subtenant for the remaining balance of the lease.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
During 1996, the Company was party to the following legal proceedings:
(a) Jack Kassindorf v. Styles On Video, Inc., et al., U.S.D.C. (C.D. Ca),
-----------------------------------------------
Case No. 94-8342 ER (Ex) (the "Kassindorf" lawsuit);
----------
Lynn Robbins v. Styles On Video, Inc., et al., Case No. 94-8362 SVW (Shx)
--------------------------------------------
(the "Robbins" lawsuit) (RDR, KMD);
-------
Donald & Co. Securities, Inc. v. Styles On Video, Inc., et al. U.S.D.C.
-------------------------------------------------------------
(C.D. Ca), Case No. 94-8637 RG (Jrx) (the "Donald" lawsuit) (RDR, KMD);
------
Dennis Ratner v. Styles On Video, Inc. et al. U.S.D.C. (C.D. Ca), Case
--------------------------------------------
No. 94-8719, JGD (Kx) (The "Ratner" lawsuit), (consolidated under Jack
------ ----
Kassindorf v. Styles On Video, Inc., et al., Case No. 94-8342 ER (Ex)
------------------------------------------
(the "Consolidated Class Action") (RDR, KMD); and
Neil Cohen v. Guy De Vreese, et al., U.S.D.C. (C.D. Ca), Case No. 95-1980
-----------------------------------
ABC (Jrx) (the "Cohen" lawsuit) (RDR, KMD).
The Kassindorf, Robbins, Donald, and Ratner suits were filed on December 13,
---------- ------- ------ ------
14, 27 and 30, 1994, respectively. The plaintiffs thereafter, on or about March
17, 1995, filed a Consolidated First Amended Complaint For Violations of the
Federal Securities Laws. On March 28, 1995, plaintiff Neil Cohen filed a
derivative action.
The suits alleged various claims based in part on violations of the federal
securities laws by the Company and/or certain of its officers and directors. In
the Consolidated Class Action, the named plaintiffs alleged that the Company and
the defendant officers and directors violated Section 10(a) of the Securities
Exchange Act and Rule 10b-5, by issuing false and misleading statements that
portrayed the Company's financial condition and future prospects in a falsely
optimistic manner. Plaintiffs further alleged that the class they purport to
represent -- the purchasers of the Company's stock during the class period --
were damaged as a result of the falsely optimistic statements. The plaintiffs
sought an undetermined amount of damages on behalf of the class.
The suits were settled in April 1995. The settlement received final approval
from the District Court in July 1996. Pursuant to the terms of the final
settlement, the Company agreed to deliver to the plaintiff class warrants to
purchase 1,750,000 shares of the Company's common stock and a promissory note in
the principal amount of $250,000, payable in 3 equal installments over 12
months. As of August 31, 1996, the Company has not made any payments on the
obligation. The Company will not have sufficient authorized shares of Common
Stock to issue upon exercise of these warrants unless it obtains stockholder
approval of a reverse stock split. The exercise price of the warrants is $.075
per share. Also as part of the settlement, the Company's director and officer's
liability insurance carriers agreed to pay $2,250,000. In addition, Guy de
Vreese, the former Chairman and Chief Executive Officer of the Company,
surrendered 250,000 shares of the Company's common stock held by him and options
for 150,000 shares of the Company's common stock held by him. The shares
surrendered by Mr. de Vreese are to be distributed to the class plaintiffs and
the options have been canceled.
(b) Thomas D. Leaper v. Styles On Video, et al., Los Angeles County Superior
------------------------------------------
Court, Case No. BC 121801 (RDR, KMD)
18
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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. The case was
dismissed in July 1996 concurrent with the settlement of Styles on Video, Inc.
---------------------
v. Kellogg & Andelson, et al.
- -----------------------------
(c) Durian Technologies, Inc., et al. v. Styles On Video, Inc., Los Angeles
----------------------------------------------------------
County Superior Court, Case No. BC 137544 (RDR, KMD)
On October 20, 1995, Durian Technologies, Inc. and Durian Finance
(collectively, "Durian") filed a complaint against SOV for breach of contract,
fraud and negligent representation in connection with financing arrangements
with Durian for the benefit of Styles and seeks an accounting and declaratory
relief. Durian also seeks an unspecified amount of damages. The Company
responded to the complaint in January 1996. In late 1996, the parties agreed to
a conditional settlement of this action, under the terms of which the action was
dismissed without prejudice and the plaintiffs received an option to obtain the
Company's interest in the "Try Us On System." The parties continue to discuss
this matter.
(d) Styles on Video, Inc., v. Kellogg & Andelson, et al., Los Angeles County
----------------------------------------------------
Superior Court, Case No. BC 142968
On January 22, 1996, the Company filed a suit 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. The suit asserted claims for professional negligence, breach of
contract and breach of fiduciary duty against these defendants arising out of
the services rendered by Kellogg & Andelson in connection with the Company's
1993 year-end audit and 1994 quarterly reports. The Company sought compensatory
damages in excess of $54 million, as well as punitive damages and injunctive
relief. The suit was settled and the settlement received final approval in July
1996. Pursuant to the settlement, the accounting firm paid $1,700,000 to the
Company.
(e) Forever Yours, Inc. v. Hasco, Inc., U.S.D.C. (C.D.Ca), Case No. 96-1696
----------------------------------
KMW (Jgx)
On March 8, 1996, FYI filed a suit against a competitor, Hasco, Inc. The
suit asserted claims for, among other things, unreasonable restraint of trade,
monopolistic practices, unfair competition, trade libel, and false and
misleading advertising. FYI sought compensatory damages relief in excess of $10
million, as well as punitive damages and injunctive relief. In the last quarter
of 1996, the suit was dismissed without prejudice and the parties entered into a
tolling agreement with respect to the statute of limitations. The terms of the
FYI Sale provide that upon closing this suit will be dismissed with prejudice.
(f) Agricultural Excess and Surplus Insurance Company (AESIC) v. Styles on
----------------------------------------------------------------------
Video, Inc.
- -----------
In 1996, a previous provider of the Company's excess director's and officer's
liability insurance filed a suit claiming that they are entitled to $1,000,000
of the $1,700,000 received by the Company in connection with the settlement of
Styles on Video, Inc. v. Kellogg & Andelson, et al. In October 1996, the
- ---------------------------------------------------
Company filed a cross-complaint alleging bad faith and seeking declaratory
relief. SOV intends to vigorously defend the suit.
(g) The Company is also a party to various other actions arising in the
ordinary course of business which, in the opinion of management, will not have a
material adverse impact on the Company's financial condition.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
During the last quarter of the Company's fiscal year ended December 31, 1996
and since that time, no matter was submitted to a vote of the security holders
of the Company.
20
<PAGE>
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Commencing on April 8, 1993 the common stock of the Company was listed for
trading on the AMEX under the symbol "SOV." Trading of the Company's common
stock was halted on December 27, 1994, and has not resumed. On July 18, 1996,
the AMEX determined to remove the Company's common stock from listing and
registration thereon effective August 2, 1996. There is currently no active
public trading market for any outstanding security of the Company. The Company
has never paid a cash dividend on the Company's common stock. The following
table sets forth, for the periods indicated, the high and low closing prices of
the Company's common stock as reported by the AMEX:
<TABLE>
<CAPTION>
FISCAL 1994 HIGH(1) LOW(1)
- ----------- ------- -------
<S> <C> <C>
First Quarter $17.625 $12.250
Second Quarter 15.000 9.125
Third Quarter 13.125 8.875
Fourth Quarter (through December 27, 1994) 12.750 2.500
</TABLE>
(1) The Company effected a 3 for 2 stock split in the form of a stock dividend
on October 14, 1993. All stock prices have been adjusted to give effect to this
stock split as if it had occurred on April 8, 1993.
On December 27, 1994, the last day the Company's common stock traded on the
AMEX, the closing price for the Company's common stock as reported by the AMEX
was $2.81.
As of January 31, 1997, there were approximately 220 holders of record of the
Company's common stock.
The present policy of the Company is to retain earnings to provide funds for
use in its business. The Company has not paid cash dividends on its common
stock and does not anticipate that it will do so in the foreseeable future.
21
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
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. SUCH FACTORS INCLUDE, AMONG
OTHER THINGS, OVERALL ECONOMIC CONDITIONS, THE IMPACT OF COMPETITION,
DEVELOPMENTS WHICH MAY RENDER THE COMPANY'S PRODUCTS AND SERVICES OBSOLETE OR
LESS ATTRACTIVE, AND THE COMPANY'S FINANCIAL CONSTRAINTS. SEE "FACTORS THAT MAY
AFFECT FUTURE RESULTS AND FINANCIAL CONDITION" BELOW.
The Company was incorporated in May 1992 as a wholly-owned subsidiary of New
Image. From January 1, 1992 until the incorporation of the Company, the
Company's business was conducted by New Image. This business consisted
primarily of product development activities, the development of a marketing
strategy for the Company's original video imaging system, the SOV Video Maker
System, and the establishment of a marketing organization. On March 29, 1993,
New Image distributed all of the common stock of the Company held by it to its
stockholders (the "Distribution") on the basis of one share of common stock of
the Company for each five shares of New Image common stock held by a
stockholder. Immediately following the Distribution, the Company effected a
rights offering (the "Rights Offering") pursuant to which each Company
stockholder received, for each share of the Company's common stock held, the
right to purchase one share of the Company's common stock for $6.00 per share.
Upon completion of the Distribution and the Rights Offering, the Company became
a publicly owned company.
On October 14, 1993, the Company effected a 3 for 2 stock split in the form
of a stock dividend. The results for the year ended December 31, 1993 and all
subsequent periods reflect this stock split.
On February 7, 1994 the Company acquired all of the outstanding stock of
Dycam. In July 1994, the Company's ownership of Dycam was reduced to
approximately 61% as a result of the issuance by Dycam of 1,000,000 shares of
its common stock in connection with the completion of an underwritten rights
offering, and the issuance of 204,169 shares of Dycam common stock in connection
with the exercise of stock options.
On April 5, 1994, the Company purchased 80% of the outstanding stock of FYI
for cash consideration of $100,000. The 20% of FYI stock not purchased by the
Company was held by FYI's then-President until May 1996, at which time he
surrendered his entire 20% interest in FYI in exchange for a warrant certificate
issued by the Company.
In April 1994, the Company established SSI as a wholly-owned subsidiary.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, without limitation, the
following factors:
Dependence on Third Party Financing. In November 1995, the Company entered
into a Note and Preferred Stock Purchase Agreement (the "1995 Agreement") with
International Digital Investors L.P. ("IDI") that provided the Company with $3
million of financing. In May 1996, the Company entered into a Note and
Preferred Stock Purchase Agreement with IDI (the "1996 Agreement") that provided
the Company with additional financing up to $1,250,000. Pursuant to the
agreements, the Company is subject
22
<PAGE>
to various restrictive covenants including limitations on the incurrence of
additional indebtedness, capital expenditures, investments, transactions with
affiliates, and consolidation merger and sale actions. The Company must also
satisfy certain financial tests during the terms of the agreements including the
maintenance of certain mandatory net worth and earnings levels. The failure to
achieve these levels constitutes an event of default under the agreements. In
the event the Company defaults, IDI has the right to accelerate the Company's
obligations under the agreements and seize and liquidate substantially all of
SOV's and FYI's major assets. At December 31, 1995 and 1996, the Company was not
in compliance with certain of the financial covenants, however, a waiver of
these defaults was obtained 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 (a) future defaults occur, (b) waivers
are not obtained, (c) SOV's and/or FYI's assets are taken in satisfaction of the
amounts due pursuant to the IDI financing, and (d) 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.
From September 1996 through January 1997, the Company and FYI borrowed an
additional $927,000 from IDI pursuant to a Bridge Note that provided additional
financing up to $977,000.
Effective January 31, 1997, SOV and FYI entered into an agreement to sell the
FYI business to Hasco. In January 1997, FYI borrowed $180,000 from Hasco
pursuant to the Loan Agreement whereby Hasco will lend to FYI up to a total of
$540,000 prior to the closing. The proceeds of the FYI sale, net of transaction
costs and satisfaction of FYI's obligations (excluding its indebtedness to IDI),
will not be sufficient to fully repay the Company's and FYI's obligations to
IDI, or to fully satisfy the Company's other liabilities to its creditors.
After the closing of the FYI Sale, IDI will continue to have a first priority
security interest in all remaining assets of the Company, including the
remaining net proceeds from the FYI sale, except for the second priority
position it holds on the shares of Dycam common stock owned by the Company, as
to which Dycam has a first priority security interest.
In order for the Company to continue its operations after the FYI sale, it
will be required to obtain additional financing from IDI or other sources, or
IDI will need to consent to postpone the repayments due from the Company and FYI
on all or part of the Company's and FYI's notes payable to IDI. Neither IDI nor
any other sources have indicated a willingness to loan additional funds to the
Company. Additionally, IDI has not indicated an intention to consent to the
postponement of the repayment it is entitled to on the Notes payable to IDI from
the Company and IDI.
Controlling Stockholder; Affiliated Party Transactions; Conflict of Interest.
Dycam became a wholly-owned subsidiary of SOV in February 1994. Immediately
following the sale of the shares of Dycam's common stock in a rights offering,
SOV owned approximately 61% of Dycam's common stock and remains in a position to
control the policies and operations of Dycam. SOV owns 100% of the common stock
of FYI and is in a position to control the policies and operations of FYI.
Certain officers and directors of SOV are directors and officers of Dycam and/or
FYI. SOV, Dycam and FYI have engaged in, and will continue to engage in,
certain transactions with each other. See "Certain Relationships and Related
Party Transactions."
There are potential conflicts of interest inherent in such relationships and
transactions. The respective Boards of Directors of SOV and Dycam have
established a Policy Review Committee to review transactions between these
corporations. The purpose of the Policy Review Committee, which has advisory
authority only, is to review any transaction proposed to be entered into between
SOV and Dycam to determine whether a conflict of interest exists and the manner
in which any such conflict can be resolved. The Policy Review Committee then
makes a recommendation to each of the Boards of Directors as to the course of
23
<PAGE>
action which should be taken. The Policy Review Committee consists of one
director each of SOV and Dycam who is not also an officer or employee of either
company, and a non-voting chairman.
Termination of Certain Operations. In January 1996, the Company determined
to terminate its hairstyle and beauty imaging operations and its franchising
operations. In January 1997, the Company and FYI entered into definitive
agreements to sell the FYI business. The FYI Sale is expected to close in April
1997, subject to the approval of the Company's stockholders, and other customary
conditions. The termination of these operations may result in significant costs
and liabilities to the Company, including, the satisfaction of outstanding
accounts payable relating to these operations, possible claims asserted by
former franchisees and area developers and possible claims asserted by certain
of the Company's current product warranty holders. Moreover, the termination of
these operations will require continuing attention by management. The Company's
future operating results and financial condition could be adversely affected by
management's inability to successfully terminate or sell its hairstyle and
beauty imaging operations, its franchising operations and its newborn infant
photography operations.
History of Losses; Variability of Operating Results; Limited Operating
History. The Company has experienced operating losses in 1994, 1995, and 1996.
The Company's revenues and operating results have varied substantially from
period to period. In addition, FYI has a limited operating history and was in
the development stage from April 1994 (inception) until March 1995 when it
recognized its first revenues. There can be no assurance that the Company will
be profitable in the future or that future revenues and operating results will
not also vary substantially. The Company's financial problems (see "Description
of Business") may have had a negative impact on FYI's ability to gain acceptance
in the marketplace despite the products and services it offers. Management has
been expending substantial time and resources in attempting to resolve these
problems and restore confidence in the Company. Future revenues and profits, if
any, will depend upon various factors, including, but not limited to,
management's ability to restore confidence in the Company, continued market
acceptance of the Company's current products, the ability of the Company to
develop and introduce new products or to develop new markets for its existing
products, the successful implementation of its planned marketing strategies, and
the Company's ability to successfully terminate SOV's hairstyle and beauty
imaging operations, SSI's franchising operations, and to close the sale of FYI's
newborn infant photography operations. If the Company is not able to achieve
its operating objectives or is unable to obtain the additional financing it
requires, the Company may be otherwise unable to achieve its goals or continue
its operations.
Certain Litigation Matters. The Company is currently party to certain
litigation which, if adversely determined, may have a material adverse impact on
the Company. The Company expects that it may need to expend substantial legal
fees in connection with these matters. See "Legal Proceedings."
Competition. The Company anticipates that both of its operating
subsidiaries, Dycam and FYI, will experience substantial competition. Dycam
believes that it is the only company in existence today which focuses entirely
upon the design, development, manufacture and sale of digital cameras,
supporting software and digital imaging solutions. However, other companies do
manufacture and market digital cameras. Dycam recognizes that as digital
photography achieves increasing acceptance and the industry grows, competition
will become increasingly intense. Existing competitors can be expected to
expand their digital camera operations and new competitors may enter the market.
Many existing competitors have significantly greater financial, marketing and
technological resources than Dycam. Some of the products manufactured by
Dycam's competitors are significantly more expensive than Dycam's cameras and
provide features (including higher quality resolution) that make these
products appropriate for applications for which Dycam's products are not
intended. Dycam believes that the flexibility of its products combined with
Dycam's experience in developing custom imaging solutions for its customers will
enable it to work with its customers to design digital photography-based systems
which serve their specific needs. Nevertheless, there can be
24
<PAGE>
no assurance that Dycam will be able to compete effectively or that competition
will not have a material adverse effect on Dycam's business, operating results
and financial condition.
The newborn infant photography market is extremely competitive. FYI
primarily faces competition from three large established competitors who
collectively control more than 75% of the market. In addition, many smaller
companies service the market. Many of the hospitals serviced by FYI's large
competitors are party to long-term service agreements. FYI's ability to
effectively compete in this market is dependent upon its ability to enter into
relationships with hospitals and to provide rapid, quality service to its
customers. FYI believes that it is unique in its use of digital photography as
a primary means to produce newborn infant photographs, and that digital
photography enhances its ability to deliver its product. If FYI's competitors
adopt digital photography systems as their primary systems, or otherwise
increase their product delivery time, or improve their service, FYI's ability to
enter into arrangements with new hospitals and its future operating results may
be adversely effected. In January 1997, the Company and FYI entered into an
agreement to sell the FYI business to Hasco. Hasco operates First Foto, a
competitor of FYI in the newborn hospital photographic business.
Rapid Technological Change and New Products. As a growth industry, digital
still photography can be expected to be characterized by rapid technological
change and new product introductions. As technological changes occur and as
other applications for the Company's products develop, Dycam may have to modify
its technology in order to keep pace with these changes and developments.
Although Dycam intends to continue to improve and add to its existing products,
there can be no assurance that Dycam's competitors will not develop products
with superior capabilities and/or market them at lower prices or that Dycam will
be able to identify, develop, manufacture or support new products successfully.
There can also be no assurance that any such new products introduced by Dycam
will gain market acceptance, or that Dycam will be able to respond effectively
to technological changes or the introduction of new products by competitors.
Reliance on Third Parties for Component Parts. Dycam relies on third parties
to supply the components which comprise its cameras. While there are several
sources of supply for the majority of these component parts, the Company is
dependent upon single overseas sources for both the main optics of the cameras
and Charge-Coupled Devices ("CCDs"), the image sensor used in digital cameras.
In addition, the microprocessor that operates the camera is a custom part
manufactured for the Company by a major U.S. corporation. Any disruption of the
operations of these third party manufacturers or discontinuance of the supply of
the optics, the CCDs or the microprocessors could cause substantial production
delays and materially and adversely affect the Company's business, financial
condition and results of operations. Additionally, the overseas manufacture of
the optics and CCD components of the cameras may subject the Company to
additional risks, including import and export controls and changes in
governmental policies.
Reliance on Related Party and Third Party Manufacturers. FYI relies upon
Dycam and third party manufacturers to perform the electronic subassembly of its
cameras and fabricate the FYI system housings. Final assembly, testing and
quality control inspections of the FYI system are performed by Dycam. With the
exception of certain proprietary components for which FYI owns all necessary
molds and tools, all components used in the FYI System are off-the-shelf
components for which there are multiple sources of supply. Any disruption of the
operations of Dycam or these third party manufacturers, or discontinuance of the
supply of the component parts of FYI's camera systems could cause substantial
production delays and materially and adversely affect FYI's projected future
business, financial condition and results of operations.
25
<PAGE>
FINANCIAL DATA
The historical selected financial data of the Company set forth below has
been derived from the Company's Consolidated Financial Statements included
elsewhere in this Report on Form 10-KSB. The consolidated financial statements
as of December 31, 1996 and 1995 have been audited by Corbin & Wertz,
independent accountants whose report with respect thereto appears elsewhere in
this Report on Form 10-KSB. The following financial information and the
accompanying Managements' Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report on Form 10-KSB. The results of operations of FYI are shown as
discontinued operations. The Company's financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP").
<TABLE>
<CAPTION>
INCOME STATEMENT DATA Year Ended December 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues $ 2,614,000 $ 4,531,000
Cost of revenues 1,883,000 2,481,000
----------- -----------
Gross Profit 731,000 2,050,000
----------- -----------
Selling, general and administrative expenses 2,705,000 4,636,000
Research and development expenses 551,000 810,000
Depreciation and amortization 342,000 347,000
----------- -----------
Total operating expenses 3,598,000 5,793,000
----------- -----------
Interest income 118,000 107,000
Interest expense (705,000) (99,000)
Legal settlement 1,700,000 -
Other income - (7,000)
Minority interest 510,000 370,000
----------- -----------
Loss from continuing operations before income taxes
and extraordinary item (1,244,000) (3,372,000)
Provision (benefit) for income taxes (32,000) 9,000
----------- -----------
Loss from continuing operations before extraordinary item (1,212,000) (3,381,000)
Forgiveness of debt, net of tax 332,000 255,000
----------- -----------
Net loss from continuing operations (880,000) (3,126,000)
Discontinued operations, net of tax (2,786,000) (2,714,000)
----------- -----------
Net loss $(3,666,000) $(5,840,000)
=========== ===========
Net loss per common share $ (0.81) $ (1.30)
=========== ===========
Weighted average shares of common stock outstanding 4,505,000 4,505,000
=========== ===========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA Year Ended December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Working capital $ (3,816,000) $ 1,967,000
Total assets 7,112,000 10,306,000
Accumulated deficit (16,193,000) (12,527,000)
Stockholders' equity 48,000 3,664,000
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth the percentages of net revenues of certain
income and expense items of the Company for the years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Revenues 100% 100%
Cost of revenues 72 55
---- ----
Gross profit 28 45
Selling, general and administrative expenses 104 102
Research and development expenses 21 18
Depreciation and amortization 13 8
---- ----
Total operating expenses 138 128
Interest income 5 2
Interest expense (27) (2)
Legal settlement 65 -
Minority interest 20 8
---- ----
Loss from continuing operations before income taxes and
extraordinary item (47) (75)
Provision (benefit) for income taxes (1) -
---- ----
Loss from continuing operations before extraordinary item (46) (75)
Forgiveness of debt, net of tax 13 6
---- ----
Net loss from continuing operations (33) (69)
Discontinued operations, net of tax (107) (60)
---- ----
Net loss (140)% (129)%
==== ====
</TABLE>
27
<PAGE>
REVENUES
The following table summarizes the Company's revenues for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
-------------------------- ------------------------------
Percentage Percentage
of of
Company Company
Revenues Revenues Revenues Revenues
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Consolidated $2,614,000 100% $4,531,000 100 %
SOV 536,000 21 2,815,000 62
Dycam 2,068,000 79 1,677,000 37
SSI 10,000 - 39,000 1
</TABLE>
Consolidated Operations. In January 1996, the Company elected to wind-down
-----------------------
its hairstyle and beauty imaging systems and franchising operations. During
1996 and the first quarter of 1997, the Company focused its resources on its
operating subsidiaries, FYI and Dycam. In January 1997, the Company and FYI
entered into definitive agreements to sell the FYI business to Hasco (see Notes
to Consolidated Financial Statements - Subsequent Events), subject to the
approval of the Company's stockholders, and other customary conditions. The FYI
Sale is expected to close in April 1997. After the wind-down and sale are
completed, SOV intends to sell access disks and act as a holding company. The
Company believes that its future revenues will be primarily derived from the
operations of its Dycam subsidiary.
SOV. SOV's revenues for the year ended December 31, 1996 decreased
---
$2,279,000 (81%) from $2,815,000 for the year ended December 31, 1995. During
fiscal 1995, SOV experienced a decline in the sales of both imaging systems and
software and support products. System and software related product sales
continued to decline throughout fiscal 1996. The Company attributes this
continued revenue decline to the general lack of market interest in SOV's
existing products at their current price point, 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. In early 1996, the Company
terminated its hairstyle and beauty imaging systems line of business. The
Company anticipates that the SOV line of business will generate only a minimal
portion of the Company's revenues and later years.
Dycam. Dycam's revenues are derived from sales of digital cameras and
-----
supporting software and accessory products, contract engineering and technology
licensing fees. Dycam's revenues for the year ended December 31, 1996 increased
$391,000 (23%) from $1,677,000 for the year ended December 31, 1995. License
fees from Logitech, which manufactured and marketed a Dycam designed camera
accounted for revenues of $1,000 for the year ended December 31, 1996 compared
to $9,000 for the year ended December 31, 1995. During 1995, 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. During 1996,
revenues from camera sales were $2,021,000 (98% of Dycam's revenues) compared to
$1,634,000 (97% of Dycam's revenues) in 1995. The increase in camera revenues is
attributed to the general emergence of the digital camera market as a whole in
1996. Revenues from contract engineering were $47,000 (2% of Dycam's revenues)
in 1996 compared to $34,000 (2% of Dycam's revenues) in 1995. Dycam intends to
continue to pursue its standard product
28
<PAGE>
strategy by facilitating the use of general purpose digital cameras, and selling
a range of Dycam branded and third party digital camera products, software, and
accessories to selected target markets. Dycam, however, will continue to
increase its efforts in the custom product line to exploit the opportunities to
design products that combine custom built digital cameras with specialized
software, hardware or packaging in order to satisfy an identified business
opportunity. During 1996, Dycam devoted a substantial portion of its resources
to pursuing custom and contract engineering business with the goal of generating
future sales. One example of this is Dycam's relationship with 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/lease of cameras to FYI, Dycam's arrangements with FYI
provide that, in exchange for certain development and maintenance services,
Dycam is entitled to a 7.5% fee on all FYI sales. Pursuant to a deferral
agreement executed in May 1996 between Dycam and FYI, certain development and
maintenance revenues due to Dycam from FYI may be accrued by FYI until April 30,
1997. Dycam intends to defer the recognition of the related revenues until
payment is received from FYI. Intercompany revenues are eliminated for
consolidated reporting purposes. At the closing of the FYI Sale, FYI and Dycam
will terminate their existing contractual relationships and Dycam will enter
into a Dycam Master Agreement with Hasco. See Notes to Consolidated Financial
Statements - Subsequent Events.
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. In January 1996, the Company began the
wind-down of SSI's operations. The Company anticipates that the SSI line of
business will generate only a minimal portion of the Company's 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 years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
-------------------------------- ----------------------------------
Gross Profit as Gross Profit as
Percentage Percentage
Gross Profit of Revenues Gross Profit of Revenues
------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Consolidated $731,000 28% $2,050,000 45%
SOV 481,000 90 1,491,000 53
Dycam 240,000 12 520,000 31
SSI 10,000 100 39,000 100
</TABLE>
SOV. The decrease in SOV's gross profit during the year ended December 31,
---
1996 compared to the year ended December 31, 1995 is due to the Company's
termination of its hairstyle and beauty imaging systems line of business in
early 1996. The Company anticipates that the SOV line of business will generate
only a minimal portion of the Company's revenues in later years.
Dycam. For the year ended December 31, 1996, Dycam's gross profit margin was
-----
12%. The decline in gross profit from 31% for the year ended December 31, 1995
was primarily attributable to an increase in the percentage of revenues derived
from camera sales, which have a lower margin than supporting software sales,
licenses, and contract engineering work; and inventory write-offs and reserves
in 1996 of
29
<PAGE>
approximately $170,000 related to excess materials and aged products. Also
contributing to the decline in gross margins were the lower average sales prices
for certain of the cameras being sold. Gross margins may continue to remain at
lower levels, or decrease further, if Dycam's custom business does not
contribute a greater portion of revenues to Dycam's total revenues.
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 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 years ended December 31, 1996, and 1995:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------------------------ ------------------------------
Percentage of Percentage of
Expense Revenues Expense Revenues
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Consolidated $2,705,000 103% $4,636,000 102%
SOV 1,469,000 274 3,128,000 111
Dycam 1,215,000 59 1,140,000 68
SSI 21,000 210 368,000 944
</TABLE>
SOV. Selling, general and administrative expenses for the year ended
---
December 31, 1996 decreased $1,659,000, or 53% from the year ended December 31,
1995. During 1996, salaries and benefits decreased $783,000, or 69%, compared
to 1995. This decrease is attributable to a decrease in the number of employees
at all levels in all departments. The total number of employees decreased from
10 at December 31, 1995 to 1 at December 31, 1996. Marketing and advertising
decreased $132,000, or 93%, in 1996 compared to 1995. This decrease was
primarily due to cut backs on the design and placement of advertisements and
attendance at trade shows. Legal and professional expenses decreased $77,000,
or 10%, in 1996 compared to 1995. Other significant decreases in expenses in
1996 included insurance with a decrease of $80,000, travel and marketing with a
decrease of $71,000, and rent with a decrease of $54,000. Bad debt expense
increased $105,000 in 1996 due to write-offs and reserves for uncollectible
balances.
In January 1996, the Company decided to terminate SOV's hairstyle and beauty
imaging systems operations. Selling, general and administrative expenses
related to SOV's operations continue to exceed the gross profit derived
therefrom. The Company continues to make efforts to keep SOV's expenses to a
minimal level consistent with its current operations, including its activities
as a holding company. SOV continues to sell access disks and ancillary products
remaining in stock, and intends to do so for the foreseeable future.
Dycam. Dycam's selling, general and administrative expenses for 1996
-----
increased 7% to $1,215,000 from $1,140,000 in 1995. This increase resulted
primarily from increased sales and marketing expenditures in the 1996 period,
and increased legal and professional costs. Dycam took steps throughout 1996 to
control these expenditures.
30
<PAGE>
SSI. Selling, general and administrative expenses for 1996 decreased
---
$347,000, or 94%, from 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 terminate SSI's operations.
RESEARCH AND DEVELOPMENT
Consolidated research and development expenses for the year ended December
31, 1996 were $551,000, a decrease of $259,000, or 32%, compared to the year
ended December 31, 1995.
SOV. Research and development expenses for SOV for 1996 were $0, a decrease
---
of $56,000, or 100% compared to 1995. SOV's product development activities
ceased in January 1996 with the Company's decision to eliminate SOV's hairstyle
and beauty imaging systems operations.
Dycam. Research and development expenses for Dycam for 1996 were $551,000 a
-----
decrease of $203,000, or 27%, compared to 1995, and represented 100% of the
Company's total research and development expenses. This decrease is
attributable to reduced staffing levels, and reduced expenses associated with
the completion of certain product development to activities including the camera
developed in conjunction with Forever Yours. Dycam believes that continuing
research and development is essential to maintaining its competitive position,
and expects to continue to expend funds in this area.
SSI. There were no research and development expenses associated with SSI's
---
operations.
DISCONTINUED OPERATIONS.
In January 1997, the Company and FYI entered into an agreement to sell the
FYI business to Hasco. Hasco operates First Foto, a competitor of FYI in the
newborn photographic business. The results of operations of FYI are shown as
discontinued operations in 1996 and 1995 in the accompanying Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Report on
Form 10-KSB.
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 as the customer base has increased to over one-hundred
twenty-five hospital accounts by January 31, 1997. FYI's revenues for the year
ended December 31, 1996 increased $1,784,000 to $2,220,000 from $436,000 for the
year ended December 31, 1995. The Company devoted significant marketing efforts
and financial resources to the development and growth of the FYI business. In
January 1997, the Company and FYI entered into an agreement to sell the FYI
business to Hasco. The Company anticipates that FYI will generate revenues
through the closing of the FYI Sale, which is anticipated to occur in April
1997, after which time no revenues will be generated from FYI.
FYI's gross profit increased from $168,000 (39% of revenues) for 1995 to
$1,477,000 (67% of revenues) for 1996 as FYI emerged from its start-up phase of
operations. FYI's gross profit excludes intercompany cost of revenues of
$278,000 and $32,000 in 1996 and 1995, respectively, related to Dycam.
FYI's selling, general and administrative expenses for 1996 increased
$1,380,000, or 51%, to $4,109,000 from 1995. During 1996, salaries and benefits
increased $483,000 due to the addition of personnel to accommodate growth.
Commissions paid to hospitals, which typically are based on a percentage of
FYI's revenues derived from each hospital, increased $510,000. Other increased
selling, general and administrative costs include legal and professional fees
with an increase of $81,000.
FYI's research and development expenses for 1996 were $11,000, a decrease of
$60,000 or 85% compared to 1995. All intercompany research and development
expenses incurred in connection with
31
<PAGE>
services performed by Dycam have been eliminated upon consolidation. FYI's
research and development activities ceased in December 1996 with the Company's
and FYI's decision to sell the FYI business.
LIQUIDITY AND CAPITAL RESOURCES
During 1996 and 1995, the Company relied primarily upon cash on hand, cash
received from sales, intercompany advances, and proceeds from the issuance of
common stock of SOV and Dycam, and financing from outside parties, to finance
its cash operating losses and the expansion of FYI. Additionally, FYI's capital
expenditures were financed in part by capital leases.
At December 31, 1996, the Company had consolidated cash and cash equivalents
of $590,000, a decrease of $788,000 from $1,378,000 at December 31, 1995. The
Company's working capital at December 31, 1996 was $(3,816,000), a decrease of
$5,783,000 when compared to $1,967,000 at December 31, 1995. The current ratio
at December 31, 1996 was 0.3 to 1 compared to 1.7 to 1 at December 31, 1995.
SOV. SOV's cash and cash equivalents at December 31, 1996 were $(1,000), a
---
decrease of $4,000 from $3,000 at December 31, 1995. Income taxes receivable
decreased $266,000 due to receipt of income tax refunds of $301,000, net of
additional income taxes which became receivable during 1996. Accounts payable
and accrued expenses decreased $371,000 due discounts received and payments made
on aged balances. Advance from stockholder decreased $48,000 due to write-off
in connection with a settlement. SOV's working capital (excluding intercompany
balances) at December 31, 1996 was $(1,707,000) compared to $(1,545,000) at
December 31, 1995. The current ratio was 0.1 to 1 at December 31, 1996 compared
to 0.3 to 1 at December 31, 1995. SOV continued to use cash to fund its cash
operating losses during 1996.
In December 1994, Dycam made a secured loan of $500,000 to SOV. In January
1995, Dycam made an additional secured loan of $500,000 to SOV. These advances
were memorialized in a secured promissory note in the principal amount of
$1,000,000 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. For additional information regarding the terms of the promissory
note, refer to the discussion that follows regarding the liquidity and capital
resources of Dycam.
In September and October 1995, SOV and FYI received financing of $375,000
from Multinational Trading Corp., a Florida corporation ("MTC"), pursuant to a
short-term financing agreement. In November 1995, SOV, FYI and International
Digital Investors, L.P., a Delaware limited partnership ("IDI") entered into a
Note and Preferred Stock Purchase Agreement (the "1995 Agreement"). Pursuant
to the 1995 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 (the "1995 Notes").
Additionally, SOV issued to IDI 500 shares of 10% Senior Series A Convertible
Preferred Stock, $100 par value, for $50,000 and warrants entitling IDI to
purchase shares equivalent to 40% of the Company's common stock on a fully
diluted basis (the "1995 Warrants"). FYI received net proceeds of $2,307,000
from the $3,000,000 financing, after repayment of the MTC financing, its
associated interest, and transaction fees. Pursuant to the 1995 Agreement, as
amended March 1996, funds totaling $750,000 were available to SOV, all of which
had been advanced to SOV by FYI as of August 31, 1996. The remaining funds were
used for the furtherance of FYI's expansion. The 1995 Agreement was amended
again in May 1996 and January 1997 to provide, among other things, for the
deferral of the first principal payment and interest to not later than May 1,
1997, less restrictive covenants and a reduction in exercise price of the 1995
Warrants to $.075 per share.
32
<PAGE>
In 1995, SOV entered into a settlement of certain class action and derivative
suits, whereby SOV agreed to deliver to the plaintiff class warrants to purchase
750,000 shares of the Company's common stock at an exercise price of $.075 per
warrant share, and a $250,000 promissory note payable in three equal semi-annual
installments commencing July 1996. The number of warrants was increased to
1,750,000 in May 1996 prior to the final settlement in July 1996. As of
February 28, 1997, no payments have been made towards the debt. See "Legal
Proceedings."
In January 1996, the Company decided to discontinue SOV's hairstyle and
beauty imaging systems 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 guarantee, however, can be made
that the Company will be able to successfully negotiate reductions on its
remaining outstanding accounts payable.
Pursuant to a Note and Preferred Stock Purchase Agreement dated as of May 14,
1996 (the "1996 Agreement"), as amended, SOV and FYI agreed to issue up to
$1,200,000 aggregate principal amount of 10% Senior Notes due June 30, 1998 (the
"1996 Notes" and together with the 1995 Notes, the "Notes") in a series of
purchases of such 1996 Notes between the May 1996 closing date and September 15,
1996. Each purchase of 1996 Notes was contingent upon the Company and FYI
meeting certain minimum performance targets. IDI also purchased 500 shares of
Series B Preferred, for $50,000 and received Common Stock Purchase Warrants (the
"1996 Warrants" and together with the 1995 Warrants, the "Warrants"). Payment
of interest is deferred to not later than May 1, 1997.
In May 1996, IDI purchased $520,000 principal amount of the 1996 Notes, of
which $270,000 was used to repay principal and interest on certain interim loans
made to the Company and FYI by IDI and IDI-related entities in April 1996. IDI
purchased an additional $250,000, $100,000 and $150,000 principal amount of the
1996 Notes in June, July and August 1996, respectively. The Company did not
meet the September 15, 1996 minimum performance targets and IDI did not purchase
the final series of 1996 Notes totaling $180,000 until January 1997, at which
time all available funds under the 1996 Notes had been borrowed.
In July 1996, the K & A suit was settled and the accounting firm agreed to
pay $1,700,000 to the Company. See "Contingencies." Of the proceeds, $870,000
was applied to the repayment of the 1996 Notes. After partial repayment of the
1996 Notes, and payment of certain legal expenses in connection with the 1996
Agreement, the net proceeds of the settlement to the Company were $430,000,
which was added to the Company's general working capital, and used to fund the
operations of SOV and FYI. In September 1996, the Company received a state
income tax refund totaling $301,000, which was used to repay the 1996 Notes. As
of February 28, 1997, the unpaid balance of the 1996 Notes was $29,000.
From September 1996 through January 1997, the Company and FYI borrowed an
additional $927,000 from IDI pursuant to a $977,000 Bridge Note. The Company is
entitled to draw the remaiing $50,000 upon receipt by the Company of certain
income tax refunds.
At December 31, 1995 and 1996, the Company was not in compliance with certain
of the 1995 and 1996 Agreement's financial covenants, however, the Company has
obtained a waiver of these defaults 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 are taken in
satisfaction of the amounts due pursuant to the 1995
33
<PAGE>
and 1996 Agreements, 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.
On January 15, 1997, the Company, FYI and IDI entered into several
agreements. The Company and IDI entered into a Securities Exchange Agreement
which provided for the issuance of 4,347,427 shares of its Common Stock to IDI
in exchange for all of the 1995 Warrants and for 1996 Warrants with respect to
1,867,029 shares of Common Stock. IDI remains the holder of 1996 Warrants for
51,419,199 shares of Common Stock.
The Company also issued a Series D Warrant (the "Series D Warrant") to IDI
which is exercisable for up to 61,803,805 shares of the Company's Common Stock
at an exercise price of $.075 per share. The Series D Warrants are contingent
upon the occurrence of a proposed reverse stock split. If the reverse stock
split is approved and the Company and IDI complete the second exchange of
securities described below, then the Series D Warrants will not be exercisable.
However, if the reverse stock split is not approved by 5:00 p.m., Los Angeles
time, on April 15, 1997, then the Series D Warrants may be exercised by IDI
prior to November 20, 2005.
If the proposed reverse stock split is approved by the stockholders, the
Company intends to complete a second exchange of securities with IDI pursuant to
which the Company will issue an additional 39,342,461 (pre-reverse split) shares
of its Common Stock to IDI in exchange for all of the remaining 1996 Warrants
with respect to 51,419,199 (pre-reverse split) shares of the Company's Common
Stock, together with the surrender of the Series D Warrants. After the second
security exchange, IDI would continue to hold 500 shares of the Company's Series
A Preferred and 500 shares of the Company's Series B Preferred, as well as
43,689,888 (pre-reverse split) shares of the Company's Common Stock, equivalent
to 67% of the shares anticipated to be outstanding on the planned date of the
second exchange, April 15, 1997.
Effective January 31, 1997, SOV and FYI entered into an agreement to sell the
FYI business to Hasco. In January and February 1997, FYI borrowed a total of
$360,000 from Hasco pursuant to the Loan Agreement whereby Hasco will lend to
FYI up to a total of $540,000 prior to the closing (see Notes to Consolidated
Financial Statements - Subsequent Events). The proceeds of the FYI sale, net of
transaction costs and satisfaction of FYI's obligations (excluding its
indebtedness to IDI), will not be sufficient to fully repay the Company's and
FYI's obligations to IDI, or to fully satisfy the Company's other liabilities to
its creditors. IDI has a first priority security interest in all remaining
assets of the Company, including the remaining net proceeds from the FYI sale,
except for the second priority position it holds on the shares of Dycam common
stock owned by the Company, as to which Dycam has a first priority security
interest.
In order for the Company to continue its operations after the FYI sale, it
will be required to obtain additional financing from IDI or other sources, or
IDI will need to consent to postpone the repayments due from the Company and FYI
on all or part of the Company's and FYI's notes payable to IDI. Neither IDI nor
any other sources have indicated a willingness to loan additional funds to the
Company. Additionally, IDI has not indicated an intention to consent to the
postponement of the repayment it is entitled to on the Notes payable to IDI from
the Company and FYI.
In addition, the Company believes that the combined cash impact of a
settlement of the Durian and AESIC loss contingencies, more fully described in
"Contingencies" will not be significant. If (a) a significant negative result
is achieved with respect to the Durian and/or AESIC matters, (b) management
cannot achieve its operating plan or (c) funding is not available or proves
insufficient to cover the shortfalls, SOV will find it necessary to obtain
additional financing or undertake other such actions as may be appropriate, and
will be otherwise unable to achieve its goals or continue its operations.
34
<PAGE>
Dycam. At December 31, 1996, Dycam had cash and short-term investments on
-----
hand of $590,000, a decrease of $784,000 from $1,374,000 at December 31, 1995.
Accounts receivable increased $14,000 during the year ended December 31, 1996.
Inventories decreased $284,000 due to a reduction of inventory levels and write-
offs of excess and aged stock. Current liabilities increased by $38,000 to
$237,000, as a result of increases in accounts payable and accrued expenses.
Dycam's working capital (excluding intercompany balances) at December 31, 1996
was $884,000, a decrease of $1,141,000 when compared to $2,025,000 at December
31, 1995. The working capital reduction was primarily the result of the
decrease in cash which was used to fund Dycam's operating losses, and net
changes in other current assets and liabilities described above. Dycam
continued to use cash to fund operating losses during the first quarter of 1997.
The current ratio at December 31, 1996 was 6.0 to 1 compared to 11.1 to 1 at
December 31, 1995. Dycam does not have any long-term indebtedness and does not
currently maintain any credit facilities.
In December 1994, Dycam made a secured loan of $500,000 to SOV. Dycam
determined that it was in the best interests of Dycam and its shareholders that
it make this loan, which enabled SOV to continue funding FYI, and thus the
development and manufacture of the FYI digital camera by FYI and Dycam. In
January 1995 Dycam approved an additional secured loan to SOV of $500,000. The
two loans totaling $1,000,000 have been memorialized in a single note which
originally provided that the entire principal balance plus accrued and unpaid
interest thereon were due and payable on September 1, 1995. Dycam subsequently
extended the maturity date of the note to December 31, 1998. All interest
payments have been made in a timely fashion by SOV. The note is secured by
1,916,667 shares of Dycam's common stock owned by SOV. If SOV is unable to
satisfy its obligations pursuant to 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.
Dycam believes that its operating and research and development activities in
1997 will continue to use cash and expects that its cash balance will continue
to decline. However, Dycam also believes that its existing cash balances,
interest payments due from SOV under the intercompany loan, payments due from
FYI for deferred license fees, and cash flow from operations will be sufficient
to meet its cash requirements through September 1997, after which time it may be
required to raise capital. In addition, to the extent Dycam experiences growth
in the future, or its cash flow from operations is less than anticipated, Dycam
may be required to obtain additional sources of cash. There is no assurance
that additional sources of cash will be available.
FYI. FYI's cash and cash equivalents at December 31, 1996 were $63,000, a
---
decrease of $1,337,000 from $1,400,000 at December 31, 1995. Accounts
receivable increased $76,000 and inventories decreased $13,000 due to sales
which began in 1995. Prepaid expenses decreased $15,000 due to the utilization
of prepaid costs including marketing materials used while introducing FYI to the
marketplace. Accounts payable and accrued expenses increased $198,000 due to
growth. Current portion of long-term debt, short term notes payable, and
related accrued interest payable increased $3,060,000 due to current maturities
and additional interest accruals. FYI's working capital (excluding intercompany
balances) at December 31, 1996 was $(3,444,000) compared to $1,129,000 at
December 31, 1995. The current ratio was 0.1 to 1 at December 1996 compared to
3.6 to 1 at December 31, 1995. The decrease in working capital was primarily
the result of a decrease in cash, which was used to fund FYI's cash operating
losses, net of changes in other current assets and current liabilities discussed
above, and advances to and from SOV.
In April 1994, SOV acquired an 80% interest in FYI. The purchase price for
this interest was $100,000 cash. In addition, SOV agreed to provide FYI with a
credit line of $1,100,000 over the next 15 months. The total amount advanced by
SOV to FYI during 1994 was $1,133,000. In November 1995, the total advances
outstanding of $2,700,000 were contributed by SOV to FYI equity in conjunction
with the IDI Agreement.
35
<PAGE>
As described above, in September and October 1995, SOV and FYI received
financing of $375,000 from MTC, pursuant to a short-term financing agreement.
In November 1995, SOV, FYI and IDI entered into the 1995 Agreement. FYI
received net proceeds of $2,307,000 from the $2,950,000 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 were available to SOV, all of which had been advanced to SOV as of
August 31, 1996. In May 1996, SOV, FYI and IDI entered into the 1996 Agreement,
which provided additional financing of $1,200,000. Additionally, from September
1996 through January 1997, IDI advanced $927,000 to SOV and FYI pursuant to a
$977,000 Bridge Note due not later than May 1, 1997. The Company was not in
compliance with certain of the Agreement's financial covenants at December 31,
1995 and 1996, however, the Company has obtained a waiver for these violations
from IDI.
FYI was in a development stage during 1994 and the first two months of 1995.
Revenues commenced in March 1995 and were at a level consistent with the
Company's expectations of revenues during FYI's start-up phase. FYI's revenues
continued to grow and contribute an increasing amount of cash to fund
operations. FYI expects that working capital requirements through the planned
closing of the FYI Sale, which is expected to occur on or about April 15, 1997,
subject to the approval of the Company's stockholders and other customary terms
and conditions, will continue to be funded through a combination of cash on
hand, cash receipts from product sales and additional advances pursuant to the
Hasco Loan. The Hasco Loan provides for funds to FYI up to $540,000 prior to
the closing of the FYI Sale. As of February 28, 1997, $360,000 had been
advanced to FYI pursuant to the Hasco Loan. Management believes that the Hasco
Loan currently in place will be sufficient to allow for FYI to continue to meet
its cash flow requirements through the planned closing of the FYI Sale. To the
extent cash flow from operations is less than anticipated, or if amounts
available under the Hasco Loan prove insufficient to cover the shortfalls, or if
the FYI Sale is not consummated, FYI will be required to obtain additional
financing, scale back its marketing activities to a level sustainable under such
circumstances or undertake other such actions as may be appropriate, and will be
otherwise unable to achieve its goals or continue its operations.
SSI. At December 31, 1996, SSI had cash and short term investments on hand
---
of $1,000. During 1995, SSI relied primarily upon advances totaling $228,000
from SOV to finance its introduction and operations, although SSI had some
limited cash receipts from the sale of franchises. SSI's working capital at
December 31, 1996 was $(11,000). SSI's current ratio was 0.08 to 1 at December
31, 1996 compared to 0.3 to 1 at December 31, 1995.
In 1995, SSI used cash in operations, primarily as a result of continued cash
operating losses. SSI has not sold any franchises since January 1995. SSI no
longer has any employees, and any corporate administrative matters are handled
by SOV on behalf of SSI. In January 1996, the Company commenced the orderly
termination of SSI's operations, and expects cash provided and used by SSI to
comprise a minimal portion of the Company's cash flow in subsequent periods.
36
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
STYLES ON VIDEO, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants 38
Consolidated Balance Sheets at December 31, 1996 and 1995 39
Consolidated Statements of Operations for the Years Ended December 31,
1996 and 1995 41
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1995 42
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996 and 1995 43
Notes to Consolidated Financial Statements 44
</TABLE>
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Styles on Video, Inc.
We have audited the accompanying consolidated balance sheets of Styles on Video,
Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Styles
on Video, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered substantial
recurring losses from operations, has an accumulated deficit and is subject to
certain contingencies that raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/
---------------------
CORBIN & WERTZ
Irvine, California
March 14, 1997
38
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 590,000 $ 1,378,000
Accounts receivable, less allowance for
doubtful accounts of $182,000 and $259,000
at December 31, 1996 and 1995, respectively 106,000 142,000
Income taxes receivable 61,000 327,000
Inventories 395,000 771,000
Net assets of discontinued operations 444,000 1,623,000
Prepaid expenses and other current assets 111,000 150,000
---------- -----------
Total current assets 1,707,000 4,391,000
Property and equipment, net 496,000 545,000
Long-term receivables, less allowance for
doubtful accounts of $87,000 and $577,000
at December 31, 1996 and 1995, respectively - 1,000
Goodwill, net of accumulated amortization of
$805,000 and $527,000 at December 31, 1996
and 1995, respectively 4,749,000 5,027,000
Debt issuance costs, net of accumulated
amortization of $163,000 and $13,000 at
December 31, 1996 and 1995, respectively 129,000 279,000
Other assets 31,000 63,000
---------- -----------
Total assets $7,112,000 $10,306,000
========== ===========
</TABLE>
Continued
39
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 785,000 $ 1,072,000
Accrued expenses 560,000 353,000
Accrued interest payable 270,000 -
Customer advances 868,000 868,000
Advance from stockholder - 48,000
Current maturities of long-term debt 2,000,000 83,000
Notes payable 1,040,000 -
------------ ------------
Total current liabilities 5,523,000 2,424,000
Long-term debt 950,000 3,117,000
Minority interests in consolidated subsidiaries 591,000 1,101,000
------------ ------------
Total liabilities 7,064,000 6,642,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000
shares authorized; 500 shares of Series A
issued and outstanding at December 31, 1996
and 1995; $50,000 liquidation preference - -
Preferred stock, $.001 par value; 1,000,000
shares authorized; 500 shares of Series B
issued and outstanding at December 31, 1996;
$50,000 liquidation preference - -
Common stock, $.001 par value; 10,000,000 shares
authorized; 4,505,000 shares issued and
outstanding at December 31, 1996 and 1995 4,000 4,000
Additional paid-in capital 16,237,000 16,187,000
Accumulated deficit (16,193,000) (12,527,000)
------------ ------------
Total stockholders' equity 48,000 3,664,000
------------ ------------
$ 7,112,000 $ 10,306,000
============ ============
</TABLE>
See independent auditors' report.
The accompanying notes are an intregal part of
these consolidated financial statements.
40
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Systems and related software sales $ 536,000 $ 2,854,000
Camera sales 2,021,000 1,634,000
Other revenues 57,000 43,000
----------- -----------
Total revenues 2,614,000 4,531,000
----------- -----------
Cost of revenues, including depreciation and
amortization of $131,000 and $19,000 in 1996
and 1995, respectively:
Cost of systems and software sold and leased 55,000 1,324,000
Cost of camera sales 1,828,000 1,157,000
----------- -----------
Total cost of revenues 1,883,000 2,481,000
----------- -----------
Gross profit 731,000 2,050,000
----------- -----------
Operating expenses:
Selling, general and administrative 2,705,000 4,636,000
Research and development 551,000 810,000
Depreciation and amortization 342,000 347,000
----------- -----------
Total operating expenses 3,598,000 5,793,000
----------- -----------
Loss from operations (2,867,000) (3,743,000)
Interest income 118,000 107,000
Interest expense (705,000) (99,000)
Legal settlement 1,700,000 -
Other expense - (7,000)
Minority interests in net losses of
consolidated subsidiaries 510,000 370,000
----------- -----------
Loss from continuing operations before income
taxes and extraordinary item (1,244,000) (3,372,000)
Provision (benefit) for income taxes (32,000) 9,000
----------- -----------
Loss from continuing operations before
extraordinary item (1,212,000) (3,381,000)
Forgiveness of debt, net of tax of zero 332,000 255,000
----------- -----------
Net loss from continuing operations (880,000) (3,126,000)
Discontinued operations:
Loss from operations of discontinued
business (less applicable income
taxes of zero) (2,786,000) (2,714,000)
----------- -----------
Net loss $(3,666,000) $(5,840,000)
=========== ===========
Loss per common share:
Loss from continuing operations before
extraordinary item $(0.27) $(0.75)
Extraordinary item 0.07 0.05
Discontinued operations (0.61) (0.60)
----------- -----------
Loss per common share $(0.81) $(1.30)
=========== ===========
Weighted average common shares outstanding 4,505,000 4,505,000
=========== ===========
</TABLE>
See independent auditors' report.
The accompanying notes are an integral part of
these consolidated financial statements.
41
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
-------------------- ------------------- ---------------------
Number of Number of Number of Paid-in Accumulated Stockholders'
Shares Par Value Shares Par Value Shares Par Value Capital Deficit Equity
--------- --------- --------- ---------- ----------- --------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 - $- - $- 4,505,000 $4,000 $16,137,000 $(6,687,000) $9,454,000
Issuance of Series A
preferred stock 500 - - - - - 50,000 - 50,000
Net loss - - - - - - - (5,840,000) (5,840,000)
--- --- --- --- --------- ------ ----------- ----------- ---------
Balances, December 31, 1995 500 - - - 4,505,000 4,000 16,187,000 (12,527,000) 3,664,000
Issuance of Series B
preferred stock - - 500 - - - 50,000 - 50,000
Net loss - - - - - - - (3,666,000) (3,666,000)
--- --- --- --- --------- ------ ---------- ------------ ---------
Balances, December 31, 1996 500 $- 500 $- 4,505,000 $4,000 $16,237,000 $(16,193,000) $ 48,000
=== === === === ========= ====== =========== ============ =========
</TABLE>
See independent auditors' report.
The accompanying notes are an integral part of
these consolidated financial statements.
42
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,666,000) $(5,840,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 195,000 96,000
Amortization of goodwill 278,000 278,000
Amortization of debt issuance costs 365,000 13,000
Provision for bad debts - 17,000
Forgiveness of debt, net of tax (332,000) (255,000)
Write-off of loan from stockholder (48,000) -
Loss on disposal of property and equipment 9,000 -
Minority interests share of losses in
subsidiaries (510,000) (370,000)
Changes in operating assets and liabilities:
Accounts receivable 36,000 25,000
Income taxes receivable 266,000 929,000
Inventories 376,000 544,000
Net assets of discontinued operations 1,179,000 (1,272,000)
Prepaid expenses and other current assets 39,000 (46,000)
Long-term receivables and other assets 33,000 (10,000)
Accounts payable and accrued expenses 522,000 356,000
----------- -----------
Net cash used in operating activities (1,258,000) (5,535,000)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 2,000 -
Purchase of property and equipment (157,000) (388,000)
----------- -----------
Net cash used in investing activities (155,000) (388,000)
----------- -----------
Cash flows from financing activities:
Proceeds received from issuance of
preferred stock 50,000 50,000
Advance from stockholder - (152,000)
Repayment of loan receivable from
stockholder - 450,000
Proceeds received from issuance of
note payable 790,000 2,950,000
Debt issuance costs (215,000) (292,000)
----------- -----------
Net cash provided by financing activities 625,000 3,006,000
----------- -----------
Net change in cash and cash equivalents (788,000) (2,917,000)
Cash and cash equivalents, beginning of year 1,378,000 4,295,000
----------- -----------
Cash and cash equivalents, end of year $ 590,000 $ 1,378,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Income taxes $ 3,000 $ 9,000
=========== ===========
Interest $ 285,000 $ 56,000
=========== ===========
</TABLE>
See independent auditors' report.
The accompanying notes are an integral part of
these consolidated financial statements.
43
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1996 and 1995
NOTE 1 - DESCRIPTION OF BUSINESS
Styles on Video, Inc. ("SOV" or, together with its subsidiaries, the "Company")
was originally incorporated as a California corporation in May 1992 as a wholly-
owned subsidiary of New Image Industries, Inc. ("New Image") and in January 1993
was reincorporated as a Delaware corporation. On March 29, 1993, New Image
distributed all of SOV's common stock held by it to its stockholders (the
"Distribution") on the basis of one share of SOV's common stock for each five
shares of New Image common stock held by a stockholder. Immediately following
the Distribution, SOV effected a rights offering (the "Rights Offering")
pursuant to which each stockholder received, for each share of SOV common stock
held, the right to purchase one share of SOV common stock for $6.00 per share.
Upon completion of the Distribution and the Rights Offering, SOV became a
publicly owned company.
On February 7, 1994, SOV acquired all of the outstanding stock of Dycam Inc.
("Dycam") for 346,140 shares of common stock of SOV. SOV's ownership of Dycam
was subsequently reduced to 61% as of December 31, 1994 (see Note 4). In April
1994, SOV purchased an 80% interest in Forever Yours, Inc. ("FYI") for $100,000
(see Note 4). SOV's ownership of FYI was subsequently increased to 100% as of
May 1996. Additionally, during the third quarter of 1994, SOV formed a wholly-
owned franchising subsidiary, Styles Servicing, Inc. ("SSI"). However, SSI has
not sold any franchises since January 1995, and its Uniform Franchising Offering
Circular has not been updated.
SOV's original business primarily consisted of the sale of computer-based
imaging systems ("Systems") designed to show customers what they look like
"wearing" various hairstyles. In addition to its hairstyle imaging systems, SOV
marketed various ancillary products, including blank video tapes, promotional
materials, and access discs which are necessary for the operation of certain
Systems. The Company's management does not believe that there is a sufficient
market for these products at their current price points to justify expenditures
on their continued promotion, manufacture or distribution. Consequently, in
January 1996 the Company began a complete wind-down of SOV's hairstyle and
beauty imaging business. During the wind-down period, the Company intends to
sell only those ancillary products which are currently part of its inventory and
does not intend to develop, market or sell existing or new SOV hairstyle and
beauty imaging systems.
Dycam designs and develops digital cameras and associated hardware and software
products primarily for use with personal computers. Dycam also performs
engineering and consulting services for FYI and for unrelated third parties.
FYI is a newborn baby photography business that was incorporated in April 1994.
FYI's primary products are digital newborn photographic portraits of newborns
which are taken while the newborns are still in the hospital nursery. The
photographs can be enhanced using image editing software. Sales at FYI
commenced in the first quarter of 1995. In January 1997, SOV and FYI entered
into an agreement to sell the FYI business to Hasco International, Inc.
("Hasco") (see Note 18). The sale is expected to close in April 1997, subject
to the approval of SOV's stockholders and other customary terms and conditions.
The operating results of FYI have been shown as discontinued operations in 1996
and 1995 in these consolidated financial statements (see Note 20). Upon the
successful completion of SOV's sale of the FYI business, SOV's assets and
operations will consist primarily of those of its 61% investment in Dycam.
NOTE 2 - LIQUIDITY AND MANAGEMENT'S PLANS
SOV's consolidated financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
Continued
44
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 2 - LIQUIDITY AND MANAGEMENT'S PLANS, CONTINUED
During 1995, SOV experienced cash liquidity shortfalls resulting from operating
deficiencies at SOV's level and from the development and expansion of the
business operated by FYI, which were funded primarily through the IDI debt and
equity financing of $3,000,000 in November 1995 as described in Note 11. These
proceeds were primarily used to fund the operating requirements of SOV and FYI,
to reduce accounts payable of SOV, and to further the growth of the FYI
business. As of February 28, 1997, no amounts have been repaid to IDI under this
financing agreement. In May 1996, the Company entered into a debt and equity
financing agreement with IDI for additional financing of $1,250,000 (see Note
11). As of February 28, 1997, the Company had borrowed all available funds under
this agreement, and, net of certain repayments, the unpaid balance of this note
payable to IDI was $29,000. From September 1996 through January 1997, the
Company and FYI borrowed an additional $927,000 from IDI pursuant to a $977,000
Bridge Note (see Note 11). No amounts have been repaid as of February 28, 1997.
Effective January 31, 1997, SOV and FYI entered into an agreement to sell the
FYI business to Hasco. In January and February 1997, FYI borrowed a total of
$360,000 from Hasco pursuant to an agreement whereby Hasco will lend to FYI up
to a total of $540,000 prior to the closing (see Note 18). The proceeds of the
FYI sale, net of transaction costs and satisfaction of FYI's obligations
(excluding its indebtedness to IDI), will not be sufficient to fully repay the
Company's and FYI's obligations to IDI and Dycam, or to fully satisfy the
Company's other liabilities to its creditors. IDI has a first priority security
interest in all remaining assets of the Company, including the remaining net
proceeds from the FYI sale, except for the second priority position it holds on
the shares of Dycam common stock owned by the Company, as to which Dycam has a
first priority security interest.
The Company's current liabilities exceeded its current assets as of February 28,
1997. In order for the Company to continue its operations after the FYI sale,
it will be required to obtain additional financing from IDI or other sources, or
IDI will need to consent to postpone the repayments due from the Company and FYI
on all or part of the Company's and FYI's notes payable to IDI. Neither IDI nor
any other sources have indicated a willingness to loan additional funds to the
Company. Additionally, IDI has not indicated an intention to consent to the
postponement of the repayment it is entitled to on the notes payable to IDI from
the Company and FYI. The continued existence of SOV and its subsidiaries is
also dependent upon its ability to achieve its 1997 operating plan and
successfully resolve certain contingencies (see Note 17).
There is substantial doubt concerning the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments which might result from the outcome of this uncertainty. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to obtain
profitable operations.
45
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 2 - LIQUIDITY AND MANAGEMENT'S PLANS, CONTINUED
The Company has defaulted on its notes payable to IDI (see Note 11), and has
historically received waivers for such defaults. There can be no assurance that
the Company will receive future waivers, if needed, from IDI. If future
defaults occur, and waivers are not obtained, the notes payable could become
immediately due, SOV's and/or FYI's assets could be taken in satisfaction of the
amounts due pursuant to the IDI financing, and, if no excess remains, funds
might not be available to meet SOV's obligations, including, without limitation,
the repayment of the $1,000,000 note owed to Dycam.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Minority Interests
- ------------------------------------
The consolidated financial statements include the accounts of the Company. All
significant intercompany balances and transactions have been eliminated. The
minority interests represent the 39% separate public ownership of Dycam and the
20% ownership of FYI by its President through May 1996, at which time FYI became
a wholly-owned subsidiary.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis in the accompanying consolidated balance sheets. The Company's financial
instruments consist of its cash and cash equivalents, accounts receivable, long-
term debt and accounts payable. The carrying amounts of the Company's financial
instruments generally approximate their fair values at December 31, 1996.
Cash and Cash Equivalents
- -------------------------
The Company considers cash on hand, cash in banks, certificates of deposit, time
deposits and U.S. government and other short-term securities with remaining
maturities of three months or less when purchased to be cash and cash
equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost or market (net realizable value)
using the first-in, first-out method. Inventories for SOV consist of mostly
purchased finished components. Inventories for Dycam consist of cameras and
camera components, image editing software and camera accessories. Such net
realizable value is based on forecasts for sales of the Company's products in
the ensuing years. The industry in which the Company operates is characterized
by rapid technological advancement and change. Should demand for the Company's
products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventories could be substantially less than
the amount reflected in the accompanying 1996 consolidated balance sheet.
46
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and gains or losses from retirements and dispositions are credited or
charged to income. Depreciation and amortization are computed using the
straight-line method over the shorter of the estimated useful lives of the
respective assets or terms of the related leases. The useful lives and lease
terms range from three to ten years.
Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation of such assets over their remaining
lives can be recovered through projected undiscounted cash flows. The amount of
impairment, if any, is measured based on projected undiscounted cash flows and
is charged to operations in the period in which such impairment is determined by
management.
Goodwill
- --------
Goodwill, which represents the excess of the purchase price over the fair value
of net assets acquired resulting from the Dycam acquisition, is amortized on a
straight-line basis over the expected periods to be benefitted. Dycam assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted future cash flows. The amount of goodwill
impairment, if any, is measured based on projected undiscounted future cash
flows and is charged to operations in the period in which goodwill impairment is
determined by management. Goodwill has been amortized in 1996 and 1995 on a
straight-line basis over the expected twenty-year life. During each of the
years ended December 31, 1996 and 1995, Dycam recorded $278,000 of amortization
expense. At December 31, 1996 and 1995, management of Dycam determined that
there was no impairment of goodwill.
Capitalized Software Development Costs
- --------------------------------------
The Company capitalizes costs incurred for the development of certain computer
software in accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software To Be Sold, Leased, or Otherwise
Marketed." Capitalization of computer software development costs begins upon
the establishment of technological feasibility. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs requires external factors,
including, but not limited to, technological feasibility and obsolescence,
anticipated future gross revenues, estimated economic life, changes in software
and hardware technology, and patent and trademark law and litigation.
Amortization of capitalized computer software costs is provided for on a
product-by-product basis at the greater of the amount computed using a ratio of
current gross revenues for a product to the total of current anticipated future
gross revenues or the straight-line method over the remaining estimated economic
life of the product. Generally, an original estimated economic life of two to
five years is assigned to capitalized computer software development costs.
During the years ended December 31, 1996 and 1995, no software development costs
were capitalized or amortized.
Continued
47
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Debt Issuance Costs
- -------------------
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective interest method over the lives of the
related debt.
Revenue Recognition
- -------------------
The Company recognizes revenue from System and software sales at the time of
shipment in accordance with the requirements of AICPA Statement of Position 91-1
on Software Revenue Recognition. The Company has no obligation to customers
after delivery of its Systems except for warranty related work described below.
Any follow-up work performed is billed when the services are performed, and the
related revenue is recognized upon completion of services.
The Company has exclusive licensing agreements covering the Styles on Video
automated software with numerous international distributors. In general, a
licensee signs an agreement to purchase a minimum number of software packages at
a specified price and is concurrently granted an exclusive right to operate the
Systems and offer Styles on Video services in their territory. Continuing
exclusivity is dependent on meeting subsequent yearly sales quotas. Failure to
meet or exceed the established yearly quotas for sales can result in the license
being revoked. Revenue is recognized upon shipment of the software packages.
Revenues from camera sales and sales of portraits of newborns are recognized
upon shipment of products. Contract engineering fees are recognized when the
service is performed. License fee revenues are recognized when earned.
Revenue from the franchising of Systems is recorded using the installment
method. The franchise fee is based on the population of a given area, and
exclusivity is maintained by selling a minimum number of franchises each year.
A small cash down payment is required and the balance of the franchise fee is
financed by the Company. Payment on the unsecured franchise notes receivable is
only required to be made from a percentage of the commissions earned by
franchisees for the sale of Styles on Video franchises, equipment or supplies.
As a result of the limited operating history of the franchisees, their inability
to sell the minimum number of franchises, and their current inability to sell
franchises, only the cash down payment and percentage of commissions received
are included in the consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company has
stopped selling Systems effective January 1996 and plans to be out of the
newborn baby photography business in April 1997. Accordingly, future revenues
will be those generated primarily from Dycam.
Advertising
- -----------
The Company reports the costs of all advertising as expense in the period in
which those costs are incurred. Advertising expense was approximately $130,000
and $244,000 for the years ended December 31, 1996 and 1995, respectively.
Continued
48
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income Taxes
- ------------
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109") effective January 1, 1993. SFAS 109
requires the asset and liability method of accounting for income taxes. Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the consolidated financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Stock Options and Warrants
- --------------------------
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for stock-
based compensation. However, SFAS 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to employees using
the intrinsic method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method of
accounting defined in SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB 25.
Loss Per Common Share
- ---------------------
Net loss per common share is computed on the basis of the weighted average
number of common and dilutive common equivalent shares outstanding. Common
stock equivalents consist of options and warrants outstanding. Common stock
equivalents have not been included in the computation of loss per common share
for 1996 and 1995 as their inclusion would be anti-dilutive.
Reclassifications
- -----------------
Certain amounts in the 1995 consolidated financial statements have been
reclassed to conform to the 1996 presentation.
Continued
49
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 4 - ACQUISITIONS
Dycam Inc.
- ----------
On February 7, 1994, the Company acquired all of the outstanding shares of Dycam
in exchange for 346,140 shares of the Company's common stock valued at
$5,495,000, plus acquisition costs of $108,000. The acquisition was accounted
for using the purchase method, and the purchase price was allocated to assets
and liabilities based on their estimated fair values as of the date of
acquisition. The cost in excess of net assets acquired of $5,554,000 was
allocated to goodwill. In accordance with Staff Accounting Bulletin No. 54, the
financial statements of Dycam as of the acquisition date were adjusted to "push-
down" the Company's cost of acquiring the common stock of Dycam.
Additionally, in connection with the above acquisition, Dycam issued 142,742
shares of common stock, totaling $137,000, in connection with the exercise of
options by employees (at exercise prices ranging from $.80 to $2.01) and 114,532
shares of common stock to two unrelated parties as fees in connection with the
acquisition.
In April 1994, Dycam declared a dividend distribution consisting of the right to
purchase 1,000,000 shares of its common stock at $6.00 per share. The Company
distributed to its stockholders one right for each five shares of SOV common
stock held of record as of May 27, 1994. The rights offering closed on July 12,
1994, and Dycam's common stock began trading on July 18, 1994. The Company
retained an approximate 66% majority interest in Dycam, which was reduced to
approximately 61% by December 31, 1994 as a result of the issuance by Dycam of
204,169 shares of its common stock upon the exercise of stock options at $6 per
share (consisting of $25,000 cash and the settlement of a related put obligation
in the amount of $1,199,832). At December 31, 1996, the Company held 1,916,667
shares of Dycam's 3,120,836 shares of common stock then outstanding. Dycam has
issued options for 502,079 shares of its common stock, of which 386,861 were
exercisable at December 31, 1996. Had the options for the remaining 502,079
shares been exercised in 1995 (average exercise price of $3.91), the Company's
equity interest in Dycam would have been reduced from 61% to 53%. The net
proceeds of the rights offering of $4,976,000 (net of offering costs and
underwriting fees and expenses) were retained by Dycam.
Forever Yours, Inc.
- -------------------
In April 1994, the Company purchased an 80% interest in FYI for $100,000. The
20% minority interest in FYI was held by the then-President of FYI until May
1996, at which time FYI became a wholly-owned subsidiary of SOV. FYI was in the
development stage until the first quarter of fiscal 1995, at which time revenues
from product sales commenced (see Note 18).
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Company maintains cash and cash equivalents with high credit quality
financial institutions. At times such balances in any one institution may
exceed the federally insured limit of $100,000.
Concentration of credit risk with respect to accounts receivable is generally
limited due to the diversity of the Company's customer base. The Company
provides credit, in the normal course of business, to individuals and
corporations who purchase digital cameras and related products. Sales of
hairstyle beauty systems and related products and newborn portraits are
generally made on a credit card or C.O.D. basis. The Company performs ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses. The Company generally does not obtain collateral to secure its
receivables.
Continued
50
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 6 - STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
During 1996 and 1995, the Company wrote-off $567,000 and $243,000, respectively,
of accounts receivable deemed uncollectible.
In 1996 and 1995, certain vendors forgave approximately $332,000 and $255,000,
respectively, of accounts payable owed to them, which has been reflected as
extraordinary items in the accompanying statement of operations, net of tax of
$0.
International sales accounted for approximately $415,000 or approximately 16% of
consolidated revenues for the year ended December 31, 1996.
NOTE 7 - INVENTORIES
- --------------------
The components of inventory, net of reserve for obsolescence of $236,000 and
$66,000 as of December 31, 1996 and 1995, respectively, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $ 266,000 $ 544,000
Work-in-process 106,000 145,000
Finished goods 23,000 82,000
--------- ---------
$ 395,000 $ 771,000
========= =========
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment at December 31 is comprised of the following:
1996 1995
-------- --------
Machinery and equipment $ 641,000 $ 620,000
Office equipment and furniture 288,000 128,000
--------- ---------
869,000 748,000
Less accumulated deprecation
and amortization (373,000) (203,000)
--------- ---------
$ 496,000 $ 545,000
========= =========
</TABLE>
NOTE 9 - LONG-TERM RECEIVABLES
Long-term receivables at December 31, 1995 include $450,000 due from a
corporation organized under the laws of Belgium, due October 1996, bearing
interest at 10% payable monthly, and collateralized by equipment and software.
The entire $450,000 was reserved at December 31, 1995 and written-off during
1996.
NOTE 10 - INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31
consists of the following:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Current:
Federal $ - $ -
State (32,000) 9,000
-------- -------
$(32,000) $9,000
======== =======
</TABLE>
Continued
51
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 10 - INCOME TAXES, CONTINUED
The Company has recorded income taxes receivable relating to the restatement of
its 1993 financial statements.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31 are presented below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts and notes receivable, principally
due to allowances for doubtful accounts $ 108,000 $ 339,000
Inventories 95,000 37,000
Net operating loss carryforwards 8,897,000 7,359,000
Tax credit carryforwards 60,000 70,000
Other 43,000 22,000
----------- -----------
Total gross deferred tax assets 9,203,000 7,827,000
Less valuation allowance (9,163,000) (7,787,000)
----------- -----------
Net deferred tax assets 40,000 40,000
Deferred tax liability -
Depreciation (40,000) (40,000)
---------- -----------
Net deferred tax liability $ - $ -
=========== ===========
</TABLE>
During 1996 and 1995, the deferred tax assets valuation allowance increased
$1,376,000 and $2,217,000, respectively, due primarily to the increase in the
net operating loss carryforwards, which will be realized only if the Company
generates net taxable income in future years.
The differences between total income tax expense and the income tax benefit
computed by applying the U.S. Federal income tax rate of 34 percent to loss
before income taxes and extraordinary item from continuing operations are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Computed "expected" tax benefit $(423,000) $(1,146,000)
Change in valuation allowance for
deferred tax assets 281,000 1,039,000
State taxes, net of benefit (21,000) 6,000
Goodwill 103,000 103,000
Other 28,000 7,000
--------- -----------
$ (32,000) $ 9,000
========= ===========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
Federal and California franchise tax purposes totaling $23,626,000 and
$14,086,000, respectively, which begin expiring in the years 2008 and 1998,
respectively. Included in the Federal and California net operating loss
carryforwards is $6,056,000 and $3,028,000, respectively, resulting from the
deduction for tax purposes of compensation expense relating to the exercise
during 1994 of nonqualified stock options. Upon realization, the related tax
benefit will be added to additional paid-in capital and will not impact the
Company's future earnings. Certain of these net operating loss carryforwards
relate to SOV's subsidiaries and their utilization, if any, will be limited in
accordance with certain Internal Revenue Code rules.
Continued
52
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 10 - INCOME TAXES, CONTINUED
In general, Section 382 of the Internal Revenue Code includes provisions which
may limit the amount of net operating loss carryforwards and other tax
attributes that may be used annually in the event that a greater than 50%
ownership change (as defined) takes place in any three-year period. Such
limitations can result in the loss of net operating loss carryforwards.
NOTE 11 - IDI FINANCING AGREEMENTS
1995 Agreement
- --------------
In November 1995, the Company executed a Financing Agreement with International
Digital Investors, L.P. ("IDI"), a Delaware limited partnership. The Financing
Agreement was amended in March and May 1996 and in January 1997. Pursuant to
the terms of the Financing Agreement, as amended (the "1995 Agreement"):
A. SOV and FYI co-issued $2,950,000 of 10% notes due June 30, 1998 (the "1995
Notes"). Interest on the 1995 Notes is payable monthly, and quarterly
principal payments of $500,000 commence not later than May 1, 1997.
Payment of unpaid interest accruing on the outstanding 1995 Notes may be
deferred through not later than May 1, 1997. The 1995 Notes are
redeemable, in whole or in part, by SOV and FYI prior to maturity without
penalty. They are subject to mandatory redemption, at par, under certain
conditions specified in the 1995 Agreement, which include the issuance of
equity, and the sale or other disposition of certain assets. The 1995 Note
holders have the option to put the Senior Notes, at par, in the event of a
sale, merger, change of control or public offering involving SOV or FYI.
Substantially all assets of SOV and FYI are pledged as collateral on the
1995 Notes, except for the 1,916,667 shares of Dycam common stock owned by
SOV which collateralizes the $1,000,000 note payable to Dycam, (see Note
17), and FYI's hospital contracts and proceeds thereof which collateralize
the Hasco Loan (see Note 18). The 1995 Notes are subject to restrictive
covenants, including the incurrence of additional indebtedness, maintenance
of net worth and other financial covenants, and limitations on capital
expenditures, investments, transactions with affiliates, and consolidation,
merger and sales of assets. At December 31, 1996 and 1995, the Company was
in default of certain restrictive covenants, which defaults were waived by
the 1995 Note holders. Compliance with the terms of the 1995 Agreement is
determined as of the end of each calendar quarter. Should the Company be in
violation of any of the covenants at a future date, waiver of such
violation is at the sole discretion of the 1995 Note holders. If future
defaults occur, waivers are not obtained, SOV's and/or FYI's assets are
taken in satisfaction of the amounts due pursuant to the IDI financing, and
no excess remains, funds might not be available to meet SOV's obligations,
including, without limitation, the repayment of a $1,000,000 note payable
to Dycam.
B. The Company issued 500 shares 10% Senior Series A Convertible Preferred
Stock (the "Series A Preferred Stock") at $100 per share, for total
consideration of $50,000. Dividends are payable quarterly and will accrue
whether or not declared by the Board of Directors. The liquidation
preference is $50,000 plus accrued dividends. The Series A Preferred Stock
is convertible at any time, in whole or in part, at the option of the
holder into shares of the Company'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 the common stock warrants (see
C. below) remain unexercised, the Series A Preferred Stock, voting as a
class, is entitled to elect four of the Company's seven
Continued
53
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 11 - IDI FINANCING AGREEMENTS, CONTINUED
directors. In the event of a change of control, as defined in the 1995
Agreement, the Company must offer to purchase all outstanding Series A
Preferred Stock at a price equal to the liquidation preference thereof at
that time, and pay all unpaid accrued dividends.
C. The Company issued 3,914,882 Series A common stock purchase warrants which
entitled IDI to purchase shares of the Company's common stock equivalent to
40% of the fully diluted common shares outstanding on the date of the 1995
Agreement (the "1995 Warrants"). The exercise price of such warrants is
$.075 per warrant. The warrants may be exercised at any time at the option
of the holder prior to expiration ten years from the date of issuance (see
Note 14). On January 15, 1997, the Company issued 4,347,427 shares of its
common stock to IDI in exchange for all of the 1995 Warrants and a portion
of the warrants issued to IDI in connection with the May 1996 financing
(see below).
Use of the funds under the 1995 Agreement was limited to the repayment of bridge
financing obtained in 1995, and related accrued interest and transaction costs,
and the furtherance of the Company's business plans, specifically the expansion
of FYI's business.
1996 Agreement
- --------------
In May 1996, the Company executed a series of agreements which included an
additional financing agreement (the "1996 Agreement") with IDI. The 1996
Agreement was amended in January 1997. Pursuant to the terms of the 1996
Agreement, as amended:
A. SOV and FYI co-issued and are entitled to borrow up to $1,200,000 pursuant
to 10% notes due June 30, 1998 (the "1996 Notes"). The loans are to be
funded in varying increments between May and September 1996, contingent
upon SOV and FYI reaching certain specified performance goals. Interest on
the 1996 Notes is payable monthly, however, may be deferred through not
later than May 1, 1997. Equal quarterly principal payments of one-fifth of
the outstanding principal amount of the 1996 Notes as of June 30, 1997
commence June 30, 1997. The 1996 Notes are redeemable, in whole or in
part, by SOV and FYI prior to maturity without penalty. They are subject
to mandatory redemption, at par, under certain conditions specified in the
1996 Agreement, which include the issuance of equity, and the sale or other
disposition of certain assets. The 1996 Note holders have the option to
put the 1996 Notes, at par, in the event of a sale, merger, change of
control or public offering involving SOV or FYI. Substantially all assets
of SOV and FYI are pledged as collateral on the 1996 Notes and 1995 Notes,
except for the 1,916,667 shares of Dycam common stock owned by SOV which
collateralize the $1,000,000 note payable to Dycam, and FYI's hospital
contracts and proceeds thereof which collateralize the Hasco Loan (see Note
18). The 1996 Notes are subject to restrictive covenants, including the
incurrence of additional indebtedness, maintenance of net worth and other
financial covenants, and limitations on capital expenditures, investments,
transactions with affiliates, and consolidation, merger and sales of
assets. At December 31, 1996, the Company was in default of certain
restrictive covenants, which defaults have been waived by the 1996 Note
holders. Compliance with
Continued
54
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 11 - IDI FINANCING AGREEMENTS, CONTINUED
the terms of the 1996 Agreement is determined as of the end of each
calendar quarter. Should the Company be in violation of any of the
covenants at a future date, waiver of such violation is at the sole
discretion of the 1996 Note holders. If future defaults occur, waivers are
not obtained, SOV's and/or FYI's assets can be taken in satisfaction of the
amounts due pursuant to the IDI financing, and, if no excess remains, funds
will not be available to meet SOV's obligations, including, without
limitation, the repayment of the $1,000,000 note payable to Dycam.
B. The Company issued 500 shares of 10% Senior Series B Convertible Preferred
Stock (the "Series B Preferred Stock") at $100 per share, for total
consideration of $50,000. Dividends are payable quarterly and will accrue
whether or not declared by the Board of Directors. The liquidation
preference is $50,000 plus accrued dividends. The Series B Preferred Stock
is convertible at any time after October 31, 1996 (earlier if certain
conditions are met), in whole or in part, at the option of the holder into
shares of the Company's common stock, at a beginning per share conversion
price equal to $.075 subject to adjustments as defined in the preferred
stock certificate. In the event of a change of control, as defined in the
Additional Agreement, the Company must offer to purchase all outstanding
Series B Preferred Stock at a price equal to the liquidation preference
thereof at that time, and pay all unpaid accrued dividends.
C. The Company issued 53,286,228 Series B common stock purchase warrants (the
"1996 Warrants") which, together with the warrants issued in connection
with the 1995 Agreement and the Series A Preferred Stock and Series B
Preferred Stock, entitle IDI to purchase shares of the Company's common
stock equivalent to 75% of the fully diluted common shares outstanding on
the date of the 1996 Agreement. The exercise price is $.075 per warrant.
The warrants may be exercised at any time after stockholder approval of a
proposed reverse stock split is obtained, which is expected to be not later
than May 1, 1997, at the option of the holder prior to expiration ten years
from the date of issuance (see Note 14). On January 15, 1997, the Company
issued 4,347,427 shares of its common stock to IDI in exchange for all of
the 1995 Warrants and a portion of the 1996 Warrants exercisable for
1,867,029 shares of the Company's common stock. After the exchange,
IDI remains the holder of 1996 Warrants exercisable for 51,419,199 shares
of the Company's common stock.
D. The minority shareholder of FYI, who was also the President of FYI until
his resignation in December 1996, surrendered all of the shares of common
stock of FYI held by him, in exchange for a Series C warrant certificate
issued by SOV, evidencing warrants to purchase 7,747,449 shares of SOV's
common stock. The shares of FYI previously owned by him were canceled. As a
result of the transaction, FYI is now a wholly-owned subsidiary of the
Company. The exercise price is $.075 per warrant. The warrants vest 25% May
Continued
55
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 11 - IDI FINANCING AGREEMENTS, CONTINUED
1996, 25% November 1996, 25% May 1997 and 25% May 1998. Vested warrants
may be exercised after stockholder approval of a proposed reverse stock
split is obtained, which is expected to be not later than May 1, 1997, and
prior to their expiration in November 2005 (see Note 14).
E. The Company issued Series C-1 warrants to purchase 80,000 shares of SOV's
common stock to one of its directors in connection with the 1996 Agreement.
The exercise price is $.075 per share (see Note 14). The warrants vest
40,000 in May 1996 and 40,000 in April 1997. Vested warrants may be
exercised after stockholder approval of a proposed reverse stock split is
obtained, which is expected to be not later than May 1, 1997, and prior to
their expiration in November 2005. The Company has granted the warrant
holder certain registration rights related to these warrants.
F. The Company entered into a consulting agreement (the "Consulting
Agreement") with an individual who later became its Chief Executive
Officer, for services relating to the Company's business. In exchange for
services, the Company was obligated to pay the consultant $12,500 per month
plus expenses. In addition, pursuant to the Consulting Agreement, the
Company issued Series C-2 warrants to purchase 250,000 shares of SOV's
common stock at an exercise price of $.075 per share (see Note 14). The
warrants vest 100,000 in April 1996 and the remaining 150,000 on a pro-rata
basis over the subsequent twelve month period. The Company has granted the
warrant holder certain registration rights related to these warrants. The
Consulting Agreement terminated and warrants ceased vesting on August 1,
1996, at which time the Company entered into an employment agreement with
the consultant.
Use of the funds under the 1996 Agreement was limited to the repayment of
interim financing obtained from IDI in 1996, and related accrued interest,
transaction costs, and furtherance of the Company's business plans, specifically
the expansion of FYI's business. The Company does not have sufficient
authorized shares to reserve for the warrants issued in connection with
the May 1996 transactions. The Company is seeking stockholder approval of a
reverse stock split in April 1997 in order to have a sufficient number of shares
available for issuance. Management believes that approval will be obtained.
The 1996 Agreement was conditioned upon settlement of a suit brought by the
Company against its former outside accounting firm and certain individual
defendants. Pursuant to the settlement of such suit, the former outside
accounting firm agreed to pay $1,700,000 to the Company. Of the settlement
proceeds, all of which were received in July 1996, $870,000 was applied to
repayment of the 1996 Notes (see Note 17). In September 1996, the Company
received a state income tax refund totaling $301,000 which was also used to
repay IDI 1996 Notes.
Continued
56
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 11 - IDI FINANCING AGREEMENTS, CONTINUED
Bridge Note
- -----------
On September 19, 1996, the Company and FYI entered into a 10% bridge note
payable to IDI. The bridge note was amended seven times through January 15,
1997; each successive amendment extended the due date of the bridge note and
increased the note amount. The amended bridge note (the "Bridge Note") together
with accrued interest, is due not later than May 1, 1997 (see Notes 12 and 18).
Accrued Interest
- ----------------
As of December 31, 1996, deferred and accrued interest payable to IDI from the
Company and FYI related to the 1995 Notes, the 1996 Notes, and the Bridge Note
was approximately $270,000.
NOTE 12 - NOTES PAYABLE
Notes payable at December 31, 1996 consists of a $250,000 9% note payable issued
in connection with the settlement of the stockholder class action and derivative
suits (see Note 17), and a total of $790,000 related to amounts outstanding
pursuant to the 1996 financing and the Bridge Note payable to IDI (see Note 11).
The notes payable both mature in 1997.
NOTE 13 - LONG-TERM DEBT
Long-term debt, including current maturities, at December 31, 1996 consists of
the $2,950,000 10% 1995 Note payable to IDI (see Note
11).
Principal payments required on long-term debt for the years ending December 31
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $2,000,000
1998 950,000
----------
$2,950,000
==========
</TABLE>
NOTE 14 - STOCK INCENTIVE PLANS AND WARRANTS
Stock Incentive Plans
- ---------------------
In January 1993, the Company adopted a stock incentive plan (the "1992 Plan")
which provides for the granting of (i) incentive stock options to employees,
(ii) stock purchase rights to employees, or (iii) nonqualified stock options to
employees, officers and, under certain circumstances, directors. The Company
has reserved 450,000 shares of common stock for issuance under this plan.
Options granted under the 1992 Plan may be granted at prices not less than 100%
of the then fair market value of the common stock and expire not more than five
years from the date of grant.
In January 1993, the Company adopted a stock option plan for directors (the
"Directors' Plan") of the Company. The Company has reserved 150,000 shares of
common stock under the Directors' Plan. Options granted under the Directors
Plan may be granted at prices not less than 100% of the then fair market value
of the common stock and expire not more than ten years from the date of grant.
57
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 14 - STOCK INCENTIVE PLANS AND WARRANTS, CONTINUED
In June 1993, the Company adopted an additional stock incentive plan (the "1994
Plan") pursuant to which there are 450,000 shares of common stock reserved. The
1994 Plan is substantially identical in terms to the 1992 Plan. Options granted
under the 1994 Plan may be granted at prices not less than 85% of the then fair
market value of the common stock and expire not more than ten years from the
date of grant.
In August 1996, the Company adopted a stock option plan (the "1996 Plan") which
provides for the granting of incentive or non-statutory options to employees,
consultants, officers and directors who will contribute to the Company's long-
range success. The Company has reserved 4,646,601 shares of common stock for
issuance under the plan. Options granted under the 1996 Plan may be granted at
prices not less than 100% of the then fair market value of the common stock and
expire not more than ten years from the date of the grant.
Full implementation of the 1996 Plan and related transactions is subject to
stockholder approval to adopt the 1996 Plan and to approve a reverse stock
split. Management believes that approval will be obtained.
Option activity for the years ended December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1992 1994 Directors' 1996 Total Exercise
Plan Plan Plan Plan Other Options Price
----- ----- ---------- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
January 1, 1995 363,241 247,000 69,648 - 100,000 779,889 $.075-$11.00
Options granted - 180,000 - - - 180,000 $.075-$1.12
Options exercised - - - - - - -
Options canceled or
surrendered (24,750) - (69,648) - (100,000) (194,398) $2.94-$11.00
------- --------- ------ --------- -------- --------
Options outstanding at
December 31, 1995 338,491 427,000 - - - 765,491 $.075-$9.88
Options granted - - - 2,922,000 - 2,922,000 $.075
Options exercised - - - - - - -
Options canceled or
surrendered (223,250) (153,000) - - - (376,250) $.075-$9.88
-------- -------- ------- --------- -------- --------
Options outstanding at
December 31, 1996 115,241 274,000 - 2,922,000 - 3,311,241 $.075-$8.67
======== ======== ====== ========= ======== =========
</TABLE>
Certain shares were repriced to $3.00 in 1995 and $.075 in May of 1996. The
above table reflects both repricings.
In May 1995, the Board granted 50,000 options each to the Company's Chief
Financial Officer and Chief Operating Officer at an original exercise price of
$3.00 (subsequently repriced to $.075). The options vested 25% immediately and
2% per month thereafter.
In October 1995, the Board approved the grant of 40,000 fully vested options
each to two directors, who subsequently resigned from the Company's Board of
Directors in November 1995, at an original exercise price of $1.12 (subsequently
repriced to $.075).
Continued
58
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 14 - STOCK INCENTIVE PLANS AND WARRANTS, CONTINUED
In September 1996, the Company granted 2,922,000 options under the 1996 Plan to
employees at an exercise price of $.075 per share. The options have a ten year
term and vest 25% on grant and the remaining 75% over three years ratably per
month.
Options exercisable at December 31, 1996 totaled 1,183,830 at prices ranging
from $.075 to $8.67.
Options available for grant were 1,724,601 shares at December 31, 1996, subject
to stockholder approval of the 1996 Plan. Management believes that approval
will be obtained. The 1996 Plan is the only stock option plan with remaining
options available for grant.
Warrants
- --------
At December 31, 1996 and 1995, there were 3,914,882 and 69,237,743 warrants
outstanding, respectively, to acquire the Company's common shares at $.075 per
share, which expire November 2005.
Additionally, in connection with the July 1996 final settlement of the
stockholder class action and derivative suits, the Company agreed to deliver
1,750,000 warrants to the plaintiff class to acquire the Company's common shares
at $.075 per share, which expire five years from the date of their distribution.
The warrants are redeemable by the Company at any time prior to exercise at
$5.00 per warrant. The Company expects to distribute the warrants by the end of
1997 (see Note 17).
In January 1997, the Company issued a Series D warrant exercisable for up to
61,803,805 shares of the Company's common stock at an exercise price of $.075
per share, which expires on November 2005 (see Note 18).
Management of the Company did not assign any value to these warrants due to the
virtual nonexistance of a market for the Company's common stock and the
Company's financial state (see Note 2).
SFAS 123 Pro Forma Information
- ------------------------------
Pro forma information regarding net income is required by SFAS 123, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method pursuant to SFAS 123, rather than the method pursuant to
APB #25 discussed herein. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions: risk-free interest rates of 6.3%; dividend yields of 0.0%;
volatility factors of the expected market price of the Company's common stock of
100%; and expected terms of two to five years.
The Black-Scholes valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Pro forma net loss:
Net loss, as reported $(3,666,000) $(5,840,000)
Compensation expense under SFAS 123 (163,000) (4,000)
----------- -----------
Pro forma net loss $(3,829,000) $(5,844,000)
=========== ===========
Pro forma net loss per share $ (0.85) $ (1.30)
=========== ===========
</TABLE>
Continued
59
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 15 - RELATED PARTY TRANSACTIONS
At December 31, 1994, the Company was owed $450,000 on an original $648,000
note, including accrued interest, by a Company affiliated with a former SOV
board member, who was the underwriter for the Company, for the exercise of
warrants issued pursuant to the initial public offering of the Company. The
note bore interest of 6% per annum, was collateralized by 62,000 shares of SOV
common stock held by the underwriter, and was due March 31, 1995. This note,
net of discount of $123,000, was repaid in April 1995.
In December 1994, the Company received a $200,000 advance from its former Chief
Executive Officer. Of this amount, $48,000 was outstanding as of December 31,
1995. In July 1996, in connection with the settlement of the Stockholder Class
Action and Derivative Lawsuits (see Note 17), the Company was released from
obligation of the outstanding balance.
In November 1995, total intercompany advances outstanding of $2,700,000 were
contributed by SOV to FYI equity in conjunction with the 1995 Agreement (see
Note 11).
NOTE 16 - 401(k) PLAN
The Company, Dycam and FYI have 401(k) plans for their employees which went into
effect August 1, 1994. All individuals already employed on that date were
considered eligible for the plans. Individuals employed subsequent to that date
were eligible upon completing two months of service. On April 1, 1995, the
Company's plan was amended whereby employees are eligible to participate upon
completing six months of service. In accordance with the terms of the plans,
employees may contribute up to 15% of their pretax earnings to the plans. The
Company may make a discretionary contribution of up to 6% of the employee's
pretax earnings. The Company's contributions for the years ended December 31,
1996 and 1995 for all plans were $27,000 and $51,000, respectively.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Facilities Leases
- -----------------
The Company leased its office facilities under operating leases that expired in
1995. During 1995, the Company entered into new operating leases for its new
facilities that expire through 2000.
Effective January 31, 1997, the Company and FYI executed definitive agreements
with Hasco to sell substantially all of the net assets of FYI to Hasco (see Note
18). In connection with the FYI sale, Hasco and FYI will enter into a sublease
pursuant to which Hasco will sublet FYI's principal operating facility in
Newbury Park, California from the date of the closing through December 31, 1998.
The rental payments under the sublease will be approximately equal to FYI's
occupancy costs under the primary lease agreement during that period. The
primary lease agreement expires May 31, 2000. The Company intends either to
negotiate an early termination of the lease with the landlord or to seek a
subtenant for the remaining balance of the lease.
Continued
60
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 17 - COMMITMENTS AND CONTINGENCIES, CONTINUED
The minimum annual future rental commitments, exclusive of sublease income, for
the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
<S> <C>
1997 $207,000
1998 110,000
1999 101,000
2000 42,000
2001 -
--------
$460,000
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 was $193,000 and
$225,000, respectively.
Employment Agreements
- ---------------------
In April 1994, FYI entered into an employment agreement with its then-Chief
Executive Officer which covered a three-year term expiring on April 5, 1997 for
which the annual compensation to be paid was $180,000, $225,000 and $260,000,
respectively. The agreement was canceled in May 1996 and FYI entered into a new
employment agreement with its then-Chief Executive Officer which covered a two-
year term expiring in May 1998 for which the base annual compensation to be paid
was $100,000. If certain cash flow conditions were met, compensation increased
to $175,000 per annum. If he were terminated without cause, he was entitled to
receive a lump-sum payment equal to the aggregate salary due to him for the then
remaining term of the agreement and immediate vesting of any unvested options
and warrants (see Note 11). In December 1996, FYI's Chief Executive Officer
resigned from FYI pursuant to a termination and settlement agreement. The
agreement provides that he shall receive his current salary until no later than
March 31, 1997. On the closing of the sale of the FYI business to Hasco, he is
entitled to receive all unpaid salary due to him under the employment agreement
expiring in May 1998 at an annual base compensation of $100,000. In addition,
all of the warrants to purchase shares of the Company's common stock held by him
fully vest on the closing of the FYI Sale.
In August 1996, the Company entered into an employment agreement with its new
Chief Executive Officer. The agreement has an initial two-year term and
contains certain renewal provisions. Pursuant to the agreement, the Company
will pay its Chief Executive Officer an annual base salary of $230,000, subject
to increase at the sole discretion of the Board of Directors. In addition, the
Chief Executive Officer will be eligible to receive a one-time bonus of $50,000
if certain cash flow conditions are met. If the Chief Executive Officer's
employment is terminated, under certain circumstances, the Chief Executive
Officer is entitled to a termination payment of up to 100% of his annual base
salary. Concurrently with the execution of the employment agreement, the Chief
Executive Officer was granted 4,071,684 Series C-3 warrants which entitle him to
purchase an aggregate number of shares at an exercise price of $.075 per share
of the Company's common stock constituting 5% of the Company's common stock on a
fully-diluted basis. The Company will not have sufficient authorized shares of
common stock to issue upon exercise of these warrants unless it receives
stockholder approval of a reverse stock split. Management believes that such
approval will be obtained. In addition, the Company terminated its prior
Consulting Agreement with him.
Continued
61
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 17 - COMMITMENTS AND CONTINGENCIES, CONTINUED
On December 20, 1996, Dycam entered into an employment agreement contract with
one key employee for a three-year term which expires December 31, 1999. The
agreement calls for annual compensation of $120,000 a year for each of the three
years. Pursuant to the employment agreement, Dycam issued 90,000 stock options
that vest at a rate of 8.33% per calendar quarter. Additionally, Dycam issued
60,000 stock options to the employee that vest 8.33% per calendar quarter, if
certain conditions are met.
Stockholder Class Action and Derivative Suits
- ---------------------------------------------
The Company entered into a settlement of a class action suit which was filed
against the Company and certain of its officers and directors in December 1994,
as well as a stockholders' derivative suit which named the directors and certain
of the officers of the Company. Pursuant to the terms of the final settlement,
the Company agreed to deliver to the plaintiff class warrants to purchase
1,750,000 shares of the Company's common stock, and has recorded a 9% $250,000
promissory note payable in three equal installments on July 1, 1996, January 1,
1997 and July 1, 1997. As of February 28, 1997, no payments have been made by
the Company. The exercise price of the warrants is $.075 per warrant/share.
The warrants have a five-year life and are redeemable by the Company at any time
for $5 per warrant (see Note 14). The Company will not have sufficient
authorized shares of common stock to issue upon exercise of these warrants
unless it receives stockholder approval of a reverse stock split. Management
believes that such approval will be obtained. 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, the former Chairman and Chief Executive
Officer of the Company agreed to the surrender of 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 surrendered shares
are to be distributed to the class plaintiffs and the options have been
canceled. The settlement received final approval by the District Court in July
1996.
Durian Suit
- -----------
On October 20, 1995, Durian Technologies, Inc. and Durian Finance (collectively,
"Durian") filed a complaint against SOV for breach of contract, fraud and
negligent representation in connection with financing arrangements with Durian
for the benefit of SOV and seeks an accounting and declaratory relief. Durian
also seeks an unspecified amount of damages. SOV responded to the complaint in
January 1996. In late 1996, the parties agreed to a conditional settlement of
this action, under the terms of which the action was dismissed without prejudice
and the plaintiffs received an option to obtain the Company's interest in the
"Try Us On System."
Suit Against the Company's Former Independent Accountants
- ---------------------------------------------------------
On January 22, 1996, the Company filed a suit against its former independent
accounting firm, along with certain individual accountants of the accounting
firm including Thomas Leaper, who also served as the Company's former Chief
Operating Officer and Chief Financial Officer. The suit asserts claims for
professional negligence, breach of contract and breach of fiduciary duty against
these defendants arising out of the services rendered in connection with the
Company's 1993 year-end audit and 1994 quarterly reports.
The suit was settled and received final approval in July 1996. Pursuant to the
settlement, the accounting firm agreed to pay $1,700,000 to the Company. A
portion of the $1,700,000 received in July 1996 was used to repay prior loans
from IDI (see Note 11), pay certain legal expenses, and the balance was used for
operating expenses of SOV and FYI.
Continued
62
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 17 - COMMITMENTS AND CONTINGENCIES, CONTINUED
Insurance Provider
- ------------------
In 1996, a previous provider of the Company's excess director's and officer's
liability insurance filed a suit claiming that they are entitled to $1,000,000
of the $1,700,000 recovery received by the Company in connection with the
settlement to the suit against the Company's former independent accountants. In
October 1996, the Company filed a cross-complaint alleging bad faith and seeking
declaratory relief. SOV intends to vigorously defend the suit. No amounts have
been accrued in the accompanying consolidated financial statements relating to
an unfavorable outcome of this matter, if any.
Suit Against the Company's Competitor
- -------------------------------------
On March 8, 1996, FYI filed a suit against a competitor. The suit asserts
claims for, among other things, unreasonable restraint of trade, monopolistic
practices, unfair competition, trade libel, and false and misleading
advertising. FYI seeks compensatory damages relief in excess of $10 million, as
well as punitive damages and injunctive relief. During the last quarter of
1996, the suit was dismissed without prejudice and the parties entered into a
tolling agreement with respect to the statute of limitations. The terms of the
sale of the FYI business to Hasco provide that upon closing this suit will be
dismissed with prejudice. See Note 18.
Other Legal Matters
- -------------------
The Company is also a party to other actions arising in the ordinary course of
business which, in the opinion of management, will not have a material adverse
impact on the Company's consolidated financial condition.
Note Payable to Dycam
- ---------------------
In December 1994, Dycam made a loan of $500,000 to the Company. In January
1995, the note was increased to $1,000,000. The note is collateralized by the
1,916,667 shares of Dycam common stock owned by the Company. The note, which
was originally due on September 1, 1995, was extended in 1995 to December 1998,
and the annual interest rate was fixed at 10%.
At December 31, 1996, Dycam's cash and cash equivalents were $590,000. Dycam is
not obligated to transfer any additional cash to the Company and its other
subsidiaries, and the management of Dycam has expressed its intent to utilize
its liquid assets solely to fund the future operations of Dycam.
NOTE 18 - SUBSEQUENT EVENTS
IDI January 1997 Agreements
- ---------------------------
On January 15, 1997, the Company, FYI and IDI entered into several agreements
(the "January 1997 Agreements"). The Company and IDI entered into a Securities
Exchange Agreement (the "Exchange Agreement") which provided for the issuance of
4,347,427 shares of its common stock to IDI in exchange for all of the 1995
Warrants and for 1996 Warrants with respect to 1,867,029 shares of common stock.
IDI remains the holder of 1996 Warrants for 51,419,199 shares of common stock.
Continued
63
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 18 - SUBSEQUENT EVENTS, CONTINUED
In addition, the Company, FYI and IDI agreed to increase the amounts borrowed
under the 1996 Notes by $180,000 to a total of $1,200,000, the maximum
borrowings permissible pursuant to the 1996 Notes. At the same time, the
obligation represented by the Bridge Note between the Company, FYI and IDI, was
decreased by $180,000 under the Seventh Amendment to Bridge Note, dated January
15, 1997 (the "Seventh Amendment"), from up to $1,157,000 to up to $977,000.
The Seventh Amendment extended the due date of the Bridge Note to not later than
May 1, 1997. As of February 28, 1997, the Company has borrowed $927,000
pursuant to the Bridge Note and is entitled to draw the remaining $50,000 upon
receipt by the Company of certain income tax refunds. Substantially all of the
assets of the Company and FYI are pledged as collateral for the 1995 Note, the
1996 Note and the Bridge Note, except for the 1,916,667 shares of Dycam common
stock owned by SOV which collateralize the $1,000,000 note payable to Dycam.
IDI has the right to foreclose on such assets or take other protective measures
upon the occurrence of an event of default which is not timely cured or waived.
In January 1997, IDI subordinated its first priority security interest in FYI's
hospital contracts and proceeds thereof to Hasco (see "FYI Sale").
The Company, FYI and IDI also entered into a General Amendment and Waiver
Agreement to (i) amend specific provisions of the 1995 Agreement, the 1996
Agreement, the 1996 Warrants, and the Certificate of Designation for Series B
Preferred Stock of SOV (collectively, the "Agreements"), and (ii) waive each of
the breaches or defaults with respect to specific provisions of the Agreements
as of January 15, 1997. The amendments extended: (i) the date by which the
Company must take all corporate action necessary to authorize and reserve for
issuance the number of shares of common stock into which the Series B preferred
stock and 1996 Warrants may be converted or exercised from October 31, 1996 to
not later than May 1, 1997; (ii) the deferral of interest payments due pursuant
to the Notes from December 31, 1996 to not later than May 1, 1997; and (iii)
extended the first principal repayment date of the 1995 Notes from March 1, 1997
to not later than May 1, 1997. In addition, the amendments reduced certain
minimum performance targets in the 1995 Agreement and 1996 Agreement.
The Company also issued a Series D Warrant (the "Series D Warrant") to IDI which
is exercisable for up to 61,803,805 shares of the Company's common stock at an
exercise price of $.075 per share (see Note 14). If the reverse stock split is
approved by the Company's stockholders, and the Company and IDI complete the
second exchange of securities described below, then the Series D Warrants will
not be exercisable. However, if the reverse stock split is not approved by April
15, 1997, then the Series D Warrants may be exercised by IDI prior to November
20, 2005. Management believes that approval will be obtained.
If the proposed reverse stock split is approved by the stockholders, the
Company intends to complete a second exchange of securities with IDI pursuant to
which the Company will issue an additional 39,342,461 (pre-reverse split) shares
of its common stock to IDI in exchange for all of the remaining 1996 Warrants
with respect to 51,419,199 (pre-reverse split) shares of the Company's common
stock, together with the surrender of the Series D Warrants. After the second
security exchange, IDI would continue to hold 500 shares of the Company's Series
A Preferred and 500 shares of the Company's Series B Preferred, as well as
43,689,888 (pre-reverse split) shares of the Company's common stock, equivalent
to 67% of the shares anticipated to be outstanding on the date of the second
exchange, which is anticipated to be April 15, 1997.
Continued
64
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 18 - SUBSEQUENT EVENTS, CONTINUED
As of February 28, 1997, the Company has borrowed $927,000 pursuant to the
$977,000 Bridge Note, and is entitled to draw the remaining $50,000 upon receipt
by the Company of certain income tax refunds. No amounts have been repaid as of
February 28, 1997. As of February 28, 1997, SOV and FYI had borrowed all
available funds under the 1996 Notes, and, after repayments, the unpaid balance
was $29,000.
FYI Sale
- --------
On December 13, 1996, the Company and FYI signed a letter of intent to sell
substantially all of the net assets of FYI to Hasco (the "FYI Sale"). Hasco
operates First Foto, a competitor of FYI in the newborn hospital photographic
business. Effective January 31, 1997, the Company and FYI executed definitive
agreements with Hasco for the FYI Sale, which is expected to close in April
1997. The sale price of $4,533,060 is payable $3,468,060 in cash at the closing
and $1,065,000 in twelve equal quarterly installments of $88,750 commencing
three months after the closing. The sale price is subject to adjustment for
certain hospital contract terminations, operating results prior to closing, and
accounts payable and accrued expenses assumed by Hasco at the closing. The
obligation of Hasco to make the installment payments is unsecured and non-
interest bearing.
The assets of FYI to be sold to Hasco (the "Purchased Assets") include
substantially all of the operating assets of FYI, excluding certain intellectual
property rights owned by FYI. With certain exceptions, Hasco will assume
substantially all obligations of FYI under all hospital and other specified
contracts that are included in the purchased assets, all of FYI's capital lease
obligations, and substantially all trade payables and commission obligations.
Hasco will not assume, and FYI will remain liable for certain other obligations
and liabilities arising prior to the closing (see Note 20).
The Company has agreed to deliver to Hasco an option permitting Hasco to
purchase that number of shares of Dycam common stock equal to 4.9% of the
outstanding shares of the common stock of Dycam held by the Company on the
closing date (approximately 152,921 shares as of January 31, 1997). The
exercise price of this three-year option to be granted to Hasco will be equal to
the average closing price for Dycam common stock during the period from January
31, 1997 through the closing date.
Hasco and FYI will enter into a sublease pursuant to which Hasco will sublet
FYI's principal operating facility in Newbury Park, California from the date of
the closing through December 31, 1998. The rental payments under the sublease
will be approximately equal to FYI's occupancy costs under the primary lease
agreement during that period. The primary lease agreement expires May 31, 2000.
The Company intends either to negotiate an early termination of the lease with
the landlord or to seek a subtenant for the remaining balance of the lease.
At the closing, FYI and Dycam will terminate their existing contractual
relationships involving the use by FYI of Dycam's cameras, software and other
supporting goods and services, and Hasco and Dycam will enter into a Dycam
Master Agreement (the "Dycam Master Agreement"), with respect to the assumption
of FYI's digital camera lease obligations to Dycam, the leasing by Hasco of
additional Dycam digital cameras, and a royalty-free license of certain digital
camera technology by Dycam to Hasco, certain hardware and software support
services to be provided by Dycam for a three-year period commencing on the
closing date and certain additional terms. Under the Dycam Master Agreement,
Hasco will be required to pay Dycam specified leasehold payments for leased
cameras, a $300,000 fee (payable quarterly over a three-year period) for the
support services and the cost of certain hardware upgrades.
Continued
65
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 18 - SUBSEQUENT EVENTS, CONTINUED
On January 22, 1997, Hasco loaned FYI $60,000 pursuant to a 10% promissory note
due January 31, 1997. On January 31, 1997, Hasco and FYI entered into a loan
agreement (the "Loan Agreement") pursuant to which Hasco will lend to FYI up to
$180,000 per month, up to a maximum of $540,000, at an interest rate of 10% per
annum (the "Hasco Loan"). As of February 28, 1997, FYI had borrowed $340,000
pursuant to the Loan Agreement, including $60,000 on the prior promissory note
which was added to the Hasco Loan balance. Borrowings under the Loan Agreement
are secured by a first priority security interest in FYI's hospital contracts
and proceeds thereof. IDI agreed to subordinate its rights to the rights of
Hasco in connection with this loan. The Company executed the Hasco Loan
Agreement and related promissory note as co-borrower and co-maker. All amounts
due under the Loan Agreement will be canceled at closing through the assumption
of these liabilities by Hasco. The purchase price will not be subject to
reduction for the amount canceled, except under certain circumstances. If the
FYI Sale is terminated or if the closing has not occurred by April 22, 1997, all
amounts under the Loan Agreement will become due and payable ninety days
following the terminating event, as defined.
The FYI Sale is subject to the approval of the Company's stockholders, and other
customary terms and conditions. The Company expects to receive the requisite
approval of its stockholders, and other customary conditions, at a meeting
planned to be held in April 1997.
In connection with the FYI Sale, each of the Company, FYI and Dycam entered into
a mutual release with Hasco with respect to all claims arising between them
prior to the execution of the FYI Sale agreements, including those claims
asserted in certain litigation then pending between FYI and Hasco.
NOTE 19 - LINES OF BUSINESS
The Company operates in two major lines of business: systems and related
software and camera. Information regarding these segments as of and for the
years ended December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net sales:
Systems and related software $ 546,000 $ 2,854,000
Camera 2,068,000 1,677,000
----------- -----------
Total $ 2,614,000 $ 4,531,000
=========== ===========
Loss from operations:
Systems and related software $(1,024,000) $(2,087,000)
Camera (1,843,000) (1,656,000)
----------- -----------
Total $(2,867,000) $(3,743,000)
=========== ===========
</TABLE>
Continued
66
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1996 and 1995
NOTE 19 - LINES OF BUSINESS, CONTINUED
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Identifiable assets:
Systems and related software $ 212,000 $ 705,000
Camera 6,109,000 7,543,000
---------- ----------
Total $6,321,000 $8,248,000
========== ==========
Depreciation and amortization expense:
Systems and related software $ 25,000 $ 33,000
Camera 448,000 333,000
---------- ----------
Total $ 473,000 $ 366,000
========== ==========
Capital expenditures:
Systems and related software $ - $ (7,000)
Camera (157,000) (381,000)
---------- ----------
Total $ (157,000) $ (388,000)
========== ==========
</TABLE>
NOTE 20 - DISCONTINUED OPERATIONS
On December 13, 1996, the Company and FYI signed a letter of intent to sell
substantially all of the net assets of FYI to Hasco (see Note 18). The FYI Sale
is expected to close in April 1997.
The operating results of FYI have been classified as discontinued operations in
the accompanying consolidated financial statements. Revenues of the
discontinued FYI segment were $2,220,000 in 1996 and $436,000 in 1995. Net loss
from the discontinued FYI segment amounted to $2,786,000 in 1996 and $2,714,000
in 1995.
For financial reporting purposes, the net assets and liabilities attributable to
this pending transaction have been classified in the consolidated balance sheets
as net assets of discontinued operations and consist of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ------------
<S> <C> <C>
Cash $ 63,000 $1,400,000
Accounts receivable, net 134,000 58,000
Inventories 22,000 35,000
Prepaid expenses and other current
assets 60,000 75,000
Property and equipment, net 466,000 446,000
Other assets 46,000 44,000
Accounts payable (148,000) (255,000)
Accrued expenses (67,000) (35,000)
Current portion of obligations
under capital leases (82,000) (56,000)
Obligations under capital leases (50,000) (89,000)
--------- ----------
Total net assets of discontinued
operations $ 444,000 $1,623,000
========= ==========
</TABLE>
Certain of FYI's accrued expenses, as well as all intercompany balances, notes
payable to IDI, related debt issuance costs and accrued interest payable will
not be assumed by Hasco pursuant to the pending FYI Sale and, accordingly, have
been excluded from net assets of discontinued operations.
The expected gain on disposal will be recognized upon completion of the sale.
67
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On March 29, 1996, Coopers & Lybrand L.L.P., the Company's former independent
public accountants, resigned their engagement. In connection with their audit
for the year ended December 31, 1994 and for the period May 5, 1995 and ending
March 29, 1996, there were no disagreements with C&L on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of C&L would
have caused them to make reference in connection with their report to the
subject matter. Their report on the consolidated financial statements for the
year ended December 31, 1994 included an explanatory paragraph concerning
substantial doubt about the ability of the Company to continue as a going
concern, otherwise, during the time period which C&L were engaged as independent
accountants for the Company, C&L's report contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. In June 1996, Corbin & Wertz accepted an
engagement by the Company to serve as the independent auditors for the Company's
financial statements as of and for the year ended December 31, 1995. In
February 1997, Corbin & Wertz accepted the engagement by the Company to serve as
the dependent auditors for the Company's financial statements as of and for the
year ended December 31, 1996.
68
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of January 31, 1997:
<TABLE>
<CAPTION>
YEAR
TERM
NAME AGE PRINCIPAL OCCUPATION EXPIRES
- ------------------------ --- ------------------------------------------- -------
<C> <C> <S> <C>
DIRECTORS:
K. Eugene Shutler 58 Chief Executive Officer and Chairman of 1998
the Board of the Company and FYI,
Secretary of FYI
John A. Edling 42 Chief Executive Officer, President, 1996
Treasurer and Secretary of Dycam
Ann Ehringer 58 Chairman, Chief Executive Officer and 1996
owner, of S. P. Land, Inc. and S. P.
Lodge, Inc.
Marshall Geller 58 Chairman and Chief Executive Officer of 1997
Geller & Friend Capital Partners, Inc.
Barry Porter 39 Partner and Managing Director of Pacific 1998
Capital Group
OTHER EXECUTIVE OFFICERS:
James E. O'Brien 49 Chief Operating Officer of FYI
Nancy H. Galgas 37 Chief Financial Officer and Secretary of
the Company; Chief Financial Officer of FYI
Peter Ritchie 45 Vice President of FYI
George Ismael 48 Vice President of Engineering of Dycam
</TABLE>
In accordance with the Certificate of the Voting Powers, Designation,
Preferences and Relative, Participating, Optional or Other Special Rights
relating to the Company's Series A Preferred Stock, the holders of the Company's
Series A Preferred Stock, voting as a single class, are allowed to elect four of
the Company's seven directors. As of December 31, 1995, the holders of the
Company's Series A Preferred Stock elected Messrs. Safchik, Geller and Porter to
the Board of Directors. Mr. Safchik resigned from the Company's Board on July
22, 1996. On August 26, 1996, Mr. Shutler was elected by the holders of the
Company's Series A Preferred Stock to fill the vacancy created by Mr. Safchik's
resignation. The holders of the Company's common stock are permitted to elect
three members of the Board. In accordance with the Certificate of Incorporation
of the Company, the Directors to be elected by the holders of the Company's
common stock are divided into three classes, Class I, Class II and Class III.
At each annual meeting of the Stockholders of the Company, directors
constituting one class are elected for three-year terms. The term of the Class
I Director expires in 1998; the term of the Class II Director expires in 1997;
and the term of the Class III Director expires in 1996.
69
<PAGE>
Mr. Shutler was elected to the Board of Directors as a Class I member by the
-----------
holders of the Company's Series A Preferred Stock in August 1996. Mr. Shutler
was Executive Vice President and a Director of MGM Grand, Inc. from February
1991 to November 1995. Thereafter, he was of counsel to the law firm of
Beckley, Singleton, Jennison & List, Chartered from April to August 1996, when
he was elected Chairman of the Board and Chief Executive Officer of the Company.
Mr. Shutler is a graduate of the University of Pennsylvania and Yale Law School.
Mr. Edling was appointed to the Board of Directors as a Class III member in
----------
November 1995. Mr. Edling is the Chief Executive Officer, President, Treasurer,
Secretary and a member of the Board of Directors of Dycam. Mr. Edling was a co-
founder of Dycam and served as its Chief Operating Officer from March 1991 until
he became Chief Executive Officer and President in December 1991. Mr. Edling
resigned as Chief Executive Officer of Dycam effective November 1994 and was
reappointed to that position effective March 1995. Since the Company's
acquisition of Dycam in February 1994, Mr. Edling has also served as Dycam Chief
Financial Officer. From November 1988 until March 1991 he was Development
Engineering Manager for Dataproducts Corporation ("Dataproducts"), where he had
responsibility for the design and marketing of the Dataproducts line of laser
printers. Mr. Edling holds a B.S. in Finance from California State University,
Northridge.
Dr. Ehringer has served on the Board of Directors since August 1994, and is
------------
currently a Class III Director. Dr. Ehringer has been Chairman, CEO and Owner
of S.P. Land, Inc., a real estate holding since 1992 and S.P. Lodge, Inc. dba
Saddle Peak Lodge, a fine-dining restaurant entity, since 1993. Since July
1996, she has served as Director of the Family & Closely-Held Business Program
and Associate Professor of Entrepreneurship of the Marshall School of Business
Program of the University of Southern California. From 1990 to 1996, she was a
management consultant and chairman of the Executive Committee, an executive
education organization of 4,000 chief executive officers. Dr. Ehringer also is
a director of Ustel, Inc., Dycam, Guggenheim Dental Supply, Inc., Quality
Transport, Inc. & Truck Rail Handling, Inc., American Etching & Manufacturing,
Inc. and United Ad Label, Inc. She also participates as an advisor to non-
profit organizations, including the California Heritage Museum Advisory Council
and the Pepperdine University Crest Associates Advisory Board. Dr. Ehringer
received a B.A. from the University of Hawaii (1960), an M.A. from Stanford
University (1967), a diploma from the Owner/President Management Program of the
Harvard Business School (1982), and a Ph.D. from the University of Southern
California (1992).
Mr. Geller was elected to the Board of Directors as a Class II member by the
----------
holders of the Company's Series A Preferred Stock in November 1995. Since
November 1995, Mr. Geller has served as Chairman, Chief Executive Officer, and
Founding Partner of Geller & Friend Capital Partners, Inc. From 1991 to October
1995, Mr. Geller was the Senior Managing Partner and founder of Golenberg &
Geller, Inc., a merchant banking investment company. From 1988 to 1990, he was
the Vice Chairman of Gruntal & Company, a New York Stock Exchange listed
investment banking firm. From 1967 through 1988, Mr. Geller was a Senior
Managing Director of Bear, Stearns & Co. Inc. Mr. Geller formerly served as
Interim Co-Chairman of Hexcel Corporation. Mr. Geller also serves on the Board
of Directors of Players International, Inc., Value Vision International, Inc.,
Ballantyne of Omaha, Inc., Cabletel Communications Corp., and Dycam.
Mr. Porter was elected to the Board of Directors as a Class I member by the
----------
holders of the Company's Series A Preferred Stock in November 1995. Since
December 1993, Mr. Porter has served as a Managing Director of Pacific Capital
Group, Inc., a private merchant banking firm. Prior thereto, Mr. Porter was a
Senior Managing Director in the investment banking group of Bear, Stearns & Co.
Inc., a firm he joined in 1986. Prior to 1986, Mr. Porter practiced corporate,
securities and entertainment law with the Los Angeles firm of Wyman, Bautzer,
Rothman, Kuchel and Silbert. Mr. Porter serves on the Board of
70
<PAGE>
Directors of OpTel, Inc., Campuslink Communications Systems, Inc. and Dycam.
Mr. Porter is a graduate of the Wharton School of the University of
Pennsylvania, he earned an M.B.A. at the University of California at Berkeley
Graduate School of Business Administration and a J.D. from UC Berkeley's Boalt
Hall School of Law.
Mr. O'Brien has served as the Chief Operating Officer of FYI since April
-----------
1994. Mr. O'Brien has served as President of FYI since December 1996. From
April 1988 to April 1994, Mr. O'Brien served as Senior Vice President and Chief
Operating Officer of The Pacifica Corporation. Mr. O'Brien holds a B.A. in
Economics from the University of Cincinnati.
Ms. Galgas has served as Chief Financial Officer of the Company since March
----------
1995. Since April 1994, Ms. Galgas has served as Chief Financial Officer of
FYI. From 1989 to April 1994, Ms. Galgas served as Controller and Vice
President of Finance of The Pacifica Corporation. From 1984 to 1989, Ms. Galgas
was with Ernst & Young's Los Angeles based Entrepreneurial Services Group. Ms.
Galgas holds a B.A. in Business Economics from the University of California at
Santa Barbara. She is a certified public accountant.
Mr. Ritchie has served as a Vice President of FYI since September 1994. From
-----------
July through September 1994, Mr. Ritchie was the Marketing Director of
Supercolor 2000. From March 1989 until December 1993, Mr. Ritchie served as the
Western Region Manager of Hasco International.
Mr. Ismael is Vice President of Engineering and a member of the Board of
----------
Directors of Dycam. Mr. Ismael was a co-founder of Dycam and has served as Vice
President of Engineering since November 1990. Between 1987 and 1990, Mr. Ismael
was Director of Engineering for Genicom Corporation ("Genicom"), where he was
responsible for a team of engineers developing non-impact printer systems. Prior
to joining Genicom, Mr. Ismael worked in engineering management positions at
Dataproducts. Mr. Ismael holds a B.A. in English from California State
University, Northridge.
Mr. Jones has been Dycam's Vice President of Sales and Marketing since May
---------
1994. From September 1993 until May 1994, Mr. Jones was responsible for new
systems sales of computer output microfilm systems for Anacomp, Inc. During 1992
and 1993, Mr. Jones was the California District Sales Manager for QMS, Inc.
From 1991 until 1992, Mr. Jones was the Vice President of Sales for Template
Graphics Software. From 1989 to 1991, Mr. Jones was employed by Pacific Hills
Mortgage Company as a mortgage loan officer. From 1976 until 1989, Mr. Jones
was employed by CalComp where he served as the Western Area Director of Sales -
North American Operations and later as the Director of Marketing Operations. Mr.
Jones received his B.S. in Marketing from the University of Utah in 1974.
Subject to the terms of applicable employment agreements, officers of the
Company are appointed by and serve at the discretion of the Board of Directors.
There are no family relationships among any of the officers or directors of the
Company. Certain directors and officers of the Company are affiliated with the
Company's largest stockholder. See "Certain Relationships and Related Party
Transactions."
The Board of Directors held a total of fifteen meetings during the year ended
December 31, 1996. The Company has an Audit Committee, a Compensation
Committee, and a Policy Review Committee. Each of the directors attended at
least 93% of the meetings of the Board of Directors and all of the meetings of
the committees of the Board on which such director served.
The Audit Committee's functions include recommending to the Board of
Directors the engagement of the Company's independent certified public
accountants, review with such accountants of the Company's business plan and
results of their examination of the financial statements of the Company and
determining
71
<PAGE>
the independence of such accountants. From late November 1995, the Audit
Committee currently consisted of Marshall Geller, Barry Porter, and Jeffrey A.
Safchik. Mr. Safchik resigned as a director in July 1996. The Audit Committee
met on three occasions in 1996.
The Compensation Committee reviews and makes recommendations with respect to
compensation of officers and directors of the Company. Beginning in late
November 1995, the Compensation Committee has consisted of Marshall Geller, Ann
Ehringer and Barry Porter. The Compensation Committee met on four occasions in
1996.
The Policy Review Committee reviews transactions between the Company and
Dycam for potential conflicts of interest and advises the companies with respect
to the possible resolutions of any conflict. The Policy Review Committee is
comprised of one member from each of the Company and Dycam and a non-voting
chairman. From late November 1995, the Policy Review Committee consisted of Jim
Alexiou as Dycam's representative. The Policy Review Committee did not meet in
1996.
In April 1996, the Board of Directors appointed Ann Ehringer, Dana Arnold and
John Edling as members of an Independent Committee to review the terms of a
financing transaction with IDI. Mr. Arnold is no longer affiliated with the
Company. The Independent Committee met on two occasions in 1996 and was
disbanded upon completion of the IDI transaction. See "Certain Relationships
and Related Party Transactions."
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Executive
officers, directors and stockholders with more than 10% of a registered class
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of such
forms received by it and written representations from certain reporting persons
that they have complied with the relevant filing requirements, the Company
believes that during the year ended December 31, 1996, all relevant Section
16(a) filing requirements were complied with, except as follows: Mr. James
O'Brien filed a late Form 5 (Annual Statement); Ms. Nancy Galgas filed a late
Form 5 (Annual Statement); Dr. Ann Ehringer filed a late Form 5 (Annual
Statement); and Mr. K. Eugene Shutler filed a late Form 3 (Initial Statement of
Beneficial Ownership of Securities). Mr. Dana Arnold did not file a Form 5
(Annual Statement).
72
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning compensation for
services in all capacities to the Company and its subsidiaries for the three
years ended December 31, 1996, 1995 and 1994 of those persons who were (1) the
Chief Executive Officer of the Company and (2) executive officers of the Company
whose total salary and bonus exceeded $100,000 for services performed by such
persons for the Company during 1996 (collectively the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ---------------
-------------------------------------- Securities
Name & Principal Underlying All Other
Position Year Salary Bonus Options/SARs(1) Compensation(2)
- ----------------------------------- ---- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
K. Eugene Shutler (3) 1996 $ 95,833 - $4,209,184 27,500(4)
Chairman of the Board, Chief 1995 - - - -
Executive Officer of the Company; 1994 - - - -
Chairman of the Board, Chief
Executive Officer, and
Secretary of FYI
Jeffrey A. Safchik (5) 1996 $ 41,667 - - -
Former Chairman of the Board, 1995 - - - -
Chief Executive Officer, 1994 - - - -
Treasurer and Secretary of
the Company
Dana I. Arnold (6)(7) 1996 $155,470 - - -
Former Director, Asst. Secy. 1995 219,000 - - -
and Former Acting CEO of the 1994 125,967 - - -
Company; Former Chairman of
the Board, Chief Executive
Officer, Treasurer and
Secretary of FYI
Guy de Vreese (8)(9) 1996 $ - - - -
Former Chairman of the Board 1995 93,896 - - -
and CEO of the Company 1994 275,000 - - $ 6,686(10)
James E. O'Brien (11) 1996 $108,622 $ - 814,000 -
Chief Operating Officer of the 1995 122,000 25,000 50,000 -
Company; President and Chief 1994 72,000 - - -
Operating Officer of FYI
Nancy H. Galgas (12)(13) 1996 $108,622(12) $ - 814,000 -
Chief Financial Officer, Secretary, 1995 118,000 25,000 50,000 -
and Treasurer of the Company; 1994 48,000 - - -
Chief Financial Officer and - - - -
Treasurer of FYI
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ---------------
-------------------------------------- Securities
Name & Principal Underlying All Other
Position Year Salary Bonus Options/SARs(1) Compensation(2)
- ----------------------------------- ---- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
John E. Edling(14) 1996 $120,000 $ 3,600(16) - -
Director of the Company; 1995 120,000 3,600(16) - -
Chairman of the Board, CEO, 1994 120,000 8,225(16) 45,000(15) -
President, Treasurer, and Secretary
of Dycam
_______________________
</TABLE>
(1) All numbers reflect the number of shares of the Company's Common Stock
subject to options granted during the fiscal year.
(2) Does not include compensation paid to individuals in consideration for
serving on the Company's Board of Directors. See "Compensation of Directors."
(3) Mr. Shutler joined the Company in August, 1996 at an annual base salary
of $230,000.
(4) Consists of a moving allowance.
(5) Mr. Safchik joined the Company in November 1995. In January 1996, the
Company's Board of Directors elected to provide Mr. Safchik with an annual base
salary of $125,000, which was reduced to zero in April 1996. In July 1996, Mr.
Safchik resigned from all positions with the Company.
(6) Mr. Arnold served as Acting Chief Executive Officer of the Company from
March 1995 through November 1995. Mr. Arnold's responsibilities with FYI
commenced in April 1994. All salary shown as having been received by Mr. Arnold
was paid by FYI, however, a portion of such compensation was allocated to the
Company. In December, 1996, Mr. Arnold resigned from all positions with the
Company and FYI.
(7) Mr. Arnold's responsibilities with FYI commenced in April 1994 and
continued until his resignation in December, 1996. His 1994 annual base salary
was set at $180,000, and his 1995 annual base salary was $225,000. In May 1996,
Mr. Arnold's annual base compensation was reduced to $100,000.
(8) Mr. de Vreese served as Chief Executive Officer of the Company from its
inception (July 1, 1992) until his resignation in February 1995.
(9) Mr. de Vreese exercised options to purchase 37,500 shares in 1994.
(10) Consists of a car allowance.
(11) Mr. O'Brien serves as Chief Operating Officer of the Company. Mr.
O'Brien has served as President of FYI since December 1996. Mr. O'Brien
continues to serve as the Chief Operating Office of FYI, where his current
responsibilities commenced in April 1994. In March 1995, Mr. O'Brien received
an annual base salary of $125,000 and a bonus of $25,000. In addition, during
1995, Mr. O'Brien received options to purchase 50,000 shares of the Company's
Common Stock which vest over three years. In May 1996, Mr. O'Brien's annual
base compensation was reduced to $100,000. In September, 1996, Mr. O'Brien
received options to purchase 814,000 shares of the Company's Common Stock which
vest over three years.
(12) Ms. Galgas has served as Chief Financial Officer of the Company since
March 1995. In addition, Ms. Galgas' current responsibilities as Chief
Financial Officer of FYI commenced in April 1994.
(13) All salary shown in this chart as having been received by Ms. Galgas in
1994 was paid by FYI and represents nine months part-time salary at an annual
full-time base rate of $108,000. A portion of such compensation expense was
allocated to the Company. In March 1995, Ms. Galgas received from the Company
an annual base salary of $125,000 and a bonus of $25,000. In addition, during
1995, Ms. Galgas received options to purchase 50,000 shares of the Company's
Common Stock which vest over three years. In May 1996, Ms. Galgas' annual base
compensation was reduced to $100,000. In September, 1996, Ms. Galgas received
options to purchase 814,000 shares of the Company's Common Stock which vest over
three years.
74
<PAGE>
(14) All monies shown in this chart as having been received by Mr. Edling in
1994 through 1996 were paid by Dycam.
(15) Does not include options to purchase 100,000 shares of Dycam Common
Stock granted to Mr. Edling in 1994 or 100,000 shares of Dycam Common Stock
granted to Mr. Edling in 1995. No shares of Dycam Common Stock were granted to
Mr. Edling in 1996.
(16) Consists of Dycam's contributions to Mr. Edling's 401(k) plan account
totalling $1,500 in 1994 and $3,600 in 1995 and 1996.
OPTION GRANTS IN LAST FISCAL YEAR
Set forth below is information regarding options or warrants granted to the
Named Executives during the 1996 fiscal year.
<TABLE>
<CAPTION>
Number of Shares Percentage of Total
Underlying Options Options or Warrants Exercise or
or Warrants Granted to Employees Base Price Expiration
Name Granted (#) in Fiscal 1996 ($/Share) Date
- ----------------- ------------------ -------------------- ----------- ----------
<S> <C> <C> <C> <C>
K. Eugene Shutler 4,209,184 59% $.075 11/05
Nancy H. Galgas 814,000 11% $.075 9/06
James E. O'Brien 814,000 11% $.075 9/06
</TABLE>
- --------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Set forth below is information with respect to options or warrants exercised
by the Named Executives during the 1996 fiscal year and the number and value of
unexercised stock options or warrants held by the Named Executives at the end of
the fiscal year.
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised In-The-
Unexercised Options or Warrants Money Options at
Held at Fiscal Year End(1)
Shares Value Fiscal Year End ----------------------------
Acquired on Realized -------------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ------------ -------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. Eugene Shutler 0 $0 814,337 3,394,847 -0- -0-
Nancy H. Galgas 0 0 285,874 578,126 -0- -0-
James O'Brien 0 0 285,874 578,126 -0- -0-
John A. Edling 0 0 45,000 -0- -0- -0-
Dana I. Arnold 0 0 3,874,725 3,874,724 -0- -0-
Jeffrey A. Safchik 0 0 -0- -0- -0- -0-
Guy de Vreese 0 0 -0- -0- -0- -0-
- ----------------
</TABLE>
(1) None of the unexercised options were in the money at fiscal year end.
75
<PAGE>
COMPENSATION OF DIRECTORS
Ann Ehringer was paid $1,000 for each day she performed services as a
member of the Independent Committee in connection with the 1996 financing
transaction with IDI, for an aggregate of $6,000. In addition, in April 1996,
the Board of Directors granted to Dr. Ehringer warrants to acquire 80,000 shares
of Common Stock in consideration for her services as Chairman of the Independent
Committee. The exercise price of the warrants is $.075 per share. The warrants
vest 40,000 in May 1996 and 40,000 in May 1997. The Company has granted the
warrant holder certain registration rights related to these warrants.
Non-employee directors receive $2,500 per calendar quarter for serving
on the Board of Directors and $500 for each meeting of the Board or any of its
committees that they attend. The amounts payable to two non-employee directors
since January 1996 remain unpaid as of January 31, 1997.
EMPLOYMENT AGREEMENTS
Effective as of April 5, 1994, FYI entered into an employment agreement
with Dana I. Arnold. This agreement provided that Mr. Arnold would serve as
Chairman of the Board, Chief Executive Officer, President and Secretary of FYI.
In addition, the agreement covered a three-year term expiring in April 1997, for
which the annual base compensation to be paid was $180,000. The agreement was
canceled in May 1996, and FYI entered into a new employment agreement with Mr.
Arnold, expiring in May 1998, with an annual base compensation of $100,000.
Under the latter agreement, if certain cash flow conditions were met, the annual
base compensation to be paid would be increased to $175,000. The agreement also
provided that Mr. Arnold would continue to serve as Chairman of the Board, Chief
Executive Officer, President and Secretary of FYI and that if Mr. Arnold were
terminated without cause, he would be entitled to receive a lump sum payment
equal to the aggregate salary due to him for the then remaining term of the
agreement and immediate vesting of any unvested options and warrants. In
December 1996, Mr. Arnold resigned from all positions with the Company and FYI
pursuant to a termination and settlement agreement. The agreement provides that
Mr. Arnold shall receive his current salary until no later than March 31, 1997.
On the closing of the FYI Sale (see Notes to Consolidated Financial Statements -
Subsequent Events), Mr. Arnold is entitled to receive all unpaid salary due to
him under the employment agreement expiring in May 1998 at an annual base
compensation of $100,000. In addition, all of the warrants to purchase shares
of the Company's Common Stock held by Mr. Arnold fully vest on the closing of
the FYI Sale. See "Certain Related Party and Other Transactions."
In August 1996, the Company entered into an employment agreement with K.
Eugene Shutler, whereby Mr. Shutler was employed by the Company as its Chief
Executive Officer. The agreement has an initial two-year term and is
automatically renewed thereafter for successive one-year periods, provided
neither the Company nor Mr. Shutler notifies the other that the agreement shall
not be so extended. Pursuant to the agreement, the Company will pay Mr. Shutler
an annual base salary of $230,000, subject to increase from time to time in the
sole discretion of the Board of Directors. In addition, Mr. Shutler will be
eligible to receive a one-time bonus (the "Incentive Bonus") of $50,000 if the
unaudited accounts of the Company reflect a cash-flow break even for any
consecutive three-month period during the term of the agreement. Mr. Shutler
shall also be eligible to receive discretionary bonuses in the sole discretion
of the Board of Directors. In the event Mr. Shutler's employment is terminated
without cause (as defined), Mr. Shutler will be entitled to a termination
benefit equal to (i) 50% of his annual base salary then in effect, subject to
reduction to the extent of earnings from other employment or self-employment,
plus (ii) any Incentive Bonus accrued but unpaid. In the event, Mr. Shutler's
employment is terminated within six months following a change of control (as
defined), he will
76
<PAGE>
be entitled to receive (i) the lesser of 100% of his annual base salary then in
effect or, if the unexpired portion of the term of the agreement is less than
twelve months, such portion of the annual base salary as would be payable
through the end of such term, plus (ii) any Incentive Bonus accrued but unpaid.
On February 7, 1994, Dycam entered into an employment agreement with
John A. Edling. This agreement provided that Mr. Edling would serve as
President of Dycam and provided for (a) an initial three-year term, (b) a base
salary of $120,000 per annum and (c) options to purchase 45,000 shares of the
Company's Common Stock at $8.67 per share, which were repriced during 1996 to
$.075 per share. The agreement expired in February 1997.
Dycam also has employment agreements with three other key employees for
three year terms which expired in February 1997. The agreements called for
annual compensation to be paid to those three employees aggregating $258,000 per
year for each of the three years.
On December 20, 1996, Dycam entered into an employment agreement
contract with one key employee for a three-year term which expires December 31,
1999. The agreement calls for annual compensation of $120,000 a year for each of
the three years. Pursuant to the employment agreement, Dycam issued 90,000 stock
options that vest at a rate of 8.33% per calendar quarter. Additionally, Dycam
issued 60,000 stock options to the employee that vest 8.33% per calendar quarter
if certain conditions are met.
77
<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of February 28, 1997, certain
information regarding the ownership of the Common Stock and the Preferred Stock
by (i) each person known by the Company to be the beneficial owner of more than
5% of the outstanding shares of the Common Stock or more than 5% of the
outstanding shares of the Preferred Stock, (ii) each of the Named Executives (as
defined below), (iii) each of the Company's directors, and (iv) all of the
Company's executive officers and directors as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, each of such persons has the sole voting and investment power
with respect to the shares owned. Beneficial ownership has been determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Under this Rule, certain shares may be deemed to be
beneficially owned by more than one person (such as where persons share voting
power or investment power). Unless otherwise stated, the address of each person
is c/o Styles on Video, Inc., 667 Rancho Conejo Boulevard, Newbury Park,
California 91320.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF PREFERRED
COMMON STOCK PERCENT OF STOCK PERCENT OF
BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING
NAME OWNED SHARES(1) OWNED SHARES
- --------------------------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
K. Eugene Shutler 1,603,306(2) 15.3% - -
John A. Edling 45,000(3) 0.5% - -
Ann Ehringer 80,000(4) 0.9% - -
Marshall Geller - - - -
Barry Porter - - - -
James E. O'Brien 357,706(5) 3.9% - -
Nancy H. Galgas 357,706(5) 3.9% - -
Jeffrey A. Safchik 56,803,387(6) 86.5% 500/Series A 100%
500/Series B 100%
Dana I. Arnold 7,597,508(7) 46.2%
International Digital
Investors, L.P. 56,803,387(6) 86.5% 500/Series A 100%
500/Series B 100%
All Directors and
Executive Officers as a
Group (7) persons 2,443,718(8) 21.6% - -
</TABLE>
- ----------------------
(1) Based upon 8,852,759 shares of Common Stock outstanding. Shares are
deemed to be beneficially owned by a person if the person has the right
to acquire the shares (for example, upon exercise of an option) within
60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the number of shares
outstanding is deemed to include the number of shares beneficially owned
by such person (and only such person) by reason of such acquisition
rights. As a result, the percentage of outstanding shares beneficially
owned by any person as shown in the table does not necessarily reflect
the person's actual ownership or voting power.
(2) Includes 1,603,306 shares of Common Stock issuable upon the exercise of
warrants which are or will become exercisable on or prior to April 30,
1997, subject to stockholder approval of a proposed reverse stock split.
78
<PAGE>
(3) Includes 45,000 shares of Common Stock issuable upon exercise of Stock
Options which are or will become exercisable on or prior to April 30,
1997.
(4) Includes 80,000 shares of Common Stock issuable upon exercise of
warrants which are or will become exercisable on or prior to April 30,
1997, subject to stockholder approval of a proposed reverse stock split.
(5) Includes 357,706 shares of Common Stock issuable upon exercise of stock
options which are or will become exercisable on or prior to April 30,
1997, of which options for 322,206 shares are exercisable subject to
stockholder approval of a proposed reverse stock split.
(6) Includes 51,419,199 shares of Common Stock issuable upon exercise of the
Series B Warrants which are or will become exercisable on or prior to
April 30, 1997; 238,095 shares of Common Stock issuable upon conversion
of the Series A. Preferred; 666,666 shares of Common Stock issuable upon
conversion of the Series B Preferred; 4,347,427 shares of Common Stock
held by International Digital Investors, L.P. ("IDI"); and 132,000
shares of Common Stock held by Greenstreet Partners, an affiliate of
IDI. Mr. Safchik is the President of IDI's managing general partner and
Messrs. Geller and Porter are partners of one of IDI's limited partners.
Messrs. Safchik, Geller and Porter disclaim beneficial ownership of the
securities held by IDI and its affiliates. This number does not include
61,803,805 shares of Common Stock issuable upon conversion of the Series
D Warrants which will become exercisable in the event a proposed reverse
stock split does not receive stockholder approval.
(7) Includes: 7,597,508 shares of Common Stock issuable upon exercise of
warrants which are or will become exercisable on or prior to April 30,
1997; subject to stockholder approval of a proposed reverse stock split.
(8) Includes 2,443,718 shares of Common Stock issuable upon exercise of
stock options which are or will become exercisable on or prior to April
30, 1997, subject to stockholder approval of a proposed reverse stock
split.
79
<PAGE>
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
RELATED PARTY TRANSACTIONS
IDI Financing Transactions. The Company and FYI have entered into a
series of transactions with IDI and certain related entities for the purpose of
raising capital to fund the Company's operations and those of FYI. Jeffrey A.
Safchik is President of IDI's corporate general partner and was appointed as
Chief Executive Officer of the Company after the series of transactions in 1995
described below which gave IDI a majority of seats on the Company's Board of
Directors. Mr. Safchik resigned all positions with the Company in July 1996.
IDI beneficially owns approximately 50.1% of the Company's outstanding Common
Stock, including 132,000 shares of Common Stock held by Greenstreet Partners, an
affiliate of IDI. Additionally, upon exercise of warrants and conversion of the
Preferred Stock, IDI will own approximately 71% of the Company's outstanding
Common Stock on a fully diluted basis.
In September 1995, the Company and FYI received short-term bridge
financing of $300,000 from Multinational Trading Corp., a Florida corporation
("MTC"), MTC and IDI are companies with overlapping but not identical
management. 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 a Note
and Preferred Stock Purchase Agreement, dated as of November 20, 1995 (the "1995
Agreement"), the Company and FYI issued to IDI $2,950,000 principal amount of
10% Senior Notes due June 30, 1998 (the "1995 Notes"). Additionally, the
Company issued to IDI 500 shares of Series A Preferred for $50,000 and Common
Stock Purchase Warrants (the "1995 Warrants") entitling IDI to purchase shares
of the Company's Common Stock equivalent to 40% of the fully diluted shares of
Common Stock outstanding on November 20, 1995. The exercise price of the 1995
Warrants was $1.12 per warrant share, which represented the estimated
consolidated per share book value per issued and outstanding share of the
Company on the date of the 1995 Agreement. The exercise price of the 1995
Warrants was $1.12 per warrant share, which represented the estimated
consolidated per share book value per issued and outstanding share of the
Company on the date of the 1995 Agreement. The exercise price of the 1995
Warrants was subsequently reduced to $.075 per warrant share as described below.
The 1995 Warrants may be exercised at any time prior to November 20, 2005.
The terms of the Series A Preferred give the holder of the Series A
Preferred the right to designate four of the Company's Board of Directors. IDI
has appointed Messrs. Geller, Porter and Shutler as its designees on the Board
of Directors and has the right to elect a director to fill one of the two
current vacancies on the Board.
Pursuant to a Note and Preferred Stock Purchase Agreement, dated as of
May 14, 1996 (the "1996 Agreement"), as amended, the Company and FYI agreed to
issue up to $1,200,000 aggregate principal amount of 10% Senior Notes Due June
30, 1998 (the "1996 Notes" and together with the 1995 Notes, the "Notes") in a
series of purchases of such 1996 Notes between the Closing Date (as defined) and
September 15, 1996. Each purchase of 1996 Notes was contingent upon the Company
and FYI meeting certain minimum performance targets.
80
<PAGE>
IDI also purchased 500 shares of Series B Preferred, for $50,000 and received
Common Stock Purchase Warrants (the "1996 Warrants" and together with the 1995
Warrants, the "Warrants"). The 1996 Warrants have an exercise price of $.075
per warrant share and are exercisable until November 20, 2005.
On May 30, 1996, IDI purchased $371,712 principal amount of 1996 Notes,
of which $271,712 was used to repay principal and interest on certain interim
loans made to the Company and FYI by IDI and IDI-related entities in April 1996.
IDI purchased an additional $250,000, $100,000, $150,000 and $180,000 principal
amount of 1996 Notes in June, July, and August, 1996 and January 1997,
respectively.
The 1995 Agreement and the 1995 Warrants were amended in 1996 to conform
to the provisions of the 1996 Agreement and the 1996 Warrants, and the exercise
price of the 1995 Warrants was reduced to $.075, the exercise price of the 1996
Warrants.
The issuance of the 1996 Warrants and the Series B Preferred triggered
the anti-dilution provisions of the 1995 Warrants and the Series A Preferred,
resulting in the 1995 Warrants and the Series A Preferred being exercisable for
and convertible into 3,914,882 shares of Common Stock and 238,095 shares of
Common Stock, respectively, as of May 14, 1996. Additionally, the 1996 Warrants
were exercisable for 53,286,228 shares of Common Stock, and the Series B
Preferred was convertible into 666,666 shares of Common Stock. On a fully-
diluted basis, IDI held Warrants and Preferred Stock exercisable for and
convertible into 58,105,871 shares of Common Stock.
The authorized Common Stock of the Company consists of 10,000,000
shares, all of which are issued and outstanding or reserved for issuance
pursuant to outstanding warrants or stock option plans, before taking into
account the Preferred Stock and the 1996 Warrants.
Pursuant to the terms of the 1996 Agreement, the Company agreed that by
October 31, 1996 it would take all corporate action, including obtaining
stockholder approval, necessary to authorize and reserve for issuance a number
of shares of Common Stock at least equal to the number of shares of Common Stock
into which the Series A Preferred, Series B Preferred, 1996 Warrants as well as
the other outstanding warrants may be converted or exercised. Originally,
failure of the Company to take all corporate action necessary to authorize and
reserve for issuance the number of share of Common Stock underlying all of the
foregoing Stock by October 31, 1996 constituted a breach of a restrictive
covenant in the 1996 Agreement, which could have caused, among other things,
acceleration of the 1996 Notes. The October 31, 1996 deadline has been extended
to May 1, 1997.
In addition, the 1996 Warrants and the other warrants issued in
connection with the 1996 financing transaction were to become exercisable upon
the earlier to occur of October 31, 1996 and the date on which all such
corporate and stockholder actions were taken by the Company. The October 31,
1996 date has been extended to May 1, 1997.
The Notes bear interest at the rate of 10% per annum, payable monthly.
The 1995 Notes provide for principal payments of $500,000 on March 31, June 30,
September 30 and December 31, 1997 and March 31, 1998. On January 15, 1997, the
due date for the March 31,
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<PAGE>
1997 principal payment was extended to no later than May 1, 1997. The 1996
Notes are payable in five equal quarterly installments commencing June 30, 1997.
The remaining principal is due and payable on June 30, 1998. The 1996 Agreement
amended the 1995 Agreement to allow the Company to defer interest payments due
between May 31, 1996 and December 31, 1996, provided that all deferred accrued
and unpaid interest shall be paid in full on or before December 31, 1996. On
January 15, 1997, the interest deferral was extended from December 31, 1996 to
not later than May 1, 1997.
The Notes are subject to mandatory redemption (in whole or in part)
under certain circumstances, including upon receipt of proceeds from the
issuance of equity by the Company or FYI (subject to certain exceptions) or
proceeds of a sale or other disposition of assets (other than sales of inventory
in the ordinary course of business, certain sales of obsolete or worn out
equipment and certain approved sales). Holders of the Notes have a put right
enabling them to cause the Company and FYI to repurchase the Notes, at par, in
the event of a sale, merger, change of control or the public offering of
securities involving the Company of FYI.
Substantially all of the assets of the Company and FYI are pledged as
collateral for the Notes. 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 1995 Agreement or the 1996 Agreement which is not timely cured or
waived. The Company and FYI 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 Company and FYI also must satisfy certain
financial tests during the term of the Agreement, including the maintenance of
certain mandatory net worth and earnings levels, determined at the end of each
calendar quarter. The failure to comply with the restrictive covenants or pass
the financial tests constitute an event of default under the 1995 Agreement and
the 1996 Agreement. In January 1997, IDI subordinated its first priority
security interest in FYI's hospital contracts and proceeds thereof to Hasco
International, Inc. (see Notes to Consolidated Financial Statements - Subsequent
Events).
The holders of the Preferred Stock are entitled to receive dividends of
$10 per share per annum prior to the distribution of any dividends to the
holders of Common Stock. Dividends accrue whether or not declared by the Board
of Directors of the Company. The Preferred Stock is subject to optional
redemption by the Company, at a redemption price of $100 per share plus any
accrued dividends. The Preferred Stock is convertible at any time, in whole or
in part, into shares of Common Stock, at a per share conversion equal to the
higher of the current market or book value of the Common Stock at the date of
conversion. The holders of the Series A Preferred, voting as a class, are
entitled to elect four of the Company's directors. In the event of a change of
control, as defined in the 1995 Agreement and the 1996 Agreement, the Company
must offer to redeem the Preferred Stock. The sale of the FYI assets
constitutes a change of control because the Company is selling a substantial
amount of its assets. If a change of control occurs, the Company must offer to
redeem the Series A Preferred and the Series B Preferred for $100 per share in
addition to any accrued dividends, which currently amount to $7,500 for the
Series A Preferred and $5,000 for the Series B Preferred. The stockholder of
the Series A Preferred and the Series B Preferred has 30 days from the date of
the change of control to elect redemption of the Preferred shares.
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<PAGE>
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.
The 1996 Agreement was conditioned upon settlement of a suit brought by
the Company against its former outside accounting firm and certain individual
defendants entitled Styles On Video, Inc. v. Kellogg & Andelson, et al.,
---------------------------------------------------
Superior Court of the State of California, County of Los Angeles, Case No. BC
14268. Pursuant to the settlement of such suit, Kellogg & Andelson agreed to
pay $1,700,000 to the Company (the "Kellogg Settlement"). The funds were
released from escrow upon the settlement of the Class Action, as described
below, in July 1996. Of the Kellogg Settlement proceeds, $870,000 was applied
to repayment of the 1996 Notes. After partial repayment of the 1996 Notes, and
payment of certain legal expenses in connection with the 1996 Agreement, the net
proceeds of the Kellogg Settlement to the Company were $430,000, which was added
to the Company's general working capital. In April 1995, the Company settled a
class action suit which was filed against the Company and certain of its
officers and directors in 1994 (the "Class Action") as well as a shareholders'
derivative suit which named the directors and certain of the officers of the
Company (the "Class Action Settlement"). Pursuant to the Class Action
Settlement, the Company agreed to deliver to the plaintiff class warrants to
purchase 1,750,000 shares of Common Stock and the Company recorded a promissory
note in the principal amount of $250,000. The exercise price on the warrants is
$.075 per share and the warrants are redeemable by the Company at any time over
the five-year life of the warrants for $5 per warrant. The Company's director
and officer liability insurance carriers also agreed to pay to the plaintiff
class $2,250,000. With regard to the derivative suit, Guy de Vreese surrendered
250,000 shares of the Company's Common Stock and options for 150,000 shares of
the Company's Common Stock. The shares of Common Stock are to be distributed to
the plaintiff class and the options were canceled.
The Company and FYI have guaranteed each other's obligations under the
1995 Agreement and the 1996 Agreement.
On January 15, 1997, the Company, FYI and IDI entered into several
agreements (the "January 1997 Agreements"). The Company and IDI entered into a
Securities Exchange Agreement (the "Exchange Agreement") which provided for the
issuance of 4,347,427 shares of its Common Stock to IDI in exchange for all of
the 1995 Warrants and for 1996 Warrants with respect to 1,867,029 shares of
Common Stock. IDI remains the holder of 1996 Warrants for 51,419,199 shares of
Common Stock.
In addition, the Company, FYI and IDI agreed to increase the amounts
borrowed under the 1996 Notes by $180,000 to a total of $1,200,000. At the same
time, the obligation represented by the Bridge Note dated September 19, 1996, as
amended (the "Bridge Note"), between the Company, FYI and IDI, was decreased by
$180,000 under the Seventh Amendment to Bridge Note, dated January 15, 1997 (the
"Seventh Amendment"), form up to $1,157,000 to up to $977,000. Each successive
amendment to the Bridge Note, including the Seventh Amendment, amended the due
date and the amounts due pursuant to the Bridge Note. The due date of the
Seventh Amendment was extended to not later than May 1, 1997. As of January 31,
1997, the Company has borrowed $927,000 pursuant to the Bridge Note and is
entitled to draw the remaining $50,000 upon receipt by the Company of certain
income tax refunds.
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<PAGE>
Substantially all of the assets of the Company and FYI are pledged as collateral
for the Bridge Note. IDI has the right to foreclose on such assets or take
other protective measures upon the occurrence of an event of default under the
Bridge Note which is not timely cured or waived. In January 1997, IDI
subordinated its first priority security interest in FYI's hospital contracts
and proceeds thereof to Hasco in connection with the sale of the FYI business.
See Notes to Consolidated Financial Statements - Subsequent Events.
The Company, FYI and IDI also entered into a General Amendment and
Waiver Agreement to (i) amend specific provisions of the 1995 Agreement, the
1996 Agreement, the 1996 Warrants, and the Certificate of Designation for Series
B Preferred Stock of SOV (collectively, the "Agreements"), and (ii) waive each
of the breaches or defaults with respect to specific provisions of the
Agreements as of January 15, 1997. The amendments extended: (i) the date by
which the Company must take all corporate action necessary to authorize and
reserve for issuance the number of shares of Common Stock into which the Series
B Preferred Stock and 1996 Warrants may be converted or exercised from October
31, 1996 to not later than May 1, 1997; (ii) the deferral of interest payments
due pursuant to the Notes from December 31, 1996 to not later than May 1, 1997;
and (iii) extended the first principal repayment date of the 1995 Notes from
March 1, 1997 to no later than May 1, 1997. In addition, the amendments reduced
certain minimum performance targets in the 1995 Agreement and 1996 Agreement.
The Company also issued a Series D Warrant (the "Series D Warrant") to
IDI which is exercisable for up to 61,803,805 shares of the Company's Common
Stock at an exercise price of $.075 per share. The Series D Warrants are
contingent upon the occurrence of a proposed reverse stock split. If the
reverse stock split is approved and the Company and IDI complete the second
exchange of securities described below, then the Series D Warrants will not be
exercisable. However, if the reverse stock split is not approved by 5:00 p.m.,
Los Angeles time, on April 15, 1997, then the Series D Warrants may be exercised
by IDI prior to November 20, 2005.
If the proposed reverse stock split is approved by the stockholders, the
Company intends to complete a second exchange of securities with IDI pursuant to
which the Company will issue an additional 39,342,461 (pre-reverse split) shares
of its Common Stock to IDI in exchange for all of the remaining 1996 Warrants
with respect to 51,419,199 (pre-reverse split) shares of the Company's Common
Stock, together with the surrender of the Series D Warrants. After the second
security exchange, IDI would continue to hold 500 shares of the Company's Series
A Preferred and 500 shares of the Company's Series B Preferred, as well as
43,689,888 (pre-reverse split) shares of the Company's Common Stock, equivalent
to 67% of the shares anticipated to be outstanding on the date of the second
exchange, April 15, 1997.
Cancellation of Certain FYI Common Stock. In connection with the
transactions contemplated by the 1996 Agreement, Dana Arnold, the then-President
of FYI, exchanged his shares of FYI common stock (20% of the outstanding shares)
for warrants exercisable for 7,749,449 shares of the Common Stock of the
Company. The shares of FYI previously held by Arnold were canceled. As a
result of such transaction, FYI is now a wholly owned subsidiary of the Company.
Due to the triggering of certain provisions by the Exchange Agreement, the
warrants became exercisable for 7,597,508 shares of the Company's Common Stock.
84
<PAGE>
Loan Transaction With Former Chief Executive Officer. In December
1994, the Company received a $200,000 advance from Guy de Vreese, the then-Chief
Executive Officer of the Company. Approximately $150,000 was repaid during the
three months ended March 31, 1995 and approximately $50,000 of this advance,
which was not memorialized in a written document, was outstanding as of December
31, 1995. In July 1996, the Company was released from the obligation in
connection with the Class Action Settlement.
Consulting Agreement. The Company entered into a consulting agreement
(the "Consulting Agreement") with an individual who later became its Chief
Executive Officer, for services relating to the Company's business. In exchange
for the services, the Company is obligated to pay the consultant $12,500 per
month plus expenses. In addition, pursuant to the Consulting Agreement, the
Company issued warrants to purchase 250,000 shares of SOV's common stock at an
exercise price of $0.75 per share, which management believes represents the fair
market value at the date of issuance. The warrants vest 100,000 in April 1996
and the remaining 150,000 on a pro-rata basis over the subsequent twelve month
period. The Company has granted the warrant holder certain registration rights
related to these warrants. The Consulting Agreement terminated and warrants
ceased vesting on August 1, 1996, at which time the Company entered into an
employment agreement with the consultant.
Loan Transaction with Dycam. In December 1994, Dycam made a secured
loan of $500,000 to the Company. Dycam determined that extending this loan was
in the best interest of Dycam and its stockholders, as the loan enabled the
Company to continue funding FYI, and thereby supported the development and
manufacture of the specialized digital camera which FYI would purchase from
Dycam. In January 1995, Dycam made an additional secured loan of $500,000 to
the Company. The two loans have been memorialized in a single note (the
"Secured Note") which bears interest at the prime rate plus two percentage
points and called for payments of interest only for eight months with all
principal and accrued interest due and payable on September 1, 1995. In
connection with the 1995 Agreement, Dycam extended the maturity date of the
Secured Note to December 31, 1998. The Company has made all interest payments
on the Secured Note in a timely fashion. The note is secured by a first
priority interest in the 1,916,667 shares of Dycam's common stock owned by the
Company. If the Company should default on its obligation pursuant to the Notes,
Dycam may not be repaid under the Secured Note and will be entitled to receive
back up to the 1,916,667 shares of Dycam's common stock held by the Company.
Issuance of Warrants to Director. In May 1996, the Company issued
warrants to purchase 80,000 shares of SOV's common stock to Ann Ehringer
representing the Independent Committee in connection with the 1996 Agreement.
The exercise price is $.075 per warrant. The warrants vest 40,000 in May 1996
and 40,000 in April 1997. The Company has granted the warrant holder certain
registration rights related to these warrants.
Intercompany Transactions Between FYI and Dycam. Under the terms of an
agreement with FYI, Dycam has agreed to provide FYI an exclusive right to use
Dycam technology in the hospital baby portrait market through April 2005. FYI
has received the option to purchase up to 5,000 Dycam cameras at predetermined
prices and to receive continual upgrades of camera technology and has agreed to
pay Dycam fees of 7.5% of net sales from all hospitals using FYI portrait
services. Dycam agreed to defer this fee until the earlier of the first
85
<PAGE>
month in which FYI has positive operating cash flow and April 30, 1997. If FYI
has its camera system manufactured by someone other than Dycam, FYI has agreed
to pay to Dycam a "Camera Technology Fee" for each camera installed in a
hospital served by FYI, instead of the 7.5% royalty described above. Dycam has
also agreed to finance the first 150 cameras bought by FYI for terms of 36-48
months with equal monthly payments of principal and interest, with interest
computed at a rate of 2% over the Wall Street Journal prime rate. At the
closing of the FYI Sale, FYI and Dycam will terminate their existing contractual
relationships. See Notes to Consolidated Financial Statements - Subsequent
Events.
Stock Options. In May 1996, certain stock options previously granted to
certain of the Company's officers, and employees were repriced from $3.00-$8.67
to $.075 per share, the fair market value as determined at the date of the
repricing.
Lease of Executive Offices. From January to April 1996, the Company's
executive offices were located at 101 Hodencamp Road, Thousand Oaks, CA 91360,
pursuant to a month-to-month sublease with rental payments of approximately
$1,000 per month, which approximated the current market rental rate for such
space. FYI's then-Chief Executive Officer is a significant stockholder and
officer of the privately-held company which subleases the executive offices to
FYI. The lease was terminated in April 1966.
Other. For other Related Party Transactions see "Item 10 - Executive
Compensation."
86
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See the Exhibit Index hereto which begins on p. 89.
(b) Reports on Form 8-K.
Since the end of the Company's fiscal year ended December 31, 1995, the
Company has filed the following reports on Form 8-K:
Form 8-K, dated March 29, 1996, reporting the resignation of Coopers &
Lybrand L.L.P., the Company's independent public accountants. The report
provides that there have been no disagreements with respect to accounting
principles, in connection with Coopers and Lybrand's audits for the year ended
December 31, 1994, or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved, would have caused Coopers & Lybrand
to make reference to such disagreements in their report.
Form 8-K, dated May 14, 1996 reporting IDI's additional investment in
the Company.
Form 8-K, dated June 17, 1996 reporting the engagement of Corbin & Wertz
as the Company's independent accountants.
Form 8-K, dated July 18, 1996 reporting the Company's delisting from the
American Stock Exchange effective August 2, 1996; and the resignation of Jeffrey
Safchik as the Company's Chief Executive Officer, Treasurer, Secretary and
Chairman of the Board. Mr. Safchik also resigned from the Boards of Directors
of the Company's subsidiaries Dycam and FYI.
Form 8-K, dated August 26, 1996 reporting the appointment of K. Eugene
Shutler as the Company's Chief Executive Officer, President and Chairman of the
Board; and the appointment of Nancy H. Galgas as the Company's Secretary and
Treasurer and James E. O'Brien as the Company's Vice President.
Form 8-K, dated December 19, 1996, reporting the resignation of Dana I.
Arnold as the Chief Executive Officer, President, Secretary and Member and
Chairman of the Board of the Company's subsidiary FYI; the appointment of K.
Eugene Shutler as FYI's Chief Executive Officer, Secretary and Chairman of the
Board; and the appointment of James E. O'Brien as FYI's President and Nancy H.
Galgas as FYI's treasurer. Mr. Arnold also resigned as a member of the
Company's Board of Directors.
Form 8-K, dated January 15, 1997, reporting a change in control
resulting from the Exchange of 4,347,427 shares of the Company's stock for
Series A and B warrants, held by IDI.
Form 8-K, dated February 4, 1997, reporting the execution of definitive
agreements with an effective date of January 31, 1997 to sell the assets of FYI
to Hasco International, Inc.
87
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STYLES ON VIDEO, INC.
(Registrant)
By: /s/
----------------------------
K. Eugene Shutler
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints K. Eugene Shutler and Nancy H. Galgas, or any one
of them, their attorney-in-fact and agent, with full power of substitution, for
them in any and all capacities, to sign any amendments to this Annual Report,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, may do or
cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- ---------------------------- ---------------
<S> <C> <C>
/s/ Chairman of the Board and March 27, 1997
- --------------------- Chief Executive Officer
K. Eugene Shutler (Principal Executive Officer)
/s/ Chief Financial Officer March 27, 1997
- --------------------- (Principal Accounting Officer
Nancy H. Galgas and Secretary)
/s/ Director March 27, 1997
- ---------------------
Marshall Geller
/s/ Director March 27, 1997
- ---------------------
John A. Edling
/s/ Director March 27, 1997
- ---------------------
Barry Porter
/s/ Director March 27, 1997
- ---------------------
Ann Ehringer
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document
- ----------- --------
<C> <S> <C>
3.1 Certificate of Incorporation of Styles on Video, Inc.
(Incorporated by reference to Exhibit 3.1 to Styles on
Video, Inc.'s Registration Statement on Form SB-2 (File
No. 3357706LA)............................................
3.2 By-Laws of Styles on Video, Inc. (Incorporated by
reference to Exhibit 3.2 to Styles on Video, Inc.'s
Registration Statement on Form SB-2 (Form No. 3357706LA)..
3.3 Amended Certificate of Designation of Series B Preferred
Stock of Styles on Video, Inc., dated as of May 28, 1996
(Incorporated by reference to Exhibit J to International
Digital Investors, L.P.'s Form 13-D, dated June 5, 1996).
3.4 Certificate of Designation of Series A Preferred Stock of
Styles on Video, Inc., dated November 9, 1995
(Incorporated by reference to Exhibit 3.4 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1994).................................................
4.1 Form of Warrant Certificate for Series B Warrants,
representing Warrants to purchase shares of Common Stock
of Styles on Video, Inc., issued in the name of
International Digital Investors, L.P. (Incorporated by
reference to Exhibit L to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996), see Schedule 4.1...
4.2 Amended and Restated Warrant Certificate for Series A
Warrants, representing Warrants to purchase 3,914,882
shares of Common Stock of Styles on Video, Inc, issued in
the name of International Digital Investors, L.P., dated
as of May 15, 1996 (Incorporated by reference to Exhibit K
to International Digital Investors, L.P.'s Form 13-D,
dated June 5, 1996).......................................
4.3 Warrant Certificate, representing 7,747,449 Warrants to
purchase the Common Stock of Styles on Video, Inc., issued
in the name of Dana I. Arnold, dated as of May 15, 1996
(Incorporated by reference to Exhibit C to Exhibit H to
International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996).............................................
4.4 Form of Warrant Certificate, representing Warrants to
purchase the Common Stock of Styles on Video, Inc.
(Incorporated by reference to Exhibit 4.4 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995), see Schedule 4.4...............................
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document
- ----------- --------
<C> <S> <C>
10.1 Note and Preferred Stock Purchase Agreement, dated as of
May 14, 1996, by and among Styles on Video, Inc., Forever
Yours, Inc. and International Digital Investors, L.P.
(Incorporated by reference to Exhibit H to International
Digital Investors, L.P.'s Form 13-D, dated June 5, 1996)..
10.2 10% Bridge Note, dated as of September 19, 1996, by
Styles on Video, Inc. and Forever Yours, Inc., in favor of
International Digital Investors, L.P. (Incorporated by
reference to Exhibit 10.2 to Styles on Video, Inc.'s Form
10-KSB, for the period ending December 31, 1995)..........
10.3 Amended and Restated Registration Rights Agreement, dated
as of May 15, 1996, by and between Styles on Video, Inc.
and International Digital Investors, L.P. (Incorporated by
reference to Exhibit M to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996).....................
10.4 Security Agreement, dated as of May 15, 1996, by and
between Styles on Video, Inc. and International Digital
Investors, L.P. (Incorporated by reference to Exhibit I to
Exhibit H to International Digital Investors, L.P.'s Form
13-D, dated June 5, 1996).................................
10.5 Security Agreement, dated as of May 15, 1996, by and
between Forever Yours, Inc. and International Digital
Investors, L.P. (Incorporated by reference to Exhibit H to
Exhibit H to International Digital Investors, L.P.'s Form
13-D, dated June 5, 1996).................................
10.6 Pledge Agreement by and between Styles on Video, Inc.,
and International Digital Investors, L.P., dated as of May
15, 1996 (Incorporated by reference to Exhibit C to
Exhibit H to International Digital Investors, L.P.'s Form
13-D, dated June 5, 1996).................................
10.7 Guaranty by Styles on Video, Inc. in favor of
International Digital Investors, L.P., dated as of May 15,
1996 (Incorporated by reference to Exhibit K to Exhibit H
to International Digital Investors, L.P.'s Form 13-D,
dated June 5, 1996).......................................
10.8 Employment Agreement, dated as of August 1, 1996, by and
between Styles on Video, Inc. and K. Eugene Shutler
(Incorporated by reference to Exhibit 10.8 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Sequential
- ----------- -------- Page No.
----------
<C> <S> <C>
10.9 Styles on Video, Inc. 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit B to Styles on
Video, Inc.'s Preliminary Proxy Statement, as filed with
the SEC on February 21, 1997).............................
10.10 Amended and Restated Employment Agreement, dated as of May
15, 1996, by and between Dana I. Arnold and Forever Yours,
Inc (Incorporated by reference to Exhibit O to Exhibit H
to International Digital Investors, L.P.'s Form 13-D,
dated June 5, 1996).......................................
10.11 Guaranty by Forever Yours, Inc. in favor of International
Digital Investors, L.P. dated as of May 15, 1996
(Incorporated by reference to Exhibit J to Exhibit H to
International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996).............................................
10.12 Second Amendment to Note and Preferred Stock Purchase
Agreement and Waiver, dated as of May 15, 1996, by and
among Styles on Video, Inc., Forever Yours, Inc. and
International Digital Investors, L.P. (Incorporated by
reference to Exhibit G to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996).....................
10.13 First Amendment to Additional Note and Preferred Stock
Purchase Agreement and Waiver, dated as of May 15, 1996,
by and among Styles on Video, Inc., Forever Yours, Inc.
and International Digital Investors, L.P. (Incorporated by
reference to Exhibit I to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996).....................
10.14 Registration Rights Agreement, dated as of May 14, 1996,
by and between Styles on Video, Inc. and Dana I. Arnold
(Incorporated by reference to Exhibit 10.14 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.15 Dycam Override Deferral Agreement, dated as of May 15,
1996, by and among Styles on Video, Inc., Forever Yours,
Inc., International Digital Investors, L.P. and Dycam Inc.
(Incorporated by reference to Exhibit N to Exhibit H to
International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996).............................................
10.16 Consulting Agreement, dated as of May 15, 1996, by and
among Styles on Video, Inc., Forever Yours, Inc. and K.
Eugene Shutler (Incorporated by reference to Exhibit O to
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Sequential
- ----------- -------- Page No.
----------
<C> <S> <C>
International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996).............................................
10.17 Consulting Agreement, dated as of May 15, 1996, by and
among Styles on Video, Inc., Forever Yours, Inc. and
Brymarc Management (Incorporated by reference to Exhibit N
to International Digital Investors, L.P.'s Form 13-D,
dated June 5, 1996).......................................
10.18 10% Senior Note, dated as of May 14, 1996, by Styles on
Video, Inc. and Forever Yours, Inc. in favor of
International Digital Investors, L.P. (Incorporated by
reference to Exhibit B to Exhibit H to International
Digital Investors, L.P.'s Form 13-D, dated June 5, 1996)..
10.19 Form of Registration Rights Agreement (Incorporated by
reference to Exhibit 10.19 to Styles on Video, Inc.'s Form
10-KSB, for the period ending December 31, 1995) see
Schedule 4.4..............................................
10.20 Full Release and Settlement Agreement, dated as of May 29,
1996, by and among Styles Video, Inc., Dycam Inc. Styles
Servicing, Inc., Forever Yours, Inc. International Digital
Investors, L.P., Kellogg & Andelson, Thomas D. Leaper,
James F. Walters, William T. Wall, Fred S. Flax and CPA
Mutual Insurance Company of America Risk Retention Group
(Incorporated by reference to Exhibit 10.20 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.21 Stipulation of Settlement of Class Action and Derivative
Claims, dated as of April 14, 1995, by and between Styles
On Video, Inc. and the Class Members and Derivative Claims
(Incorporated by reference to Exhibit 10.21 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.22 Amendment and Waiver Agreement to 10% Bridge Note,
dated as of October 15, 1996, by and among Styles on
Video, Inc., Forever Yours, Inc. and International Digital
Investors L.P. (Incorporated by reference to Exhibit 10.22
to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1995).................................
10.23 Second Amendment to Bridge Note, by and among Styles on
Video, Inc, Forever Yours, Inc, and International Digital.
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Sequential
- ----------- -------- Page No.
----------
<C> <S> <C>
Investors, L.P., dated October 25, 1996 (Incorporated by
reference to Exhibit 10.23 to Styles on Video, Inc.'s Form
10-KSB, for the period ending December 31, 1995)..........
10.24 Third Amendment to Bridge Note, by and among Styles on
Video, Inc, Forever Yours, Inc, and International Digital
Investors, L.P., dated November 18, 1996 (Incorporated by
reference to Exhibit 10.24 to Styles on Video, Inc.'s Form
10-KSB, for the period ending December 31, 1995)..........
10.25 Fourth Amendment to Bridge Note, by and among Styles on
Video, Inc, Forever Yours, Inc, and International Digital
Investors, L.P., dated December 11, 1996 (Incorporated by
reference to Exhibit 10.25 to Styles on Video, Inc.'s Form
10-KSB, for the period ending December 31, 1995)..........
10.26 Fifth Amendment to Bridge Note, by and among Styles on
Video, Inc, Forever Yours, Inc, and International Digital
Investors, L.P., dated December 27, 1996 (Incorporated by
reference to Exhibit 10.26 to Styles on Video, Inc.'s Form
10-KSB, for the period ending December 31, 1995)..........
10.27 Sixth Amendment to Bridge Note, by and among Styles on
Video, Inc, Forever Yours, Inc, and International Digital
Investors, L.P., dated January 13, 1997 (Incorporated by
reference to Exhibit 10.27 to Styles on Video, Inc.'s Form
10-KSB, for the period ending December 31, 1995)..........
10.28 10% Promissory Note, dated as of January 21, 1997, by and
between Forever Yours, Inc. and Hasco International, Inc.
(Incorporated by reference to Exhibit 10.28 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.29 Amendment and Waiver Agreement, dated as of February 13,
1997, by and among Styles on Video, Inc., Forever Yours,
Inc., and K. Eugene Shutler (Incorporated by reference to
Exhibit 10.29 to Styles on Video, Inc.'s Form 10-KSB, for
the period ending December 31, 1995)......................
10.30 Amendment and Waiver Agreement dated February 13, 1997,
by and among Styles on Video, Inc., Forever Yours, Inc.
and Ann Graham Ehringer (Incorporated by reference to
Exhibit 10.30 to Styles on Video, Inc.'s Form 10-KSB, for
the period ending December 31, 1995)......................
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Sequential
- ----------- -------- Page No.
----------
<C> <S> <C>
10.31 Letter Agreement dated as of January 15, 1997 by and among
Styles on Video, Inc., Forever Yours, Inc. and
International Digital Investors, L.P increasing the
principal amount borrowed pursuant to the Note and
Preferred Stock Purchase Agreement, dated as of May 14,
1996 (Incorporated by reference to Exhibit 10.31 to Styles
on Video, Inc.'s Form 10-KSB, for the period ending
December 31, 1995)........................................
10.32 Securities Exchange Agreement by and between Styles on
Video, Inc. and International Digital Investors, L.P.,
dated as of January 15, 1997 (Incorporated by reference to
Exhibit 10.32 to Styles on Video, Inc.'s Form 10-KSB, for
the period ending December 31, 1995)......................
10.33 Seventh Amendment to Bridge Note, by and among Styles on
Video, Inc., Forever Yours, Inc., and International
Digital Investors, L.P., dated as of January 15, 1997
(Incorporated by reference to Exhibit 10.33 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.34 General Amendment and Waiver Agreement, dated as of
January 15, 1997, by and among Styles on Video, Inc.,
Forever Yours, Inc. and International Digital Investors,
L.P. (Incorporated by reference to Exhibit 10.34 to Styles
on Video, Inc.'s Form 10-KSB, for the period ending
December 31, 1995)........................................
10.35 Letter Agreement, dated as of January 15, 1997, by and
between Styles on Video, Inc. and International Digital
Investors, L.P. regarding Warrants exercised in excess of
authorized and unissued shares of Common Stock
(Incorporated by reference to Exhibit 10.35 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.36 Warrant Certificate for Series D Warrants representing
Warrants to purchase 61,803,850 shares of Common Stock of
Styles on Video, Inc., issued in the name of International
Digital Investors, L.P., dated as of January 15, 1997
(Incorporated by reference to Exhibit 10.36 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.37 Termination and Settlement Agreement by and among Forever
Yours, Inc., Styles on Video, Inc. and Dana I. Arnold,
dated as of December 19, 1996 (Incorporated by reference
to Exhibit
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Sequential
- ----------- -------- Page No.
----------
<C> <S> <C>
10.37 to Styles on Video, Inc.'s Form 10-KSB, for the
period ending December 31, 1995)..........................
10.38 Asset Purchase Agreement by and among Forever Yours, Inc.,
Styles on Video, Inc. and Hasco International Inc., dated
as of January 31, 1997 (Incorporated by reference to
Exhibit 10.38 to Styles on Video, Inc.'s Form 10-KSB, for
the period ending December 31, 1995)......................
10.39 Mutual Release by and between Forever Yours, Inc. and
Hasco International, Inc., dated as of February 4, 1997
(Incorporated by reference to Exhibit 10.39 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.40 Mutual Release by and between Styles on Video, Inc. and
Hasco International, Inc., dated as of February 4, 1997
(Incorporated by reference to Exhibit 10.40 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.41 Mutual Release by and between Dycam, Inc. and Hasco
International, Inc. dated as of February 4, 1997
(Incorporated by reference to Exhibit 10.41 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.42 Loan Agreement by and among Forever Yours, Inc., Styles
on Video, Inc. and Hasco International, Inc., dated as of
January 31, 1997 (Incorporated by reference to Exhibit
10.42 to Styles on Video, Inc.'s Form 10-KSB, for the
period ending December 31, 1995)..........................
10.43 Revolving Note by and between Forever Yours, Inc. and
Hasco International, Inc. dated as of January 31, 1997
(Incorporated by reference to Exhibit 10.43 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.44 Security Agreement by Forever Yours, Inc. in favor of
Hasco International, Inc. dated as of January 31, 1997
(Incorporated by reference to Exhibit 10.44 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.45 Note and Preferred Stock Purchase Agreement, dated as of
November 20, 1995, between Styles on Video, Inc., Forever
Yours, Inc. and International Digital Investors, L.P.
(Incorporated by reference to Exhibit 10.1 to Styles on
Video,
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Sequential
- ----------- -------- Page No.
----------
<C> <S> <C>
Inc.'s Form 10-KSB,, for the period ending December 31,
1994).....................................................
10.46 10% Senior Note, dated November 20, 1995, by Styles on
Video, Inc. and Forever Yours, Inc. in favor of
International Digital Investors, L.P. (Incorporated by
reference to Exhibit 10.2 to Styles on Video, Inc.'s Form
10-KSB,, for the period ending December 31, 1994).........
10.47 Registration Rights Agreement, dated November 20, 1995,
between Styles on Video, Inc. and International Digital
Investors, L.P. (Incorporated by reference to Exhibit 10.3
to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1994).................................
10.48 Security Agreement, dated as of November 20, 1995, between
Styles on Video, Inc. and International Digital Investors,
L.P. (Incorporated by reference to Exhibit 10.4 to Styles
on Video, Inc.'s Form 10-KSB, for the period ending
December 31, 1994)........................................
10.49 Pledge Agreement between Styles on Video, Inc. and
International Digital Investors, L.P., dated as of
November 20, 1995 (Incorporated by reference to Exhibit
10.8 to Styles on Video, Inc.'s Form 10-KSB, for the
period ending December 31, 1994)..........................
10.50 Guaranty by Styles on Video, Inc. in favor of
International Digital Investors, L.P., dated as of
November 20, 1995 (Incorporated by reference to Exhibit
10.9 to Styles on Video, Inc.'s Form 10-KSB, for the
period ending December 31, 1994)..........................
10.51 Amended and Restated Promissory Note, dated January 25,
1995, by Styles on Video, Inc. in favor of Dycam Inc.
(Incorporated by reference to Exhibit 10.10 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1994).................................................
10.52 Letter Agreement, dated April 12, 1995 by and among Dycam
Inc., Forever Yours, Inc. and Styles on Video, Inc.
(Incorporated by reference to Exhibit 10.50 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1994).................................................
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Sequential
- ----------- -------- Page No.
----------
<C> <S> <C>
10.53 Letter Agreement, dated May 10, 1995, by and among Dycam
Inc., Forever Yours, Inc. and Styles on Video, Inc.
(Incorporated by reference to Exhibit 10.51 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1994).................................................
10.54 Letter Agreement between Styles on Video, Inc. and Dycam
re: Extension of Dycam Note, dated November 9, 1995
(Incorporated by reference to Exhibit 10.57 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1994).................................................
10.55 Assignment of Patent Application from Dana Arnold to
Forever Yours, Inc., dated November 18, 1995 (Incorporated
by reference to Exhibit 10.66 to Styles on Video, Inc.'s
Form 10-KSB, for the period ending December 31, 1994).....
10.56 Guaranty by Forever Yours, Inc. in favor of International
Digital Investors, L.P., dated as of November 20, 1995
(Incorporated by reference to Exhibit 10.67 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1994).................................................
10.57 First Amendment to Note and Preferred Stock Purchase
Agreement and Waiver, dated March 12, 1996, between Styles
on Video, Inc., Forever Yours, Inc. and International
Digital Investors, L.P. (Incorporated by reference to
Exhibit 10.70 to Styles on Video, Inc.'s Form 10-KSB, for
the period ending December 31, 1994)......................
10.58 Form of Master Lease Agreement (Incorporated by reference
to Exhibit 10.62 to Styles on Video, Inc.'s Form 10-KSB,
for the period ending December 31, 1994) see Schedule
10.58.....................................................
10.59 Letter Agreement dated as of May 24, 1995, by and between
Styles on Video, Inc. and Interactive Video Systems, Inc.
(Incorporated by reference to Exhibit 10.59 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
10.60 Employment Agreement dated as of December 20, 1996, by and
between Dycam Inc. and Ronald N. Iverson (Incorporated by
reference to Exhibit 10.60 to Styles on Video, Inc.'s Form
10-KSB, for the period ending December 31, 1995)..........
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Sequential
- ----------- -------- Page No.
----------
<C> <S> <C>
16.1 Letter from Coopers & Lybrand L.L.P., dated March 29,
1996, resigning as accountants for Styles on Video, Inc.
(Incorporated by reference to Exhibit 16.1 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December
31, 1995).................................................
21.1 List of Subsidiaries of Styles on Video, Inc..............
23.1 Consent of Corbin & Wertz.................................
27.1 Financial Data Schedule...................................
</TABLE>
98
<PAGE>
SCHEDULE 4.1
FORM:
Warrant Certificate for Series B Warrants, representing Warrants to purchase
53,286,228 shares of Common Stock of Styles on Video, Inc., issued in the name
of International Digital Investors, L.P., dated as of May 15, 1996
(Incorporated by reference to Exhibit L to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996).
(a) Warrant Certificate for Series B Warrants representing Warrants to purchase
51,419,199 shares of Common Stock of Styles on Video, Inc., issued in the
name of International Digital Investors, L.P., dated as of January 15,
1997.
Differences from Form Warrant Certificate are:
(1) DATE: January 15, 1997
(2) NUMBER OF SHARES UNDERLYING THE WARRANTS: 51,419,199
(3) Language stating that the 51,419,199 Warrants to replace the 53,286,228
Warrants issued on May 15, 1996.
99
<PAGE>
SCHEDULE 4.4
FORM:
Warrant Certificate, representing C-2 Warrants to purchase 250,000 shares of
Common Stock of Styles on Video, Inc., issued in the name of K. Eugene Shutler,
dated as of May 15, 1996 (Incorporated by reference to Styles on Video, Inc.'s
Form 10-KSB, for the period ending December 31, 1995).
(a) Warrant Certificating, representing C-1 Warrants to purchase 80,000 shares
of Common Stock of Styles on Video, Inc., issued in the name of Dr. Ann
Graham Ehringer, dated as of May 15, 1996.
Differences from Form Warrant Certificates are:
(1) NAME: Dr. Ann Graham Ehringer
(2) NUMBER OF SHARES UNDERLYING THE WARRANTS: 80,000
(3) CONSIDERATION FOR WARRANTS: Services as Chairman of the Joint
Independent Committee of Directors of the Company and its subsidiary,
Forever Yours, Inc., a Delaware Corporation, established to review
certain transactions with International Digital Investors, L.P.
(4) TYPE OF WARRANTS: C-1
(5) VESTING SCHEDULE: 40,000 Warrants vested on May 15, 1996 and $40,000
Warrant will vest on April 18, 1997.
(b) Warrant Certificate, representing C-3 Warrants to purchase 4,071,684 shares
of Common Stock of Styles on Video, Inc., issued in the name of K. Eugene
Shutler, dated August 1, 1996.
Differences from Form Warrant Certificate are:
(1) DATE: August 1, 1996
(2) NUMBER OF SHARES UNDERLYING THE WARRANTS: 4,071,684
(3) CONSIDERATION OF WARRANTS: Executive services in connection with his
Employment Agreement.
(4) TYPE OF WARRANTS: C-3
(continued)
100
<PAGE>
SCHEDULE 4.4 (CONTINUED)
(5) VESTING SCHEDULES: Four percent (4%) of the Warrants vested on August
1, 1996; and, so long as Initial Holder is employed by the Company
pursuant to the Employment Agreement, four percent (4%) of the Warrants
have vested and shall vest on the first day of each month thereafter,
until all of the Warrants shall have vested, provided however: (i) in
the event the Initial Holder's employment under the Employment Agreement
is terminated for cause (as defined in the Employment Agreement) or
Initial Holder terminates his employment voluntarily in the absence of a
breach of the Employment Agreement by the Company, no further vesting of
the Warrants shall occur from and after the date of such termination;
(ii) in the event Initial Holder's employment by the Company pursuant to
the Employment Agreement is terminated without cause, or if Initial
Holder terminates his employment pursuant to the Employment Agreement
voluntarily because of a breach of the Employment Agreement by the
Company, all of the Warrants shall vest immediately; and (iii) in the
event the Employment of the Initial Holder is terminated within six
months after the occurrence of a Change of Control (as defined in the
Employment Agreement), the Warrants shall continue to vest in accordance
with the vesting schedule set forth above and the requirement that
Initial Holder be employed by the Company shall be waived.
101
<PAGE>
SCHEDULE 10.19
FORM:
Registration Rights Agreement, dated as of May 15, 1996, by and between Styles
on Video, Inc. and K. Eugene Shutler (Incorporated by reference to Exhibit 10.9
to Styles on Video, Inc.'s Form 10-KSB, for the period ending December 31,
1995).
(a) Registration Rights Agreement, dated as of May 15, 1996, by and between
Styles on Video, Inc. and Dr. Ann Graham Ehringer.
Differences from Form Registration Rights Agreement are:
(1) NAME: Dr. Ann Graham Ehringer
(2) CONSIDERATION FOR WARRANTS: Services as Chairperson of the Independent
Committee to review certain transactions with International Digital
Investors, L.P.
(3) NUMBER OF SHARES UNDERLYING WARRANT: 80,000
(b) Registration Rights Agreement, dated as of August 1, 1996, by and between
Styles on Video, Inc. and K. Eugene Shutler.
Differences from Form Registration Rights Agreement are:
(1) DATE: August 1, 1996
(2) NUMBER OF SHARES UNDERLYING WARRANTS: 4,071,684
(3) Reference to Warrants as "New Warrants" issued pursuant to his
Employment Agreement.
102
<PAGE>
SCHEDULE 10.58
FORM:
Master Lease Agreement, dated December 21, 1994, between Forever Yours, Inc.
and Balboa Capital Corporation (Incorporated by reference to Exhibit 10.62 to
Styles on Video, Inc.'s Form 10-KSB, for the period ending December 31, 1994.)
(a) Master Lease Agreement, dated October 10, 1995, among Forever Yours, Inc.,
Styles on Video, Inc. and Balboa Capital Corporation.
Differences from Form Master License Agreement are:
(1) LESSEE: Styles on Video, Inc. added as co-lessee
(2) DATE: October 10, 1995
(3) EXHIBIT A: (i) FP100 Fotoprint Printer S/N 00246AK95
(ii) X-RITE Densitometer P/N 16828562-005
(b) Master Lease Agreement, dated March 8, 1996, among Forever Yours, Inc.,
Styles on Video, Inc. and Balboa Capital Corporation.
Differences from Form Master License Agreement are:
(1) LESSEE: Styles on Video, Inc. added as co-lessee
(2) DATE: March 8, 1996
(3) EXHIBIT A: (i) IP4000 Color Imager/Processor
(ii) High Performance Windows Toolkit
(iii) Spare Parts Kit
103
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF STYLES ON VIDEO, INC.
Dycam Inc.
Forever Yours, Inc.
Styles Servicing, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Styles on Video, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (33-77942) and the Registration Statements on Form S-8
(33-79138, 33-60830, 33-60832, 33-60834 and 33-60836) of our report dated March
14, 1997 on the consolidated financial statements of Styles on Video, Inc. and
subsidiaries as of and for the year ended December 31, 1996 appearing in the
Annual Report on Form 10-KSB of Styles on Video, Inc. for the year ended
December 31, 1996.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
March 27, 1997
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 590,000
<SECURITIES> 0
<RECEIVABLES> 288,000
<ALLOWANCES> 182,000
<INVENTORY> 395,000
<CURRENT-ASSETS> 1,707,000
<PP&E> 869,000
<DEPRECIATION> 373,000
<TOTAL-ASSETS> 7,112,000
<CURRENT-LIABILITIES> 5,523,000
<BONDS> 3,990,000
0
0
<COMMON> 4,000
<OTHER-SE> 44,000
<TOTAL-LIABILITY-AND-EQUITY> 7,112,000
<SALES> 2,614,000
<TOTAL-REVENUES> 2,614,000
<CGS> 1,883,000
<TOTAL-COSTS> 1,883,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 705,000
<INCOME-PRETAX> (3,454,000)
<INCOME-TAX> (32,000)
<INCOME-CONTINUING> (1,754,000)
<DISCONTINUED> (2,786,000)
<EXTRAORDINARY> 332,000
<CHANGES> 0
<NET-INCOME> (3,666,000)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> 0
</TABLE>
