<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11836
STYLES ON VIDEO, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 95-4389082
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
667 RANCHO CONEJO BLVD.
NEWBURY PARK, CALIFORNIA 91320
(Address of Principal Executive Offices)
(805) 375-0996
(Issuer's Telephone Number, Including Area Code)
101 HODENCAMP ROAD
THOUSAND OAKS, CALIFORNIA 91360
(Former Name, Former Address and Fiscal Year, if Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [_]
Concurrent with the filing of this Report on Form 10-QSB, the registrant is
filing all previously filed reports required to be filed under Section 13 or
15(d) of the Exchange Act as of February 28, 1997.
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Common Stock, $0.001 Par Value 8,852,759 shares as of March 21, 1997
Transitional Small Business Disclosure Format (Check One)
Yes [_] No [X]
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STYLES ON VIDEO, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,415,000 $ 2,778,000
Accounts receivable, less allowance of $266,000 and
$267,000 at March 31, 1996 and December 31, 1995,
respectively 254,000 200,000
Income taxes receivable 327,000 327,000
Inventories 693,000 806,000
Prepaid expenses and other current assets 100,000 225,000
------------ -----------
Total current assets 2,789,000 4,336,000
Property and equipment, net 952,000 991,000
Long-term receivables, less allowance of $106,000 and
$577,000 at March 31, 1996 and December 31, 1995,
respectively 8,000 1,000
Goodwill, net of accumulated amortization of $596,000
and $527,000 at March 31, 1996 and December 31, 1995, 4,958,000 5,027,000
respectively
Debt issuance costs, net of accumulated amortization of
$50,000 and $13,000 at March 31, 1996 and December 31,
1995, respectively 242,000 279,000
Other assets 100,000 107,000
------------ -----------
Total assets $ 9,049,000 $10,741,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,318,000 $ 1,327,000
Accrued expenses 381,000 388,000
Customer advances 868,000 868,000
Advance from stockholder 48,000 48,000
Current portion of notes payable and obligations under
capital leases 726,000 139,000
------------ ------------
Total current liabilities 3,341,000 2,770,000
Notes payable 2,533,000 3,117,000
Obligations under capital leases 73,000 89,000
Minority interest in consolidated subsidiary 1,019,000 1,101,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.001; 1,000,000 shares
authorized; 500 shares of Series A issued and outstanding
at March 31, 1996 and December 31, 1995 - -
Common stock, par value $.001; 10,000,000 shares
authorized; 4,505,000 shares issued and outstanding at
March 31, 1996 and December 31, 1995 4,000 4,000
Additional paid-in capital 16,187,000 16,187,000
Accumulated deficit (14,108,000) (12,527,000)
------------ ------------
Total stockholders' equity 2,083,000 3,664,000
------------ ------------
Total liabilities and stockholders' equity $ 9,049,000 $ 10,741,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues
Systems and related software sales $ 222,000 $ 987,000
Camera sales 705,000 405,000
Photography sales 308,000 4,000
Other revenues 14,000 43,000
------------ ------------
Total revenues 1,249,000 1,439,000
Cost of revenues
Cost of systems and software sold 31,000 592,000
Cost of camera sales 543,000 347,000
Cost of photography sales 148,000 4,000
Other costs - -
------------ ------------
Total cost of revenues 722,000 943,000
------------ ------------
Gross profit 527,000 496,000
Operating expenses
Selling, general and administrative 1,929,000 2,066,000
Research and development 164,000 204,000
Depreciation and amortization 140,000 98,000
------------ ------------
Total operating expenses 2,233,000 2,368,000
------------ ------------
Loss from operations (1,706,000) (1,872,000)
Interest expense, net (65,000) (3,000)
Minority interest in net losses of consolidated subsidiary 82,000 42,000
------------ ------------
Loss before income taxes and extraordinary item (1,689,000) (1,833,000)
Provision for income taxes 2,000 -
------------ ------------
Loss before extraordinary item (1,691,000) (1,833,000)
Forgiveness of debt, net of tax of $0 110,000 -
------------ ------------
Net loss $( 1,581,000) $ (1,833,000)
============ ============
Net loss per common share $(.35) $(.41)
============ ============
Weighted average shares of common stock outstanding 4,505,000 4,505,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Series A Preferred Stock Common Stock
-------------------------- -------------------------- Additional
No. of No. of Paid-in Accumulated Stockholders'
Shares Par Value Shares Par Value Capital Deficit Equity
------ --------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 500 $ - 4,505,000 $4,000 $16,187,000 $(12,527,000) $ 3,664,000
Net loss - - - - - (1,581,000) (1,581,000)
--- ------- --------- ------ ----------- ------------ -----------
Balance,
March 31, 1996 500 $ - 4,505,000 $4,000 $16,187,000 $(14,108,000) $ 2,083,000
=== ======= ========= ====== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
----------------------------------------
March 31, 1996 March 31, 1995
------------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,581,000) $(1,833,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 153,000 98,000
Amortization of debt issuance costs 37,000 -
Forgiveness of debt, net of tax (110,000) -
Minority interest in consolidated subsidiary (82,000) (42,000)
Changes in operating assets and liabilities:
Accounts receivable (54,000) (6,000)
Income taxes receivable - 62,000
Inventories 113,000 91,000
Prepaid expenses and other current assets 125,000 90,000
Long-term receivables and other assets - (49,000)
Accounts payable and accrued expenses 94,000 133,000
----------- -----------
Net cash used in operating activities (1,305,000) (1,456,000)
Cash flows from investing activities:
Purchases of property and equipment (45,000) (59,000)
----------- -----------
Net cash used in investing activities (45,000) (59,000)
Cash flows from financing activities:
Repayment of loan receivable from stockholder - 120,000
Repayment of advance from stockholder - (150,000)
Payment on notes payable and capital lease obligations (13,000) (3,000)
----------- -----------
Net cash used in financing activities (13,000) (33,000)
----------- -----------
Net decrease in cash and cash equivalents (1,363,000) (1,548,000)
Cash and cash equivalents, beginning 2,778,000 4,361,000
----------- -----------
Cash and cash equivalents, ending $ 1,415,000 $ 2,813,000
=========== ===========
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid during the year for:
Income taxes $ 2,000 $ -
Interest $ 35,000 $ 3,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
(1) General
(a) The accompanying unaudited consolidated financial statements of Styles
on Video, Inc. ("SOV") and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles ("GAAP")
and in accordance with the instructions to Form 10-QSB. Accordingly, these
consolidated financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and all such adjustments are of a normal recurring nature. The
results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year. For
more complete information, including a discussion of various factors that may
affect the future financial position and results of operations of the Company,
refer to the Company's Report on Form 10-KSB for the year ended December 31,
1995, as filed with the Commission on March 24, 1997.
(2) 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 Chief Executive Officer 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 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.
6
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
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. 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 $0.075, 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
7
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
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
1996 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, 1997 principal payment was extended to not later than
May 1, 1997 as described below. 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, if the combined operating cash flow of the Company and FYI is
negative, provided that monthly interest payments must be made in months where
the combined operating cash flow of the Company and FYI is positive and 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 Subsequent Events -FYI Sale).
8
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
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.
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.
9
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
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"), from 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. 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 "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 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, unless the Market Price is greater.
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
10
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
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 of the Exchange Agreement, the
warrants became exercisable for 7,597,508 shares of the Company's Common Stock.
Employment Agreement with FYI's Chief Executive Officer. 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 $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 was
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, 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 "Subsequent Events."
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.
Consulting Agreement. The Company entered into a consulting agreement (the
"Consulting Agreement") with K. Eugene Shutler, who later became its Chief
Executive Officer, for services relating
11
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
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 $.075 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 him.
Employment Agreement with Company's Chief Executive Officer. In August
1996, the Company entered into an employment agreement with K. Eugene Shutler.
The agreement has an initial two-year term and contains certain renewal
provisions. Pursuant to the agreement, the Company will pay him an annual base
salary of $230,000, subject to increase at the sole discretion of the Board of
Directors. In addition, he will be eligible to receive a one-time bonus of
$50,000 if certain cash flow conditions are met.
If Mr. Shutler's employment is terminated, under certain circumstances, he
is entitled to a termination payment of up to 100% of his annual base salary.
Concurrently with the execution of the employment agreement, he was granted
warrants 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, which vest at the rate of 4% per month beginning
August 1996. In addition, the Company terminated its prior Consulting Agreement
with him.
Employment Agreement with Dycam's Chief Executive Officer. On February 7,
1994, Dycam entered into an employment agreement with John A. Eding. This
agreement provided that Mr. Eding 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.
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
12
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
and will be entitled to receive back up to the 1,916,667 shares of Dycam's
common stock held by the Company.
Intercompany Transactions Between FYI and Dycam. Under the terms of an
agreement with FYI, Dycam agreed to provide an exclusive right to use Dycam
technology in the hospital baby portrait market through April 2005. FYI
received an option to purchase up to 5,000 Dycam cameras at predetermined prices
and to receive continual upgrades of camera technology and agreed to pay Dycam
royalties of 7.5% of net sales from all hospitals using FYI portrait service.
Dycam agreed to defer this royalty until the earlier of the first 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 agreed to pay Dycam a
"Camera Technology Fee" for each camera installed in a hospital served by FYI,
instead of the 7.5% royalty described above. Dycam earned approximately
$170,000 and $32,000 under this agreement in the years ended December 1996 and
1995, respectively. Dycam also agreed to finance the first 200 cameras bought
by FYI for terms of 36 to 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 "Subsequent Events".
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 settlement of the Class Action.
Stock Options. In May 1996, 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, Dana Arnold, is a significant
stockholder and officer of the privately-held company which subleased the
executive offices to FYI.
Other. See "Subsequent Events."
(3) Subsequent Events
(a) Stock Incentive Plan - 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
approximately 5,000,000 shares of common stock for issuance under the plan.
13
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
Such options generally will be granted at fair market value at the date of grant
and vest over time. Full implementation of the 1996 Plan and related
transactions is subject to shareholder approval to adopt the 1996 Plan and to
increase the authorized share capital of the Company.
(b) IDI Financing Events - In September 1996, the Company received a state
income tax refund totaling $301,000 which was used to repay IDI debt.
(c) FYI Sale - On December 13, 1996, the Company and FYI signed a letter
of intent to sell substantially all of the assets, together with the assumption
of certain liabilities, 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 $3,468,000 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 and certain operating results prior to closing. The
obligation of Hasco to make the installment payments is unsecured and non-
interesting 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 that arise after the closing under all hospital
and other specified contracts of FYI that are included in the Purchased Assets,
all of FYI's capital lease obligations, and all trade payables and commissions
arising after the closing. Hasco will not assume, and FYI will remain liable
for, all obligations and liabilities arising prior to the closing, and certain
hospital guarantee and commission payments.
The Company has agreed to deliver to Hasco an option permitting Hasco to
purchase from the Company that number of shares of Dycam common stock equal to
4.9% of the outstanding shares of the common stock of Dycam on the Closing Date
(approximately 152,921 shares as of January 31, 1997). The exercise price of
this three-year option to be granted to 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 earlier 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
relationship 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
14
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
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.
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 January 31, 1996, FYI has borrowed
$180,000 pursuant to the Loan Agreement, including $60,000 on the 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 proceed 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 cancelled at Closing through the
assumption of these liabilities by Hasco. The purchase price will not be
subject to reduction for the amount cancelled, 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.
The FYI Sale is subject to the approval of the stockholders of the Company.
The Company expects to receive the requisite approval of its stockholders 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.
(d) Other - See "Related Party Transactions" and "Contingencies."
(4) Contingencies
(a) In April 1995, the Company settled a class action suit which was filed
against the Company and certain of its officers and directors in December 1994
as well as a shareholders' derivative suit which named the directors and certain
of the officers of the Company. The settlement received final approval by the
District Court in July 1996. Pursuant to the terms of the final settlement, as
amended, 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
promissory note in the principal amount of $250,000 at December 31, 1994,
payable in three equal installments on July 1, 1996, January 1, 1997 and July 1,
1997 at 9% interest. As of January 31, 1997, the Company has not made any
payments on the obligation. The exercise price of the warrants is $.075 per
share. The warrants will have a five-year life and are redeemable by the
Company at any time for $5 per warrant. Issuance of warrants to purchase
approximately 1,000,000 of the Company's common stock is subject to stockholder
approval to
15
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
increase the authorized share capital of the Company. Also as part of the
settlement, the Company's director and officer liability insurance carriers
agreed to pay $2,250,000. In the derivative case, Guy de Vreese, the former
Chairman and Chief Executive Officer of the Company, surrendered 250,000 shares
of the Company's common stock held by him and of 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) In October 1995, Durian Technologies, Inc. and Durian Finance
(collectively, "Durian") filed a complaint against Styles on Video, Inc. for
breach of contract, fraud and negligent representation in connection with
financing arrangements with Durian for the benefit of Styles On Video, Inc. and
seeks accounting, and declaratory relief. Durian also seeks an unspecified
amount of damages. Styles on Video, Inc. responded to the complaint in January
1996. Styles on Video, Inc. intends to vigorously defend the suit and assert
appropriate counterclaims.
(c) In February 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 the lawsuit
against the Company's former independent accountants.
(d) In January 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 (collectively, "K&A"). 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 K&A 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 received final approval
in July 1996. Pursuant to the settlement, the accounting firm paid $1,700,000
to the Company.
(e) In March 1996, FYI filed a suit against its major competitor, Hasco.
The suit asserts, among other things, claims for unreasonable restraint of
trade, monopolistic practices, unfair competition, trade libel, and false and
misleading advertising. FYI seeks compensatory damages in excess of $10
million, as well as punitive damages and injunctive relief. 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 FYI Sale provide that upon closing this suit will be dismissed
with prejudice. See "Subsequent Events".
(f) In 1996, a previous provider of the Company's excess director's and
officer's liability insurance ("AESIC") filed a suit claiming that they are
entitled to $1,000,000 of the $1,700,000 received by the Company in connection
with settlement of the suit against the Company's former independent
accountants. The Company intends to vigorously defend the suit and assert
appropriate counterclaims, if necessary.
16
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
(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.
(5) Wind-down of Certain Operations
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 began the wind-down of SOV's
hairstyle and beauty imaging systems operations and SSI's operations. It 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 ancillary
products which are currently part of its inventory. SOV intends to continue to
sell access disks, which generate a higher gross margin percentage than system
sales, for the foreseeable future.
All SSI employees have been terminated and 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 January 31, 1997,
the Company has entered into cancellation agreements 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 the wind-down of SSI. The Company now
only sells access disks and ancillary products remaining in stock, and acts as a
holding Company for its remaining operating subsidiaries, Dycam and FYI.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S REPORT ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1995, AND THE COMPANY'S REPORTS ON
FORM 10-QSB FOR THE QUARTERLY PERIODS ENDED JUNE 30, 1996 AND SEPTEMBER 30,
1996, WHICH WERE FILED WITH THE COMMISSION ON MARCH 24, 1997. THE INFORMATION
CONTAINED IN THE COMPANY'S REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1995, AND THE COMPANY'S REPORTS ON FORM 10-QSB FOR THE QUARTERLY PERIODS ENDED
JUNE 30, 1996 AND SEPTEMBER 30, 1996, PROVIDES ADDITIONAL DISCUSSION OF THE
COMPANY'S CURRENT FINANCIAL POSITION AND RESULTS OF OPERATIONS, INCLUDING A
DISCUSSION OF VARIOUS FACTORS THAT MAY AFFECT THE FUTURE FINANCIAL POSITION AND
RESULTS OF OPERATIONS OF THE COMPANY.
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
17
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
UNCERTAINTIES AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE
BEYOND THE COMPANY'S CONTROL. FOR INFORMATION REGARDING POTENTIAL FACTORS THAT
COULD AFFECT THE COMPANY'S FUTURE RESULTS AND FINANCIAL CONDITION, REFER TO THE
SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL
CONDITION" CONTAINED IN ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION OF THE COMPANY'S REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995 WHICH WAS FILED WITH THE COMMISSION ON MARCH 24, 1997.
Three months ended March 31, 1996 compared to the three months ended March 31,
- ------------------------------------------------------------------------------
1995
- ----
Revenues
- --------
The following table summarizes the Company's revenues for the three months
ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
----------------------------- ----------------------------
Percentage of Percentage of
Company Company
Revenues Revenues Revenues Revenues
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Consolidated $1,249,000 100% $1,439,000 100%
SOV 222,000 18 1,004,000 70
Dycam 714,000 57 408,000 28
FYI 308,000 25 4,000 -
SSI 5,000 - 23,000 2
</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 an agreement to sell the FYI business to Hasco (see
Notes to Consolidated Financial Statements - Subsequent Events), subject to
the approval of the Company's stockholders. The FYI Sale is expected to
close in April 1997. After the wind-down and sale is 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.
. Styles on Video. Revenues from sales of SOV imaging systems ("Systems"),
software, and related products for the three months ended March 31, 1996
decreased $782,000, or 78%, compared to the three months ended March 31,
1995. The overall decrease in sales was primarily the result of the
decision in January 1996 to terminate sales of hairstyle and beauty imaging
systems, precipitated by the general lack of market interest in SOV's
existing products at their current price point. The Company currently only
sells access disks and ancillary products remaining in stock. The Company
anticipates that the SOV line of business will generate only a minimal
portion of the Company's revenues in 1996 and later years.
18
<PAGE>
. Dycam. Dycam's revenues are derived from sales of digital cameras and
supporting software and accessory products, technology licensing fees, and
contract engineering work. Dycam's total revenues for the three months
ended March 31, 1996 increased $306,000, or 75%, compared to the three
months ended March 31, 1995. The increase in revenue was primarily
associated with increased camera sales. Dycam believes that the increase
in camera revenues is attributed to the general emergence of the digital
camera market as a whole. Dycam intends to continue to sell stock camera
products. Dycam, however, believes its strength lies in the custom and
contract engineering of digital imaging systems and intends to devote a
substantial portion of its resources in the future to pursuing the custom
and contract engineering business. Dycam derived only minimal revenues
from contract engineering work during the three months ended March 31, 1996
and 1995. The Company believes that, by the end of 1996, a substantial
portion of Dycam's revenues will be derived from the sale/lease of cameras
to and licensing revenue from FYI. The core element of the FYI camera
system is a specialized digital camera subsystem engineered and produced by
Dycam under an exclusive contract with FYI. In addition to the sale/lease
of cameras to FYI, Dycam's arrangement with FYI provides that, in exchange
for certain development and maintenance services, Dycam is entitled to a
7.5% fee on all FYI sales. Pursuant to deferral agreement executed in May
1996, certain development and maintenance fees 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.
. FYI. FYI's revenues are derived from sales of newborn baby photographs and
ancillary products. FYI's revenues for the three months ended March 31,
1996 were $308,000. 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. The Company has 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.
. SSI. SSI's revenues are primarily derived from the sale of franchises.
SSI has not sold any franchises since January 1995 and its Uniform
Franchise Operating Circular has not been updated. In January 1996, the
Company commenced the wind-down of the SSI line of business. The Company
anticipates that the SSI line of business will generate a minimal portion
of the Company's revenues in 1996 and in later years.
19
<PAGE>
Gross Profit
- ------------
Gross profit is comprised of revenues less direct costs and expenses. The
following table summarizes the Company's gross profit for the three months ended
March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
------------------------------ -------------------------------
Gross Profit as Gross Profit as
Percentage of Percentage of
Gross Profit Revenues Gross Profit Revenues
------------ --------------- ------------ ----------------
<S> <C> <C> <C> <C>
Consolidated $527,000 42% $496,000 34%
SOV 191,000 86 412,000 41
Dycam 171,000 24 61,000 15
FYI 160,000 52 - -
SSI 5,000 100 23,000 100
</TABLE>
. Styles on Video. SOV's overall gross profit decreased for the three month
period ended March 31, 1996 compared to the three month period ended March
31, 1995 primarily due to the decision to terminate sales of hairstyle and
beauty imaging systems in January 1996. Gross profit as a percentage of
revenues increased due to the increase in the percentage of revenues
derived from the sale of access disks, which have a higher margin than
system sales.
. Dycam. Gross profit for the three months ended March 31, 1996 increased
compared to the three months ended March 31, 1995 primarily as a result of
increased revenues from mature camera product sales with lower margins and
decreased start-up costs for new products. Gross margins may decrease
further if Dycam's custom product business does not contribute a greater
portion of revenues to Dycam's total revenues.
. FYI. FYI recognized its first sales in March 1995. FYI's gross profit
increased as FYI emerged from its start-up phase of operations. FYI's
gross profit excludes intercompany cost of revenues related to Dycam.
. SSI. There are no significant direct costs associated with the sale of
franchises.
20
<PAGE>
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses consist of administrative
expenses, the salaries of corporate officers, office staff and sales personnel,
advertising and promotion, accounting, legal and other professional expenses and
rent and occupancy costs. They exclude depreciation and amortization, which are
stated separately. The following table summarizes the Company's selling,
general and administrative expenses for the three months ended March 31, 1996
and 1995:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
---------------------------- ----------------------------
Percentage of Percentage of
Expenses Revenues Expenses Revenues
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Consolidated $1,929,000 154% $2,066,000 144%
SOV 623,000 281 906,000 90
Dycam 285,000 40 330,000 81
FYI 1,012,000 329 534,000 13,350
SSI 9,000 180 296,000 1,287
</TABLE>
. Styles on Video. Selling, general and administrative expenses of SOV for
the three months ended March 31, 1996 decreased $283,000 or 31%, from the
three months ended March 31, 1995, and represented 32% of the Company's
total selling, general and administrative expenses. Salaries and benefits
decreased due to a decrease in the number of employees at all levels in all
departments. Marketing and advertising decreased due to steps taken to
reduce costs including reducing the design and number of advertisements
placed and trade shows attended. SOV made efforts to reduce selling,
general and administrative expenses throughout 1995 and during the first
two quarters of 1996. The total personnel employed by SOV was reduced to
one employee by August 31, 1996.
In January 1996, the Company decided to terminate the Company's hairstyle
and beauty imaging systems operations. SOV 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.
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. Selling, general and administrative expenses for the three months
ended March 31, 1996 decreased $45,000, or 14%, compared to the three
months ended March 31, 1995 and represented 15% of the Company's total
selling, general and administrative expenses. The decrease resulted
primarily from reductions in personnel and other expenditures in the 1996
period, and continuing efforts to control costs.
. FYI. Selling, general and administrative expenses for the three months
ended March 31, 1996 increased $478,000 or 90%, from the three months ended
March 31, 1995 and represented 52%
21
<PAGE>
of the Company's total selling, general and administrative expenses.
Salaries and benefits increased $203,000 in 1996 due to the addition of
personnel to accommodate growth. Travel and marketing costs increased
$40,000 due to additional costs associated with continuing to introduce FYI
to the market place. FYI continued to add staff during the remainder of
1996 and in 1997 based on growth. Other selling, general and
administrative costs, including commissions paid to hospitals, which
typically are based on a percentage of FYI's revenues derived from each
hospital, increased primarily due to FYI's growth. In January 1997, the
Company and FYI entered into an agreement to sell the FYI business. The FYI
Sale is expected to close in April 1997.
. SSI. Selling, general and administrative expenses of SSI for the three
months ended March 31, 1995 represented less than 1% of the Company's total
selling, general and administrative expenses. The Company took steps to
reduce SSI's expenditures during 1995. In January 1996, the Company
decided to terminate SSI's operations and commenced the wind-down of SSI's
operations.
Research and Development
- ------------------------
Consolidated research and development expenses for the three months ended
March 31, 1996 were $164,000 (13% of consolidated revenues), a decrease of
$40,000, or 20%, compared to $204,000 (14% of consolidated revenues) for the
three months ended March 31, 1995. The decrease is primarily attributable to
Dycam.
. Styles on Video. SOV did not incur any research and development expenses
during the first quarter of 1996 or 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 the three months ended March
31, 1996 were $159,000 (22% of Dycam's revenues), a decrease of $40,000 or
20%, from $199,000 (49% of Dycam's revenues) for the three months ended
March 31, 1995 and represented 97% of the Company's total research and
development expenses. The decrease in Dycam's research and development
expenses is primarily attributable to reductions in the number of
personnel, and the completion of development of certain products introduced
in 1995. Dycam believes that continuing research and development is
essential to maintaining its competitive position, and expects to continue
to expend similar levels of funds in this area.
. FYI. Research and development expenses for the three months ended March
31, 1996 and 1995 were $5,000. FYI's research and development expenses
carried out in conjunction with 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.
. SSI. There were no research and development expenses associated with SSI's
operations.
Depreciation and Amortization
- -----------------------------
The Company's depreciation and amortization expenses consist primarily of
the amortization of goodwill which resulted from the Company's acquisition of
Dycam. Such goodwill is being amortized over a twenty year term at the rate of
$23,000 per month. Depreciation and amortization expense
22
<PAGE>
(including amounts charged to cost of revenues) for the three months ended March
31, 1996 was $153,000, an increase of $55,000 from $98,000 for the three months
ended March 31, 1995. The increase resulted primarily from depreciation of
fixed assets acquired by Dycam and FYI during the three months ended March 31,
1996.
Liquidity and Capital Resources
- -------------------------------
During the three months ended March 31, 1996, the Company relied primarily
upon cash on hand, including intercompany advances and cash received from sales,
to finance its cash operating losses and the expansion of FYI.
At March 31, 1996, the Company had consolidated cash and cash equivalents
of $1,415,000, a decrease of $1,363,000 from $2,778,000 at December 31, 1995.
The Company's consolidated working capital was $(552,000) at March 31, 1996, a
decrease of $2,118,000 compared to $1,566,000 at December 31, 1995. Working
capital reduction was primarily the result of cash used in operations. The
current ratio at March 31, 1996 was .83 to 1 compared to 1.6 to 1 at December
31, 1995.
. Styles on Video. SOV's cash and cash equivalents at March 31, 1996 were
$15,000, up $12,000 from $3,000 at December 31, 1995. Inventories decreased
$28,000 due to sales of product. Accounts payable and accrued expenses
decreased $239,000 due to negotiated discounts and paydowns of accounts payable.
SOV's working capital (excluding intercompany balances) at March 31, 1996 was
$(1,527,000), an increase of $18,000, compared to $(1,545,000) at December 31,
1995. The working capital increase was primarily the result of cash used in
operations, net of related party notes and advances, and net changes in other
current assets and liabilities described above. SOV continued to use cash to
fund cash operating losses throughout the first two quarters of 1996.
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"). In addition, SOV issued $50,000
worth of 10% Senior Series A Convertible Preferred Stock, $100 par value.
Moreover, the 1995 Agreement requires the Company to issue sufficient warrants
so that when they are exercised, IDI will control 40% of the Company's common
stock on a fully diluted basis (the "1995 Warrants"). FYI received net proceeds
of $2,307,000 from the $3,000,000 financing, after repayment of the Bridge
Financing, its associated interest, and transaction fees. Additionally, SOV
received $50,000 for the issuance of 10% Senior Series A Convertible Preferred
Stock. 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 interest to not later than May
1, 1997, less restrictive covenants and a lower exercise price of the 1995
Warrants. At December 31, 1995 and 1996, the Company was not in compliance with
certain of the 1995 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 Agreement, and no excess
remains, funds will not be available to meet SOV's
23
<PAGE>
obligations, including, without limitation, the repayment of a $1,000,000 note
owed to Dycam. For additional information see "Related Party Transactions."
In 1995, SOV entered into a settlement of certain class action and
derivative suits which received final approval from the District Court in July
1996. Pursuant to the Final Settlement, SOV agreed to deliver to the plaintiff
class warrants to purchase 1,750,000 shares of the Company's common stock and a
$250,000 promissory note payable in three equal semi-annual installments
commencing July 1996. As of January 31, 1997, no payments have been made
towards the debt. See "Contingencies".
In January 1996, the Company decided to discontinue SOV's hairstyle and
beauty imaging systems 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.
In May 1996, pursuant to a Note and Preferred Stock Purchase Agreement (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 is 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 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 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.
The 1995 Agreement and the 1995 Warrants were amended in May 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 $0.075, the exercise price of
the 1996 Warrants.
From September 1996 through January 1997, the Company and FYI borrowed an
additional $927,000 from IDI pursuant to a $977,000 Bridge Note.
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.
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 (see "Subsequent Events"). The proceeds of the
FYI sale, net of transaction costs and satisfaction of FYI's obligations
(excluding its
24
<PAGE>
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 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 further
reduce its levels of expenditures or undertake other such actions as will be
appropriate, and may be otherwise unable to achieve its goals or continue its
operations.
. Dycam. At March 31, 1996, Dycam had cash and short-term investments on
hand of $1,385,000, up $11,000 from $1,374,000 at December 31, 1995.
Current liabilities at March 31, 1996 increased by $145,000 from December
31, 1995 to $344,000 primarily as a result of an increased accounts payable.
Dycam's working capital (excluding intercompany balances) at March 31, 1996 was
$1,900,000, a decrease of $125,000 when compared to $2,025,000 at December 31,
1995. The working capital reduction was primarily the result of increased
current liabilities. The current ratio at March 31, 1996 was 6.5 to 1 compared
to 11.2 to 1 at December 31, 1995. Dycam does not have any long-term
indebtedness and does not currently maintain any credit facilities.
Since the closing of its rights offering in 1994, Dycam has expended a
substantial portion of the $4,976,000 raised, including advancing $1,000,000 to
SOV pursuant to a secured loan originally due in September 1995 and later
extended to December 1998. The purpose of the advance was to provide funds for
the operation and expansion of FYI. All interest payments pursuant to the note
have been made in a timely fashion by SOV. If the Company defaults on the
Agreement, and IDI exercises its rights, Dycam may not be repaid and will be
entitled to receive back the 1,916,667 shares of Dycam's common stock owned by
SOV which secure the $1,000,000 note payable to Dycam.
Dycam believes that its existing cash balances, payments due under the
intercompany loan, payments due for deferred license revenues, 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, or scale back its operating and research and
development expenses to a level sustainable under such a situation. There is no
assurance that additional sources of cash will be available.
25
<PAGE>
. FYI. At March 31, 1996, FYI had cash and short-term investments on hand of
$14,000, down $1,386,000 from $1,400,000 at December 31, 1995. FYI relied
primarily upon cash on-hand to finance its operations and expansion. FYI's
revenues commenced in March 1995.
The decrease in cash for the three months ended March 31, 1996 primarily
reflects cash losses for the period, and capital expenditures. FYI's working
capital (excluding intercompany balances) at March 31, 1996 was $(987,000), a
decrease of $2,016,000 when compared to $1,029,000 at December 31, 1995. The
current ratio at March 31, 1996 was .1 to 1, compared to 2.9 to 1 at December
31, 1995. FYI's working capital decreased primarily as the result of cash
operating losses, and the reclassification of certain long-term debt to short-
term to reflect current maturities.
As described above, in November 1995, SOV, FYI and IDI, entered into the
1995 Agreement. FYI received net proceeds of $2,307,000 from the $3,000,000
financing, after repayment of the Bridge Financing, its associated interest, and
transaction fees. Pursuant to the transaction, as amended in March 1996, up to
$750,000 of the funds were available to SOV, approximately all of which had been
advanced to SOV as of August 31, 1996. As discussed above, 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 of these
violations from IDI. In May 1996, SOV, FYI and IDI entered into the 1996
Agreement, providing additional financing up to $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.
FYI expects that working capital requirements through the closing of the
FYI Sale, which is expected to occur on or about April 15, 1997, 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. 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 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 and research and development 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 March 31, 1996, SSI had cash and short term investments on hand of
$1,000, its only current asset. SSI's working capital at March 31, 1996 was
$(765,000). The current ratio at March 31, 1996 and December 31, 1995 was less
than .01 to 1. For the three months ended March 31, 1996, SSI did not have any
cash operating losses and did not use any cash.
SSI stopped the sale of franchises in January 1995. SSI no longer has any
employees, and all corporate administrative matters are handled by SOV on behalf
of SSI. In January 1996, the Company commenced the wind-down of the SSI line of
business and expects cash provided and used by SSI to comprise only a minimal
portion of the Company's cash flow in 1996 and later years.
26
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings - (1)
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders - None
Item 5 Other Information- None
Item 6 Exhibits and Reports on Form 8-K - (1)
Exhibit No. Document
- ---------- --------
27.1 Financial Data Schedule
(1) Incorporated by reference from Styles on Video, Inc.'s Annual Report on
Form 10-KSB for the Fiscal Year ended December 31, 1995 filed with the
Commission on March 24, 1997.
27
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant,
Styles on Video, Inc., caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ K. Eugene Shutler Chairman of the Board
- ------------------------ and Chief Executive March 21, 1997
K. Eugene Shutler Officer (Principal
Executive Officer)
/s/ Nancy H. Galgas Chief Financial Officer
- ------------------------ (Principal Accounting March 21, 1997
Nancy H. Galgas Officer and Secretary)
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,415,000
<SECURITIES> 0
<RECEIVABLES> 520,000
<ALLOWANCES> 266,000
<INVENTORY> 693,000
<CURRENT-ASSETS> 2,789,000
<PP&E> 952,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,049,000
<CURRENT-LIABILITIES> 3,341,000
<BONDS> 2,606,000
0
0
<COMMON> 4,000
<OTHER-SE> 2,079,000
<TOTAL-LIABILITY-AND-EQUITY> 9,049,000
<SALES> 1,249,000
<TOTAL-REVENUES> 1,249,000
<CGS> 722,000
<TOTAL-COSTS> 722,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,000
<INCOME-PRETAX> (1,771,000)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (1,691,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 110,000
<CHANGES> 0
<NET-INCOME> (1,581,000)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> 0
</TABLE>
