<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOCUS AFFILIATES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
- -------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
1-12571 95-4467726
- --------------------------- ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
401 East Corporate Drive, Suite 220
Lewisville, Texas 75057
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip code)
Issuer's telephone number (214) 222-7979
--------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest predictable date.
Class Outstanding at March 31, 2000
- ----------------------------- ---------------------------------------
Common Stock, $0.01 par value 10,752,926
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Focus Affiliates, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net Sales $ 14,518,000 $ 6,666,000
Cost of Sales 13,711,000 6,201,000
------------ ------------
Gross Income on Sales 807,000 465,000
Selling, General and Administrative Expenses 2,937,000 953,000
------------ ------------
Loss from Operations (2,130,000) (488,000)
Other Income (expense):
Interest Expense (302,000) --
Other, net 4,000 (5,000)
------------ ------------
Loss Before Provision for Income Taxes (2,428,000) (493,000)
Provision for Income Taxes -- --
------------ ------------
Net Loss $ (2,428,000) $ (493,000)
============ ============
Basic Loss Per Share $ (0.23) $ (0.08)
============ ============
Diluted Loss Per Share $ (0.23) $ (0.08)
============ ============
Weighted number of common shares outstanding 10,746,527 6,093,500
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
<PAGE> 3
Focus Affiliates, Inc.
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, December 31,
Assets 2000 1999
--------------- ---------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 659,000 $ 2,495,000
Accounts Receivable, net 3,869,000 9,922,000
Inventories, net 1,799,000 9,488,000
Due from Related Parties 471,000 732,000
Prepaid Expenses and Other Current Assets 571,000 657,000
--------------- ---------------
Total Current Assets 7,369,000 23,294,000
Property and Equipment, net 4,239,000 4,443,000
Goodwill and Intangible Assets, net 15,978,000 16,423,000
Other 272,000 74,000
--------------- ---------------
Total $ 27,858,000 $ 44,234,000
=============== ===============
Liabilities and Shareholders' Equity
Current Liabilities:
Current Maturities of Long-Term Debt $ 500,000 $ 500,000
Note Payable 417,000 --
Revolving Credit Facility 1,629,000 12,699,000
Accounts Payable 10,529,000 13,190,000
Accrued Expenses 1,471,000 2,006,000
--------------- ---------------
Total Current Liabilities 14,546,000 28,395,000
Long-Term Liabilities:
Long-Term Debt 1,593,000 1,645,000
Other 268,000 324,000
--------------- ---------------
Total Long-Term Liabilities 1,861,000 1,969,000
Shareholders' Equity:
Preferred Stock - $.01 Par Value, 1,000,000 Shares Authorized, none
issued -- --
Common Stock - $.01 Par Value, 15,000,000 Shares Authorized,
10,752,926 and 10,737,740 issued and outstanding on March 31,
2000 and December 31, 1999, respectively 108,000 108,000
Additional Paid-In Capital 28,006,000 27,997,000
Accumulated Deficit (16,663,000) (14,235,000)
--------------- ---------------
Total Shareholders' Equity 11,451,000 13,870,000
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 27,858,000 $ 44,234,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 4
Focus Affiliates, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (2,428,000) $ (493,000)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities-
Depreciation and Amortization 734,000 41,000
Provision for Doubtful Accounts Receivable 200,000 (116,000)
Provision for Inventory Reserves 1,140,000 172,000
Changes in Operating Assets and Liabilities-
Accounts Receivable 5,853,000 (296,000)
Inventories 6,549,000 231,000
Due from Related Parties 261,000 --
Prepaid Expenses and Other Current Assets (60,000) (262,000)
Accounts Payable and Accrued Expenses (3,179,000) 879,000
--------------- ---------------
Net Cash Provided by Operating Activities 9,070,000 156,000
Cash Flows from Investing Activities:
Acquisition of Property and Equipment (137,000) (22,000)
--------------- ---------------
Net Cash Used in Investing Activities (137,000) (22,000)
Cash Flows from Financing Activities:
Proceeds from Long-Term Debt 791,000 --
Payments of Long-Term Debt (500,000) --
Advances (Repayments) Under Credit Facility (11,070,000) --
Proceeds from the Exercise of Warrants 10,000 --
Proceeds from the Sale of Capital Stock -- 999,000
--------------- ---------------
Net Cash (Used in) Provided by Financing
Activities (10,769,000) 999,000
Net (Decrease) Increase in Cash and Cash Equivalents (1,836,000) 1,133,000
Cash and Cash Equivalents, Beginning of Period 2,495,000 362,000
--------------- ---------------
Cash and Cash Equivalents, End of Period $ 659,000 $ 1,495,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
Focus Affiliates, Inc.
Notes to Consolidated Financial Statements
(1) BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
its financial position at March 31, 2000 and December 31, 1999 and its
results of operations and cash flows for the three months ended March 31,
2000 and March 31, 1999. All adjustments are of a normal recurring nature.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Article 10 of Regulation S-X and therefore do
not include all information and footnotes necessary for a fair presentation
of the financial position, results of operations and cash flow in
conformity with generally accepted accounting principles. The accompanying
financial information should be read in conjunction with the audited
financial statements contained in the Company's Annual Report of Form 10-K,
for the year ended December 31, 1999. Footnote disclosures that
substantially duplicate those in the Company's Form 10-K, including
significant accounting policies, have been omitted.
The results of operations for the three-month period ended March 31, 2000
are not necessarily indicative of the results to be expected for the full
year.
(2) COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
As previously reported in the Company's Form 8-K filed on May 11, 2000, the
Company has petitioned the American Arbitration Association seeking to
rescind its acquisition of Cellular Wholesalers, Inc. ("CWI"), or, in the
alternative, seeking monetary damages from the former CWI stockholders
(including certain members of the former CWI management team) based, in
part, on the misstatements of certain financial information relating to
CWI. There can be no assurance, however, that the Company will be
successful in obtaining a rescission of its acquisition of CWI or monetary
damages from the former CWI stockholders.
(3) SUBSEQUENT EVENTS
Subsequent to March 31, 2000, the Company discontinued its Chatsworth,
California and Miami, Florida facilities and began to take certain steps
to reduce the overhead costs related to its CWI operations. In connection
with these actions, the Company has terminated approximately 75 employees
since March 31, 2000.
On May 8, 2000, the Company received a notice from Critical Capital Growth
Fund L.P. ("Critical Capital") asserting that the Company is in default
with respect to its $1,000,000 subordinated note payable to Critical
Capital. See "Management's Discussion and Analysis of Results of Operations
and Changes in Financial Position."
<PAGE> 6
ITEM 2. Management's Discussion And Analysis of Results of Operations and
Changes in Financial Position
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: THE STATEMENTS CONTAINED IN THIS REPORT WHICH ARE NOT HISTORICAL FACTS ARE
FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT
NOT LIMITED TO, THE NEED FOR ADDITIONAL WORKING CAPITAL, POSSIBLE DELAYS IN THE
COMPANY'S EXPANSION EFFORTS, CHANGES IN THE WIRELESS COMMUNICATIONS MARKETS AND
TECHNOLOGIES, THE NATURE OF POSSIBLE SUPPLIER OR CUSTOMER ARRANGEMENTS WHICH MAY
BECOME AVAILABLE TO THE COMPANY IN THE FUTURE, POSSIBLE PRODUCT OBSOLESCENCE,
UNCOLLECTIBLE ACCOUNTS RECEIVABLE, SLOW MOVING INVENTORY, LACK OF ADEQUATE
FINANCING, INCREASED COMPETITION AND UNFAVORABLE GENERAL ECONOMIC CONDITIONS.
THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN
ANY FORWARD LOOKING STATEMENT.
Results of Operations
First Quarter 2000 Compared to First Quarter 1999
Net sales were $14,518,000 in the first quarter of 2000 compared to $6,666,000
in the first quarter of 1999. The increase of $7,852,000 or 117.8% is a function
of the inclusion of a full quarter of net sales attributable to CWI (acquired in
October 1999) and an increase in the volume of products sold.
Gross profit increased by $342,000 or 73.5% from $465,000 in the first quarter
of 1999 to $1,420,000 in 2000. The related margin decreased from 7.0% of net
sales in the first quarter of 1999 to 5.6% in 2000. The decrease in gross
profit was principally attributable to increased reserves for obsolete
inventory and an increased allowance for doubtful accounts receivable. The
higher reserves combined to offset the improved sales mix which included a
greater volume of accessory sales.
Selling, general and administrative expenses increased by $1,984,000 or 208.2%
from $953,000 or 14.2% of net sales in the first quarter of 1999 to $2,937,000
or 20.2% of net sales in the first quarter of 2000. The increase in selling,
general and administrative expenses and the higher expense rate was attributable
to the inclusion of the former CWI operations for a full quarter, unanticipated
expenses related to information technology requirements and the amortization of
goodwill for the acquisitions completed in late 1999.
Interest expense increased from $0 in the first quarter of 1999 to $302,000 in
the first quarter of 2000 as a result of borrowings necessary to finance the
increased working capital requirement of the CWI acquisition as well as the
interest costs associated with the subordinated debt utilized to finance a
portion of the acquisition.
Liquidity and Capital Resources
Losses incurred in 1999, particularly during the fourth quarter of 1999, and in
the first quarter of 2000, as well as additional working capital requirements
associated with the merger of CWI have had a significant negative impact on
working capital and the liquidity of the Company. At December 31, 1999, the
Company's working
<PAGE> 7
capital position was a deficit of $5,101,000 compared to a working capital
deficit of $7,177,000 at March 31, 2000. The Company's continuing losses in
the first quarter of 2000 continued to severely restrict the Company's liquidity
and have caused the Company to operate on restricted terms with vendors.
Cash provided by operating activities was $9,070,000 for the first quarter of
2000, as compared to cash provided by operating activities of $156,000 for the
comparable quarter in 1999. The primary cause for the increase in cash provided
by operating activities for the first quarter of 2000 compared to first quarter
of 1999 was the inclusion of CWI's former operations for a full quarter,
management's ability to better manage inventory levels and the utilization of
terms available on payables.
Cash used in investing activities increased from $22,000 in the first quarter of
1999 to $137,000 in 2000. During the first quarter of 2000, cash was utilized
to repay obligations due under the Company's revolving line of credit.
Cash flows from financing activities decreased from $999,000 in the first
quarter of 1999 to a use of cash in financing activities of $10,769,000 in 2000.
During the first quarter of 2000, cash was utilized to repay obligations due
under the Company's revolving line of credit.
During 1999 and the first quarter of 2000, the Company continued to incur
significant losses. Due to the Company's negative working capital position and
its recent operating losses, the Company will need to secure substantial
additional capital in the immediate future or be forced to further reduce the
scope of or suspend its current operations. The Company has no commitment or
arrangements for any such financing, and there can be no assurance whether, or
on what terms, such capital may be available.
The Company is currently not in compliance with the covenants of its debt
facility with its senior lender, Banc of America Commercial Finance
("BancAmerica"), which restricts its ability to draw any further amounts under
the facility and which BancAmerica asserts entitles BancAmerica to certain
termination fees. At May 12, 2000, there was a credit balance of approximately
$336,000 outstanding under this facility. In addition, the Company is not
currently in compliance with the covenants of its outstanding $1,200,000
subordinated note payable to American National Bank ("ANB"). The Company has
obtained a one-time waiver of its noncompliance from ANB. The Company is
negotiating with BancAmerica in an effort to secure BancAmerica's agreement to
forbear from asserting any of its rights based on the Company's covenant
violations.
On May 8, 2000, the Company received a notice from Critical Capital asserting
that the Company is in default with respect to its $1,000,000 subordinated note
payable to Critical Capital. On May 3, 2000, in reliance on ANB's subordination
agreement with Critical Capital, Critical Capital sent a "payment blockage
notice" to ANB detailing the asserted events of default by the Company and
requesting ANB to hold all payments received from the Company in trust for
Critical Capital.
The Company is negotiating with Critical Capital in an effort to secure Critical
Capital's agreement to forebear from asserting any of its rights based on the
Company's purported default. If Critical Capital refuses to grant a waiver or
forebearance and were successful in establishing a default by the Company, it
could elect to declare all of the Company's indebtedness owing to Critical
Capital immediately due and payable, including accrued and unpaid interest.
<PAGE> 8
The Company no longer has any credit available through any of its vendors. There
can be no assurance the Company will be able to maintain the current level of
its operations. In addition, the lack of borrowing capability further inhibits
the Company's ability to finance new business initiatives, including existing
and contemplated relationships with network operators and manufacturers that
would require additional working capital.
Pending the Company's obtaining additional capital the Company plans to seek
informal arrangements with a number of its vendors. There is no assurance that
the Company will be successful in resolving any issues with its creditors and
vendors. If the Company is not successful, its ability to raise additional
capital may be materially and adversely affected.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company believes that its exposure to market risk to changes in foreign
rates, interest rate fluctuations and trade accounts receivable is immaterial.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, in March 2000, the Company entered into an agreement
with the former shareholders of CWI by which the former CWI shareholders agreed,
among other things, to contribute to the Company for cancellation an aggregate
of 1,300,000 shares of the Company's Common Stock previously delivered to them
in connection with the Company's acquisition of CWI. The agreement of the
former CWI shareholders was conditioned upon the Company having obtained by
April 23, 2000 additional equity capital of at least $3,900,000, which has not
occurred.
As previously reported in the Company's Form 8-K filed on May 11, 2000, the
Company subsequently petitioned the American Arbitration Association seeking to
rescind its acquisition of CWI, or, in the alternative, seeking monetary damages
from the former CWI stockholders (including certain members of the former CWI
management team) based, in part, on the misstatements of certain financial
information relating to CWI. There can be no assurance, however, that the
Company will be successful in obtaining a rescission of its acquisition of CWI
or monetary damages from the former CWI stockholders.
Item 2. Change in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
As described above under Part I, Item 2, the Company is currently not in
compliance with the covenants of its debt facility with its senior lender,
BancAmerica, which restricts its ability to draw any further amounts under the
facility and which BancAmerica asserts entitles BancAmerica to certain
termination fees. At May 12, 2000, there was a credit balance of approximately
$336,000 outstanding under this facility. In addition, the Company is not
currently in compliance with the covenants of its outstanding $1,200,000
subordinated note payable to ANB. The Company has obtained a one-time waiver of
its noncompliance from ANB. The Company is negotiating with BancAmerica in an
effort to secure BancAmerica's agreement to forbear from asserting any of its
rights based on the Company's covenant violations.
<PAGE> 9
On May 8, 2000, the Company received a notice from Critical Capital asserting
that the Company is in default with respect to its $1,000,000 subordinated note
payable to Critical Capital. On May 3, 2000, in reliance on ANB's subordination
agreement with Critical Capital, Critical Capital sent a "payment blockage
notice" to ANB detailing the asserted events of default by the Company and
requesting ANB to hold all payments received from the Company in trust for
Critical Capital. The Company is negotiating with Critical Capital in an effort
to secure Critical Capital's agreement to forebear from asserting any of its
rights based upon the Company's purported default.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On May 10, 2000, the Company received a letter from Nasdaq expressing Nasdaq's
concern that the Company may not be able to sustain compliance with Nasdaq's
continued listing requirements, based on the Company's having received a "going
concern" opinion from Arthur Andersen LLP in connection with the Company's
financial statements for the year ended December 31, 1999. Nasdaq requested that
the Company provide by May 23, 2000 a detailed plan and timetable addressing the
specific items that led Arthur Andersen LLP to issue the "going concern"
opinion, including but not limited to the Company's operating losses and
negative working capital, and explaining the basis for the Company's belief that
it will be able to sustain compliance with Nasdaq's continued listing
requirements. The Company plans to submit its plan to Nasdaq within the required
time period. There can be no assurance, however, that the Company will be able
to prevent Nasdaq from delisting the Company. If the Company were to be
delisted, it would have a material adverse effect on the Company's ability to
secure equity financing and on the liquidity of the market for, and the market
price of, the Company's Common Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith pursuant to Rule 601 of Regulation
S-K.
10.1 Employment Agreement between the Company and James E. Krohn, dated as of
February 14, 2000.
27 Financial Data Schedule.
<PAGE> 10
(b)(1) The Company filed a Current Report on Form 8-K on January 6, 2000 to
report the appointment of Arthur Andersen LLP to replace Hollander,
Lumer & Co., LLP as the Company's independent accountants. This report
was subsequently amended on February 11, 2000 to state that during the
last three fiscal years and the subsequent interim period through
January 2, 2000, there were no disagreements between the Company and
Hollander, Lumer & Co. LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of
Hollander, Lumer & Co. would have caused it to make a reference to the
subject matter of the disagreements in connection with its reports.
(b)(2) The Company filed a Current Report on Form 8-K on January 11, 2000 to
report the completion of its acquisition of Source Wireless.com.
<PAGE> 11
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Focus Affiliates, Inc
Date: May 15, 2000 By: /s/ MICHAEL HEDGE
----------------- ----------------------------------------
Michael Hedge
President and Chief Executive Officer
Date: May 15, 2000 By: /s/ JOHN SWINEHART
---------------- ----------------------------------------
John Swinehart
Chairman of the Board, Vice President of
Finance and Principal Accounting Officer
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 Employment Agreement between the Company and James E. Krohn,
dated as of February 14, 2000.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Agreement is made effective as of February 14, 2000, by and between James
E. Krohn ("Employee") and FOCUS AFFILIATES, INC., a Delaware corporation
("Employer" or the "Company")
RECITALS
A. Employer desires to employ Employee as its Chief Financial Officer (CFO) and
to be assured of his services as such on the terms and conditions hereinafter
set forth.
B. Employee is willing to accept employment in the above-described capacity on
such terms and conditions.
C. For all the reasons set forth above, and in consideration of the mutual
covenants and promises of the parties, and intending to be legally bound hereby,
Employer and Employee agree as follows:
Section I
Employment
Employee shall perform the duties and responsibilities of CFO,
reporting directly to the Chief Executive Officer and its Board of Directors
("Board"). Employee shall be entitled to report to, and confer with, members of
the Board of Directors at any time, in the Employee's sole discretion. Such
duties and responsibilities shall be reasonably related to Employee's position.
(See attached initial Job Description). Employee shall not have the
responsibility of Chief Accounting Officer as that position pertains to the
regulatory filings for fiscal periods, or portions thereof, ended on or prior to
December 31, 1999. Employee shall devote all of his business time, attention,
knowledge and skills faithfully, diligently and to the best of his ability, in
furtherance of the business and activities of the Company and may not, directly
or indirectly, in any capacity, do any work for or on behalf of himself
exclusively, or any other company, person or entity, irrespective of whether or
not same is in a competing business. Employee is under Texas law considered
employed at will. The principal place of performance by Employee of his duties
hereunder shall be the Company's principal executive offices or such other
place, as the Board shall determine, although Employee may be required to travel
outside of the area where the Company's principal executive offices are located
in connection with the business of the Company.
Section II
Term of Employment
The term of employment shall be one (1) year commencing as of the date
hereof (the "Effective Date") (such period being referred to as the "Initial
Term" and any year commencing on the Effective Date or any anniversary of the
Effective Date being hereinafter referred to as an "Employment Year"). After the
Initial Term, this Agreement shall be renewable automatically
<PAGE> 2
for successive one year periods (each such period being referred to as a
"Renewal Term"), unless, at least sixty (60) days prior to the expiration of the
Initial Term or any Renewal Term, either the Employee or the Company give
written notice that the employment will not be renewed. Notwithstanding the
foregoing, the term of this Agreement shall automatically expire (a) upon the
Employer's termination of Employee under Section VI, (b) upon the death or
resignation of Employee, in which event Employee shall not be entitled to any
compensation other than that earned through his date of death or his
resignation, or (c) as provided in Section VI(d).
Section III
Compensation
Employer shall pay employee an annual salary ("Salary") of $150,000,
payable every other week (pro-rated, as applicable), or at such other times as
may mutually be agreed upon between Employer and Employee. In addition, Employee
shall be entitled to the following:
(a) Employer shall grant Non-Qualified Stock Options to purchase
110,000 shares of common stock of the Company. The five-year options shall be
granted with an exercise price of $3.00. Of these options, 10,000 will vest on
the 91st day of employment. One-third of the remaining 100,000 options will vest
on each of December 31, 2000, December 31, 2001 and December 31, 2002. Except as
specifically provided in this agreement, all of the options will be subject to
the same terms and conditions as Non-Qualified Stock Options under the Company's
1998 Stock Option Plan.
(b) Subject to formal Board approval and at the sole discretion of the
Board, Employee may, from time to time receive bonuses based on performance of
the Employee and the earnings of the Employer. Said bonuses will be paid in
either cash or stock options, at the Board's sole discretion.
(c) It is the intention of the Board to institute an annual Bonus Plan
for the benefit of Executive Management and other employees. This Plan is in the
design and drafting stage at the date of this Agreement. Employee would be
included under the Plan when implemented.
Section IV
Benefits
(a) During the term of this Agreement, Employee shall have the right to
receive or participate in all benefits and plans, which the Company may from
time to time, institute during such period for its employees and for which
Employee is eligible. In addition, Employee shall be afforded such other general
benefits as are made available from time to time to the CEO or other senior
members of management. Nothing paid to Employee under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of salary or any other obligation payable to Employee pursuant to this
Agreement.
(b) During the term of this Agreement Employee shall be entitled to the
number of paid holidays, personal days off and sick leave days in each calendar
year as are determined by the Company from time to time. Employee shall be
entitled to two (2) weeks of vacation per year. Such vacation shall be taken in
Employee's discretion with the prior approval of Employer, and at such times as
are not inconsistent with the reasonable business needs of the Company.
<PAGE> 3
(c) Employee will be entitled to reasonable reimbursement for cost of
maintaining his CPA status (including costs of licenses, membership in
professional organizations, tuition and travel expenses related to continuing
education and professional education programs). In addition, Employee is
entitled to reimbursement of monthly membership dues in the Dallas Crescent Club
(approx. $160/mo.) and the Columbian C.C. (approx. $425/mo.).
Section V
Travel and Other Expenses
Employer shall pay all travel and other expenses incident to the
rendering of services reasonably incurred on behalf of the Company by Employee
during the term of this Agreement. If Employee pays any such expenses in the
first instance, Employer shall reimburse him therefor within a reasonable time
of presentation of appropriate receipts for such expenses.
Section VI
Termination
(a) Notwithstanding anything in this Agreement to the contrary,
Employer shall have the right to discharge Employee for "cause," which is
defined to include any of the following circumstances: (i) Employee shall be
unable to perform his full duties pursuant to this Agreement to the satisfaction
of Employer as a result of illness, disability, or other incapacity for an
aggregate period of 90 days or more during any 12-month period during the term
hereof; or (ii) Employer notifies Employee that he has failed to competently
perform his reasonable duties assigned to him by Employer and Employee has not
cured such violation within 15 days of such notice; or (iii) Employee shall
commit a willful or intentional breach of his duties and obligations to Employer
or engage in any materially dishonest conduct in connection with the performance
of his duties under this Agreement; or (iv) Employee shall otherwise violate any
material provision of this Agreement, and after notification by Employer, in
writing, Employee has not cured such violation within 15 days of such notice; or
(v) Employee shall be adjudicated an incompetent; or (vi) Employee shall engage
in criminal misconduct (including, without limitation, embezzlement and criminal
fraud); or (vii) Employee shall be convicted of any felony; or (viii) Employee
shall have breached any material warranty given under this Agreement and
Employer shall have been materially damaged as a result of such breach. Upon
discharge pursuant to this Section, Employer shall have no further obligation or
duties to Employee other than payment of salary and reimbursement of expenses
through the effective date of termination of Employee. Notwithstanding the
foregoing, Employer shall have no right to terminate Employee for any reason
relating to events occurring, or actions taken, by any employee of Employer for
periods ending on or before December 31, 1999 or any actions taken after such
date in respect to periods ending before such date.
(b) In the event that Employee's employment is terminated with cause,
then Employer shall have no further obligation or duties to Employee, other than
for payment of amounts as provided under Section V and VI and shall be entitled
to recover from Employee any costs or damages resulting from Employee's breach
of this Agreement. In the event of termination without cause, after six months
from the Effective Date, Employer shall continue to pay Employee, at the current
Salary rate, and provide benefits, for a further period of twelve months
following termination. In the event of such termination without cause, within
six months from the Effective Date, Employer shall continue to pay Employee, at
the current Salary rate, and
<PAGE> 4
provide benefits, for a further period of six months following termination. For
purposes of this Section VI(b), Employee shall be deemed to have been terminated
without cause if the Company relocates its Executive Headquarters to a county
outside of Dallas county, Texas or its contiguous counties unless this provision
is waived in writing by Employee.
(c) Notwithstanding the discharge of Employee pursuant to Sections 6(a)
and 6(b) above, Employee shall continue to be bound by the provisions of
Sections VII and VIII of this Agreement.
(d) In the event that there is a Change in Control (as hereinafter
defined), (i) the Company shall notify Employee in writing of such event, (ii)
all options granted to Employee shall become fully vested and exercisable, but
any unexercised options shall automatically expire on the eleventh calendar day
following such notice, and (iii) upon such notice, this Agreement will be
terminated and the Employer and Employee shall have no further obligation or
duties to each other, except as provided in Sections VII and VIII. In addition,
should a Change of Control occur after six months from the Effective Date,
Employer shall continue to pay Employee for a period of one (1) year after the
Change of Control. Should a Change of Control occur within six months from the
Effective Date, Employer shall continue to pay Employee for a period of six
months after the Change of Control.
(e) For purposes of this Agreement a "Change in Control" shall mean and
be determined to have occurred if (A) any person ("Person") (as such term is
used in Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934, as
amended) (the "Exchange Act") is or becomes the beneficial owner ("Beneficial
Owner") (as defined in Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of the Company representing thirty five percent (35
%) or more of the combined voting power of the then outstanding securities of
the Company; (B) during any period of two (2) years, a majority of the members
of the Board is replaced by directors who were not nominated and approved by the
Board; or (C) the Company is combined with or acquired by another company and
the Board shall have determined, either before such event or thereafter, by
resolution, that a Change in Control will occur or has occurred.
Section VII
Non-Disclosure and Non-Competition
(a) Employer and Employee acknowledge that the services to be performed
by Employee under this Agreement are unique and extraordinary and, as a result
of such employment, Employee will come unto possession of confidential
information relating to the business and practices of the Company. The term
"Confidential Information" shall mean any and all information (verbal and
written) relating to the Company or any of its affiliates, or any of their
respective activities, other than such information which can be shown by
Employee to be in the public domain (such information not being deemed to be in
the public domain merely because it is embraced by more general information
which is in the public domain) other than as a result of a breach of the
provisions of this Section, including, but limited to: trade secrets, research
projects, personnel lists, financial information, services used, pricing,
customers, customer lists and prospects, product sourcing, marketing and selling
and servicing. Employee will not at any time, either during or after the term of
this Agreement, divulge any Confidential Information to any other person, firm,
or entity, nor use or permit the use of any said Confidential Information, other
than pursuant to Employment on behalf of Employer hereunder. Without limiting
the generality of the foregoing, upon the termination of Employment hereunder,
for any reason, Employee shall forthwith deliver to Employer all documents and
other material in his possession or under his control containing any
Confidential Information and/or relating to the business of Employer.
<PAGE> 5
(b) It is understood and agreed by Employee that all business
relationships and goodwill now existing with respect to customers and suppliers
of Employer, whether or not created or served by Employee hereunder, and all
such relationships and goodwill which may hereafter become known to or be
created or enhanced by Employee in the course of Employment hereunder,
constitute valuable proprietary rights and interests of Employer, and are, and
shall at all times remain, the sole property of, and shall inure to the sole
benefit of Employer. Accordingly, Employee agrees that during the term of
Employment and for a further period (i) corresponding to the period during which
the Employee is paid pursuant to Section VI(b), up to a period of one (1) year
from the date of termination of Employment, or (ii) of one (1) year following
the termination of Employee for cause, Employee will not, as proprietor,
partner, joint venturer, stockholder, director, officer, trustee, principal,
agent, servant, employee consultant or in any other capacity whatever, directly
or indirectly, solicit orders from, sell, or render services to any customer
within the United States, its territories and possessions, with respect to any
product or service competitive with any product or service sold or developed by
Employer or any subsidiary or affiliated corporation at any time during
Employment, nor shall Employee directly or indirectly aid or assist any other
person, firm, or corporation to do any of the aforesaid acts.
(c) During Employment and for a further period (x) corresponding to the
period during which the Employee is paid pursuant to Section VI(b), up to a
period of one (1) year from the date of termination of Employment, or (y) of one
(1) year following the termination of Employee for cause, Employee shall not, as
a proprietor, partner, joint venturer, stockholder, director, officer, trustee,
principal, agent, servant, employee, consultant or any other capacity whatever,
directly or indirectly, (i) engage in, or be financially interested in any
business operating within the United States, and any other country in which
Employer conducts substantial business, which is competitive with any business
which is conducted, or contemplated to be conducted (as evidenced in writing),
by Employer as of the date of Employee's termination from employment, or (ii)
solicit or induce any officer, salesman, or other employee of Employer or any
subsidiary or affiliated corporation, for any employment in a line of business
which is competitive with any business which is conducted, or contemplated to be
conducted (as evidenced in writing), by Employer as of the date of Employee's
termination from employment, nor shall Employee directly or indirectly aid or
assist any other person, firm, or corporation to do any of the aforesaid acts.
(d) The provisions of Section VII(b) and Section VII(c) above will be
limited to a period of six months if the Employee's employment with Employer is
less than one year.
(e) Employee acknowledges that, as an executive of Employee, he will
become familiar with the affairs, customers and other Confidential Information
of Employer. Employee acknowledges that his compliance with the provisions of
this Agreement and, in particular, this Section is necessary to protect the
goodwill and other proprietary interests of Employer, that their enforcement
will not significantly impair the ability of Employee to earn a livelihood and
that, but for the covenants entered into hereunder, Employer would not enter
into this Agreement with Employee. Employee acknowledges that his breach of any
of the provisions of this Section will result in irreparable and continuing
damage to the business of Employer for which there will be no adequate remedy at
law and agrees that in the event of any such breach, Employer and its successors
and assigns shall be entitled to injunctive relief and to such other and further
relief as may be proper.
<PAGE> 6
(f) The parties hereto hereby acknowledge that, in addition to any
other remedies the Company may have under paragraph (e) of this Section, the
Company shall have the right and remedy to require Employee to account for, and
pay over to the Company, all compensation, profits, monies, accruals, increments
or other benefits (collectively, "Benefits") derived or received by Employee as
the result of any transactions constituting a breach of this Section VII or
Section VIII below, and Employee hereby agrees to account for and pay over such
Benefits to the Company.
(g) Each of the rights and remedies enumerated above shall be
independent of the other and shall be severally enforceable. All such rights and
remedies shall be in addition to, and not in lieu of, any other rights and
remedies available to the Company under law or in equity.
(h) If any provision contained in this agreement is construed to be
invalid or unenforceable, the same shall not affect the remainder of the
covenants, which shall be given full effect, without regard to the invalid
portions. If any provision contained in this Section VII, or Section VIII below,
is found to be unenforceable by reason of the extent, duration or scope thereof,
or otherwise, then the court making such determination shall have the right to
reduce the extent, duration, scope, or other provision, and in its reduced form
any such restriction shall thereafter be enforceable as contemplated hereby.
Section VIII
Discoveries and Inventions
(a) Any discovery, invention, formula, process, improvement or idea
("Discovery" or "Discoveries"), whether or not patentable, relating to or useful
in the business of Employer and wholly or partially conceived, made or learned
by Employee during the period of Employment shall be the sole and exclusive
property of Employer. Employee shall disclose any Discovery to Employer promptly
and shall upon request, assist Employer in obtaining and assigning to it all
rights, title and interest in any United States or foreign patent on any
Discovery.
(b) If any Discovery is described in a patent application or is
disclosed to third parties, directly or indirectly, by Employee within one (1)
year following termination of his employment with the Company, it is to be
presumed that the Discovery was conceived or made during the period of
Employee's employment by the Company.
(c) Employee will not assert rights to any Discovery as having been
made or acquired by him prior to the date of this Agreement, except for
Discoveries, if any, disclosed to the Company in writing prior to the date
hereof.
Section IX
Indemnification
Employee agrees to indemnify and hold harmless Employer and its
successors and assigns against any loss, cost, liability or expense incurred by
any of them (including, without limitation, attorney's fees and costs of suit)
by reason of breach or nonfulfillment by Employee of any provision of this
Agreement
<PAGE> 7
Section X
Arbitration
Any differences, claims, or matters in dispute arising between the
parties out of this agreement or connected with this agreement shall be
submitted by them to arbitration by the American Arbitration Association or its
successor, and the determination of the American Arbitration Association or its
successor shall be final and absolute. The arbitrator shall be governed by the
rules and regulations of the American Arbitration Association or its successor,
and the pertinent provisions of the laws of the State of Texas relating to
arbitration. The decision of the arbitrator may be entered as a judgement in any
court of the State of Texas or elsewhere.
Section XI
Provisions of General Application
(a) Employee warrants and represents that (i) he is in good health and
not suffering from any impairment to his general well being, (ii) the execution
of this Agreement and discharge of Employee's obligations hereunder does not and
will not constitute a breach of or default under (A) any employment agreement or
non-competition agreement to which Employee is a party, or (B) any other
contract, agreement, or understanding between Employee and any other party or
parties, and (iii) Employee has ideas, information and know-how relating to the
type of business conducted by Employer, and Employee's disclosure of such ideas,
information and know-how to Employer will not conflict with or violate the
rights of any third party or parties.
(b) This Agreement contains the entire agreement of the parties
relating to the subject matter hereof. This Agreement supersedes and is in lieu
of any and all other employment arrangements between Employee and Employer.
(c) Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been effectively given for all
purposes (i) if delivered personally, upon delivery, or (ii) if mailed, upon
deposit in the United States mail, registered or certified mail, postage
prepaid, addressed to Employee's residence (as last known to Employer), in the
case of Employee, or to the principal office of Employer, in the case of
Employer. Either party may change the address at which such party is to receive
notice by notice to the other party.
(d) Any waiver, change, modification, extension or discharge in
connection with this Agreement must be in writing and signed by the party to be
bound thereby. The waiver by Employer of a breach by Employee of, or failure of
Employee to comply with, any provision of this Agreement shall not be construed
as, or constitute, a continuing waiver of, or a waiver of any breach of, or
failure to comply with any provision of this Agreement.
(e) Employer may sell, assign and transfer all or part of its rights
under this Agreement to any affiliates of Employer or any purchaser of Employer
or successor to the business or assets of Employer, provided, however, that such
purchaser or successor assumes the obligations of Employer hereunder. This
Agreement is personal to Employee, and Employee may not sell, assign, pledge or
otherwise transfer any of these rights under this Agreement.
(f) All provisions of this Agreement are intended to be interpreted and
construed in a manner making such provisions valid, legal and enforceable. In
the event any provision of this Agreement or portion thereof is found to be
wholly or partially invalid, illegal or unenforceable in
<PAGE> 8
any judicial proceeding, such provision shall be deemed to be modified or
restricted to the extent necessary to make such provision valid, legal and
enforceable. In the event such provision or portion thereof cannot be so
modified or restricted, such provision or portion thereof shall be deemed to be
excised from this Agreement, and the validity, legality and enforceability of
the remainder of this Agreement shall not be affected or impaired in any manner.
(g) Confidential Information shall constitute a "Trade Secret" as
defined and subject to protection by Employer, under the Uniform Trade Secrets
Act. This Agreement is entered into in the State of Texas and shall not be
governed by and construed in accordance with the internal laws and decisions of
the State of Texas.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement
as of the date first above written.
FOCUS AFFILIATES, INC.
By: /s/ Michael Hedge By: /s/ James E. Krohn
--------------------------- -------------------------------------
Michael Hedge, CEO James E. Krohn
"Employer" "Employee"
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENT INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 649,000
<SECURITIES> 0
<RECEIVABLES> 5,069,000
<ALLOWANCES> 1,200,000
<INVENTORY> 1,799,000
<CURRENT-ASSETS> 7,369,000
<PP&E> 4,989,000
<DEPRECIATION> 750,000
<TOTAL-ASSETS> 27,858,000
<CURRENT-LIABILITIES> 14,546,000
<BONDS> 0
0
0
<COMMON> 108,000
<OTHER-SE> 11,451,000
<TOTAL-LIABILITY-AND-EQUITY> 27,858,000
<SALES> 14,518,000
<TOTAL-REVENUES> 14,518,000
<CGS> 13,711,000
<TOTAL-COSTS> 16,648,000
<OTHER-EXPENSES> (2,130)
<LOSS-PROVISION> (1,472,000)
<INTEREST-EXPENSE> 302,000
<INCOME-PRETAX> (2,428,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,428,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,428,000)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
