FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-11860
------------------------------
FOCUS ENHANCEMENTS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 04-3186320
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
800 WEST CUMMINGS PARK, SUITE 4500
WOBURN, MA 01801
(Address of principal executive offices)
(617) 938 - 8088
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of May 8, 1996, there were outstanding 8,354,309 shares of Common Stock, $.01
par value per share.
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FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
March 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FACING PAGE 1
TABLE OF CONTENTS 2
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1996
and December 31, 1995 3
Consolidated Statements of Operations
for the Three Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT 11- Computation of Primary and Fully Diluted Earnings Per Share 18
</TABLE>
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1996 1995
----------------- -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $1,006,468 $2,140,043
Accounts receivable, net of allowance of $246,499 and $296,887
at March 31, 1996 and December 31, 1995, respectively 3,640,238 1,860,592
Inventories 1,766,703 1,862,335
Prepaid expenses and other current assets 223,065 346,458
----------------- -----------------
Total current assets 6,636,474 6,209,428
Property and equipment, net 341,215 417,849
Other assets, net 88,145 105,379
Goodwill, net 2,153,039 2,227,723
----------------- -----------------
Total assets $9,218,873 $8,960,379
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $2,607,458 $3,637,458
Obligations under capital leases 98,807 133,497
Accounts payable 2,223,170 1,228,860
Accrued liabilities 2,479,460 346,927
----------------- -----------------
Total current liabilities 7,408,895 5,346,741
Obligations under capital leases 16,930 26,310
----------------- -----------------
Total liabilities 7,425,825 5,373,052
----------------- -----------------
Stockholders' equity
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued - -
Common stock, $.01 par value: 16,000,000 shares authorized,
8,353,809 and 7,171,862 shares issued and outstanding at
March 31, 1996 and December 31, 1995, respectively. 83,538 71,719
Additional paid-in capital 15,007,483 13,168,730
Accumulated deficit (13,297,973) (9,653,122)
----------------- -----------------
Total stockholders' equity 1,793,048 3,587,327
----------------- -----------------
Total liabilities and stockholders' equity $9,218,873 $8,960,379
================= =================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
------------------ -----------------
<S> <C> <C>
Net sales $ 3,801,879 $5,274,721
Cost of goods sold 5,125,810 3,707,242
------------------ -----------------
Gross profit (1,323,931) 1,567,479
Operating expenses:
Sales, marketing and support 1,147,129 779,030
General and administrative 768,354 484,080
Research and development 283,252 296,136
------------------ -----------------
Total operating expenses 2,198,735 1,559,246
------------------ -----------------
Income (loss) from operations (3,522,666) 8,233
Interest expense, net (104,374) (137,887)
Other income (expense) (10,311) 182,154
------------------ -----------------
Net income (loss) before income taxes (3,637,351) 52,500
Federal income tax expense 7,500 -
------------------ -----------------
Net income (loss) $(3,644,851) $ 52,500
================== =================
Net income (loss) per common share $ (.49) $ 0.01
================== =================
Weighted average common and common
equivalent shares outstanding 7,382,665 5,377,106
================== =================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
------------------------- -------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,644,851) $ 52,500
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 204,324 246,187
Amortization of deferred compensation - 14,768
Other income - (182,154)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,739,646) 88,255
Increase in notes receivable (40,000) -
Decrease (increase) in inventories 95,632 (459,176)
Decrease (increase) in prepaid expenses and other assets 123,393 (87,373)
Increase (decrease) in accounts payable 994,310 (121,384)
Increase in accrued liabilities 2,132,533 4,647
------------------------- -------------------------
Net cash used in operating activities (1,874,305) (443,730)
------------------------- -------------------------
Cash flows from investing activities:
Purchase of property and equipment (35,772) (19,624)
------------------------- -------------------------
Net cash used in investing activities (35,772) (19,624)
------------------------- -------------------------
Cash flows from financing activities:
Payments on notes payable (1,030,000) (164,314)
Payments under capital lease obligations (44,070) (45,794)
Net proceeds from private offering of common stock 890,357 708,688
Net proceeds from exercise of warrants 883,215 -
Proceeds from exercise of common stock options 77,000 9,609
------------------------- -------------------------
Net cash provided by financing activities 776,502 508,189
------------------------- -------------------------
Net increase (decrease) in cash and cash equivalents (1,133,575) 44,835
Cash and cash equivalents at beginning of period 2,140,043 81,181
------------------------- -------------------------
Cash and cash equivalents at end of period $ 1,006,468 $ 126,016
========================= =========================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of FOCUS Enhancements, Inc. ("the
Company") as of March 31, 1996 and for the three months ended March 31, 1996 and
1995 are unaudited and should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1995
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995. In the opinion of management, the consolidated financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of the interim
periods. The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results that may be expected for any future
period.
2. NET INCOME (LOSS) PER SHARE
Per share amounts are calculated using the weighted average number of
common shares and common share equivalents outstanding during periods of net
income. Common share equivalents are attributable to unexercised stock options
and warrants and are computed using the treasury stock method. Per share amounts
are calculated using only the weighted average number of common shares
outstanding during periods of net loss.
3. NOTE RECEIVABLE
On January 5, 1996, an officer of the Company borrowed $40,000 under a
promissory note, bearing interest at 8.5% per annum and due not later than
January 5, 1997. At March 31, 1996, the balance is included in accounts
receivable.
4. INVENTORIES
Inventories consist of the following:
March 31, December 31,
1996 1995
---- ----
Finished goods $ 1,559,706 $ 1,669,003
Raw materials 206,997 193,332
------------------- -------------------
$ 1,766,703 $ 1,862,335
=================== ===================
5. NOTES PAYABLE
The Company maintains a line of credit with a bank which permits
borrowings up to $1,000,000. Borrowings under the line of credit are payable on
demand and are collateralized by all of the assets of the Company except as
noted below. Borrowings aggregating $910,000 at March 31, 1996 bear interest at
the bank's prime rate plus 1% and are personally guaranteed by an investor. The
line of credit expired on April 6, 1996, and the Company is currently
negotiating with the lender to extend the due date of the line of credit.
In October 1994, the Company borrowed $2,500,000 from an unrelated
individual under a term line of credit note (the "term note") due February 1,
1996. The term note accrues interest at
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the prime rate plus 2%, payable quarterly in arrears, and is collateralized by
the inventory, accounts receivable and contract rights related to the Company's
business with Apple Computer, Inc. The Company is currently negotiating with the
lender to extend the due date of the term note to March 31, 1997 or convert the
term note into equity. In January 1996, the Company repaid $1,000,000 of the
amount owed under the term note. At March 31, 1996, the Company owed $1,500,000
to the lender under the term note.
6. SUPPLEMENTARY CASH FLOW INFORMATION
In March 1996, the Company sold approximately 339,000 shares of common
stock for gross proceeds of approximately $951,000 in connection with a private
offering to foreign investors. This stock is unregistered and subject to
restrictions on private trading in the United States for a period of forty-one
days. In connection with the offering, the Company incurred fees of
approximately $61,000. No warrants were issued to the underwriter. Net proceeds
of the offering were approximately $890,000.
From January 1, through March 31, 1996, the Company issued
approximately 781,000 shares of common stock upon the exercise of approximately
774,000 private and public warrants, receiving gross proceeds of approximately
$1,010,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain "forward looking"
information that involves risks and uncertainties. In particular, statements
contained in this Form 10-QSB which are not historical facts constitute forward
looking statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Each forward looking statement should
be read in conjunction with the consolidated financial statements and notes
thereto in Part I, Item 1, of this Quarterly Report and with the information
contained in Item 2, including, but not limited to, "Certain Factors That May
Affect Future Results" contained herein, together with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995, including, but not limited to, the section therein
entitled "Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Three-Month Period Ended March 31, 1996 As Compared
With The Three-Month Period Ended March 31, 1995
NET SALES
Net sales for the three-month period ended March 31, 1996 were
$3,801,879 as compared with $5,274,721 for the three-month period ended March
31, 1995, a decrease of $1,472,842 or 28%. In May 1995, the Company restructured
its agreement with Apple Computer, Inc. ("Apple") regarding the Company's L-TV
product so that it could recognize royalty revenue rather than product sales
with related cost of goods sold, as it had in its transactions with Apple during
the first quarter of 1995. The restructuring of the agreement resulted from the
severe liquidity and cash flow problems experienced by the Company at the end of
1994 and during the first six months of 1995. In the quarter ended March 31,
1996, the Company recognized royalty revenues from Apple of approximately
$317,000 or 8% of net sales, with 100% gross margin. If the Company had
recognized Apple revenue on a product sale rather than royalty basis in the
quarter ended March 31, 1996, net sales would have been approximately
$4,927,000, a decrease of $347,000, or 7% from net sales in the three months
ended March 31, 1995. The Company expects that royalty revenues from the Apple
agreement will not be material for the remainder of 1996.
Also, in the three-month period ended March 31, 1996, net sales were
lower in that the Company experienced a significant reduction in orders from
Apple for the Company's L-TV product and orders for the Company's graphics/
connectivity products for Apple's PowerBook 190 and 5300 laptop computers.
As of March 31, 1996, the Company had a sales order backlog, including
royalty sales, of approximately $236,000.
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COST OF GOODS SOLD
Cost of goods sold were $5,125,810 or 135% of net sales, for the
three-month period ended March 31, 1996, as compared with $3,707,242 or 70% of
net sales, for the three months ended March 31, 1995, an increase of $1,418,568
or 38%. The increase in cost of goods sold in absolute dollars and as a
percentage of sales is due principally to the writedown of inventory related to
the Company's graphics/connectivity products for the Powerbook 190 and 5300
laptop computers and miscellaneous adjustments for sales of inventory at cost
including freight expediting charges associated with the launch of the Micro
Presenter product.
As previously disclosed in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995, the Company experienced a significant
reduction in orders for the Company's L-TV product and graphics/connectivity
products for the Powerbook 190 and 5300 laptop computers during the quarter
ended March 31, 1996. In the past months, management has become aware of various
product quality and poor sell-through issues relating to Apple's Powerbook 190
and 5300 products, including a recall by Apple of these products in May 1996.
Because of the uncertainty with respect to these Apple products and the
likelihood that demand for the Company's graphics/connectivity products will be
significantly below current inventory levels, management has decided to minimize
the Company's inventory exposure and take a charge of $2.2 million in the first
quarter of 1996.
SALES, MARKETING AND SUPPORT EXPENSES
Sales, marketing and support expenses were $1,147,129 or 30% of net
sales, for the three-month period ended March 31, 1996, as compared with
$779,030, or 15% of net sales, for the three-month period ended March 31, 1995,
an increase of $368,099 or 47%. The increase in sales, marketing and support
expenses in both absolute dollars and as a percentage of net sales is primarily
the result of increased marketing and advertising expenditures, principally for
display and mail order advertising both domestically and internationally.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month period ended
March 31, 1996 were $768,354 or 20% of net sales, as compared with $484,080, or
9% of net sales for the three-month period ended March 31, 1995, an increase of
$284,274 or 59%. The increase is due primarily to higher than expected audit,
legal and outside consulting fees associated with the Company's 1995 audit and
related filings.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three-month period ended
March 31, 1996 were $283,252, or 7% of net sales, as compared to $296,136, or 6%
of net sales, for three-month period ended , a decrease of $12,884 or 4%. The
decrease in research and development expenses in both absolute dollars and as a
percentage of revenue is due primarily to lower salary and related expenses.
During the quarter ended March 31, 1996, the Company launched PC-Z-TV for Zenith
and the Micro Presenter product.
INTEREST EXPENSE, NET
Net interest expense for the three-month period ended March 31, 1996
was $104,374, or 3% of net sales, as compared to $137,887, or 3% of net sales,
for the three-month period ended March 31, 1995 a decrease of $33,513, or 24%.
Interest expense for the three-month period ended March 31, 1996 arose primarily
from the $2,500,000 term note, which the Company
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issued in October 1994 to an unrelated party, and a $1,000,000 line of credit
with its commercial bank. In addition, expenses related to the issuance of
warrants to lenders in 1995 are included in interest expense for the quarter
ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended March 31, 1996, net cash used in operating
activities was $1,874,305 consisting primarily of a net loss of $3,644,851, and
an increase in accounts receivable of $1,739,646. These were partially offset by
increased accounts payable and accrued liabilities totaling $3,126,843 as well
as depreciation of property, plant and equipment and amortization of goodwill
relating to the Lapis acquisition of $204,324. Net cash provided by financing
activities was $776,503 due primarily to proceeds of approximately $1,850,000
from the exercise of warrants and issuance of shares of common stock in private
placements described below. The proceeds were partially offset by the payment of
notes payable totaling $1,030,000 primarily the partial repayment of $1,000,000
of the amount owed under the Company's $2,500,000 term note.
As of March 31, 1996, the Company had a working capital deficit of
$772,741, as compared to working capital of $862,686 at December 31, 1995, a
decrease of $1,635,107. The decrease is primarily attributable to an increase in
accounts payable of approximately $1,000,000 and an increase in accrued
liabilities of approximately $2,100,000 offset by an increase in accounts
receivable of approximately $1,700,000.
In March 1996, the Company sold approximately 339,000 shares of common
stock for gross proceeds of approximately $951,000 in connection with a private
offering to private investors. This stock is unregistered and subject to
restrictions on private trading in the United States for a period of forty-one
days. In connection with the offering, the Company incurred fees of
approximately $61,000. No warrants were issued to the underwriter. Net proceeds
of the offering were approximately $890,000.
From January 1, through March 31, 1996, the Company issued
approximately 781,000 shares of common stock upon the exercise of approximately
774,000 private and public warrants, receiving gross proceeds of approximately
$1,010,000.
In connection with the Company's writedown of $2.2 million in inventory
of graphics/connectivity products for the Apple 190 and 5300 laptop computers,
the Company recorded approximately $466,000 in charges for inventory received in
the quarter ended March 31, 1996 and recorded an additional approximately
$1,742,000 of accrued liabilities for products ordered under non-cancellable
purchase orders that had not been received at March 31, 1996.
From its inception through March 31, 1996, the Company has incurred
approximately $13 million of accumulated losses. The report of independent
accountants on the Company's financial statements as of and for the years ended
December 31, 1995 and 1994 includes an explanatory paragraph to the effect that
the Company's ability to continue as a going concern is dependent upon the
Company's ability to achieve its fiscal 1996 operating plan, including the
achievement of sustained profitability, and obtaining additional sources of
financing. In 1995, the Company redefined its operating model to achieve
profitability by discontinuing sales of lower-margin, non-proprietary products,
by focusing its marketing efforts on its higher-margin proprietary products,
emphasizing sales to OEMs and the reseller channel, limiting inventory levels
and reducing operating costs. In 1996, the Company expects to continue to use
this business model. The Company's ability to achieve profitability in 1996 is
dependent upon its securing additional contracts from OEM partners such as Apple
and Zenith Electronics, Inc., as well as, increasing revenues through its
domestic and international distributors. The Company does not have any material
commitments for capital expenditures. Management anticipates that
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current working capital, funds generated through the revised business model, and
additional funds that may be received from debt or equity financing will be
sufficient to fund operations for at least 12 months. The Company is currently
negotiating with its commercial bank and its unaffiliated lenders to extend
until March 1997 the term of its $1,000,000 line of credit and its $2,500,000
term note. There can be no assurance that the Company will achieve sustained
profitability or obtain sufficient financing to provide the liquidity necessary
for the Company to continue operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discussion of the Company's risk factors should be read
in conjunction with the financial statements and related notes thereto. The
following factors among others, could cause actual results to differ materially
from those contained in forward looking statements contained or incorporated by
reference in this report and presented by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
Reliance on Major Customer. Approximately 50% of the Company's net
sales during the year ended December 31, 1995 and approximately 8% of the
Company's net sales during the three months ended March 31, 1996 were derived
from sales of the Company's L-TV product to Apple Computer, Inc. ("Apple"). In
August 1994, the Company entered into a two year Master Purchase Agreement with
Apple under which Apple has agreed to bundle and distribute the Company's L-TV
product with Apple's "Presentation System" product offering. In May 1995, the
Company restructured the Agreement due to the Company's severe liquidity and
cash flow problems at the end of 1994 and during the first half of 1995. As a
result, the Company outsourced all manufacturing functions to a turnkey vendor
who paid the Company a royalty on sales. The Agreement is non-exclusive and does
not obligate Apple to purchase minimum quantities of the L-TV product and may be
terminated at any time by Apple. Management believes that orders under this
agreement in 1996 will not be material to the Company's revenues for the year as
a whole. The Company believes it may secure additional contracts from Apple in
the future, however, no assurances can be given that the Company will be
successful in securing one or more additional contracts.
Future Capital Needs. At March 31, 1996, the Company had a working
capital deficit of $772,421, cash and cash equivalents of $1,006,468 and was
fully drawn on its $1 million line of credit with its bank and its $2.5 million
term note with an unaffiliated lender. Historically, the Company has been
required to meet its short- and long-term cash needs through debt and the sale
of Common Stock in private placements in that cash flow from operations has been
insufficient. In December 1995, the Company received gross proceeds of $1
million from the sale of Common Stock to four investors in a private placement.
In the first quarter of 1996, the Company received approximately $1,850,000 in
proceeds from the exercise of warrants and sale of common stock.
The Company's future capital requirements will depend on many factors,
including cash flow from operations, continued progress in its research and
development programs, competing technological and market developments, and the
Company's ability to market its products successfully. During 1996, the Company
may be required to raise additional funds through equity or debt financing, of
which there can be no assurance. Any equity financing could result in dilution
to the Company's then-existing stockholders that the Company will be able to
obtain. Sources of debt financing may result in higher interest expense. Any
financing, if available, may be on terms unfavorable to the Company. If adequate
funds are not available, the Company may be required to curtail its activities
significantly.
-11-
Limited Availability of Capital under Credit Arrangements with Lenders.
The Company maintains a $1,000,000 line of credit with Silicon Valley Bank. As
of March 31, 1996, approximately $910,000 is owed to the Bank under the line of
credit. Pursuant to its agreement with the Bank, the line of credit terminated
in April 1996, and the Company is currently negotiating with the Bank to extend
the line of credit until March 31, 1997. In the event that the Bank does not
renew the line of credit, the Company will be required to pay the amounts
outstanding from working capital or other equity or debt financing. At March 31,
1996, the Company's cash position was approximately $1 million, which could be
used to repay a portion of the outstanding balance on this line of credit.
In October 1994, the Company borrowed $2,500,000 from a private lender
to help finance its inventory and accounts receivable under its Master Purchase
Agreement with Apple. The Company issued to this private lender its term note in
the aggregate principal amount of $2,500,000. The term note accrues interest at
the revolving rate of prime plus 2%, is payable quarterly in arrears at the end
of December, March, June, and September, and is due February 1, 1996. The term
note is secured by those specific assets financed under the agreement with
Apple, including accounts receivable, finished goods, inventory, raw materials,
work-in-process and contract rights arising under the Apple agreement. The
Company has fully utilized the proceeds of this term note to finance purchase
orders received from Apple. In January 1996, the Company repaid approximately $1
million of the amount owed under the term note. The Company is currently
negotiating with the lender to extend the due date of the term note to March 31,
1997 or convert the term note into equity. In the event that the lender does not
extend the due date of the term note, the Company will be required to pay the
amounts outstanding from working capital or other equity or debt financing.
Component Supply Problems. The Company purchases all of its parts from
outside suppliers and from time to time experiences difficulty in obtaining some
components or peripheral devices. The Company attempts to reduce the risk of
supply interruption by evaluating and obtaining alternative sources for various
components or peripheral devices. However, there can be no assurance that supply
shortages will not occur in the future which could significantly increase the
cost, or delay of shipment of, the Company's products, which in turn could
adversely affect its results of operations.
Dependence on Apple Macintosh Platform: Adverse Effects of Reduced
Apple Macintosh Sales. A substantial portion of the Company's sales to date have
been derived from products designed for use on the Apple Macintosh family of
personal computers, and the Company expects that sales of products for use with
Macintosh computers will continue to represent a substantial portion of its net
sales for the foreseeable future. Although sales of Macintosh computers have
increased from year to year, there can be no assurance that such sales will
continue to be widely accepted as a platform for high performance applications.
Also, there can be no assurance that other computer platforms will not gain
increased acceptance in the Company's markets as these platforms evolve to
support applications similar to those offered for the Macintosh. In addition,
there can be no assurance that the Company will be able to make timely and
successful introductions of products for other platforms.
Reliance on Single Vendor. Approximately 60% of the components for the
Company's products are manufactured on a turnkey basis by a single vendor, Pagg
Corporation. In the event that the vendor were to cease supplying the Company,
management believes there are alternative vendors for the components for the
Company's products. However, the Company would experience short-term delays in
the shipment of its products.
Market Acceptance. The Company's sales and marketing strategy
contemplates sales of its products to the Macintosh computer enhancements
market. There can be no assurance that the Company's marketing strategy will be
effective and that consumers of Macintosh computer
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enhancements will buy the Company's products. The failure of the Company to
penetrate the Macintosh enhancements market would have a material adverse effect
upon its operations and prospects. Market acceptance of the Company's current
and proposed products will depend upon the ability of the Company to demonstrate
the advantages of its products over other computer enhancement products.
Competition. The Macintosh computer enhancements market is extremely
competitive. The Company competes with computer retail stores, including
superstores, certain hardware and software vendors which sell directly to
end-users, and other direct marketers of Macintosh enhancements and peripheral
products. Many of the Company's competitors, including Apple, Radius and Asante,
have greater market recognition and greater financial, technical, marketing and
human resources than the Company. Although the Company is not currently aware of
any announcements by its competitors that would have a material impact on the
Company or its operations, there can be no assurance that the Company will be
able to compete successfully against existing companies or new entrants to the
marketplace.
Technological Obsolescence. The Macintosh computer enhancements market
is characterized by extensive research and development and rapid technological
change resulting in product life cycles of nine to eighteen months. Development
by others of new or improved products, processes or technologies may take the
Company's products or proposed products obsolete or less competitive. The
Company will be required o devote substantial efforts and financial resources to
enhance its existing products and to develop new products. There can be no
assurance that the Company will succeed with these efforts.
Protection of Proprietary Information. The Company does not have any
patents. The Company treats its technical data as confidential and relies on
internal nondisclosure safeguards, including confidentiality agreements with
employees, and on laws protecting trade secrets to protect its proprietary
information. There can be no assurance that these measures will adequately
protect the confidentiality of the Company's proprietary information or that
others will not independently develop products or technology that are equivalent
or superior to those of the Company. While it may be necessary or desirable in
the future to obtain licenses relating to one or more of its products or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms.
Dependence on Key Personnel. The Company's success depends to a
significant extent, upon a number of key employees. The loss of services of one
or more of these employees, especially the Company's Chief Executive Officer and
President, Thomas L. Massie, could have a material adverse effect on the
business of the Company. The Company believes that its future success will also
depend in part upon its ability to attract, retain and motivate qualified
personnel. Competition for such personnel in the computer industry is intense.
Although the Company has not in the past experienced difficulty in attracting
and retaining qualified personnel, there can be no assurance that the Company
will be successful in attracting and retaining such personnel in the future.
Volatility of Stock Price. The price of the Company's Common Stock and
Redeemable Common Stock Purchase Warrants has fluctuated widely in the past.
Management believes that such fluctuations may have been caused by quarterly
fluctuations in the Company's results of operations and other factors, including
changes in the personal computer market generally and in the market for products
related to the Apple operating system in particular. Due to the rapid
technological changes and highly competitive nature of the computer industry as
a whole, prices for the securities of technology companies have experienced
extreme volatility over the past several months and can be expected to
experience extreme volatility in the future. Such price volatility could have a
material adverse effect on the Company's ability to raise capital
-13-
at favorable valuations, as well as reduce the ability of a holder of the
Company's securities to sell them at favorable prices.
-14-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings, other than
routine litigation that is incidental to the business, which would have a
material adverse effect on the Company's financial position or results of
operation for the quarter ended March 31, 1996.
ITEM 2. CHANGES IN SECURITIES
No instruments defining the rights of the holders of any class of
registered securities have been materially modified nor have the rights
evidenced by any class of registered securities been materially limited or
qualified by the issuance or modification of any other class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company maintains a revolving line of credit with a bank which
permits borrowings up to $1,000,000. Borrowings under the line are payable on
demand and are collateralized by all assets of the Company except as noted
below. Borrowings aggregating $910,000 at March 31, 1996 bear interest at the
bank's prime rate plus 1% and are personally guaranteed by an investor. The line
expired on April 6, 1996, and the Company is currently negotiating with the
lender to extend the due date of the loan.
In October 1994, the Company borrowed $2,500,000 from an unrelated
individual under a term note due February 1, 1996. The term note accrues
interest at the prime rate plus 2%, payable quarterly in arrears, and is
collateralized by the inventory, accounts receivable and contract rights related
to the Company's business with Apple Computer, Inc. The Company is currently
negotiating with the lender to extend the due date of the term note to March 31,
1997 or convert the term note into equity. In January 1996, the Company repaid
$1,000,000 of the amount owed under the term note. At March 31, 1996, the
Company owed $1,500,000 to the lender under the term note.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
No matters were submitted during the first quarter ended March 31, 1996
to a vote of security holders of the Company, whether through solicitation of
proxies or otherwise.
ITEM 5. OTHER INFORMATION
None
-15-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed herewith:
a. Exhibit 11 - Statement Computation of Per Share Earnings.
b. Report on Form 8-K. The Company did not file any reports on Form
8-K during the quarter ended March 31, 1996.
-16-
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOCUS ENHANCEMENTS, INC.
May 15, 1996 By: /s/ Thomas L. Massie
-----------------------------------
Thomas L. Massie
President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
May 15, 1996 By: /s/ Jeremiah J. Cole, Jr.
-----------------------------------
Jeremiah J. Cole, Jr.
Vice President of Finance
(Principal Accounting Officer)
-17-
EXHIBIT 11
FOCUS ENHANCEMENTS, INC.
STATEMENT COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
1996 1995
------------------- -------------------
<S> <C> <C>
Net income (loss) $ (3,644,851) $ 52,500
=================== ===================
Primary:
Weighted average number of common shares outstanding 7,382,665 5,087,931
Weighted average common equivalent shares - 289,175
------------------- -------------------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 7,382,665 5,377,106
=================== ===================
Net income (loss) per share $ (.49) $ 0.01
=================== ===================
</TABLE>
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,006,468
<SECURITIES> 0
<RECEIVABLES> 3,640,238
<ALLOWANCES> 246,499
<INVENTORY> 1,766,703
<CURRENT-ASSETS> 6,636,474
<PP&E> 341,215
<DEPRECIATION> 1,190,764
<TOTAL-ASSETS> 9,208,873
<CURRENT-LIABILITIES> 7,408,895
<BONDS> 0
0
0
<COMMON> 83,538
<OTHER-SE> 3,917,509
<TOTAL-LIABILITY-AND-EQUITY> 9,208,873
<SALES> 3,801,879
<TOTAL-REVENUES> 3,724,949
<CGS> 5,125,810
<TOTAL-COSTS> 2,198,735
<OTHER-EXPENSES> 10,311
<LOSS-PROVISION> 246,499
<INTEREST-EXPENSE> 104,374
<INCOME-PRETAX> (3,637,351)
<INCOME-TAX> 7,500
<INCOME-CONTINUING> (3,694,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,644,851)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> 0
</TABLE>
