U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee required] For the fiscal year ended December 31, 1996,
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]
For the transition period from to .
Commission File Number 1-11860
FOCUS Enhancements, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 04-3186320
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
142 North Road
Sudbury, Massachusetts 01776
(Address of Principal Executive Offices) (Zip Code)
(508) 371-2000
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.01 par value NASDAQ
Common Stock Purchase Warrant NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the Issuer (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 (or for such other 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. X Yes No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB[ ].
Issuer's revenues for the fiscal year ended December 31, 1996 were $15,076,368.
The aggregate market value of voting Common Stock held by non-affiliates of the
Registrant was approximately $17,913,976 based on the closing bid price of the
Registrant's Common Stock on March 10, 1997 as reported by NASDAQ ($1.875 per
share).
As of March 10, 1997, there were 11,602,185 shares of Common Stock outstanding.
Document Incorporated by Reference: Part
Proxy Statement for 1997 Annual Meeting of Stockholders III
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TABLE OF CONTENTS
PART 1 Page
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 15
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 7. Financial Statements F-1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 27
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act 28
Item 10. Executive Compensation 28
Item 11. Security Ownership of Certain Beneficial Owners
and Management 28
Item 12. Certain Relationships and Related Transactions 28
Item 13. Exhibits and Reports on Form 8-K 28
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PART I
ITEM 1. BUSINESS
BUSINESS OF THE COMPANY
FOCUS Enhancements, Inc. (the "Company" or "FOCUS") internally
develops, markets and sells worldwide a proprietary line of PC-to-TV video
conversion products and a diversified line of high-quality, low-cost
connectivity devices for Windows(TM) and Mac(TM)OS based personal computers.
Based on an independent survey by PC Data Corp., the Company is an industry
leader in the development and marketing of PC-to-TV conversion products that
make personal computers "TV-ready" and televisions "PC-ready".
The Company's proprietary PC-to-TV video conversion products include
video output devices marketed and sold under the Company's registered brand
name, TView. All of the Company's PC-to-TV conversion products enable users to
transmit at low-cost, high quality, computer generated images from any DOS,
Windows or Mac OS based personal computer to any television of any size with a
standard RCA or S-Video interface. FOCUS's PC-to-TV technology provides sharp,
flicker-free, computer-generated images on televisions for multimedia/business
presentations, classroom/training sessions, game playing or even collective
viewing of spreadsheets or internet browsing. The Company's connectivity
products provide end users with a sophisticated, yet inexpensive, local area
network for Mac OS based personal computers. Personal computers equipped with
the Company's EtherLAN Ethernet connectivity products can also function as part
of a larger, high speed network that provides communications and connectivity to
Mac OS compatible computers.
The Company markets and sells its FOCUS branded consumer products
globally through a network of distributors, volume resellers, mail order, value
added resellers ("VARs") and original equipment manufacturers ("OEMs"). In North
America, the Company markets and sells its products through national
distributors such as Ingram Micro D, D & H, Academic and Nuvo; national volume
resellers such as CompUSA, Computer City, Micro Center, Staples and Egg Head;
and through third party mail order companies such as MicroWarehouse, Multiple
Zones, Global, PC Connection and Tiger Direct.
In addition, the FOCUS branded PC-to-TV products have been selected by
leading personal computer manufacturers to be marketed with the use of their
select brand of personal computers. Compaq, Toshiba and Apple have included the
Company's PC-to-TV products on their selected market price lists, and promote
the FOCUS PC-to-TV products in their box materials.
The Company also markets and sells its products internationally in over
30 countries by independent distributors in each country. These independent
distributors market and sell the FOCUS branded products to retailers, mail order
companies, and VARs in their respective countries.
In addition to the FOCUS branded products, the Company markets, sells
or licenses its proprietary PC-to-TV technology to television manufacturers such
as Zenith Electronics, and to personal computer manufacturers such as Apple
Computer. The Company is currently in discussions with several other PC
manufacturers, television manufacturers, VGA chip developers and VGA card
developers globally.
The Company was founded in December 1991, as a Massachusetts
corporation and was reincorporated in Delaware in April 1993. In December 1993,
the Company acquired Lapis Technologies Inc. ("Lapis"), a developer of
high-quality, low-cost Macintosh multimedia graphics products. Effective
September 30, 1996, the Company consummated the acquisition of TView, Inc., a
developer of PC-to-TV video conversion technology. This acquisition has played a
major strategic role in allowing FOCUS to gain a major technological lead over
competitors in the video scan conversion category and has positioned FOCUS as a
leader in PC-to-TV video conversion technology.
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The Company's principal executive offices are located at 142 North
Road, Sudbury, Massachusetts 01776. Its research and development center is
located at 9275 SW Nimbus Drive, Beaverton, Oregon 97008. The Company's European
sales and marketing office, FOCUS Enhancements B.V., is located at Schipholweg
118, Kantorenhuis, 2316 XD Leiden, The Netherlands. The Company's general
telephone number is (508) 371-2000 and its worldwide web address is
http://www.focusinfo.com.
BUSINESS STRATEGY
In 1996, the Company's long-term business strategy was refined to focus
on the opportunities presented by the PC-to-TV convergence market and by the
emergence of new computing platforms often referred to as "Information
Appliances". FOCUS has increased its research and development activities to
sustain its technological leadership and to continue to grow its PC-to-TV
product line. Management expects that this increased emphasis will provide
additional third party opportunities for OEM, and licensing partnerships with PC
manufacturers, television manufacturers, set top box developers, and VGA chip
developers.
According to a CRW market report in September 1996, the market for
PC-to-TV conversion products is expected to grow 375% by the end of 1998.
Current industry surveys, such as one conducted by the Consumer Electronics
Manufacturers Association, indicate that 31% of consumers are likely to buy a
converged PC-TV in the future, although only 4% of consumers in the United
States currently own PC-to-TV conversion products.
The Company has sought to address the growth in this market by
acquiring Lapis in December 1993 and TView in September 1996. Since first
introducing PC-to-TV products, the Company has shipped approximately 18,000
units in 1994, approximately 100,000 units in 1995 and approximately 140,000
units in 1996. According to a survey by PC Data Corp. conducted in December
1996, the Company's revenues of PC-to-TV products represent approximately 58% of
all PC-to-TV product sales.
The Company uses a diversified sales and marketing distribution
strategy both domestically and internationally. Domestically, the Company
markets and sells its products through national distributors, including
resellers, mail order companies and VARs, through computer, office/business and
consumer electronic superstores and through computer, television and set top box
OEMs. Internationally, the Company markets and sells its products in over 30
countries by independent distributors in each country. These independent
distributors market and sell the FOCUS products to retailers, mail order
companies and VARs in their respective countries.
In addition, the FOCUS branded PC-to-TV products have been selected by
leading personal computer manufacturers to be marketed with the use of their
select brand of personal computers. Compaq, Toshiba and Apple have included the
Company's PC-to-TV products on their selected markets price list, and promote
the FOCUS PC-to-TV products in their box materials.
PRODUCT STRATEGY
Guided by customer feedback and technological feasibility, the Company
targets state-of-the-art products in the video convergence market that it can
bring to market within 6 to 12 month product cycles. The Company believes that
this rapid development cycle will maximize its return on investment and gross
profit. The Company's research and development center is located in Beaverton,
Oregon.
Research and development expenses were $3,339,736, including purchased
research and development of $2,000,000, for the fiscal year ended December 31,
1996 and $1,007,513 for 1995. As a percentage of total research and development
expenses, approximately 90% of expenses represent new product development
activities.
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The success of the Company's development strategy depends on the
Company's ability to target growth opportunities in emerging markets. These
opportunities tend to provide relatively higher gross profit margins and fewer
barriers to marketshare gains.
The Company is committed to developing state-of-the-art products for
the rapidly converging computing and entertainment industries. This convergence
marketplace shows the greatest potential for growth in the coming decade.
Management believes that FOCUS is well positioned, as the market expands in the
next three to five years, to develop products which will win both market
acceptance and technological acclaim.
MARKETING AND SALES STRATEGY
The Company's marketing and sales strategy is to ensure that its
products are well positioned and well received in the high growth channels where
computers and consumer electronics are sold. Those channels include national
distributors, volume retailers, national mail order companies, direct retail,
systems integrators and international distributors, resellers and mail order
companies.
The Company's marketing strategy employs a range of tactics to reach
its customers. The Company seeks to reach retail end users by selected
advertising in leading computer magazines, both in the United States and abroad.
To increase brand awareness, the Company also cross-markets all of its products
across disparate channels to resellers, systems integrators and distributors
through fax transmission delivery of product specifications. These tactics are
outlined below:
Direct Marketing. The Company markets its products directly to
business, educational and end-user customers. The Company produces a
color product guide that it mails periodically to customers and
prospects. The product guide promotes the Company's resellers, and
invites the customer to call a convenient 800 number for additional
information and reseller referrals.
Display Advertising. The Company utilizes target advertising in popular
computer and consumer journals for the development of lead generation
and product brand recognition. The Company currently advertises in
magazines such as Windows, Computer Reseller News, Technology &
Learning, Presentations, and PC Graphics & Video.
The Company's international distributors and resellers also advertise,
at their expense, the Company's product line in targeted country
magazines. This advertising artwork is pre-approved by the Company to
ensure image control and to maximize product-brand recognition.
Cross-Marketing. Although principally focused in PC-to-TV video
graphics products, the Company offers cross platform networking
products through a separate division and cross-markets all of its
products. The Company ships over 20,000 products a month, and a product
guide is provided in all shipped packages. This strategy is designed to
increase customer awareness of other FOCUS products, and aids the
Company's brand-recognition marketing goals.
On-line. Taking advantage of the internet megatrend is an essential
element of any successful marketing plan. FOCUS has adapted its direct
marketing approach to the internet by providing complete product and
Company information on the World Wide Web and assists customers and
prospects with both pre- and post- sales needs. The Company's web site
contains an interactive list of resellers and outlets for its products
contributing to the goal of direct access to end users and building
relationships.
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The Company also utilizes a sophisticated 24-hour fax-on-demand system.
Each product specification fax requested by the customer is
cross-marketed for synergistic products.
Broad Distribution. Since beginning its operations in March 1992, the
Company has grown through its diversified global sales strategy and
broad product offerings. As of the date of this report, the Company has
over 1,600 active resellers globally. The Company markets and sells its
products through national resellers such as CompUSA, Computer City,
Staples, Micro Center, Computer Town, Fry's Electronics, Elek-tek, Data
Vision, and J&R. The Company markets and sells its products through
national distributors such as Ingram Micro D, Nuvo of Canada, D&H and
Academic. The Company also markets and sells its products through third
party mail order companies such as MicroWarehouse, Multiple Zones,
Global, PC Connection and Tiger Direct.
The Company's products are also sold to resellers, independent mail
order companies and distributors abroad. The Company's products are
sold through these channels in France, the United Kingdom, Scandinavia,
Germany, Switzerland, Italy, the Czech Republic, Russia, Australia,
Japan, China and Korea. Additionally, in February 1996, the Company
established its European headquarters in Amsterdam to expand the number
of and to service its European partners.
Telemarketing and Telesales. The Company is receiving and placing over
120,000 combined calls per year. The Company utilizes telemarketing and
telesales programs.
Telemarketing. The Company gathers valuable marketing data from
callers. This data allows the Company to continuously analyze its
market data such as customer type, media response and product interest.
The Company also receives over 20,000 marketing registration cards
annually that provide the Company with marketing information such as
product quality, service quality and sales representative product
knowledge.
Reactive Telesales. The Company receives calls and product orders from
its lead generation marketing efforts such as advertising, targeted
business reply cards and product guides (catalog) mailings.
PRODUCTS AND APPLICATIONS
FOCUS Enhancements develops internally all of its PC-to-TV video
conversion products thereby allowing the Company to market and sell a
proprietary suite of products to the PC-to-TV video convergence marketplace. The
Company's connectivity products are primarily acquired from third party
networking product developers, which the Company markets under its own brand
names. Each of these product groups are compatible with both Windows and Mac OS
personal computers. The Company's product lines are divided into two basic
categories: PC-to-TV video scan conversion products and connectivity products
(Ethernet and LocalTalk networking):
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PC-TO-TV VIDEO SCAN CONVERSION
TVIEW AND L-TV PRODUCTS
The Company's primary focus within the videographics category is in the
conversion of standard PC video output (VGA) into television video input (NTSC
or PAL). FOCUS' broad line of PC-to-TV products easily allow the user to display
Windows or Mac OS video output directly to a TV monitor or to videotape. These
products are currently available as either a board-level product or an external
set top device. FOCUS currently brands this technology under the L-TV brand for
education and under the newly acquired TView brand in retail and mail order
channels. These products have a variety of features geared toward the needs of
business, education and consumer customer groups. The Company has developed
various proprietary enhancements for their PC-to-TV products including image
stabilization which eliminates all flicker, and TrueScale(TM) technology which
insures proper aspect ratios on the television screen even when a computer image
is compressed to fit on a television.
External Set Top Boxes. The Company currently offers three models of
external set top boxes under the L-TV brand and three models of
external set top boxes under the TView brand. Under the L-TV brand, the
Company sells the L-TV Micro, which is compatible solely with Mac OS
based personal computers, the PC Micro Presenter and the PC Micro
Presenter Plus, which are compatible with Windows and DOS based
computers. Under the TView brand, the Company sells the TView Micro,
the TView Silver and the TView Gold, all of which are compatible with
both Windows and Mac OS based personal computers. All the external set
top boxes weigh less than 7 ounces, and are easily connected to the VGA
video port of the computer and a television through the cables
provided. The PC Micro Presenter Plus and the TView Gold include a
cordless hand-held mouse that can be used in lieu of a standard mouse
at a distance of up to 40 feet away from the unit.
Internal Board Level Products for PCs and TVs. For those environments
where portability is less important, such as classrooms or home
entertainment, the Company offers board level products that can be
installed directly into a personal computer or television. The Company
currently offers two board level products for televisions, the PC-Z-41
and the PC-Z Gold that are sold for Zenith television sets equipped
with Zenith's proprietary SuperPort. The Company also offers two board
level products for personal computers, the TView Classmate for
installation in Macintosh Performa or PowerMac 5000 series computers,
and the TView PresoCard for installation into Windows based laptops.
All board level products are shipped with "mirroring" and compression
software to display the same image on both the computer screen and TV
monitor simultaneously. Both the TView Classmate and PresoCard are
shipped with the Company's proprietary Electronic Marker(TM) software
which turns the computer screen cursor into a drawing tool, allowing
the user to highlight or annotate text and graphics directly on the
screen.
Integrated Circuits. The Company currently offers two integrated
circuit products, the FOCUS Scan 200 and the FOCUS Scan 300. The FOCUS
Scan 200 is included on the Company's board level products. It is
expected that the FOCUS Scan 300 will be shipped starting at the end of
the second calendar quarter. The FOCUS Scan 200 features 3 line
averaging and supports resolutions up to 640 x 480. The FOCUS Scan 300,
when completed, will support resolutions up to 1024 x 768 and feature
"video scaling", whereby the image on the television is scaled both
horizontally and vertically to ensure that the entire contents of the
computer screen are displayed on the television. Both of the integrated
circuits can be installed on both personal computers and televisions.
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TVIEW AND L-TV SYSTEM APPLICATIONS
Presentation Device. The large screen area of a TV monitor makes it an
inexpensive way to present computer graphics and text to a large
audience or classroom environment. These applications are used for
presentations, education, training, video teleconferencing, Internet
viewing, and games.
Print to Video. The TView and L-TV systems will output the computer
images directly to a VCR allowing for an inexpensive way to print
anything created on a Windows or Mac OS personal computer to video
tape.
Mirroring Mode. This proprietary software allows the presenter to use
the small computer screen as a mirroring console to the same images
displayed on the larger TV monitor. Training of applications can be
performed from the Windows or Mac OS personal computer while the
audience observes the images on the TV monitor.
CONNECTIVITY PRODUCTS
ETHERNET PRODUCTS
Ethernet is a high-performance system that allows connected computers
on a network to communicate at speeds five to ten times faster than possible on
a Local Talk LAN. Ethernet as it exists on Macintosh computers is the same as
Ethernet on other non-Macintosh platforms, thus broadening the inter-operability
choices for Macintosh users.
EtherLAN 10 Mbit. The Company's EtherLAN family of network interface
cards enable Macintosh computers equipped with expansion slots to
communicate with other Ethernet-connected computers. Capable of
transferring digital signals using standard Ethernet communication
protocols, EtherLAN cards are equipped with three adapters which
support all Ethernet cabling standards. The memory capacity of these
cards can be expanded for faster network throughput.
EtherLAN Lightning 1100. 100 Mbit Ethernet standards have moved the
networking world toward higher speed networking. These new Ethernet
networks have now become the platform of preference for pre-press and
publishing organizations. The Lightning series Ethernet products
address that need. In particular, the EtherLAN Lightning 1100 is a
network interface card that permits both Windows and Mac OS based
computers to automatically switch between 10 and 100 Mbit networks
providing backward compatibility with forward extendibility.
EtherLAN AAUI Transceivers. Newer models of Macintosh computers are
being delivered with an Ethernet port built in, thus eliminating the
need for a network interface card. However, these computers require an
external transceiver to make the physical attachment to the Ethernet
cabling. FOCUS offers a line of these transceiver devices which comply
with the Apple Ethernet standard and allow "plug and play" connectivity
to Ethernet networks.
EtherLAN Hubs. The Company offers a full line of Ethernet hubs with 4,
8, 16 and 32 ports. They can be used to create stand-alone networks
providing the centralized repeater function required in Ethernet
networks and can be interconnected to build larger networks.
EtherLAN Mini SC. The Company's EtherLAN SC is a pocket-sized adapter
that enables the Macintosh to communicate with other Ethernet-connected
computers via the Small Computer System Interface ("SCSI") port built
into every Macintosh.
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EtherLAN Lightning Hubs. The Company offers a full line of 100 Mbit
Ethernet hubs which can act as a standalone fast Ethernet network or as
an extension of legacy 10 Mbit networks. Equipped with four 10 Mbit
switched ports, the 4100 Hub S is a switching hub which allows seamless
integration into 10 Mbit networks. The Lightning 8100 Hub is a high
performance 8 port, 100 Base-TX Fast Ethernet Hub designed for users of
graphics, image transfer and other data intensive applications.
ETHERNET APPLICATIONS
A group of Macintosh computers equipped with Ethernet network interface
cards can become part of larger, high-speed networks that can communicate not
only with other Macintosh networks but also with PC-compatible platforms.
Ethernet networks proliferate in enterprise computing environments where the
number of users can range from 50 to as many as 1,000. The Ethernet products are
capable of linking several departments, managing multiple network protocols and
operating systems, delivering electronic messages and file-sharing capabilities,
and spooling to various printers on the network to prevent long queues.
LOCAL TALK PRODUCTS
Local Talk is the networking system built into Macintosh computers that
enables up to ten Macintosh users to share information on a common
network.
TurboNet ST. The Company's TurboNet product links Macintosh computers
in a network by allowing the transfer of digital signals from one
computer to another over standard telephone lines. The Company's
TurboNet connectors are equipped with advanced circuitry that solves
signal flow problems of Macintosh networks.
LOCAL TALK APPLICATIONS
A group of Macintosh computers equipped with the Company's TurboNet
product can operate as a sophisticated, yet very inexpensive, local area network
("LAN"). Using the Company's Local Talk connectivity products, the network
manager can configure a Macintosh network into a star, trunk or combination LAN
in addition to the standard daisy chain configuration. A Local Talk LAN is
ideally suited to a small work group environment, serving from 5 to 10 users.
MAJOR CUSTOMERS
During 1996, the Company began shipments of its PC-to-TV conversion
products to Zenith Electronics, Inc. ("Zenith") under an exclusive agreement
announced on October 17, 1996. Revenues to Zenith for the year ended December
31, 1996 were approximately $3,472,000 or 23% of total revenue. Under the
agreement Zenith must purchase at least $12,000,000 of PC-to-TV conversion
products in 1997 and at least $30,000,000 of the products in 1998 in order to
maintain its exclusivity. If Zenith were to terminate the agreement or to cease
ordering units of the PC-to-TV products, the Company's operations and ability to
achieve profitability would be materially and adversely affected.
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During fiscal year 1996, the Company derived 15% of its revenues from
sales to Ingram Micro D, a leading distributor of computer enhancement devices,
as compared with 6% of revenues for the fiscal year ended December 31, 1995. The
loss of Ingram Micro D could have a material adverse effect on the Company's
operating results in 1997.
For the year ended December 31, 1996, the Company experienced a
significant reduction in orders from Apple Computer, Inc. ("Apple") for the
Company's L-TV and graphics connectivity products. As a result, sales to Apple
in 1996 represented 8% of total sales as compared to 50% of total sales in 1995.
This was due primarily to the expiration in August 1996 of the two-year Master
Purchase Agreement between the Company and Apple pursuant to which the Company's
L-TV product that was sold as part of Apple's "Presentation System." Currently,
there is no master agreement in place with Apple. Any new purchases that are
made by Apple are accompanied by purchase orders that state the orders are non
cancellable, and irrevocable. In January 1997, the Company began to ship to
Apple a custom PC-to-TV product. This PC-to-TV design is being integrated into
select Macintosh computers for shipment into Apple Computer's education market.
The Company expects to ship approximately $2.5 million of the newly designed
PC-to-TV product to Apple during 1997.
CUSTOMER SUPPORT
Management believes that its future success will depend, in part, upon
the continued strength of customer relationships. To ensure customer
satisfaction, the Company provides customer service and technical support
through a five-days-per-week "hot line" telephone service. The Company uses 800
telephone numbers for customer service and a local telephone number for
technical support (the customer pays for the phone charge on technical support).
The customer service and support lines are currently staffed by technicians who
provide advice free of charge to ensure customer satisfaction and obtain
valuable feedback on new product concepts. In order to educate its own telephone
support personnel, the Company also periodically conducts in-house training
programs and seminars on new products and technology advances in the industry.
The Company offers this same level of support for its entire domestic
market including its direct market customers who purchase the Company's products
through computer superstores or system integrators. The Company also provides
technical support to its international resellers and distributors. The Company's
international resellers and distributors also provide local support to the
customers for their respective markets.
The Company also provides customers with a thirty-day, unconditional
return policy on all products and a one to three-year unconditional warranty on
all products. The Company repairs or replaces a defective product which is still
under warranty coverage, and substantially all the components which the Company
purchases are also covered by vendor warranties of comparable duration. Returned
products with defective components are returned by the Company to the component
vendors for repair or replacement. Product returns, exclusive of reseller stock
balancing, averaged approximately 5% and 7% of total product revenue during the
years ended December 31, 1996 and 1995, respectively.
COMPETITION
The Company currently competes with other developers of PC-to-TV
conversion products and connectivity products and expects to compete in the
future with developers of videographic integrated circuits. Although the Company
believes that it is a leader in the PC-to-TV conversion product marketplace, the
videographic integrated circuit and the connectivity markets are intensely
competitive and characterized by rapid technological innovations. This has
resulted in new product introductions over relatively short time periods with
frequent advances in price/performance ratios. Competitive factors in these
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markets include product performance, functionality, product quality and
reliability, as well as, volume pricing discounts, customer service, customer
support, marketing capability, corporate reputation, brand recognition and
increases in relative price/performance ratios for products serving these
markets.
In the PC-to-TV conversion product market, the Company competes with
companies such as AI Tech and Avermedia. In the connectivity market, the Company
competes against manufacturers such as Farallon and Asante.
Many of the Company's competitors have greater technical and capital
resources, more marketing experience, and larger research and development staffs
than the Company. Management believes that it competes favorably on the basis of
product quality and technical benefits and features. The Company also believes
it provides competitive pricing, extended warranty coverage, and strong customer
relationships, including selling, servicing and after-market support. However,
there can be no assurance that the Company will be able to compete successfully
in the future against existing companies or new entrants to the marketplace.
MANUFACTURING
In the manufacture of its products, the Company relies primarily on
turnkey subcontractors who utilize components purchased or specified by the
Company. The "turnkey" house is responsible for component procurement, board
level assembly, product assembly, quality control testing, final pack-out and in
some cases direct shipment. All subcontracted turnkey houses currently used by
the Company are ISO 9002 certified. During 1996, the Company relied and
currently continues to rely on one turnkey manufacturer, Pagg Corporation, for
approximately 60% of the Company's product manufacturing. Although there are
several alternative manufacturers and suppliers, there would be a material
adverse impact to the Company's revenues and results of operation if Pagg
Corporation were to discontinue to provide services to the Company.
Upon receipt of a customer's order, the Company's telemarketing
representative enters the order into the Company's computerized order entry and
inventory management system. Once the customer's credit has been verified and
approved by the finance department, the orders are electronically dispatched to
operations for order fulfillment and shipment. Final packaging and fulfillment
of product orders are then performed by the Company with most customer orders
being shipped in less than three business days from the date they are placed
into the system. For certain products, the Company's turnkey manufacturer ships
directly to the customer and forwards shipping information to the Company for
billing purposes.
Quality control is maintained through standardized ISO 9002 quality
assurance practices at the build site and random testing of finished products as
they arrive at the Company's fulfillment center. The Company has lowered its
inventory on hand and staff requirements by adopting the turnkey fulfillment
model. This model also allows the Company better quality control and product
flexibility which has resulted in quicker product turns and a better cash flow
position.
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All customer returns are processed by the Company in its fulfillment
center. Upon receipt of a returned product, a trained testing technician at the
Company tests the product to diagnose the problem. If a product is found to be
defective the unit is either returned to the turnkey subcontractor for rework
and repair or is repaired by the Company and returned to the customer. The
majority of the Company's defective returns are repaired or replaced and
returned to customers within five business days. In 1996, product returns
represented approximately 5% of the Company's revenues.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company currently has two patents pending and expects to file one
additional patent in the second quarter of 1997, all with respect to its
PC-to-TV videographics products. Historically, the Company has relied
principally upon a combination of copyrights, common law trademarks and trade
secret laws to protect the rights to its products that it markets under the
FOCUS and TView brand names.
Upon joining the Company, employees and consultants are required to
execute agreements providing for the non-disclosure of confidential information
and the assignment of proprietary know-how and inventions developed on behalf of
the Company. In addition, the Company seeks to protect its trade secrets and
know-how through contractual restrictions with vendors and certain large
customers. 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.
Because of the rapid pace of technological innovation in the Company's
markets, management believes that in addition to its patent pending status, the
Company's success is greatly attributable to the creative skills and experience
of its employees, the frequency of Company product offerings and enhancements,
product pricing and performance features, its diversified marketing strategy,
and the quality and reliability of its support services.
MANAGEMENT INFORMATION SYSTEMS
The Company has committed significant resources to the purchase and
development of a sophisticated computer system which is used to manage all
aspects of its business. The computer information system is based on a UNIX
hardware platform. This system supports telemarketing, direct mail management,
order entry, inventory control, purchasing, accounting, customer service,
warehousing and fulfillment. The system allows the Company, among other things,
to monitor sales trends, make informed purchasing decisions and provide product
availability and order status information. In addition to the main system, the
Company has a system of networked Macintosh and IBM compatible computers, which
facilitates data sharing and provides an automated office environment. The
Company believes that certain modifications and upgrades to its existing systems
and software modules will be necessary in the future in order to more closely
tailor its information system to its on-going needs.
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PERSONNEL
As of December 31, 1996, the Company employed 40 people, of whom 9 are
in research and development, 17 in sales, marketing and customer support, 7 in
operations, and 7 in finance and administration.
BACKLOG
At December 31, 1996, the Company had a backlog of approximately
$1,167,000 for products ordered by customers as compared to a backlog of
$200,000 at December 31, 1995. The Company expects to fill these orders in 1997.
The increase in backlog in 1996 as compared to 1995 is primarily due to orders
for the Company's PC-to-TV conversion products. Generally, management does not
believe backlog for products ordered by customers is a meaningful indicator of
sales that can be expected for a particular time period.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company leased approximately 38,000 square
feet of space at four locations. The Company leases approximately 32,000 square
feet of space in Sudbury, Massachusetts which is used for administration, sales,
marketing, customer service, limited assembly, quality control, packaging and
shipping. This lease expires on July 30, 2001 and requires monthly rent payments
of $17,258. Approximately 5,200 square feet is leased in Berkeley, California
and Beaverton, Oregon, each of which serves as a research and development center
for the Company. The lease on the Berkeley facility expires October 31, 1997
with rental payments of $1,098 per month, plus expenses, and the lease on the
Beaverton facility expires June 30, 2000 with rental payments of approximately
$3,631 per month, plus expenses. Additionally, the Company's European sales and
marketing subsidiary, FOCUS Enhancements, B.V., occupies approximately 1,000
square feet of space in Leiden, The Netherlands. The rent on this facility is
approximately $2,735 per month, plus expenses, and the lease expires June 30,
2001. The Company believes that its existing facilities are adequate to meet
current requirements and that it can readily obtain appropriate additional space
as may be required on comparable terms.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims and legal
proceedings that arise in the ordinary course of business. Currently there are
no claims or legal proceedings which, in the opinion of management, would have a
material adverse effect on the Company's financial position or results of
operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1996 to a vote of security holders of the Company, whether through
solicitation of proxies or otherwise.
On March 18, 1997, a Special Meeting of Shareholders (the "Meeting")
was held in Sudbury, Massachusetts for the purpose of increasing the number of
shares of authorized Common Stock from 16 million to 20 million. At the Meeting,
the proposal was approved by the holders of a majority of the shares of Common
Stock issued and outstanding on February 14, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Trading in the Company's Common Stock and public warrants (the
"Warrants") commenced on May 25, 1993, when the Company completed its initial
public offering, and since that time the Company's Common Stock and Warrants
have traded principally on the NASDAQ Small-Cap Market under the symbol "FCSE"
and "FCSEW", respectively. The Company's Common Stock and Warrants were traded
on the Boston Stock Exchange under the symbols "FCS" and "FCSW", respectively,
during the period May 26, 1993 through March 7, 1997. The following table sets
forth the range of quarterly high and low bid quotations for the Company's
Common Stock and Warrants as reported by NASDAQ. The quotations represent
inter-dealer quotations without adjustment for retail markups, markdowns or
commissions, and may not necessarily represent actual transactions. The closing
bid price of the Company's Common Stock and Warrants on the NASDAQ Small-Cap
Market on March 10, 1997 were $1.875 per share and $0.3438 per Warrant,
respectively.
Warrants Common Stock
-------- ------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
Calendar 1995 Quotations
First Quarter $ 0.31 $ 0.12 $ 2.13 $ 1.25
Second Quarter $ 0.43 $ 0.06 $ 2.13 $ 1.13
Third Quarter $ 1.25 $ 0.28 $ 5.56 $ 1.81
Fourth Quarter $ 2.56 $ 0.65 $ 7.12 $ 3.625
Calendar 1996 Quotations
First Quarter $ 3.31 $ 0.46 $ 6.75 $ 2.00
Second Quarter $ 1.62 $ 0.37 $ 4.62 $ 1.375
Third Quarter $ 0.87 $ 0.31 $ 3.00 $ 1.9375
Fourth Quarter $ 0.84 $ 0.25 $ 3.62 $ 1.6875
As of March 10, 1997, there were 167 holders of record of the Company's
11,602,185 shares of Common Stock outstanding on that date. The Company
estimates that approximately 2,000 shareholders hold securities in street name.
The Company does not know the actual number of beneficial owners who may be the
underlying holders of such shares.
The Company has not declared nor paid any cash dividends on its Common
Stock since its inception. The Company's bank line of credit prohibits the
payment of cash dividends. The Company intends to retain future earnings, if
any, for use in its business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company was organized in December 1991 for the purpose of
developing and direct marketing peripheral enhancements for Apple Macintosh,
Windows- and DOS-compatible personal computers. The Company currently markets
videographic and connectivity products. The Company began shipping its products
in March 1992 and, since inception, has experienced significant losses due to
the introduction of numerous product offerings, aggressive market development,
and increased operating expenses resulting from the Company's merger in 1993
with Lapis Technologies, Inc. ("Lapis"), a developer of high-quality, low-cost
Macintosh desktop publishing and multimedia graphics products and the Company's
acquisition in 1996 of TView, Inc. ("TView"), a developer of PC-to-TV conversion
products.
On December 16, 1993, upon the closing of the Lapis merger, FOCUS
issued 500,000 shares of its Common Stock in exchange for all of the outstanding
stock of Lapis at a guaranteed stock value of $6.70 per share. The business
combination was accounted for using the purchase method of accounting and
initially resulted in goodwill of approximately $4,000,000. During 1995, the
Company settled substantially all claims arising from this acquisition and the
merger agreement was amended to eliminate the stock value guarantee in
consideration for the issuance to the Lapis stockholders of an additional
123,879 shares of Common Stock. The agreement resulted in a reduction of
goodwill of approximately $1,200,000.
In conjunction with the Company's acquisition of TView, on September
30, 1996, the Company evaluated the recoverability of the Lapis goodwill and
wrote-off approximately $1,214,000 of the remaining goodwill associated with the
Lapis acquisition. This write-off was based upon the Company's evaluation of the
intangible asset in relation to the competing technology acquired from TView and
other factors.
In June 1994, the Company acquired selected assets and liabilities of
Inline Software Inc. ("Inline"), a publisher of low-cost software utilities and
entertainment software for Apple Macintosh, Windows and DOS operating
environments. Since the acquisition, Inline operated as a division of FOCUS. As
a result of its evaluation of the recoverability of goodwill and intangible
assets related to this acquisition, the Company wrote-off the goodwill balance
of approximately $151,000, recording a charge in general and administrative
expense in the fourth quarter of 1995, and the balance of intangible assets of
approximately $59,000 in the third quarter of 1996. The evaluation considered
the significant reduction in related software sales during the second half of
1995 and in 1996.
In connection with the Company's acquisition of TView, the Company
issued to the TView stockholders an aggregate of $2,000,000 in FOCUS Common
Stock which aggregated 732,869 shares of such stock and assumed net liabilities
of approximately $716,000. The business combination was accounted for using the
purchase method of accounting resulting in goodwill of $716,000 and a $2,000,000
charge to purchased in-process research and development. The shares issued in
connection with this transaction are being held in escrow to be released upon
satisfaction of certain performance criteria of TView's ASIC chip.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following table sets forth, for the periods indicated, income and
expense items included in the Consolidated Statements of Operations, expressed
as a percentage of net sales:
Year Ended December 31,
1996 1995
---- ----
Net sales 100% 100%
Cost of good sold 99 57
---- ----
Gross profit 1 43
---- ----
Operating expenses:
Sales, marketing and support 23 18
General and administrative 25 15
Research and development 9 6
Purchased research and development 13 -
---- ----
Total operating expenses 70 39
---- ----
Income (loss) from operations (69) 4
Interest expense, net (2) (4)
Other income (expense) - 2
---- ----
Net income (loss) (71%) 2%
==== ====
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Net Sales. Net sales for the year ended December 31, 1996 were
$15,076,368, as compared with $17,099,616 for the year ended December 31, 1995,
a decrease of $2,023,248, or 12%. During the year ended December 31, 1996, the
Company realized a significant reduction in orders from Apple for the Company's
L-TV product and orders for the Company's graphics/connectivity products for the
Apple Powerbook 190 and 5300 laptop computers. During the year ended December
31, 1996, sales to Apple represented 8% of revenues as compared to 50% for 1995.
Management expects that 1997 revenues from Apple will increase to approximately
15% of total sales.
During 1996, the Company began shipments of its PC-to-TV conversion
products under its agreement with Zenith Electronics, Inc. ("Zenith"). Revenues
for the year ended December 31, 1996 were approximately $3,472,000 or 23% of
total revenue. There were no sales to Zenith in 1995. On October 17, 1996, the
Company announced an exclusive agreement with Zenith for its PC-to-TV conversion
products. Under the agreement, Zenith must purchase at least $12,000,000 of
PC-to-TV conversion products in 1997 and at least $30,000,000 of these products
in 1998 in order to maintain exclusivity.
The Company realized a growth in sales to its domestic and
international distributors and resellers for the period ended December 31, 1996,
as compared to 1995. Net sales to domestic and international distributors and
resellers for fiscal 1996 were approximately $10,535,000 ($8,142,000 domestic;
$2,393,000 international) as compared to approximately $8,621,000 ($6,989,000
domestic; $1,632,000 international) for the same period in 1995. This represents
an increase in domestic and international sales during 1996 of $1,914,000 or 22%
from the prior year. The increase comes as a result of the Company's continued
efforts to add new products for Windows and Mac OS based personal computers and
broaden its distribution channels.
Cost of Goods Sold. Cost of goods sold was $14,887,902, or 99% of net
sales, for the year ended December 31, 1996, as compared with $9,745,228, or 57%
of net sales, for the year ended December 31, 1995, an increase of $5,142,674 or
53%. The increase in cost of goods sold in absolute dollars and as a percentage
of net sales is primarily attributable to the write-down and refurbishment of
inventory related to the Company's graphics/connectivity products for the Apple
Powerbook 190 and 5300 laptop computers, the writedown of approximately $1.2
million of barter credits recorded as an "Other Asset" as of December 31, 1996
(See Note 2 of consolidated financial statements relating to the restatement of
prior financial statements) and , additional provisions of approximately
$300,000 made for inventory obsolescence. Additionally, as compared to 1995,
when the Company's revenues included approximately $5,500,000 of royalty
payments from Apple with no related cost of goods sold, in 1996, the Company had
approximately $315,000 in royalty revenue from Apple. If the 1995 Apple royalty
revenues were excluded from net sales, total cost of goods sold would have been
approximately 84% of net sales. In an effort to control and improve the cost of
goods, management has negotiated and seeks to continually negotiate favorable
pricing and payment terms with its manufacturers and suppliers.
Sales, Marketing and Support Expenses. Sales, marketing and support
expenses were $3,480,024, or 23% of net sales, for the year ended December 31,
1996, as compared with $3,161,566, or 18% of net sales, for the year ended
December 31, 1995, an increase of $318,458 or 10%. 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 staffing, marketing and
advertising expenditures related to the Company's efforts to expand its domestic
and international distribution channels.
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General and Administrative Expenses. General and administrative
expenses for the year ended December 31, 1996 were $3,797,238 or 25% of net
sales, as compared with $2,544,492, or 15% of net sales, for the year ended
December 31, 1995, an increase of $1,252,746 or 49%. The increase in terms of
absolute dollars and as a percentage of net sales is primarily attributable to
the write-down of intangibles of approximately $1,273,000 associated with the
Company's prior acquisitions of Lapis and Inline, the recording of $400,000
additional reserves for estimated returns resulting from stock balancing
transactions (See Note 2 to the consolidated financial statements relating to
the restatement of prior financial statements) and, higher than expected audit,
legal and outside consulting fees associated with the Company's 1995 audit and
related SEC filings. The write-off of goodwill resulted from the Company's
evaluation of the impairment of the Lapis and Inline asset as a result of the
Company's acquisition of TView, the declining Macintosh marketplace and shifting
of the market to PC based products. The increase in expenses was partially
offset by the Company's other reductions of administrative expenses for fiscal
year 1996.
Research and Development Expenses. Research and development expenses
for the year ended December 31, 1996 were $1,339,736, or 9% of net sales, as
compared with $1,007,513, or 6% of net sales, for the year ended December 31,
1995, an increase of $332,223 or 33%. The increase in research and development
expenses in both absolute dollars and as a percentage of revenue is due
primarily to increased staffing levels and related expenses associated with new
product development and enhancement of the Company's current and future product
offerings, as well as the transition of research and development activities from
Alameda, California to Beaverton, Oregon, as a result of the Company's
acquisition of TView.
Purchased Research and Development. In connection with the Company's
acquisition of TView, the Company issued $2,000,000 in Common Stock and assumed
net liabilities of approximately $716,000. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price was
allocated based on the estimated fair value of the assets and liabilities
acquired. The Company allocated $2,000,000 of the purchase price to purchased
research and development which was charged to operations, based upon an
evaluation of the purchased research and development prepared by an investment
banking firm. In conducting the evaluation, the investment banking firm took
into consideration the market dynamics, revenue potential, technological
advancement and estimated cost to complete the in-process research and
development. (approximately $750,000 between October 1, 1996 and the second
quarter of 1997).
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Interest Expense, Net. Net interest expense for the year ended December
31, 1996 was $312,833, or 2% of net sales, as compared to $606,165, or 4% of net
sales, for the year ended December 31, 1995, a decrease of $293,332 or 48%. The
reduction in interest expense is primarily due to the repayment, in January
1996, of $1 million of the outstanding principal on a $2.5 million note payable
to an unrelated party issued in October 1994. Interest expense for the year
ended December 31, 1995 arose primarily from the note payable to the unrelated
party and from the Company's line of credit with its commercial bank. In
addition, the computed value of imputed interest costs related to the issuance
of certain warrants are included in interest expense for 1996 and 1995 at
$61,388 and $94,937, respectively.
Other Income/(Expense). For the year ended December 31, 1996, the
Company incurred other expenses of $14,504. For the year ended December 31,
1995, other income consisted primarily of $313,651 recognized in connection with
the settlement of certain accounts payable and notes payable obligations.
Net Income (Loss). For the year ended December 31, 1996, the Company
reported a net loss of $10,772,410, or $1.18 per share (primary), as compared to
net income of $328,761, or $.05 per share (primary), for the year ended December
31, 1995.
FINANCIAL CONDITION
Total Assets. Total assets decreased $1,053,012, or 12%, from December
31, 1995 to December 31, 1996. The decrease in assets is primarily the result of
decreases in cash and goodwill partially offset by an increase to accounts
receivable. Accounts receivable increased $1,352,973, or 73%, primarily due to
the increased sales to the Company's distribution partners resulting from the
Company's channel expansion efforts in 1996. During 1996, the Company wrote-down
goodwill and other intangible assets in the amount of approximately $1,273,000
related to the Company's Lapis and Inline acquisitions based upon the Company's
analysis of impairment of these assets.
Total Liabilities. Total liabilities increased $1,561,792, or 29% from
December 31, 1995 to December 31, 1996. The increase is primarily the result of
an increase in accounts payable of approximately $2,356,000 offset by a decrease
in notes payable of $1,120,000. In January 1996, the Company repaid $1,000,000
of the principal amount outstanding under a $2,500,000 note payable to an
unaffiliated lender.
Working Capital. As a result of the changes in current assets and
current liabilities described above, the Company's working capital decreased
$1,870,195 from working capital of $862,686 at December 31, 1995 to a working
capital deficit of $1,007,509 at December 31, 1996.
Stockholders' Equity. Stockholders' equity decreased $2,614,804 from
December 31, 1995 to December 31, 1996. The decrease is primarily due to the
Company's net loss of $10,772,410 for the year ended December 31, 1996 offset by
the issuance of Common Stock, resulting from the exercise of common stock
options and warrants, as well as private offerings to foreign private investors.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through the public and private sale of Common Stock, short-term borrowing from
private lenders, favorable credit arrangements with vendors and suppliers, the
line of credit with its commercial bank ($900,000 at December 31, 1996), and a
$2.5 million loan from an unaffiliated lender ($1.5 million at December 31,
1996).
Net cash provided by (used in) operating activities for the years ended
December 31, 1996 and 1995 was ($6,228,630) and $1,131,590, respectively. In
1996, net cash used in operating activities consisted primarily of the net loss
of $10,772,410, and an increase in accounts receivable of $1,351,230. This was
offset by an increase in accounts payable of $1,666,212, depreciation and
amortization of $681,408, the write-off of goodwill and other intangible assets
associated with the Lapis and Inline acquisitions of $1,273,000 and the
write-off of purchased research and development cost associated with the
Company's acquisition of TView of $2,000,000. In 1995, net cash provided by
operations consisted primarily of net income of $328,761, depreciation and
amortization of $900,828 resulting primarily from amortization of goodwill
relating to the Lapis acquisition and a decrease in accounts receivable of
$1,617,480. This was offset by a decrease in accounts payable of $1,071,757 and
a gain in forgiveness of accounts and notes payable of $313,651.
Net cash used in investing activities for the years ended December 31,
1996 and 1995 was $359,628 and $168,094, respectively. In 1996, cash used in
investing activities consisted primarily of the purchases of property and
equipment ($306,174) and an increase in notes receivable ($80,000). In 1995,
cash used in investing activities consisted primarily of the purchases of
property and equipment ($82,306) and intangible assets ($85,788).
Net cash from financing activities for the years ended December 31,
1996 and 1995 was $4,862,109 and $1,095,366, respectively. In 1996, the Company
received $5,158,203 in net proceeds from private offerings of Common Stock and
$957,403 from the exercise of common stock options and warrants. The Company's
proceeds provided by financing activities are offset by $1,120,000 in payments
on notes payable and $133,497 in payments under capital lease obligations. In
1995, the Company received $2,086,509 in net proceeds from private offerings of
Common Stock and $207,435 from the exercise of common stock options and
warrants. The Company's proceeds provided by financing activities in 1995 are
offset by $1,025,502 in payments on notes payable and $173,076 in payments under
capital lease obligations.
As of December 31, 1996, the Company had a working capital deficit of
$1,007,509, as compared to working capital of $862,686 at December 31, 1995, a
decrease of $1,870,195. The Company's cash position declined to $413,894 at
December 31, 1996, a decrease of $1,726,149, or 81%, over amounts at December
31, 1995.
During April 1996, the Company renegotiated the terms of the $1,000,000
line of credit with its commercial bank reducing it to $900,000. Certain
covenants were revised, and the line was collateralized by the personal
guarantee of a shareholder of the Company. As of December 31, 1996, the Company
had borrowings under its line of credit of $820,000.
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In 1996, the Company sold approximately 2,523,000 shares of its Common
Stock, for gross proceeds totaling approximately $5,721,000 (or $2.27 per
share), in connection with private offerings to foreign investors. This stock
was unregistered and subject to restrictions on trading in the United States for
a period of forty days. In connection with the offerings, the Company incurred
fees of approximately $563,000.
From its inception through December 31, 1996, the Company has incurred
approximately $20.4 million of accumulated losses. The report of the independent
accountants on the Company's financial statements as of and for the year ended
December 31, 1996 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 1997 operating plan, including the achievement of
sustained profitability, and obtaining additional sources of financing. In 1995
and 1996, 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 expanding its distribution and reseller channels, limiting inventory
levels and reducing operating costs. In 1997, the Company expects to continue to
use this business model. The Company's ability to achieve profitability in 1997
is dependent upon its securing additional contracts from OEM partners such as
Apple and Zenith, increasing revenues through its domestic and international
distributors and its reducing expenses as a percentage of net sales. The Company
does not have any significant commitments for capital expenditures. Management
anticipates that funds generated through the its present business model, and
additional funds that may be received from debt or equity financings will be
sufficient to fund operations for at least 12 months.
During 1996, the Company extended the terms of its $900,000 line of
credit with its commercial bank and its $1,500,000 line of credit with its
unaffiliated lender until March 1997. At December 31, 1996, the Company was in
violation of certain debt covenants relating to the line of credit with its
commercial bank. In March 1997, the Company received a waiver of the covenants
from the commercial bank, a revision of the loan covenants and an agreement to
extend the line until March 1998. In addition, the Company is currently
negotiating with its unaffiliated lender to extend the due date of March 1997
for the $1.5 million note payable which was in default as of the date of this
report. In the event that the unaffiliated lender does not extend the due date,
the Company would be required to pay the amounts outstanding from working
capital or from an equity or debt financing.
During January and February of 1997, the Company sold an aggregate of
293,181 shares of its Common Stock valued at approximately $476,931 in
connection with two private offerings to foreign investors. This stock is
unregistered and subject to restrictions on trading in the United States for a
period of forty days. In connection with the offerings, the Company incurred
fees of $64,431, receiving net proceeds of $412,500. In March 1997, the Company
completed a financing of approximately $1,650,000 in gross proceeds for the sale
of approximately 1,100,000 shares of Common Stock in a private placement to
unaffiliated accredited investors. The shares issued as part of this transaction
are not registered under the Securities Act of 1933, however, the Company has
agreed to register the shares within 90 days from the date of issuance. Fees and
expenses associated with this offering will be approximately $65,000 yielding
net proceeds of $1,585,000. In connection with this transaction, the Board of
Directors authorized the grant of warrants to the Placement Agent to purchase
110,000 shares of the Company's Common Stock at a price per share equal to the
common stock on the date of the closing ($1.6875 per share) exercisable for a
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period of five years. Although the Company has been successful in the past in
raising sufficient capital to fund its operations, there can be no assurance
that the Company will achieve sustained profitability or obtain sufficient
financing in the future to provide the liquidity necessary for the Company to
continue operations.
Effects of Inflation and Seasonality
The Company believes that inflation has not had a significant impact on
the Company's sales or operating results. The Company's business does not
experience substantial variations in revenues or operating income during the
year due to seasonality.
Environmental Liability
The Company has no known environmental violations or assessments.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which
is effective for financial statements issued for periods ending after December
15, 1997. Earlier application is not permitted. This Statement requires
restatement of all prior period earnings per share data presented.
In addition, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure", which is effective for financial
statements issued for periods ending after December 15, 1997.
The Company is in the process of reviewing these new standards. The
impact of their adoption has not been determined.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
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 involve risks and uncertainties. In particular, statements
contained in this Form 10-KSB which are not historical facts (including, but not
limited to, statements concerning international revenues, anticipated operating
expense levels and such expense levels relative to the Company's total revenues)
constitute forward looking statements and are made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed within this Form
10-KSB, as well as the accuracy of the Company's internal estimates of revenue
and operating expense levels.
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.
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Future Capital Needs. At December 31, 1996, the Company had a working
capital deficit of $1,007,509, cash and cash equivalents of $413,894 and was
fully drawn on its $900,000 line of credit (approximately $820,000 at December
31, 1996) with its bank and its $1.5 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. During 1996, the Company
received approximately $6,116,000 in net proceeds from the exercise of warrants,
stock options and the 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 1997, 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. 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.
Reliance on Major Customers. In the year ended December 31, 1996,
approximately 23% and 15% of the Company's revenues were derived from sales to
Zenith Electronics, Inc. ("Zenith") and Ingram Micro D, a national distributor,
respectively. Management expects that sales to Zenith and Ingram will continue
to represent a significant percentage of the Company's future revenues. In
October 1996, the Company entered into a two-year exclusive agreement with
Zenith, under which Zenith must purchase at least $12,000,000 of PC-to-TV
conversion products in 1997 and at least $30,000,000 of these products in 1998
in order to maintain exclusivity. There can be no assurances, however, that
Zenith will purchase the indicated quantities. Further, if the contract were to
be terminated by Zenith, there would be a material adverse effect to the Company
and its business.
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
twelve months ended December 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
agreed to bundle and distribute the Company's L-TV product with Apple's
"Presentation System" product offering. This agreement expired in August 1996.
In the first quarter of 1997, the Company received significant additional volume
orders from Apple for shipment in the first and second quarters of 1997. The
Company believes that in 1997, Apple will be a major customer. Although the
orders are irrevocable and non-cancelable, no assurances can be given that Apple
will take delivery on the products or continue to order products from the
Company.
History of Operating Losses. The Company has experienced limited
profitability since its inception. Although the Company reported net income of
$328,761 in the year ended December 31, 1995, the Company incurred net losses of
$3,726,606, $4,458,483 and $10,772,410 in the years ended December 31, 1993,
1994 and 1996, respectively. There can be no assurance that the Company will
return to profitability in 1997.
The Company's independent auditors have included an explanatory
paragraph in their report on the Company's financial statements for the year
ended December 31, 1996 to the effect that the Company's ability to continue as
a going concern is contingent upon its ability to secure financing and attain
profitable operations. In addition, the Company's ability to continue as a going
concern must be considered in light of the problems, expenses and complications
frequently encountered by its entrance into established markets and the
competitive environment in which the Company operates.
24
<PAGE>
Limited Availability of Capital under Credit Arrangements with Lenders.
The Company maintains a $900,000 line of credit with Silicon Valley Bank. As of
December 31, 1996, approximately $820,000 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 was extended until March 7, 1997. At December 31, 1996, the
Company was in violation of certain debt covenants relating to the line of
credit with its commercial bank. In March 1997 the Company received a waiver of
the covenants from the commercial bank, a revision of the loan covenants and an
agreement to extend the line until March 1998.
In October 1994, the Company borrowed $2,500,000 from an unaffiliated
lender to help finance its inventory and accounts receivable under its Master
Purchase Agreement with Apple. The Company issued to this unaffiliated 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 was due February
1, 1996. The term note was originally 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 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. On June 28,
1996, the Company negotiated an amendment to the term note with the lender to
extend the due date of the term note to March 31, 1997. Pursuant to the
amendment, the Company granted the lender a second security interest in all the
assets of the Company. The Company is currently negotiating an additional
extension with the lender, however, there can be no assurances that the term
note will be extended on terms favorable to the Company.
Market Acceptance. The Company's sales and marketing strategy is
targeted to sales of its PC-to-TV videographics products to the Windows, Mac OS
markets, including computer manufacturers, VGA graphic card developers and VGA
chip developers, as well as to television manufacturers. Although the Company
has to date experienced success in penetrating these markets, there can be no
assurance that the Company's marketing strategy will continue to be effective
and that current customers will continue to buy the Company's products. 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
PC-to-TV videographics and connectivity products.
Reliance on Single Vendor. At December 31, 1996, approximately 60% of
the components for the Company's products were secured and 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.
Adverse Effects of Reduced Apple Macintosh Sales. Although in the year
ended December 31, 1996, the Company increased the sales of Windows based
products as a percentage of total sales, a substantial portion of the Company's
sales to date have been derived from products designed for use on Mac OS based
personal computers, and the Company expects that sales of products for use with
Macintosh computers may represent up to 35% (including direct sales to Apple) of
its net sales in 1997. Although sales of Macintosh computers have increased from
year to year, there can be no assurance that the Macintosh operating system will
continue to be accepted as a platform for personal computer applications.
Management believes that other computer platforms, such as Windows, have gained
greater acceptance in the Company's markets as these platforms have evolved 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.
25
<PAGE>
Dependence on timely delivery of the FOCUSScan 300 Chip. The Company is
currently completing development of an ASIC called the FOCUSScan 300 Chip which
the Company expects to incorporate into all of its next generation PC-to-TV
videographics products. A significant portion of the Company's anticipated
revenues and gross margins for 1997 are dependent on the timely completion and
delivery of the FOCUSScan 300 Chip. In the event that the Chip is not available
before the end of the second calendar quarter of 1997, the Company's revenues
and profitability for 1997 could be adversely effected.
Technological Obsolescence. The Windows and Mac OS 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 make the
Company's products or proposed products obsolete or less competitive. The
Company will be required to 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.
Competition. The Windows and Mac OS markets are extremely competitive.
The Company currently competes with other developers of PC-to-TV conversion
products and expects to compete in the future with videographic integrated
circuit developers. Many of the Company's competitors 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.
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 shipment of, the Company's products, which in turn could
adversely affect its results of operations.
Protection of Proprietary Information. Although the Company has filed
two patents and expects to file one additional patent in the second quarter of
1997 with respect to its PC-to-TV videographics products, the Company does not
currently 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 upon 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.
26
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements and the related reports of
independent accountants are presented in the following pages. The consolidated
financial statements filed in this Item 7 are as follows:
Page
Reports of Independent Accountants........................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995..............F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995................................................F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1995................................................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995................................................F-7
Notes to Consolidated Financial Statements................................F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FOCUS Enhancements, Inc.
Sudbury, Massachusetts
We have audited the accompanying consolidated balance sheet of FOCUS
Enhancements, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FOCUS
Enhancements, Inc. and subsidiaries as of December 31, 1996, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
As discussed in Note 2, the Company has restated its December 31, 1996 financial
statements by writing off the balance of certain barter credits and providing
additional reserves for stock balancing return transactions.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred recurring losses
from operations resulting in an accumulated deficit and a working capital
deficiency at December 31, 1996. In addition, the Company has a note payable,
due currently, which must be refinanced. These circumstances raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
WOLF & COMPANY P.C.
Boston, Massachusetts
March 14, 1997, except for Notes 8 and 16
as to which the date is March 31, 1997 and Note 2
as to which the date is October 20, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FOCUS Enhancements, Inc.:
We have audited the accompanying consolidated balance sheet of FOCUS
Enhancements, Inc. as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FOCUS
Enhancements, Inc. as of December 31, 1995, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's losses from operations,
notes payable due currently which must be refinanced and other circumstances, as
further described in Note 1 to the consolidated financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
COOPERS & LYBRAND L.L.P
Boston, Massachusetts
April 11, 1996
F-3
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Note 8)
December 31,
1996 1995
-------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 413,894 $ 2,140,043
Accounts receivable, net of allowances of $888,605 and $296,887
at December 31, 1996 and 1995, respectively 3,213,565 1,860,592
Inventories (Note 5) 1,975,381 1,862,335
Prepaid expenses and other current assets 243,829 346,458
-------------- ---------------
Total current assets 5,846,669 6,209,428
Property and equipment, net (Note 6) 483,591 417,849
Other assets, net (Note 7) 110,001 105,379
Goodwill, net (Note 13) 1,467,106 2,227,723
-------------- ---------------
Total assets $ 7,907,367 $ 8,960,379
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Notes 8 and 9) $ 2,517,458 $ 3,637,458
Obligations under capital leases (Note 10) 124,132 133,497
Accounts payable (Notes 8 and 9) 3,584,284 1,228,860
Accrued liabilities 628,304 346,927
-------------- ---------------
Total current liabilities 6,854,178 5,346,742
Obligations under capital leases (Note 10) 80,666 26,310
-------------- ---------------
Total liabilities 6,934,844 5,373,052
-------------- ---------------
Commitments (Note 10)
Stockholders' equity (Notes 11 and 16)
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued - -
Common stock, $.01 par value; 20,000,000 shares authorized,
11,301,845 and 7,171,862 shares issued and outstanding at
December 31, 1996 and 1995, respectively. 113,018 71,719
Additional paid-in capital 21,285,037 13,168,730
Accumulated deficit (20,425,532) (9,653,122)
-------------- ---------------
Total stockholders' equity 972,523 3,587,327
-------------- ---------------
Total liabilities and stockholders' equity $ 7,907,367 $ 8,960,379
============== ===============
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
F-4
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1995
------------- -------------
Net sales (Note 14) $ 15,076,368 $ 17,099,616
Cost of goods sold 14,887,902 9,745,228
------------ ------------
Gross profit 188,466 7,354,388
------------ ------------
Operating expenses:
Sales, marketing and support 3,480,024 3,161,566
General and administrative (Note 13) 3,797,238 2,544,492
Research and development 1,339,736 1,007,513
Purchased research and development (Note 13) 2,000,000 --
------------ ------------
Total operating expenses 10,616,998 6,713,571
------------ ------------
Income (loss) from operations (10,428,532) 640,817
Interest expense, net (312,833) (606,165)
Other income(expense), net (Note 9) (14,504) 317,109
------------ ------------
Income (loss) before income taxes (10,755,869) 351,761
Income tax expense (Note 12) (16,541) (23,000)
------------ ------------
Net income (loss) $(10,772,410) $ 328,761
============ ============
Net income (loss) per common share
Primary $ (1.18) $ 0.05
============ ============
Fully Diluted $ (1.18) $ 0.04
============ ============
Weighted average common and common
equivalent shares outstanding
Primary 9,101,634 7,061,277
============ ============
Fully Diluted 9,101,634 8,173,526
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 and 1995
Common Stock
---------------------- Additional Unamortized Total
Number of Paid-in Deferred Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Equity
---------------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 4,784,708 $ 47,847 $ 11,577,889 $(88,615) $ (9,981,883) $1,555,238
Issuance of common stock upon exercise
of stock options and warrants (Note 11) 403,705 4,037 203,398 -- -- 207,435
Issuance of common stock warrants
(Notes 8 and 11) -- -- 121,000 -- -- 121,000
Issuance of common stock from private
offerings, net of issuance costs of
$316,833 (Note 11) 1,551,025 15,511 2,070,999 -- -- 2,086,510
Amortization of deferred compensation -- -- -- 88,615 -- 88,615
Issuance of common stock upon conversion
of notes payable (Note 8) 308,545 3,085 396,915 -- -- 400,000
Issuance of common stock and related
adjustment for acquisition of Lapis
Technologies, Inc. (Note 13) 123,879 1,239 (1,201,471) -- -- (1,200,232)
Net income -- -- -- -- 328,761 328,761
---------- -------- ------------ ------- ------------ -----------
Balance at December 31, 1995 7,171,862 71,719 13,168,730 -- (9,653,122) 3,587,327
Issuance of common stock upon exercise
of stock options and warrants, net of
issuance costs of $165,124 873,834 8,738 948,665 -- -- 957,403
Issuance of common stock from private
offerings, net of issuance costs of
$562,285 (Note 11) 2,523,280 25,233 5,132,970 -- -- 5,158,203
Issuance of common stock for
acquisition of TView, Inc. (Note 11) 732,869 7,328 1,992,672 -- -- 2,000,000
Issuance of common stock warrants (Note 8) -- -- 42,000 -- -- 42,000
Net loss -- -- -- -- (10,772,410) (10,772,410)
========== ======== ============ ======= ============ ===========
Balance at December 31, 1996 11,301,845 $113,018 $ 21,285,037 $ -- $(20,425,532) $ 972,523
========== ======== ============ ======= ============ ===========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,772,410) $ 328,761
Adjustments to reconcile net income (loss) to net
cash provided (used in)
operating activities:
Depreciation and amortization 681,408 900,828
Writedown of Inline and Lapis goodwill and intangibles 1,273,000 151,238
Purchased research and development 2,000,000 --
Amortization of deferred compensation -- 88,615
Amortization of warrant value 61,388 94,937
Gain on settlement of notes and accounts payable -- (313,651)
Changes in operating assets and liabilities, net of the
effects of acquisition;
(Increase) decrease in accounts receivable (1,348,930) 1,617,480
(Increase) decrease in notes receivable -- 41,555
Decrease (increase) in inventories 21,563 (180,371)
Decrease (increase) in prepaid expenses and other asset 65,988 (167,430)
Increase (decrease) in accounts payable 1,666,212 (1,071,757)
Increase (decrease) in accrued liabilities 123,151 (358,615)
------------ ------------
Net cash provided (used in) operating activities (6,228,630) 1,131,590
------------ ------------
Cash flows from investing activities:
Cash received in acquisition of TView, Inc. 26,546 --
Purchase of property and equipment (306,174) (82,306)
Increase in notes receivable (80,000) --
Purchase of intangible assets -- (85,788)
------------ ------------
Net cash used in investing activities (359,628) (168,094)
------------ ------------
Cash flows from financing activities:
Payments on notes payable (1,120,000) (1,025,502)
Payments under capital lease obligations (133,497) (173,076)
Net proceeds from private offerings of common stock 5,158,203 2,086,509
Net proceeds from exercise of common stock options and warrants 957,403 207,435
------------ ------------
Net cash provided by financing activities 4,862,109 1,095,366
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,726,149) 2,058,862
Cash and cash equivalents at beginning of year 2,140,043 81,181
------------ ------------
Cash and cash equivalents at end of year $ 413,894 $ 2,140,043
============ ============
<CAPTION>
Supplemental schedule of noncash investing and financing activities:
On September 30, 1996, the Company purchased all of the capital stock of TView, Inc. as follows:
<S> <C>
Fair value of tangible assets acquired $ 223,047
Fair value of liabilities assumed (939,071)
------------
Fair value of net assets acquired (716,024)
Purchased research and development 2,000,000
Common stock issued (2,000,000)
------------
Excess of cost over fair value of net assets acquired $ 716,024
============
Supplementary cash flow information is disclosed in Note 15.
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business of the Company
FOCUS Enhancements, Inc. (the "Company" or "FOCUS") is involved in the
development or acquisition of proprietary PC-to-TV convergence products for
Windows(TM) and Mac(TM)OS based personal computers. Since commencing operations
in 1992, the Company has experienced growth through a diversified channel and
product strategy which has allowed it to capitalize on several trends in the
personal computer marketplace. Based on a targeted product plan and its
expertise in video conversion technology, FOCUS has developed a strategy to play
a major role in the PC-to-TV convergence phenomenon now dominating the
productization efforts of major computer and consumer electronics manufacturers.
The Company's consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates continuity of
operations, realization of assets and the satisfaction of liabilities in the
normal course of business. However, for the year ended December 31, 1996, the
Company experienced a net loss of $10,772,410 and at December 31, 1996, the
Company had a working capital deficiency of $1,007,509 and an accumulated
deficit of $20,425,532. In addition, the Company has a note payable that is due
currently, which must be refinanced. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern.
The Company's continued existence is dependent upon its ability to
achieve its fiscal 1997 operating plan, including the achievement of sustained
profitability, and obtaining additional sources of financing (See Note 16). In
1997, the Company is continuing to re-define its operating model to achieve
profitability by focusing its marketing efforts on its higher-margin proprietary
products, emphasizing sales to original equipment manufacturers ("OEMs") and the
reseller channel, limiting inventory levels, and reducing operating costs as a
percentage of net sales. The Company's ability to achieve profitability in 1997
is dependent upon securing additional OEM contracts and sales commitments with
partners such as Zenith Electronics, Inc. and Apple Computer, Inc., as well as,
increasing revenues through its domestic and international distribution
channels.
Approximately 50% of the Company's revenue during the year ended
December 31, 1995 was 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 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 with Apple 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 out-sourced all
manufacturing functions to a turnkey vendor, resulting in the Company receiving
a royalty on sales. The Agreement was non-exclusive and did not obligate Apple
to purchase minimum quantities of the L-TV product and could be terminated at
any time by Apple. Orders under this Agreement in 1996 were not material to the
Company's revenues for the year as a whole. In August 1996, the Company's
two-year Master Purchase Agreement with Apple expired. Presently, there is no
master agreement in place with Apple Computer and all current purchases are
transacted through non-cancellable purchase orders. The Company 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. The Company's 1996 revenues derived from sales to Apple amounted to
approximately $1.2 million, representing 8% of net sales.
F-8
<PAGE>
Although the Company has successfully expanded its line of products for
use on the Windows platform, a substantial portion of the Company's sales to
date have been derived from products designed for the Apple Macintosh family of
personal computers, and the Company expects that such Apple related product
sales will continue to represent a substantial portion of its net sales for
1997. 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 software applications.
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 was to cease supplying the Company, management believes
that alternative turnkey manufacturers for the Company's products could be
secured. However, the Company would most likely experience short-term delays in
the shipment of its products.
The personal 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 make the Company's products or proposed
products obsolete or less competitive. Management believes it necessary to
devote substantial efforts and financial resources to enhance its existing
Windows and Macintosh products and to develop new products. There can be no
assurance that the Company will succeed with these efforts.
There can be no assurance that the Company will achieve sustained
profitability or will continue to obtain additional financing to provide the
liquidity necessary for the Company to continue its operations.
2. Restatement Of Financial Statements
The Company issued its financial statements for the year ended December
31, 1996 in its annual report on Form 10-KSB, filed with the Securities and
Exchange Commission ("SEC") on March 31, 1997. The financial statements for the
year ended December 31, 1996 included the sale in the fourth quarter of 1996 of
certain graphics/connectivity and other products to a barter exchange
organization in exchange for $1,700,000 in value of barter credits. As a result
of a review of the Company's financial statements conducted by The Nasdaq Stock
Market in August 1997, the Company concluded that its recording of the barter
credits valued at approximately $1.2 million as "Other Assets" at December 31,
1996 was inconsistent with generally accepted accounting principles. The Company
had recorded the barter credits as an asset based on the estimated fair value of
the inventory exchanged which was determined by management's interpretation and
application of the accounting literature. The Nasdaq Stock Market disagreed with
management's application of the accounting literature, and as a result, in
October 1997 the Company reduced the amount originally reported as "Other
Assets" by approximately $1.2 million on its Consolidated Balance Sheet at
December 31, 1996.
In addition, the Company has also recorded at December 31, 1996
additional reserves, totaling approximately $400,000, for potential stock
balancing and other product return transactions. Although the Company provided
allowances for potential uncollectible amounts, estimated future returns,
exchanges and price protection credits prior to the restatement, it did not
provide for returns resulting from stock balancing transactions as required by
F-9
<PAGE>
generally accepted accounting principles. As a result of the Company's
discussions with the Nasdaq Stock Market, management agreed to provide
additional reserves for estimated returns resulting from stock balancing
transactions and amended its revenue recognition accounting policy.
The accompanying restated financial statements for the year ended
December 31, 1996, reflect a $1,563,979 increase in the Company's previously
reported net loss from $9,208,431 to $10,772,410.
<TABLE>
<CAPTION>
The impact of the restatement on the Company's Consolidated Financial
Statements as of December 31, 1996 and for the year ended December 31, 1996 is
summarized as follows:
Consolidated Statement of Operations:
Year Ended
December 31, 1996
-----------------------------------------
As Reported As Restated
<S> <C> <C>
Cost of goods sold $ 13,723,923 $ 14,887,902
Gross profit 1,352,445 188,466
General and administrative 3,397,238 3,797,238
Total operating expenses 10,216,998 10,616,998
Income (loss) from operations (8,864,553) (10,428,532)
Income (loss) before income taxes (9,191,890) (10,755,869)
Net income (loss) (9,208,431) (10,772,410)
Net income (loss) per common share (1.01) (1.18)
<CAPTION>
Consolidated Balance Sheet:
December 31, 1996
-----------------------------------------
As Reported As Restated
<S> <C> <C>
Accounts receivable $ 3,613,565 $ 3,213,565
Total current assets 6,246,669 5,846,669
Other assets, net 1,273,980 110,001
Total assets 9,471,346 7,907,367
Accumulated deficit (18,861,553) (20,425,532)
Total stockholders' equity 2,536,502 972,523
Total liabilities and stockholders' equity 9,471,346 7,907,367
</TABLE>
3. Summary of Significant Accounting Policies
Basis of Presentation. The consolidated financial statements comprise
those of the Company and its wholly-owned subsidiaries; Lapis Technologies,
Inc., FOCUS Enhancements B.V. (a Netherlands corporation) and TView, Inc. All
intercompany accounts and transactions have been eliminated.
Use of Estimates. The process of preparing financial statements in
conformity with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues and expenses. Actual results may differ from estimated amounts.
Significant estimates used in preparing these financial statements related to
accounts receivable and sales allowances, inventory valuation, deferred tax
asset valuation, the recoverability of goodwill and other intangible assets
related to acquisitions and the net realizable value of barter credits. It is at
least reasonably possible that the estimates used will change within the next
year.
F-10
<PAGE>
Financial Instruments. The carrying amounts reflected in the
consolidated balance sheets for cash, receivables and accounts payable
approximate the respective fair values due to the short-term maturities of these
instruments. Notes payable consist of variable rate instruments at terms that
would be available through similar transactions with other third parties.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Revenue Recognition. Revenue from product sales, including royalties
from third party manufacturers in 1995, is recognized when products are shipped.
Revenue from sales to distributors may be subject to agreements allowing limited
rights of return and price protection. The Company provides allowances for
potential uncollectible amounts, estimated stock balancing and future returns,
exchanges and price protection credits.
Concentration of Credit Risk. As of December 31, 1996, Ingram Micro D,
a distributor, represented approximately 40% of the Company's accounts
receivable, with three other distributors or resellers and Zenith Electronics,
Inc. comprising approximately another 12% and 5%, respectively. In 1995,
approximately 50% of the accounts receivable balance was represented by four
distributors or resellers, while Apple Computer, Inc. represented an additional
13% of the balance. The Company provides credit to customers in the normal
course of business with terms generally ranging between 30 to 90 days. The
Company does not usually require collateral for trade receivables, but attempts
to limit credit risk through its customer credit evaluation process.
Inventories. Inventories are stated at the lower of cost or market
value using the first-in, first-out method, but not in excess of net realizable
value. The Company periodically reviews its inventories for potential slow
moving or obsolete items and writes down specific items to estimated net
realizable value, as appropriate.
Property and Equipment. Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the related assets as set forth below. Equipment leased under capital leases is
stated at the present value of future lease obligations and is amortized over
estimated useful lives.
Category Depreciation Period
Equipment: 3 years
Furniture and fixtures: 5 years
Leasehold improvements: Lesser of 5 years or the term of the lease
Barter Credits. The Company's barter credits may be redeemed as partial
payment toward the purchase of goods and/or services utilized by the Company.
Any benefit received from the barter credits will be recognized at the time that
they are utilized in the Company's procurement process.
Maintenance and repairs are expensed as incurred. When assets are sold
or retired, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is included in the determination of net
income.
Goodwill and Intangible Assets. Goodwill resulting from business
combinations is amortized on a straight-line basis over a seven to ten-year
period. Other intangible assets acquired through business combinations are
amortized on a straight-line basis over periods ranging from three to seven
years. The Company evaluates the net realizable value of goodwill and other
intangible assets periodically based on a number of factors including operating
results, business plans, budgets and economic projections. The Company's
evaluation also considers non-financial data such as market trends, customer
relationships, product development cycles and changes in management's market
emphasis.
Advertising and Sales Promotion Costs. Advertising and sales promotion
costs are expensed as incurred.
Research and Development. Research and development costs are expensed
as incurred.
F-11
<PAGE>
Product Warranty Costs. The Company's warranty period on sale of its
products is generally one to three years. Estimated future costs for initial
product warranties are not material.
Income Taxes. Deferred taxes are determined based on the differences
between the financial statement and tax basis carrying amounts of assets and
liabilities, using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are provided if, based
upon the weight of available evidence, it is more likely than not some or all of
the deferred tax assets will not be realized.
Foreign Currency Translation. The functional currency of the Company's
foreign subsidiary, FOCUS Enhancements, B.V., is the local currency. Financial
statements are translated into U.S. dollars using the exchange rates at each
balance sheet date for assets and liabilities and using a weighted average
exchange rate for each period for revenue, expenses, gains and losses. Foreign
exchange gains or losses are not material in any period presented.
Stock Compensation Plans. In October 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." This statement
encourages all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is measured at the
grant date based on the fair value of the award which is recognized over the
service period, which is usually the vesting period. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
whereby compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. Stock options issued under the Company's
stock option plan have no intrinsic value at the grant date, accordingly, no
compensation cost is recognized. The Company has elected to continue with the
accounting prescribed in Opinion No. 25 and, as a result, must make pro forma
disclosures of net income and earnings per share and other disclosures, as if
the fair value based method of accounting had been applied. The disclosure
requirements of this statement are effective for the Company's consolidated
financial statements for the year ended December 31, 1996. The pro forma
disclosures include the effects of all awards granted on or after January 1,
1995. (See Note 11.)
Net Income (Loss) Per Share. Net income (loss) per common share is
computed based upon the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of stock options and warrants and are computed using the treasury stock
method. In loss periods, net loss per share is computed using only the weighted
average number of common shares outstanding, as the effect of common equivalent
shares would be anti-dilutive.
4. Notes Receivable
At December 31, 1994, the Company held a $59,000 demand note from an
employee of the Company. The note bears interest at 7% per annum and was due not
later than January 5, 1997. The note was collateralized by the pledge of 17,000
shares of the Company's common stock which are owned by the employee.
During 1995, the employee resigned and entered into an independent
consulting agreement with the Company. In connection with the agreement, the
Company released the employee from the obligation to pay $41,555 of this note
and recorded compensation in the same amount in the fourth quarter of 1995. In
addition, the collateral for the note was reduced to a pledge of 5,000 shares of
the Company's common stock. At December 31, 1996 and 1995, the remaining balance
of $17,445, is included in accounts receivable. The balance of this note was not
paid off at the maturity date. The Company is in the process of negotiating the
payment of this note with the former employee.
F-12
<PAGE>
<TABLE>
<CAPTION>
5. Inventories
Inventories consist of the following at:
December 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Finished goods $1,555,812 $1,669,003
Raw materials 419,569 193,332
---------- ----------
$1,975,381 $1,862,335
========== ==========
</TABLE>
<TABLE>
<CAPTION>
6. Property and Equipment
Property and equipment consist of the following at:
December 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Equipment $1,307,477 $1,062,586
Furniture and fixtures 422,954 328,462
Leasehold improvements 147,823 44,974
Purchased software 60,815 60,185
---------- ----------
1,939,069 1,496,207
Less accumulated depreciation
and amortization 1,455,478 1,078,358
---------- ----------
Net book value $ 483,591 $ 417,849
========== ==========
</TABLE>
Depreciation and amortization expense related to property and equipment
for the years ended December 31, 1996 and 1995 totaled $377,120 and $430,983,
respectively.
7. Other Assets
Notes 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 on demand. This amount is in addition to an existing $30,000 promissory note
to the same officer. In September 1996, an officer of the Company borrowed
$40,000, as part of a relocation agreement, under a promissory note bearing
interest at 8.5% per annum and due on demand.
Intangible Assets. In May 1994, the Company acquired certain intangible
assets from Inline Software, Inc. These intangible assets, consisting of
trademarks, trade name and mailing list, were amortized in 1994 and 1995 on a
straight line basis over estimated useful lives of three to seven years. In
connection with an evaluation of related goodwill and the resulting write-down
in the fourth quarter of 1995 (see Note 13), the remaining amortization period
of these intangible assets was reduced to two years. In September 1996, the
Company wrote-off the remaining unamortized balance of approximately $59,000,
recording the charge to general and administrative expense. At December 31,
1995, the value of these assets totaled $100,647, net of accumulated
amortization of $43,865. Additions of $11,000 were recorded during 1995.
F-13
<PAGE>
In June 1993, the Company acquired from a software developer certain
technology which is used in the Company's products. The purchase price of
$119,800 was capitalized and amortized based upon unit shipments over an
estimated two-year life commencing in 1994. At December 31, 1995, the asset was
fully amortized.
8. Notes Payable/Security Arrangements
Lines of Credit, Banks. As of December 31, 1996, the Company maintained
a revolving line of credit with a bank which permitted borrowings up to
$900,000. Borrowings under the line are payable upon demand and are
collateralized by all of the assets of the Company, except as noted below.
Borrowings, aggregating $820,000 at December 31, 1996, bear interest at the
bank's prime rate plus 1% (9.25% at December 31, 1996) and are personally
guaranteed by an investor. Under the terms of the line of credit agreement, the
Company is required to comply with certain restrictive covenants and was in
violation of certain of these covenants at December 31, 1996. The Company has
received a waiver of the covenant violations from the bank and the line, which
expired in March 1997, has been extended to March 8, 1998. At December 31, 1995,
$940,000 was owed under this line of credit arrangement.
The Company has another revolving line of credit with a bank which
permitted borrowings up to $200,000 through April 1, 1995. Borrowings under the
line are payable upon demand and are collateralized by certain inventory of the
Company and marketable securities of certain affiliates. Interest is payable
monthly at 1.5% above the prime rate, as defined (9.75% at December 31, 1996).
Borrowings outstanding under the line of credit as of December 31, 1996 and 1995
were $197,458 for both years. The Company has not renewed the line.
Term Line of Credit. At December 31, 1996, the Company owed $1,500,000
to an unrelated individual under a term line of credit originated in October
1994 for $2,500,000. In connection with this line, the Company issued a
promissory note with detachable warrants to purchase 200,000 shares of
unregistered common stock at $2.00 per share. The warrants are exercisable from
April 1, 1995 to October 31, 1997. No value was ascribed to these warrants at
that time. In June 1995, in consideration for extending the line, the Company
reduced the exercise price of the warrants to $1.05 per share. The Company
valued the repriced warrant at $40,047, recording interest expense of $33,372
during the fourth quarter and deferred interest expense of $6,675, at December
31, 1995. In January 1996, the Company repaid $1,000,000 of the amount owed
under the term note. Additionally, the note was extended in June 1996 by the
lender until March 31, 1997. In consideration of the extension, the Company
granted a second security interest in all of the assets of the Company and
issued 50,000 warrants to the lender exercisable for the period of three years
at a price of $2.07 per share. The term note accrues interest at the prime rate
plus 2% (10.25% at December 31, 1996), payable quarterly in arrears. The Company
recorded an additional charge in 1996 for interest in the amount of
approximately $42,000, representing amortization of the estimated value of the
warrants over the term of the note. This note was due on March 31, 1997 and was
not paid. The Company is in the process of renegotiating the terms and
expiration date of this loan with the lender. In the event that the unaffiliated
lender does not extend the due date, the Company would be required to pay the
amounts outstanding from working capital or from an equity or debt financing.
F-14
<PAGE>
In June 1994, the Company borrowed $425,000 from four shareholders and
one unrelated individual in connection with the issuance of unsecured promissory
notes with detachable warrants. In aggregate, the warrants entitled holders to
purchase 85,000 shares of unregistered common stock at a price of $1.80 per
share. No value was ascribed to these warrants. The debt bore interest at 9% per
annum and was due on January 1, 1996. At December 31, 1995, none of the notes
remained outstanding, with $25,000 having been paid during 1995 and $400,000
having been converted into 308,545 shares of common stock at effective prices of
$1.05 and $4.38 per share.
In September and December 1994, the Company negotiated with certain
vendors to convert their trade payable balances, with an aggregate value of
$1,167,431, into subordinated unsecured promissory notes, payable monthly with
interest at prime plus 2% per annum (10.5% at December 31, 1995). At December
31, 1994, amounts totaling $992,497 were outstanding. During 1995, principal
payments of $859,502 were made, and the Company was released from the remaining
debt and interest obligations of $132,995 and $14,527, respectively. The amount
of obligations forgiven was recorded as other income in 1995.
Vendor Security Agreement. In June 1996, the Company entered into a
security agreement with its largest inventory supplier regarding certain amounts
owed by the Company to the supplier. At December 31, 1996, the outstanding
amount owed the supplier was approximately $806,000. The amounts owed the
supplier are secured by a tertiary position security interest in the Company's
assets and amounts past due bear interest at 10.25%. Interest expense on this
arrangement amounted to approximately $3,900 in the year ended December 31,
1996.
9. Other Income
During the year ended December 31, 1995, the Company recognized a total
of $313,651 of other income in connection with the release of selected
obligations and the reduction of certain accounts payable.
10. Commitments
Leases. The Company leases office facilities and certain equipment
under operating leases. Two of the facility leases have five-year terms which
expire in June 2000 and July 2001. Under the lease agreements, the Company is
obligated to pay for utilities, taxes, insurance and maintenance. Total rent
expense for the years ended December 31, 1996 and 1995 was approximately
$300,000 and $290,000, respectively.
The Company leases certain computer and office equipment under capital
leases with three-year terms. The carrying value of assets under capital leases
was $131,497 and $158,458 at December 31, 1996 and 1995, respectively, which is
net of accumulated amortization of $485,573 and $375,009. The cost and net book
value of capitalized leased assets are included in property and equipment.
F-15
<PAGE>
<TABLE>
<CAPTION>
Minimum lease commitments at December 31, 1996 are as follows;
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1996 $165,941 $321,561
1997 94,358 311,616
1998 -- 313,818
1999 -- 289,688
2000 -- 137,216
-------- --------
Total minimum lease payments 260,299 $1,373,899
==========
Less amount representing interest 55,501
--------
Present value of minimum obligations 204,798
Less current portion 124,132
--------
Non current portion $ 80,666
========
</TABLE>
Employment Agreements. The Company has employment agreements with
certain corporate officers. The agreements are generally one to three years in
length and provide for minimum salary levels. These agreements include severance
payments of approximately one to three times each officer's annual compensation.
Letter of Credit. As part of the Company's acquisition of TView, Inc.
in September 1996, the Company assumed a $125,000 irrevocable letter of credit
with a bank to secure office space in Beaverton, Oregon. At December 31, 1996,
the letter of credit had not been drawn upon.
11. Stockholders' Equity
Preferred Stock. The stockholders of the Company have authorized
3,000,000 shares of preferred stock. As of December 31, 1996, no shares of
preferred stock were issued or outstanding.
Common Stock. All common stock issued and outstanding has full voting
rights. Dividend and liquidation rights of the common stock are subordinated to
those of preferred stock. On August 18, 1995, the stockholders approved an
increase in the number of authorized shares from 10,000,000 to 16,000,000. On
March 18, 1997, the stockholders voted to increase the authorized shares of
FOCUS Enhancements, Inc. Common Stock from 16,000,000 shares to 20,000,000
shares.
During the year ended December 31, 1996, the Company sold at various
times, 2,523,280 shares of common stock receiving gross proceeds of
approximately $5,721,000 through private placements to foreign investors. This
stock was unregistered and was subject to restrictions on trading in the United
States for a period of forty days. In connection with these offerings, the
Company incurred fees of approximately $563,000. Net proceeds from these
offerings was approximately $5,158,000.
During the year ended December 31, 1996, the Company issued, at various
times, 793,029 shares of common stock resulting from the exercise of public and
private warrants, receiving gross proceeds of approximately $1,021,000.
Additionally, during the year ended December 31, 1996, stock options to purchase
80,805 shares of common stock were exercised for gross proceeds of approximately
$102,000. Net proceeds from these transactions was approximately $957,000.
F-16
<PAGE>
Effective September 30, 1996, the Company consummated the acquisition
of all the capital stock of TView, Inc. ("TView"), a Delaware corporation,
pursuant to the terms and conditions set forth in the Agreement and Plan of
Merger. In consideration for the capital stock of TView, the Company issued to
TView stockholders an aggregate of $2,000,000 in FOCUS Enhancements common
stock, $.01 par value per share, which aggregated 732,869 shares of such stock
and assumed net liabilities of approximately $716,000. The shares issued in
connection with this transaction have been placed into an escrow account until
certain performance criteria are met on TView's development and completion of
certain its ASIC chip.
From January to July 1995, the Company sold 1,308,275 shares of common
stock for gross proceeds of approximately $1,403,212 through a private offering
to foreign investors. This stock was unregistered and subject to restrictions on
trading in the United States for a period of forty days. In connection with this
offering, the Company incurred fees of $301,833 and issued to the underwriter
warrants for the purchase of 150,000 shares of common stock at a price of $1.50
per share. The warrants are exercisable until June 30, 1998. The Company has
granted piggy-back registration rights with respect to the common stock and
warrants in the event that the Company registers other common stock. Net
proceeds from these offerings was approximately $1,101,379.
In December 1995, the Company completed an additional private offering,
selling 242,750 shares of common stock for gross proceeds of $1,000,130. This
stock was unregistered and subject to restrictions on trading in the United
States for a period of nine months. The Company has granted certain demand
registration and certain piggy-back registration rights after the nine month
period from the date of issuance of the stock. In connection with the offering,
the Company paid fees of $15,000 and realized net proceeds of $985,130.
In May 1994, the Company granted a restricted stock award, consisting
of 40,000 shares of common stock with a fair-market value of $110,000, in
exchange for services of an employee of the Company. The Company amortized the
remaining $88,615 of the deferred compensation in 1995.
Warrants. In April 1996, the Company issued warrants in conjunction
with the private placement made in December 1995. The warrants granted are for
the purchase of 100,000 shares of common stock at $2.063 per share and are
exercisable for a period of 36 months from the date of the grant.
Additionally, the Company also issued warrants for the purchase of
50,000 shares of common stock in consideration of the extension of its $1.5
million term note with its unrelated lender. The warrants are exerciseable for a
period of 36 months at a price of $2.07 per share.
In April 1995, the Board of Directors authorized, and ratified on June
26, 1995, the issuance to two employees of warrants to purchase an aggregate of
500,000 shares of Series A Preferred Stock exercisable at $1.10 per share, the
fair market value as determined by the Board of Directors. In accordance with
their terms, Series A warrants were automatically exchanged for non-qualified
options to purchase an equivalent number of shares of common stock at $1.10 per
share in August 1995, when the stockholders of the Company approved an increase
in the number of shares of authorized common stock. Also in April 1995, the
Board of Directors authorized the issuance to a former legal counsel identical
warrants for the purchase of 20,000 shares of Series A Preferred Stock, which
were also automatically converted to non-qualified options in August 1995. The
Company recorded compensation expense of $3,400 in 1995 based upon the value
ascribed to these warrants.
F-17
<PAGE>
In June 1995, in consideration for the personal guarantee by an
investor for borrowings under the Company's $1 million bank line of credit and
in connection with an extension of the Company's other bank line, the Company
issued warrants for the purchase of 265,000 shares of common stock at an
exercise price of $.90 per share, exercisable until June 30, 2000. The Company
valued the warrants at $77,553, recording interest expense of $58,165 and
$19,388 in 1995 and 1996 respectively.
In June 1993, the Company completed an initial public offering of
1,655,055 units, including the underwriters' overallotment of 155,055 units,
(the "Units") at $4.25 per Unit. Each Unit consisted of one share of common
stock and one redeemable common stock purchase warrant (the "Warrant"). The
Warrant allows the holder to purchase one share of the Company's common stock at
a price of $5.75 per share during the first 30 months following the effective
date of the public offering and at a price of $6.75 per share during the
following 30 months. On November 21, 1995, the Company announced a temporary
reduction in the exercise price of each Warrant from $5.75 to $5.16. On March
15, 1996, the exercise price of each Warrant was reestablished at $6.75. The
Warrants are subject to redemption by the Company at $0.05 per Warrant, upon 30
days written notice.
In connection with the initial public offering, the Company issued a
warrant to the underwriter (the "Underwriter's Warrant") for the purchase of
150,000 units, exercisable one year after the effective date of the public
offering over a four year period, at $5.74 per unit. Each unit subject to the
Underwriter's Warrant consists of one share of common stock and one redeemable
common stock purchase warrant. The common stock purchase warrants included in
the Underwriter's Warrant are exercisable from May 24, 1995 to May 24, 1999 at
an exercise price of 135% of the per share exercise price of the Warrants (or
$7.76 and $9.11). The Underwriter's Warrant is not transferable prior to its
exercise date. The Underwriter's Warrant and the securities issuable thereunder
may not be offered for sale to the public unless registered by the Company
pursuant to certain registration rights attached thereto. The public Warrant
described above and the Underwriter's Warrant contain anti-dilution provisions
in the event of certain common stock transactions.
<TABLE>
<CAPTION>
Warrant activity since January 1, 1995 is summarized as follows:
Shares Warrant Prices
------ --------------
<S> <C> <C>
Shares under warrant at January 1, 1995 2,730,200 $0.01 - 9.11
Anti-dilution adjustment 748,304 --
Issued 1,025,000 $0.90 - 3.94
Exercised (248,009) $0.01 - 1.80
Canceled (606,784) $0.90 - 2.00
---------
Shares under warrant at December 31, 1995 3,648,711 $0.90 - 9.11
Anti-dilution adjustment 247,857 --
Issued 150,000 $2.06 - 2.07
Exercised (793,029) $0.90 - 4.00
Canceled (35,479) $1.29 - 7.76
---------
Shares under warrant at December 31, 1996 3,218,060 $0.90 - 9.11
=========
</TABLE>
F-18
<PAGE>
1992 Stock Option Plan. In 1992, the Company adopted the 1992 Stock
Option Plan (the "Plan"), which provides for the granting of incentive and
non-qualified options to purchase up to approximately 900,000 shares of common
stock. On August 18, 1995, the stockholders approved an increase in the number
of shares of common stock authorized under the Plan to 1,800,000. Incentive
stock options may be granted to employees of the Company. Non-qualified options
may be granted to employees, directors or consultants of the Company. Incentive
stock options may not be granted at a price less than 100% (110% in certain
cases) of the fair-market value of common stock at date of grant. Non-qualified
options may not be granted at a price less than 85% of fair-market value of
common stock at date of grant. As of December 31, 1996, all options under the
plan were issued at market value at date of grant, as determined by the Board of
Directors. Options generally vest annually over a three-year period and are
exercisable over a five-year period from date of grant. The term of each option
under the Plan is for a period not exceeding ten years from date of grant.
During 1996 and 1995, the Board of Directors authorized reductions in the
exercise price of certain options granted under the plan to prices reflecting
the fair market value on the repricing date.
1993 Non-Employee Director Stock Option Plan. In October 1993, the
Board of Directors adopted the 1993 Non-Employee Director Stock Option Plan (the
"1993 Director Plan"), which was approved by the stockholders on May 24, 1994.
The 1993 Director Plan offers non-qualified stock options to members of the
Board of Directors who are neither employees nor officers of the Company. The
1993 Director Plan authorized the grant of options to purchase up to an
aggregate of 125,000 shares of common stock. Each non-employee director who was
in office on October 15, 1993 received an automatic grant of an option to
purchase 25,000 shares of common stock. Each non-employee director elected
subsequent to October 15, 1993 is entitled to automatically receive an option to
purchase 25,000 shares of common stock. The exercise price per share of options
granted under the 1993 Director Plan is 100% of the market value of the common
stock of the Company on the date of grant. Options granted under the 1993
Director Plan are exercisable in installments, with one-third becoming
exercisable on each anniversary of the date of grant. In the event that an
optionee ceases to be a member of the Board of Directors for any reason other
than death or disability, any then-unexercised portion of the option will, to
the extent not then vested, immediately terminate. In the event that an optionee
ceases to be a member of the Board of Directors by reason of his or her death or
disability, any option granted to this optionee will be immediately and
automatically accelerated and become fully vested.
1995 Non-Employee Director Stock Option Plan. In August 1995, the Board
of Directors adopted the 1995 Non-Employee Director Stock Option Plan (the "1995
Director Plan"), subject to stockholder approval which was received on July 15,
1996. The 1995 Director Plan offers non-qualified stock options to members of
the Board of Directors who are neither employees nor officers of the Company.
The 1995 Director Plan authorized the grant of options to purchase up to an
aggregate of 400,000 shares of Common Stock. Each non-employee director who was
in office on August 18, 1995 received an automatic grant of an option to
purchase 100,000 shares of Common Stock. Each non-employee director elected
subsequent to November 1, 1995 is entitled to automatically receive an option to
purchase 100,000 shares of common stock. The exercise price per share of options
granted under the 1995 Director Plan is 100% of the market value of the Common
Stock of the Company on the date of grant. Options granted under the 1995
Director Plan are exercisable in installments, with one-third becoming
exercisable on each anniversary of the date of grant. In the event that an
optionee ceases to be a member of the Board of Directors for any reason other
than death or disability, any then-unexercised portion of this option will, to
the extent not then vested, immediately terminate. In the event that an optionee
ceases to be a member of the Board of Directors by reason of his or her death or
disability, any option granted to this optionee will be immediately and
automatically accelerated and become fully vested.
Non-plan Stock Options. At December 31, 1996, there were 520,000
non-plan stock options outstanding which were originally granted in April 1995
as warrants to purchase Series A Preferred Stock (See Note 11 Warrants).
F-19
<PAGE>
A summary of the status of the Company's outstanding stock options as
of December 31, 1996 and 1995, and the changes during the years then ended, is
presented below:
<TABLE>
<CAPTION>
1996 1995
----------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Fixed Options:
Outstanding at beginning of year 1,389,407 $ 2.32 872,236 $ 2.56
Granted 761,237 2.80 1,241,000 2.40
Exercised (80,805) 1.30 (155,696) .83
Canceled (306,235) 3.49 (568,133) 1.80
--------- ---------
Outstanding at end of year 1,763,604 2.57 1,389,407 2.26
========== =========
Options exercisable at year-end 790,940 1.94 406,024 1.75
========== =========
Weighted average fair value of
options granted during the year 1.14 1.08
</TABLE>
<TABLE>
<CAPTION>
Information pertaining to options outstanding at December 31, 1996 is
as follows:
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .24 - 2.00 668,854 4.1 $1.12 497,314 $1.09
$2.01 - 4.00 973,000 3.9 $2.81 286,696 3.32
$4.01 - 6.00 121,750 3.1 $4.53 6,930 6.50
---------- ----------
Outstanding at
December 31, 1996 1,763,604 3.6 $2.29 790,940 1.94
========= =========
</TABLE>
F-20
<PAGE>
Stock-based Compensation. At December 31, 1996, the Company has three
stock-based compensation plans and non-plan stock options outstanding which are
described above. The Company applies APB Opinion No. 25 and related
interpretations in accounting for the plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans. Had compensation cost for
the Company's stock-based compensation plans and non-plan stock options
outstanding been determined based on the fair value at the grant dates for
awards under those plans consistent with the method prescribed by SFAS No. 123,
the Company's Net income(loss) and Net income(loss) per share would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995
---- ----
<S> <C> <C> <C>
Net income (loss) As reported $(10,772,410) $ 328,761
Pro forma (11,144,410) (25,239)
Primary earnings (loss) per share As reported $(1.18) $0.05
Pro forma $(1.22) $0.00
Fully diluted earnings (loss) per share As reported $(1.18) $0.04
Pro forma $(1.22) $0.00
</TABLE>
Common stock equivalents have been excluded from all calculations of
loss per share in 1996 and from the calculation of pro forma loss per share in
1995 because the effect of including them would be anti-dilutive.
The fair value of each grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively; dividend yield of
0.0 percent; expected volatility of 51% and 46%, risk-free interest rates of
6.4% and 6.5% and expected lives of 5.0 and 4.3 years.
12. Income Taxes
FOCUS Enhancements, Inc., Lapis Technologies, Inc. and TView, Inc. file
a consolidated federal income tax return. Allocation of the provision for income
taxes between federal and state income taxes is as follows:
Years Ended December 31,
1996 1995
---- ----
Current:
Federal income taxes $ 8,000 $18,000
State income taxes 8,541 5,000
------- -------
16,541 23,000
Deferred federal and state income taxes -- --
------- -------
$16,541 $23,000
======= =======
F-21
<PAGE>
The differences between the provision (benefit) for income taxes from
the amounts computed by applying the statutory Federal income tax rate are as
follows:
Years Ended December 31,
1996 1995
---- ----
Computed at statutory rate (34%) $(3,657,000) $ 120,000
State income taxes, net of federal tax benefit (674,400) 17,600
Increase (decrease) in valuation allowance on
deferred tax asset 4,854,000 --
Benefit of operating loss carryforwards -- (314,000)
Other, net (506,059) 199,400
----------- -----------
$ 16,541 $ 23,000
=========== ===========
The net deferred tax asset consists of the following:
December 31,
1996 1995
---- ----
Deferred tax asset $ 9,500,000 $ 3,696,000
Deferred tax liability -- --
Valuation allowance on deferred tax asset (9,500,000) (3,696,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The tax effects of each type of income and expense item that give rise
to deferred taxes are as follows:
December 31,
1996 1995
---- ----
Net operating loss carryforward $ 6,585,000 $ 3,432,000
Income tax credit carryforward 123,000 17,000
Tax basis in excess of book basis of fixed assets 117,000 48,000
Book inventory cost less than tax basis 139,000 68,000
Reserve for bad debts not deductible for
income taxes 355,000 116,000
Tax basis in excess of book basis of other assets 465,000 --
Tax basis in subsidiaries in excess of book value 1,716,000 15,000
----------- -----------
9,500,000 3,696,000
Valuation allowance on deferred tax asset (9,500,000) (3,696,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
F-22
<PAGE>
A summary of the change in the valuation allowance on deferred tax
assets is as follows:
Years Ended December 31,
1996 1995
---- ----
Balance at beginning of year $ 3,696,000 $ 4,010,000
Increase in allowance due to loss carryforwards
of TView, Inc. at date of acquisition 950,000 --
Addition to the allowance for the benefit of net
operating loss carryforwards not recognized 4,854,000 --
Utilization of net operating loss carryforwards -- (314,000)
----------- -----------
Balance at end of year $ 9,500,000 $ 3,696,000
=========== ===========
At December 31, 1996, the Company has the following carryforwards
available for income tax purposes:
Federal net operating loss carryforwards
expiring in various amounts through 2011 $16,701,000
===========
State net operating loss carryforwards
expiring in various amounts through 2001 $16,701,000
===========
Credit for research activities $ 123,000
===========
Due to the uncertainty surrounding the realization of these favorable
tax attributes, the Company has placed a valuation allowance against its
otherwise recognizable net deferred tax assets. The net operating loss
carryforwards may be subject to annual limitations based on ownership changes in
the Company's common stock as provided in Section 382 of the Internal Revenue
Code.
13. Business Combinations
Inline Software, Inc. On May 27, 1994, the Company acquired
substantially all of the assets and assumed certain liabilities of Inline
Software, Inc. ("Inline"). In connection with the agreement, the Company
purchased inventory, computer, office and production equipment; and certain
intangible assets, including trademarks, trade names, mailing lists, and
publishing and distribution rights to selected software titles being published
and/or sold by Inline on the acquisition date. The Company agreed to assume
certain unpaid royalty and other obligations of Inline which approximated
$217,000. In addition, the Company agreed to pay Inline earn-out consideration
based on net collections derived from sales of software titles acquired from
Inline, determined as 15% of the Company's net collections for the two years
ended May 1996 and 10% of the Company's net collections for the year ended May
1997.
F-23
<PAGE>
The business combination was accounted for using the purchase method of
accounting. The total purchase price, consisting of cash consideration of
$107,000 and liabilities assumed and incurred in connection with the
acquisition, totaled approximately $374,000. The purchase price was allocated to
the assets acquired based on their fair-market values, with the excess being
allocated to goodwill. As a result of this allocation, intangible assets of
$133,500 were recorded and initially amortized over their estimated useful lives
between three and seven years using the straight-line method (see Note 7), and
goodwill of $133,500 was initially amortized over ten years using the
straight-line method. No amount of the earn-out consideration was accrued at the
acquisition date. During 1994, the Company adjusted the purchase price and
recorded additional goodwill of $46,168, based upon the earn-out provisions of
the agreement. The results of Inline have been included in the accompanying
consolidated financial statements since the date of the acquisition.
In the fourth quarter of 1995, as a result of its evaluation of the net
realizable value of intangible assets related to this acquisition, the Company
wrote-off the goodwill balance of $151,238, recording the charge in general and
administrative expense. The evaluation considered the significant reduction in
related software sales during the second half of 1995 and the reduced revenue
projection for 1996. Prior to the charge, the Company had recorded amortization
of $18,905 in 1995.
Lapis Technologies, Inc. On December 16, 1993, a wholly-owned
subsidiary of FOCUS was merged with and into Lapis Technologies, Inc. ("Lapis").
In accordance with the merger agreement, FOCUS issued 500,000 shares of its
common stock in exchange for all of the outstanding common stock of Lapis. Under
the terms of the agreement, the former Lapis shareholders were entitled to
receive a limited number of additional shares of FOCUS' common stock to bring
the total exchange value to $6.70 per share if the price of such stock failed to
trade at an average value of $6.70 per share for 30 consecutive trading days
within twenty-four months of the merger effective date. The business combination
was accounted for using the purchase method of accounting. The total guaranteed
stock value, net liabilities assumed, and merger expenses, aggregating
$3,963,438, were recognized as goodwill and were initially amortized over a ten
year term. The results of Lapis have been included in the accompanying
consolidated financial statements since the date of the merger.
From May to August 1995, the Company settled substantially all claims
by the former Lapis shareholders arising from the Company's acquisition of
Lapis. In connection therewith, the Company issued 123,879 shares of common
stock to the former Lapis shareholders, and the merger agreements were amended
to eliminate the stock value guarantee. This stock issuance was accounted for as
an adjustment to the purchase price, based on the fair market value of the
500,000 shares issued at the time of the acquisition and the fair market value
of the 123,879 shares issued in 1995. As a result, goodwill and stockholders'
equity were reduced by $1,200,232 in 1995. Negotiations are ongoing to settle
the claims of two remaining Lapis shareholders but the outcome is not expected
to be material to the Company's financial position. In addition, during 1995,
the Company recorded additional goodwill of $74,788 related to payments for
additional pre-acquisition liabilities of Lapis.
In the third quarter of 1996, as a result of its evaluation of the
recoverability of intangible assets related to this acquisition, the Company
wrote-off a portion of the goodwill in the amount of $1,214,000, recording the
charge in general and administrative expense. The evaluation considered the
Company's acquisition of TView, Inc. on September 30, 1996, the declining
Macintosh marketplace, shifting of the market to PC based products and
technological advances and projected future sales of Lapis products. At December
31, 1996 and 1995, the balance of the goodwill was $771,424 and $2,227,723 net
of accumulated amortization and write-offs of $2,227,319 and $771,024,
respectively.
F-24
<PAGE>
TView, Inc. Effective September 30, 1996, FOCUS consummated the
acquisition of all the capital stock of TView, Inc. ("TView"), a Delaware
corporation. In consideration for the capital stock of TView, the Company issued
to TView stockholders an aggregate of $2,000,000 in FOCUS Common Stock, $.01 par
value per share, which aggregated 732,869 shares of such stock and assumed net
liabilities of approximately $716,000. The shares issued in connection with this
transaction have been placed into an escrow account to ensure the attainment of
certain performance criteria of TView's ASIC chip. In addition, two former
officers and principal stockholders of TView, became Vice Presidents of the
Company and entered into one year employment agreements and two year non
competition agreements.
Each of these individuals received options to purchase 80,000 shares of
common stock under the Company's 1992 Stock Option Plan. The options, which
expire 5 years from the date of grant, were granted at $2.73 per share and vest
over a three year period.
The business combination has been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired based on their estimated fair value. This accounting treatment
resulted in approximately $716,000 of goodwill that will be amortized over its
estimated period of benefit, seven years. Approximately $2,000,000 of the
acquisition cost represented purchased research and development, which was
charged to expense at the date of acquisition. Management projects that the
Company will incur additional costs of approximately $750,000 commencing October
1, 1996 to complete the attainment of certain performance criteria of TView's
ASIC chip.
The results of operations of TView, Inc., have been included in the
accompanying consolidated financial statements since the date of the merger. The
following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and TView, Inc. as if the acquisition had
occurred at the beginning of each period presented. These results include
certain pro forma adjustments to give effect to purchased research and
development and amortization of intangibles and are not necessarily indicative
of what results would have occurred had the Company owned TView during the
periods presented.
Pro forma Results
Years Ended
December 31,
1996 1995
---- ----
Net Sales $ 17,177,000 $ 20,755,000
Loss from operations (12,820,000) (2,692,000)
Net Loss (13,018,000) (3,049,000)
Primary net loss per common share $ ( 1.35) $ (0.39)
============ ============
F-25
<PAGE>
14. Segment Information
The Company operates in one business segment: the development,
manufacturing, marketing and sale of computer enhancement devices for personal
computers and televisions. Sales to Zenith Electronics, Inc., a new customer in
1996, totaled approximately $3,472,000, or 23 % of total revenue for 1996.
Revenues from Ingram Micro D, a distributor, represented approximately
$2,287,000, or 15%, of the Company's 1996 revenues as compared to approximately
$982,000 or 6% of revenues for 1995. During fiscal 1996 sales to Apple Computer,
Inc. totaled approximately $1.2 million or 8% of net sales for the period as
compared to approximately $8.5 million, or 50% of net sales for the year ended
December 31, 1995.
In May 1995, the Company restructured its agreement with Apple whereby
it began to recognize royalty revenue rather than product sales with related
cost of goods sold, as it had in all prior transactions with Apple. For the year
ended December 31, 1995, royalty revenues recognized from Apple approximated
$5,500,000 with 100% gross margin.
Sales outside North America for the year ended December 31, 1996 were
approximately $2,393,000, principally to Europe ($1,769,000 ), Asia ($579,000)
and Latin America ($45,000). Sales outside North America for the year ended
December 31, 1995 were approximately $1,632,000, principally to Europe
($1,069,000) and Asia ($401,000).
15. Supplementary Cash Flow Information
During the years December 31, 1996 and 1995, the Company paid interest
of approximately $274,000 and $445,000, respectively. Non-cash financing and
investing activities are summarized as follows:
Years Ended December 31,
1996 1995
---- ----
Issuance of common stock for conversion of notes
payable $ -- $400,000
Issuance of common stock to settle claims for former
Lapis shareholders (Note 13) -- 337,544
Issuance of common stock warrants (Notes 8 and 11) 42,000 121,000
F-26
<PAGE>
16. Subsequent Events
In January 1997, the Company sold approximately 75,000 shares of its
common stock, valued at approximately $138,750, in connection with a private
offering to foreign investors. This stock is unregistered and subject to
restrictions on trading in the United States for a period of forty days. In
connection with the offering, the Company paid approximately $26,250 to the
underwriter. Net proceeds of the private offering were approximately $112,500.
On February 12, 1997, the Company sold approximately 218,181 shares of
common stock for gross proceeds of approximately $338,181 in connection with a
private offering to foreign investors. This stock is unregistered and subject to
restrictions on trading in the United States for a period of forty days. In
connection with the offering, the Company incurred fees of $38,181, receiving
net proceeds of $300,000.
On March 18, 1997, the stockholders voted to increase the authorized
shares of FOCUS Enhancements, Inc. common stock from 16,000,000 shares to
20,000,000 shares.
On March 27, 1997, the Company completed a financing of approximately
$1,650,000 in gross proceeds for the sale of approximately 1,100,000 shares of
Common Stock in a private placement to unaffiliated accredited investors. The
shares issued as part of this transaction are not registered under the
Securities Act of 1933, however, the Company has agreed to register the shares
within 90 days from the date of issuance. Fees and expenses associated with this
offering will be approximately $65,000 (exclusive of registration costs)
yielding net proceeds of $1,585,000. In connection with this transaction, the
Board of Directors authorized the grant of warrants to the Placement Agent to
purchase 110,000 shares of the Company's common stock at a price per share equal
to the common stock price on the date of the closing ($1.6875 per share)
exercisable for a period of five years.
F-27
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective May 14, 1996, Coopers & Lybrand L.L.P. resigned as the
independent accountants of FOCUS Enhancements, Inc. (The "Registrant").
The report of Coopers & Lybrand L.L.P. on the Registrant's financial
statements for the years ended December 31, 1994 and 1995 included an
explanatory paragraph regarding the Registrant's ability to continue as a going
concern. The foregoing notwithstanding, the report of Coopers & Lybrand L.L.P.
did not contain any other adverse opinion, a disclaimer of opinion or
qualification as to uncertainty, audit scope or accounting principles.
Except as set forth in the letter dated June 4, 1996, from Coopers &
Lybrand L.L.P. to the Securities and Exchange Commission (a copy of which was
filed as an exhibit to Form 8-K #1 dated May 14, 1996), in connection with the
audits of the Registrant's financial statements for the years ended December 31,
1994 and 1995, and during the subsequent interim period through May 14, 1996,
there were no disagreements between the Registrant and Coopers & Lybrand L.L.P.
relative to accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which, if not resolved to the satisfaction of
Coopers & Lybrand L.L.P., would have caused Coopers & Lybrand L.L.P. to make
reference to the matter in its report. None of the reportable events listed in
Item 304(a)(1)(iv)(B) of Regulation S-B occurred with respect to the Registrant
during the years ended December 31, 1994 and 1995 and the subsequent interim
period preceding the resignation of Coopers & Lybrand L.L.P.
On June 18, 1996, FOCUS Enhancements, Inc. (The "Registrant") engaged
Wolf & Company P.C. as independent accountants to audit the consolidated
financial statements of the Registrant for the year ending December 31, 1996.
The decision to engage Wolf & Company P.C. was approved by the Audit Committee
of the Registrant's Board of Directors. During the fiscal years ended December
31, 1994 and 1995, and the subsequent interim period prior to the engagement of
Wolf & Company P.C., neither the Registrant nor any person on the Registrant's
behalf consulted Wolf & Company P.C. regarding the application of accounting
principles to a specified transaction either completed or proposed, or the type
of audit opinion that might be rendered on the Registrant's consolidated
financial statements, or any matter that was the subject of a disagreement with
the previous independent accountants (as defined in paragraph 304(a)(1)(iv) of
Regulation S-K) or a reportable event (as defined in paragraph 304(a)(1)(v) of
Regulation S-K), and no written or oral advise concerning same was provided to
the Registrant that was an important factor considered by the Registrant in
making a decision as to any accounting, auditing or financial reporting issue.
27
<PAGE>
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's 1997 Annual
Meeting of Stockholders.
Item 10. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's 1997 Annual
Meeting of Stockholders.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's 1997 Annual
Meeting of Stockholders.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's 1997 Annual
Meeting of Stockholders.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits, required by Item 601 of Regulation S-B, are filed as a
part of this Annual Report on Form 10-KSB. Exhibit numbers, where applicable, in
the left column correspond to those of Item 601 of Regulation S-B.
Exhibit
Item No. Item and Description
1.4 Form of Stock Escrow Agreement (1)
2.1 Agreement of Merger, dated April 12, 1993, between FOCUS Enhancement,
Inc., a Massachusetts corporation, and the Company (1)
2.2 Certificate of Merger, as filed with the Delaware Secretary of State on
April 12, 1993 (1)
28
<PAGE>
2.3 Articles of Merger, as filed with the Massachusetts Secretary of State
on April 14, 1993 (1)
2.4 Agreement and Plan of Reorganization and Merger between the Company,
FOCUS Acquisition Corporation and Lapis Technologies, Inc. dated as of
November 29, 1993 (2)
3.1 Second Restated Certificate of Incorporation of the Company (1)
3.2 Certificate of Amendment to Second Restated Certificate of
Incorporation of the Company (3)
3.3 Restated By-laws of the Company (1)
4.1 Specimen certificate for Common Stock of the Company (1)
4.2 Specimen certificate for Redeemable Common Stock Purchase Warrant (1)
4.3 Form of Warrant Agreement between the Company, Mellon Securities Trust
Company and Thomas James Associates, Inc. (1)
4.4 Form of Warrant issued to Thomas James Associates, Inc. (1)
10.1 Amended and Restated Employment Contract between the Company and Thomas
L. Massie, effective January 1, 1992 (1)
10.2 1992 Stock Option Plan, as amended (4)
10.3 Form of Incentive Stock Option Agreement, as amended, under the 1992
Stock Option Plan, as amended (1)
10.4 Form of Non-Qualified Stock Option Agreement, as amended, under the
1992 Stock Option Plan, as amended (1)
10.5 1993 Non-Employee Director Stock Option Plan (4)
10.6 Form of Non-Qualified Stock Option Agreement under the 1993
Non-Employee Director Stock Option Plan (4)
10.7 Credit Agreement between the Company, Lapis and Silicon Valley Bank
dated January 20, 1994 (4)
10.8 Promissory Note in the principal amount of $2,000,000, dated as of
January 20, 1994, made by the Company and Lapis to the other of Silicon
Valley Bank (4)
10.9 Security Agreement, dated as of January 20, 1994, by the Company in
favor of Silicon Valley Bank (4)
29
<PAGE>
10.104 Security Agreement, dated as of January 20, 1994, by Lapis in favor of
Silicon Valley Bank (4)
10.11 Pledge Agreement, dated as of January 20, 1994, by the Company in favor
of Silicon Valley Bank (4)
10.12 Purchase and Sale Agreement, dated as of May 25, 1994, between the
Company and Inline Software, Inc. (5)
10.13 Master Purchase Agreement, dated as of August 12, 1994, between the
Company and Apple Computer, Inc. (5)
10.14 Forbearance Letter, dated as of October 6, 1994, to the Company from
Silicon Valley Bank (5)
10.15 Note and Warrant Subscription Agreement, dated as of October 18, 1994,
between the Company and Fred Kassner (5)
10.16 Security Agreement, dated as of October 18, 1994, between the Company
and Fred Kassner (5)
10.17 Term Line of Credit Note, dated October 18, 1994, by the Company in
favor of Fred Kassner (5)
10.18 Warrant W-K issued to Fred Kassner, dated as of October 18, 1995 (5)
10.19 Intercreditor and Subordination Agreement, dated as of October 18,
1994, by and between the Company, Fred Kassner and Silicon Valley Bank
(5)
10.20 Debt Extension Agreement, dated as of February 22, 1995, by and between
the Company and Fred Kassner (5)
10.21 1995 Non-Employee Director Stock Plan (7)
10.22 Form of Non-Qualified Stock Option Agreement under the 1995
Non-Employee Director Stock Plan (6)
10.23 Form of Settlement Agreement between the Company and Lapis
Technologies, Inc. Shareholders (7)
10.24 Manufacturing Agreement between the Company and Pagg Corporation (7)
10.25 Loan Document Modification Agreement dated as of April 5, 1996 by and
between the Company, Lapis Technologies, Inc. and Silicon Valley Bank
(8)
30
<PAGE>
10.26 Amended and Restated Promissory Note dated as of April 5, 1996 in favor
of Silicon Valley Bank (8)
10.27 Amendment No. 2 to the Note and Warrant Subscription Agreement dated as
of June 28, 1996 between the Company and Fred Kassner(8)
10.28 Amended and Restated Term Line of Credit Note dated as of June 28, 1996
in favor of Fred Kassner (8)
10.29 Security Agreement dated as of June 28, 1996 between the Company and
Fred Kassner (8)
10.30 Warrant W96/6, dated June 28, 1996, issued to Fred Kassner (8)
10.31 Agreement dated as of June 28, 1996 between the Company and PAGG
Corporation (8)
10.32 Security Agreement dated as of June 28, 1996 between the Company and
PAGG Corporation (8)
10.33 Amendment to Master Purchase Agreement between the Company and Zenith
Electronics, Inc. (10)
10.34 Lease Agreement between the Company and Cummings Properties for the
facility at 142 North Road, Sudbury, Massachusetts (10)
10.35 Agreement of Plan of Merger dated September 30, 1996, by and among the
Company, FOCUS Acquisition Corp., and TView, Inc. (9)
11.1 Statement re Computation of Earnings [Loss] Per Share (11)
21.1 Subsidiaries of the Company (10)
23.1 Consent of Wolf & Company P.C., Independent Accountants (11)
23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants (11)
27 Financial Data Schedule (11)
_________
1 Filed as an exhibit to the Company's Registration Statement on Form
SB-2, No. 33-60248-B, and incorporated herein by reference.
2 Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 29, 1993, and incorporated herein by reference.
31
<PAGE>
3 Filed as an exhibit to the Company's Form 10-QSB for the period ended
September 30, 1995, and incorporated herein by reference.
4 Filed as an exhibit to the Company's Form 10-KSB for the year ended
December 31, 1993 and incorporated herein by reference.
5 Filed as an exhibit to the Company's Form 10-KSB for the year ended
December 31, 1994, and incorporated herein by reference.
6 Filed as an exhibit to the Company's Registration Statement on Form
S-8, No. 33-80651, filed with the Commission on December 19, 1995, and
incorporated herein by reference.
7 Filed as an exhibit to the Company's Registration Statement on Form
SB-2, No. 33-80033, and incorporated herein by reference.
8 Filed as an exhibit to the Company's Form 10-QSB for the period ended
June 30, 1995, and incorporated herein by reference.
9 Filed as an exhibit to the Company's Form 8-K dated November 4, 1996
10 Filed as an exhibit to the Company's Form 10-KSB for the year ended
December 31, 1996.
11 Filed herewith
(b) Reports on Form 8-K
Date of Form 8-K Summary of Item
November 4, 1996 Registrant reported the acquisition of TView, Inc.
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
FOCUS ENHANCEMENTS, INC.
By: /s/ Thomas L. Massie
-----------------------------------
Thomas L. Massie,
President, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas L. Massie President, Chief Executive November 12, 1997
- ------------------------------ Officer and Director (Principal
Thomas L. Massie Executive Officer)
/s/ Harry G. Mitchell Sr. Vice President, November 12, 1997
- ------------------------------ Chief Financial Officer and
Harry G. Mitchell Treasurer, (Principal Financial
and Accounting Officer)
/s/ John Cavalier Director November 12, 1997
- ------------------------------
John Cavalier
/s/ William Coldrick Director November 12, 1997
- ------------------------------
William Coldrick
/s/ U. Haskell Crocker II Director November 12, 1997
- ------------------------------
U. Haskell Crocker II
/s/ Timothy Mahoney Director November 12, 1997
- ------------------------------
Timothy Mahoney
</TABLE>
33
EXHIBIT 11
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
Years Ended December 31,
1996 1995
------------ ------------
<S> <C> <C>
Net income (loss) $(10,772,410) $ 328,761
============ ============
Primary:
Weighted average number of common shares outstanding 9,101,634 6,083,881
Weighted average common equivalent shares 977,396
------------ ------------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 9,101,634 7,061,277
============ ============
Fully diluted:
Weighted average number of common shares outstanding 9,101,634 6,083,881
Weighted average common equivalent shares 2,089,645
------------ ------------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 9,101,634 8,173,526
============ ============
Net income (loss) per share
Primary $ (1.18) $ 0.05
============ ============
Fully diluted $ (1.18) $ 0.04
============ ============
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
FOCUS Enhancements, Inc. on Form S-8 (Nos. 33-80498, 33-80651 and 333-33243) and
on Form S-3 (No. 333-26911) of our report, which included an explanatory
paragraph about the Company's ability to continue as a going concern, dated
March 14, 1997, (except for Notes 8 and 16 as to which the date is March 31,
1997 and Note 2 as to which the date is October 20, 1997), on our audit of the
consolidated financial statements of FOCUS Enhancements, Inc. as of December 31,
1996 and for the year ended, which report is included in this Annual Report on
Form 10-KSB/A-1.
WOLF & COMPANY, P.C.
Boston, Massachusetts
November 12, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
FOCUS Enhancements, Inc. on Form S-8 (Nos. 33-80498, 33-80651 and 333-33243) and
on Form S-3 (No. 333-26911) of our report, which included an explanatory
paragraph related to the Company's ability to continue as a going concern, dated
April 11, 1996, on our audit of the consolidated financial statements of FOCUS
Enhancements, Inc. as of December 31, 1995 and for the year then ended, which
report is included in this Annual Report on Form 10-KSB/A-1.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
November 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 413,894
<SECURITIES> 0
<RECEIVABLES> 4,102,170
<ALLOWANCES> 888,605
<INVENTORY> 1,975,381
<CURRENT-ASSETS> 5,846,669
<PP&E> 1,939,069
<DEPRECIATION> 1,455,478
<TOTAL-ASSETS> 7,907,367
<CURRENT-LIABILITIES> 6,854,178
<BONDS> 0
0
0
<COMMON> 113,018
<OTHER-SE> 859,505
<TOTAL-LIABILITY-AND-EQUITY> 7,907,367
<SALES> 15,076,368
<TOTAL-REVENUES> 15,076,368
<CGS> 14,887,902
<TOTAL-COSTS> 10,616,998
<OTHER-EXPENSES> 14,504
<LOSS-PROVISION> 888,605
<INTEREST-EXPENSE> 312,833
<INCOME-PRETAX> (10,755,869)
<INCOME-TAX> 16,541
<INCOME-CONTINUING> (10,772,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,772,410)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
