FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-11860
FOCUS ENHANCEMENTS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 04-3186320
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
142 NORTH ROAD
SUDBURY, MA 01776
(Address of principal executive offices)
(508) 371 - 2000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of March 31, 1997, there were outstanding 12,714,625 shares of Common Stock,
$.01 par value per share.
FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
March 31, 1997
TABLE OF CONTENTS
PAGE
FACING PAGE 1
TABLE OF CONTENTS 2
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 2. Changes in Securities 19
ITEM 3. Defaults Upon Senior Securities 19
ITEM 4 Submission of Matters to a Vote of Security Holders 19
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
Exhibit 11 - Statement Re: Computation of Per Share Earnings 22
2
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1997 1996
--------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,300,717 $ 413,894
Accounts receivable, net of allowance of $340,833 and $488,605
at March 31, 1997 and December 31, 1996, respectively 5,621,438 3,613,565
Inventories 1,751,294 1,975,381
Prepaid expenses and other current assets 252,121 243,829
--------------- ----------------
Total current assets 8,925,570 6,246,669
Property and equipment, net 679,329 483,591
Other assets, net 1,300,993 1,273,980
Goodwill, net 1,413,855 1,467,106
--------------- ----------------
Total assets $ 12,319,747 $ 9,471,346
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,497,458 $ 2,517,458
Obligations under capital leases 124,132 124,132
Accounts payable 4,422,051 3,584,284
Accrued liabilities 626,109 628,304
--------------- ----------------
Total current liabilities 7,669,750 6,854,178
Obligations under capital leases 74,847 80,666
--------------- ----------------
Total liabilities 7,744,597 6,934,844
--------------- ----------------
Stockholders' equity
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued - -
Common stock, $.01 par value; 20,000,000 shares authorized,
12,714,625 and 11,301,845 shares issued and outstanding at
March 31, 1997 and December 31,1996, respectively. 127,146 113,018
Additional paid-in capital 23,293,081 21,285,037
Accumulated deficit (18,845,077) (18,861,553)
--------------- ----------------
Total stockholders' equity 4,575,150 2,536,502
--------------- ----------------
Total liabilities and stockholders' equity $ 12,319,747 $ 9,471,346
=============== ================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
3
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
---------------------- ------------------
<S> <C> <C>
Net Sales $ 4,801,550 $ 3,801,879
Cost of goods sold 3,267,841 5,125,810
---------------------- ------------------
Gross profit (loss) 1,533,709 (1,323,931)
---------------------- ------------------
Operating expenses:
Sales, marketing and support 952,964 1,147,129
General and administrative 385,092 768,354
Research and development 179,402 283,252
---------------------- ------------------
Total operating expenses 1,517,458 2,198,735
---------------------- ------------------
Income (loss) from operations 16,251 (3,522,666)
Interest expense, net (67,240) (104,374)
Other income (expense) 69,015 (10,311)
---------------------- ------------------
Income (loss) before income taxes 18,026 (3,637,351)
Income tax expense 1,550 7,500
---------------------- ------------------
Net income (loss) $ 16,476 $ (3,644,851)
====================== ==================
Net income (loss) per common share
Primary $ 0 $ (0.49)
====================== ==================
Fully Diluted $ 0 $ (0.49)
====================== ==================
Weighted average common and common
equivalent shares outstanding
Primary 12,158,128 7,382,665
====================== ==================
Fully Diluted 12,158,128 7,382,665
====================== ==================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
4
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
---------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 16,476 $ (3,644,851)
Adjustments to reconcile net income (loss) to net cash provided (used in)
operating activities:
Depreciation and amortization 92,319 204,324
Gain on forgiveness of accounts payable (71,304) -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,007,873) (1,739,646)
(Increase) decrease in notes receivable - (40,000)
Decrease (increase) in inventories 224,087 95,632
Decrease (increase) in prepaid expenses and other assets (35,305) 123,393
Increase (decrease) in accounts payable 909,071 994,310
Increase (decrease) in accrued liabilities (2,195) 2,132,533
---------------- -------------------
Net cash provided (used in) operating activities (874,724) (1,874,305)
---------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (234,806) (35,772)
---------------- -------------------
Net cash used in investing activities (234,806) (35,772)
---------------- -------------------
Cash flows from financing activities:
Payments on notes payable (20,000) (1,030,000)
Payments under capital lease obligations (5,819) (44,070)
Net proceeds from private offerings of common stock 1,996,813 890,357
Net proceeds from exercise of common stock options and warrants 25,359 960,215
---------------- -------------------
Net cash provided by financing activities 1,996,353 776,502
---------------- -------------------
Net increase (decrease) in cash and cash equivalents 886,823 (1,133,575)
Cash and cash equivalents at beginning of period 413,894 2,140,043
---------------- -------------------
Cash and cash equivalents at end of period $ 1,300,717 $ 1,006,468
================ ===================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
5
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of FOCUS Enhancements, Inc. ("the
Company") as of March 31, 1997 and for the three month periods ended March 31,
1997 and 1996 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1996 included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries Lapis Technologies,
Inc., TView, Inc. and FOCUS Enhancements b.v. In the opinion of management, the
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
of the interim periods. The results of operations for the three month period
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for any future period.
2. NET INCOME (LOSS) PER SHARE
Per share amounts are calculated using the weighted average number of
common shares and common share equivalents outstanding during periods of net
income. Common share equivalents are attributable to unexercised stock options
and warrants and are computed using the treasury stock method. Per share amounts
are calculated using only the weighted average number of common shares
outstanding during periods of net loss.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 - Earnings Per Share. This Statement
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. However, an
entity is permitted to disclose pro forma earnings per share (EPS) amounts
computed using this Statement in the notes to the financial statements in
periods prior to required adoption. After the effective date, all prior period
EPS data presented shall be restated to conform with the provisions of this
Statement.
The Company has elected to disclose pro forma EPS amounts computed using
this Statement, as follows:
Three Months Ended March 31,
---------------------------------------------------------------
1997 1996
---- ----
Shares Per Share Shares Per Share Amount
Amount
Basic EPS 11,530,607 $0.00 7,382,665 $ (0.49)
========== ===== ========= ========
Diluted EPS 12,158,128 $0.00 7,382,665 $ (0.49)
========== ===== ========= ========
6
3. INVENTORIES
Inventories consist of the following:
March 31, December 31,
1997 1996
---- ----
Finished goods $1,165,195 $ 1,555,812
Raw materials 586,099 419,569
------------------- -------------------
$1,751,294 $ 1,975,381
=================== ===================
4. NOTES PAYABLE
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
$800,000 at March 31, 1997, bear interest at the bank's prime rate plus 1% (9.5%
at March 31, 1997) 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.
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 (10.00% at March 31, 1997).
Borrowings outstanding under the line of credit as of March 31, 1997 were
$197,458. The Company has not renewed the line.
Term Line of Credit. At March 31, 1997, 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. In January
7
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% (10.5% at March 31,
1997), payable quarterly in arrears. The Company recorded an additional charge
in 1996 for interest in the amount of approximately $42,000. 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.
5. COMMON STOCK TRANSACTIONS
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 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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain "forward looking"
information that involves risks and uncertainties. In particular, statements
contained in this Form 10-QSB which are not historical facts constitute forward
looking statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Each forward looking statement should
be read in conjunction with the consolidated financial statements and notes
thereto in Part I, Item 1, of this Quarterly Report and with the information
contained in Item 2, including, but not limited to, "Certain Factors That May
Affect Future Results" contained herein, together with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, including, but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Three-Month Period Ended March 31, 1997 As Compared
With The Three-Month Period Ended March 31, 1996
NET SALES
Net sales for the three-month period ended March 31, 1997 (Q1 97) were
$4,801,550 as compared with $3,801,879 for the three-month period ended March
31, 1996 (Q1 96), an increase of $999,671 or 26.3%. The growth in net sales is
attributed to orders from new customers and increased product awareness and
acceptance of the Company's PC to TV products. Specifically, net sales in Q1 97
to the Company's US resellers increased 57% to $2,899,000 from $1,843,000 in Q1
96. Net sales to international resellers rose 55% to $770,000 from $496,000 for
the same quarter in 1996. Net sales from OEM/Licensing customers decreased 23%
to $1,133,000 in Q1 97 from $1,463,000 for the same quarter in 1996. This
decrease reflects primarily the reduction of OEM sales to Apple Computer. During
Q1 97, net sales to Apple represented 15% of the Company's revenues as compared
to 24% of revenues during the comparable quarter in 1996.
9
During the quarter ended March 31, 1996, the Company recognized OEM
royalty revenues from Apple of approximately $317,000, or 8% of net sales, with
100% gross margins. If the Company had recognized Apple revenue on a product
sale rather than a royalty basis in Q1 96, net sales on a proforma basis would
have been approximately $4,927,000, slightly greater than the Company's actual
net sales during Q1 97.
As of March 31, 1997, the Company had a sales order backlog of
approximately $2.0 million.
COST OF GOODS SOLD
Cost of goods sold were $3,267,841 or 68% of net sales, for the
three-month period ended March 31, 1997, as compared with $5,125,810 or 135% of
net sales, for the three month period ended March 31, 1996, a decrease of
$(1,857,969) or (36.2)%. The decrease in cost of goods sold was primarily due to
the write down of $2.2 million of inventory in Q1 96 related to the Company's
graphics/connectivity products for Apple Computer's Powerbook 190 and 5300
products. Excluding this write-down, the proforma cost of goods sold for Q1 96
would have been approximately $2.9 million or 76% of net sales. This decrease in
cost of goods sold as a percentage of net sales for Q1 97 is primarily due to
the product sales mix of PC-to-TV video products versus sales of networking
products which have lower margins.
SALES, MARKETING AND SUPPORT EXPENSES
Sales, marketing and support expenses were $952,964 or 20% of net
sales, for the three-month period ended March 31, 1997, as compared with
$1,147,129, or 30% of net sales, for the three-month period ended March 31,
1996, a decrease of $(194,165) or (16.9)%. The decrease is due primarily to the
combination of cost control measures adopted by management for Q1 97, reduction
in direct display advertising, mail order promotional expenditures, and reduced
sales department salaries. These reductions were offset by the increase in costs
for the Company's technical support / customer service department.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month period ended
March 31, 1997 were $385,092 or 8% of net sales, as compared with $768,354, or
20% of net sales for the three-month period ended March 31, 1996, a decrease of
$(383,262) or (49.9)%. The decrease is due primarily to the lower personnel
related costs of approximately $100,000, a decrease in administrative costs of
$104,000, and a reduction in facility expenses of $42,000. In addition, the
amortization of goodwill was approximately $111,000 lower in Q1 97 due to the
write down in 1996 of certain intangible costs related to the Lapis acquisition.
RESEARCH AND DEVELOPMENT EXPENSES
10
Research and development expenses for the three-month period ended
March 31, 1997 were $179,402, or 4% of net sales, as compared to $283,252, or 7%
of net sales, for three-month period ended March 31, 1996, a decrease of
$(103,850) or (36.7)%. The decrease is due principally to a reduction in
consulting expenses of $18,000, R & D facility expenses of $33,000 and other net
reductions in company wide engineering costs. During Q1 97, FOCUS completed the
majority of development efforts for an ASIC relating to the Company's PC-to-TV
products. The engineering in-process costs to manufacture the ASIC masks during
Q1 97, amounting to approximately $156,000 have been capitalized as a fixed
asset and will be amortized over the expected life of the ASIC technology
licensing and product sales, expected to commence in the third quarter of 1997.
INTEREST EXPENSE, NET
Net interest expense for the three-month period ended March 31, 1997
was $(67,240), or 1.4% of net sales, as compared to $(104,374), or 2.7% of net
sales, for the three-month period ended March 31, 1996, a decrease of $37,134,
or (35.6)%. Interest expense decreased in absolute dollars due to the reduction
in the principal amount outstanding of a note payable to an unrelated investor
from $2.5 million to $1.5 million during Q1 96, and due to the reduction of the
Company's line of credit from $910,000 at March 31, 1996 to $800,000 as of March
31, 1997.
OTHER INCOME (EXPENSE)
For the three month period ended March 31, 1997, the Company realized
other income of $69,015 in connection with the settlement of certain accounts
payable obligations. For the three month period ended March 31, 1996, the
Company incurred other expense of $(10,311).
NET INCOME (LOSS)
For the quarter ended March 31, 1997, the Company reported net income
of $16,476, or $0.00 per share, as compared to a net loss of $(3,644,851), or
$(0.49) per share, for the quarter ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three month periods ended
March 31, 1997 and 1996 was ($874,724) and ($1,874,305), respectively. In Q1 97,
net cash used in operating activities consisted primarily of an increase in
accounts receivable of $2,007,873. This was offset by an increase in accounts
payable of $909,071, a decrease in inventories of $224,087, depreciation and
amortization of $92,319, and net income of $16,476. For Q1 96, net cash used in
operations was $1,874,305 consisting primarily of a net loss of $3,644,851 and
an increase in accounts receivable of $1,739,646. These uses were partially
offset by increased accounts payable and accrued liabilities totaling $3,126,843
as well as depreciation and amortization of $204,324.
11
Net cash used in investing activities for the three month periods ended
March 31, 1997 and 1996 was $234,806 and $35,772, respectively. In Q1 97 and Q1
96, cash used in investing activities was expended for the purchase of property
and equipment.
Net cash from financing activities for the three month periods ended
March 31, 1997 and 1996 was $1,996,353 and $776,052, respectively. In Q1 97, the
Company received $1,996,813 in net proceeds from private offerings of Common
Stock and $25,359 from the exercise of common stock options and warrants. The
Company's financing proceeds were offset by payments on notes payable and
capital lease obligations. In Q1 96, the Company received $890,357 in net
proceeds from private offerings of Common Stock and $960,215 from the exercise
of common stock options and warrants. The Q1 96 financing proceeds were offset
by $1,074,070 in payments on notes payable and capital lease obligations.
As of March 31, 1997, the Company had working capital of $1,255,820, as
compared to a working capital deficiency of $(607,509) at December 31, 1996, an
increase of $1,863,329. The Company's cash position increased to $1,300,717 at
March 31, 1997, an increase of $886,823, or 214%, over amounts at December 31,
1996.
On January 15, 1997, the Company sold approximately 75,000 shares of its
Common Stock for gross proceeds of 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 27, 1997, the Company completed a financing of $1,650,000 in
gross proceeds for the sale of 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 were 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 closing bid price of the Common Stock on the date
of the closing ($1.6875 per share) exercisable for a 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.
12
From its inception through March 31, 1997, the Company has incurred
approximately $18.8 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 included 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 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 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 March 1997 due date 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.
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.
13
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discussion of the Company's risk factors should be read
in conjunction with the financial statements and related notes thereto. The
following factors, among others, could cause actual results to differ materially
from those contained in forward looking statements contained or incorporated by
reference in this report and presented by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
Future Capital Needs. At March 31, 1997, the Company had working capital of
$1,255,820, cash and cash equivalents of $1,300,717 and was fully drawn on its
$900,000 line of credit (approximately $800,000 at March 31, 1997) 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. 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. During the three month period ended March
31, 1997 the Company received approximately $1,997,000 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. For the three months ended March 31, 1997, approximately 29% of
the Company's revenues were derived from sales to Ingram Micro D, a national
distributor, and approximately 8% were derived from sales to Zenith Electronics,
Inc. 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.
14
In the year ended December 31, 1996 and for the three months ended March
31, 1997, approximately 8% and 15%, respectively, of the Company's net sales
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 $9,208,431 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.
Limited Availability of Capital under Credit Arrangements with Lenders.
The Company maintains a $900,000 line of credit with Silicon Valley Bank. As of
March 31, 1997, approximately $800,000 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,
raw materials, work-in-process inventories, 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
15
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. In the three months ended March 31, 1997,
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.
Dependence on Timely Delivery of the FOCUS Scan 300 Chip. The Company
is currently completing development of an ASIC called the FOCUS Scan 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 FOCUS Scan 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.
16
Technological Obsolescence. The Windows and MAC OS markets are
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
17
qualified personnel, there can be no assurance that the Company will be
successful in attracting and retaining such personnel in the future.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings, other than
routine litigation that is incidental to the business, which would have a
material adverse effect on the Company's financial position or results of
operation for the three month period ended March 31, 1997.
ITEM 2. CHANGES IN SECURITIES
No instruments defining the rights of the holders of any class of
registered securities have been materially modified nor have the rights
evidenced by any class of registered securities been materially limited or
qualified by the issuance or modification of any other class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In October 1994, the Company borrowed $2,500,000 from an unrelated lender
under a term note due February 1, 1996. The term note accrues interest at the
prime rate plus 2%, payable quarterly in arrears, and is collateralized by a
second security interest in all the assets of the Company. At March 31, 1997,
the Company owed $1,500,000 to the lender under the term 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
On February 18, 1997, the Board of Directors caused to be distributed
to stockholders of record as of February 14, 1997, a Notice of Special Meeting
of Stockholders, Proxy and Proxy Statement for a Special Meeting held on March
18, 1997. As of the record date, 11,366,303 of Common Stock (excluding treasury
shares) were entitled to vote.
At the meeting, the stockholders acted upon a proposal to approve
an amendment to the Company's Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 16,000,000 to 20,000,000
shares.
Votes "For" represent affirmative votes and do not represent abstentions or
broker non-votes. In cases where a signed proxy was submitted without direction,
the shares represented by the proxy were voted "For" each proposal in the manner
disclosed in the Proxy Statement and Proxy.
The voting results were as follows:
For Against Abstain
--- ------- -------
8,751,422 212,968 39,100
19
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
11 - Statement Re: Computation of Per Share Earnings
b. Reports on Form 8-K
During the quarter covered by this report, the following reports on
FORM 8-K were filed:
Date of Form 8-K Summary of Item
- ---------------- ---------------
January 6, 1997 In accordance with Regulation S-B, Item 3.10,
Registrant filed an amendment to the Form 8-K
dated November 4, 1996 that included the
financial statements of TView, Inc. which was
acquired in October 1996, together with the
proforma financial information showing the
combined financial statements of the Company and
TView.
January 15, 1997 Registrant reported the sale of 449,444 shares
of its Common Stock pursuant to Regulation S to
three non-US entities.
March 3, 1997 Registrant reported the sale of 218,181 shares
of its Common Stock pursuant to Regulation S to
one non-US entity.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOCUS ENHANCEMENTS, INC.
May 15, 1997 By: /s/ Thomas L. Massie
----------------------------------------
Thomas L. Massie
President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
May 15, 1997 By: /s/ Harry G. Mitchell
-------------------------------------
Harry G. Mitchell
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
21
EXHIBIT 11
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
1997 1996
-------------------- ---------------------
<S> <C> <C>
Net income (loss) $ 16,476 $ (3,644,851)
==================== =====================
Primary:
Weighted average number of common shares outstanding 11,530,607 7,382,665
Weighted average common equivalent shares 627,521 -
-------------------- ---------------------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 12,158,128 7,382,665
==================== =====================
Fully diluted:
Weighted average number of common shares outstanding 11,530,607 7,382,665
Weighted average common equivalent shares 570,220 -
-------------------- ---------------------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 12,100,827 7,382,665
==================== =====================
Net income (loss) per share
Primary $ 0.00 $ (0.49)
==================== =====================
Fully diluted $ 0.00 $ (0.49)
==================== =====================
The accompanying notes are an integral part of the consolidated financial
statements.
22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,300,717
<SECURITIES> 0
<RECEIVABLES> 5,962,271
<ALLOWANCES> 340,833
<INVENTORY> 1,751,294
<CURRENT-ASSETS> 8,925,570
<PP&E> 2,173,874
<DEPRECIATION> 1,494,545
<TOTAL-ASSETS> 12,319,747
<CURRENT-LIABILITIES> 7,669,750
<BONDS> 0
0
0
<COMMON> 127,146
<OTHER-SE> 4,448,004
<TOTAL-LIABILITY-AND-EQUITY> 4,575,150
<SALES> 4,801,550
<TOTAL-REVENUES> 4,801,550
<CGS> 3,267,841
<TOTAL-COSTS> 1,517,458
<OTHER-EXPENSES> (69,015)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,240
<INCOME-PRETAX> 18,026
<INCOME-TAX> 1,550
<INCOME-CONTINUING> 16,476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,476
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
