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: September 30, 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 September 30, 1997, there were outstanding 13,816,516 shares of Common
Stock, $.01 par value per share.
<PAGE>
FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
September 30, 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 September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations
for the Three Months Ended September 30, 1997
and 1996 4
Consolidated Statement of Operations
for the Nine Months Ended September 30, 1997
and 1996 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997
and 1996 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,492,705 $ 413,894
Securities - Available for Sale 595,000 --
Accounts receivable, net of allowances of $802,494 and $488,605 7,728,398 3,213,565
Inventories 2,582,754 1,975,381
Prepaid expenses and other current assets 415,245 243,829
------------ ------------
Total current assets 13,814,102 5,846,669
Property and equipment, net 970,493 483,591
Other assets, net 154,982 110,001
Goodwill, net 1,304,089 1,467,106
------------ ------------
Total assets $ 16,243,666 $ 7,907,367
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,249,122 $ 2,517,458
Obligations under capital leases 136,718 124,132
Accounts payable 5,225,828 3,584,284
Accrued liabilities 1,042,092 628,304
------------ ------------
Total current liabilities 8,653,760 6,854,178
Deferred Income 84,212 --
Obligations under capital leases 87,908 80,666
------------ ------------
Total liabilities 8,825,880 6,934,844
------------ ------------
Commitments
Stockholders' equity
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued
Common stock, $.01 par value; 25,000,000 shares authorized,
13,816,516 and 11,301,845 shares issued and outstanding at
September 30, 1997 and December 31, 1996 respectively 138,165 113,018
Additional paid-in capital 27,043,064 21,285,037
Accumulated deficit (19,763,443) (20,425,532)
------------ ------------
Total stockholders' equity 7,417,786 972,523
------------ ------------
Total liabilities and stockholders' equity $ 16,243,666 $ 7,907,367
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30, September 30,
1997 1996
------------ -------------
Net sales $ 6,913,013 $ 3,327,228
Cost of goods sold 4,764,299 3,479,135
----------- -----------
Gross profit (loss) 2,148,714 (151,907)
----------- -----------
Operating expenses:
Sales, marketing and support 1,147,392 940,860
General and administrative 525,361 1,960,508
Research and development 331,318 532,319
Purchased research and development -- 2,000,000
----------- -----------
Total operating expenses 2,004,071 5,433,687
----------- -----------
Income (loss) from operations 144,643 (5,585,594)
Interest expense, net (72,466) (65,504)
Other income (expense) 351,279 --
----------- -----------
Income before income taxes 423,456 (5,651,098)
Income tax expense 9,550 6,541
----------- -----------
Net income (loss) $ 413,906 $(5,657,639)
=========== ===========
Net income (loss) per common share
Primary $ 0.03 $ (0.60)
=========== ===========
Fully Diluted $ 0.03 $ (0.60)
=========== ===========
Weighted average common and common
equivalent shares outstanding
Primary 14,582,324 9,476,462
=========== ===========
Fully Diluted 15,172,554 9,476,462
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
4
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
Sept 30, Sept 30,
1997 1996
------------ ------------
Net sales $ 17,839,430 $ 11,498,362
Cost of goods sold 12,089,949 11,193,421
------------ ------------
Gross profit 5,749,481 304,941
------------ ------------
Operating expenses:
Sales, marketing and support 3,112,609 2,917,645
General and administrative 1,384,928 3,192,833
Research and development 763,156 1,150,260
Purchased research and development -- 2,000,000
------------ ------------
Total operating expenses 5,260,693 9,260,738
------------ ------------
Income (loss) from operations 488,788 (8,955,797)
Interest expense, net (209,109) (235,607)
Other income (expense) 395,110 (12,792)
------------ ------------
Income (loss) before income taxes 674,789 (9,204,196)
Income tax expense 12,700 16,541
------------ ------------
Net income (loss) $ 662,089 $ (9,220,737)
============ ============
Net income (loss) per common share
Primary $ 0.05 $ (1.09)
============ ============
Fully Diluted $ 0.05 $ (1.09)
============ ============
Weighted average common and common
equivalent shares outstanding
Primary 12,787,591 8,477,011
============ ============
Fully Diluted 13,031,965 8,477,011
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
5
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 662,089 $(9,220,737)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 301,267 1,747,824
Purchased research and development -- 2,000,000
Gain on forgiveness of accounts payable (125,427) --
Deferred Income 84,212 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (4,514,833) (2,997,584)
(Increase) decrease in notes receivable -- (37,957)
(Increase) decrease in marketable securities (595,000) --
Decrease (increase) in inventories (607,373) 108,950
Decrease (increase) in prepaid expenses and other assets (217,546) 109,361
Increase (decrease) in accounts payable 1,766,971 1,697,341
Increase (decrease) in accrued liabilities 413,788 1,025,616
----------- -----------
Net cash used in operating activities (2,831,852) (5,567,186)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (534,932) (78,207)
Net proceeds from sale of fixed assets 800 --
Net proceeds from acquisition of TView, Inc. -- 27,248
----------- -----------
Net cash used in investing activities (534,132) (50,959)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (268,336) (1,090,000)
Payments under capital lease obligations (70,043) (117,986)
Net proceeds from private offerings of common stock 5,650,099 4,363,538
Net proceeds from exercise of common stock options and warrants 133,075 994,766
----------- -----------
Net cash provided by financing activities 5,444,795 4,150,318
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,078,811 (1,467,827)
Cash and cash equivalents at beginning of period 413,894 2,140,043
----------- -----------
Cash and cash equivalents at end of period $ 2,492,705 $ 672,216
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
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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 September 30, 1997 and for the three and nine month periods
ended September 30, 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., FOCUS Enhancements b. v. and Focus
Networking, Inc. 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 and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for any future period.
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 barter
credits totaling 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 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 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 impact of the restatement on the Company's Consolidated Balance
Sheet as of December 31, 1996 is summarized as follows:
Year Ended December 31, 1996
-------------------------------
As As
Reported Restated
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
3. ACCOUNTING POLICY
Securities-Available For Sale
Securities-available for sale consist of shares of common stock carried
at fair value, with unrealized gains and losses reported as a separate component
of stockholders' equity.
7
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4. 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:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------------------
1997 1996
---- ----
Shares Per Share Shares Per Share
Amount Amount
<S> <C> <C> <C> <C>
Basic EPS 14,582,324 $.03 9,476,462 $(.60)
========== ==== ========= =====
Diluted EPS 15,172,554 $.03 9,476,462 $(.60)
========== ==== ========= =====
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------------
1997 1996
---- ----
Shares Per Share Shares Per Share
Amount Amount
<S> <C> <C> <C> <C>
Basic EPS 12,787,591 $.05 8,477,011 $(1.09)
========== ==== ========= =====
Diluted EPS 13,031,965 $.05 8,477,011 $(1.09)
========== ==== ========= =====
</TABLE>
5. INCOME TAXES
The Company has utilized its net operating loss carryforwards in
estimating its provision for income taxes in the three and nine month periods
ended September 30, 1997.
8
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6. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1997 1996
------------- ------------
Finished goods $1,883,196 $1,555,812
Raw materials 699,558 419,569
---------- ----------
$2,582,754 $1,975,381
========== ==========
7. NOTES PAYABLE
Lines of Credit, Banks. The Company maintains a revolving line of
credit with a bank, which is fully drawn as of September 30, 1997. 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 $750,000
at September 30, 1997, bear interest at the bank's prime rate plus 1% (9.5% at
September 30, 1997) and are personally guaranteed by an investor. In March 1997,
the line of credit was extended to March 8, 1998.
On September 18, 1997, the Company repaid another line of credit in the
amount of $197,458, plus accrued interest.
Term Line of Credit. At September 30, 1997, the Company owed $1,500,000
to an unrelated individual under a term line of credit originated in October
1994 in the principal amount of $2,500,000. Borrowings under the line of credit
were made pursuant to a promissory note that 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 equity or debt financing.
8. SALE OF NETWORKING DIVISION
Effective September 30, 1997, the Company sold its line of computer
connectivity products to Advanced Electronic Support Products, Inc. (AESP).
Consideration for this purchase totaled 189,701 shares of AESP common stock.
Included in the sale were FOCUS Enhancements networking division's U. S. and
European customer list and the rights to use the Focus Networking brand name to
market the existing FOCUS computer connectivity product line as well as certain
of AESP's complementary products. In connection with this transaction, the
Company recorded other non-operating income in the amount of $348,727,
securities available for sale in the amount of $595,000 (discounted 15% to
reflect restricted common stock), and deferred income of $71,712. In addition
the Company sold networking inventory to AESP in the amount of $159,000 at cost.
Mr. William Coldrick, a director of the Company, is also a director of
AESP. The Company's Board of Directors, with Mr. Coldrick abstaining, relied on
the opinion of an independent valuation firm in determining that the sale price
was fair to the Company from a financial point of view.
9
<PAGE>
9. 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 were registered through Form S-3 with
the Securities and Exchange Commission on May 12, 1997. Fees and expenses
associated with this offering amounted to $76,000 yielding net proceeds of
$1,574,000. 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.
On September 10, 1997, the Company completed a financing of
approximately $3,810,000 in gross proceeds from the sale of 1,000,000 shares of
Common Stock in a private placement to the Smith Barney Fundamental Value Fund,
Inc. In the event that the last sale price of the Company's Common Stock is less
than $3.00 per share for 20 consecutive trading days during the 12 month period
following the closing, the Company will also issue seven year warrants to
purchase 333,000 shares of Common Stock exercisable at $3.00 per share. The
shares issued and issuable as part of this transaction will be registered on a
Form S-3 registration statement to be filed with the Securities and Exchange
Commission no later than 90 days from the closing date of the financing. Fees
and expenses associated with this offering amounted to approximately $190,000,
yielding net proceeds of $3,620,000. In connection with this transaction, the
Board of Directors authorized the grant to the Placement Agent of warrants to
purchase 100,000 shares of the Company's Common Stock at $6.00 per share
exercisable for a period of five years.
10. REDEEMABLE COMMON STOCK PURCHASE WARRANTS
The Company has filed with the Securities and Exchange Commission a
post-effective amendment on Form S-3 to the registration statement on Form SB-2,
declared effective February 19, 1996 relating to the shares of Common Stock
issuable upon exercise of the Company's Redeemable Common Stock Purchase
Warrants (the "Warrants"). Upon being declared effective by the Commission of
which there can be no assurance, the shares issuable upon exercise of the
Warrants will be fully transferable under the Securities Act of 1933, as
amended.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-KSB/A-1 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/A-1 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 September 30, 1997 As Compared
With The Three-Month Period Ended September 30, 1996
Net Sales
Net sales for the three-month period ended September 30, 1997 ("Q3 97")
were $6,913,013 as compared with $3,327,228 for the three-month period ended
September 30, 1996 ("Q2 96"), an increase of $3,585,785 or 108%. 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 Q3 97 to the Company's US resellers increased 194% to $2,702,000 from
$918,000 in Q3 96. Net sales to US resellers include net sales totalling
$1,126,000 to Ingram Micro D ("Ingram") representing 16% of total net sales in
Q3 97. Net sales to international resellers rose 34% to $752,000 from $562,000
for the same quarter in 1996. Net sales from OEM/Licensing customers increased
87% to $3,459,000 in Q3 97 from $1,847,000 for the same quarter in 1996.
OEM/Licensing revenues include sales to SCI Systems, Inc. ("SCI") totalling
$1,666,000 and sales to Zenith Electronics, Inc. ("Zenith") totalling $1,471,000
or 48% and 43% respectively, of total OEM/Licensing sales. In Q3 97, sales to
Zenith and SCI represented 20% and 24% respectively, of total sales in the
quarter as compared to 12% and 0% respectively, of total sales in Q3 96.
As of September 30, 1997, the Company had a sales order backlog of
approximately $2.7 million.
11
<PAGE>
Cost of Goods Sold
Cost of goods sold were $4,764,299 or 69% of net sales, for the
three-month period ended September 30, 1997, as compared with $3,479,135 or 105%
of net sales, for the three-month period ended September 30, 1996, an increase
in absolute dollars of $1,285,164 or 37%. The Company's gross profit margins for
Q3 97 and Q3 96 were 31% and (5)%, respectively. The increase in cost of goods
sold in absolute dollars is due principally to the increased sales volume of the
Company's PC-to-TV products. Cost of goods sold as of September 30, 1996
included approximately $300,000 of inventory refurbishment costs associated with
the Company's graphics/connectivity products for Apple's PowerBook 190 and 5300
laptop computers and increased inventory reserves for inventory obsolescence of
approximately $400,000.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $1,147,392 or 16.5% of net
sales, for the three-month period ended September 30, 1997, as compared with
$940,860, or 28% of net sales, for the three-month period ended September 30,
1996, an increase of $206,532 or 22%. The increase in absolute dollars is due
primarily to increased sales commissions as a result of increased sales from
period to period and, an increase in advertising and trade show events as well
as increased domestic channel expansion efforts.
General and Administrative Expenses
General and administrative expenses for the three-month period ended
September 30, 1997 were $525,361 or 7.5% of net sales, as compared with
$1,960,508, or 59% of net sales for the three-month period ended September 30,
1996, a decrease of $1,435,147 or 73%. The decrease in absolute dollars is due
primarily to a Q3 96 write down of intangibles of approximately $1,237,000
associated with the Company's prior acquisitions of Lapis and Inline.
Research and Development Expenses
Research and development expenses for the three-month period ended
September 30, 1997 were $331,318, or 5% of net sales, as compared to $532,319,
or 16% of net sales, for three-month period ended September 30, 1996, a decrease
of $201,001 or 38%. The decrease is due principally to reductions in consulting
expenses of $67,000, product refurbishment costs of $100,000, and other cost
reductions initiated by management.
Purchased Research and Development
On September 30, 1996, the Company completed its acquisition of TView,
Inc. in a purchase transaction for approximately $2,570,000. The Company issued
$2,000,000 in FOCUS Enhancements, Inc. Common Stock and assumed net liabilities
of approximately $570,000. As a result of the acquisition, the Company charged
$2,000,000 to operations, representing the portion of the purchase for
in-process research and development for the technology purchased.
Interest Expense, Net
Net interest expense for the three-month period ended September 30,
1997 was $72,466, or 1% of net sales, as compared to $65,504, or 2% of net
sales, for the three-month period ended September 30, 1996, an increase of
$6,692, or 10%. The increase is primarily attributable to fees incurred for the
extension of the Company's revolving line of credit.
12
<PAGE>
Other Income (Expense)
Other Income (Expense) for the three-month period ended September 30,
1997 was $351,279 as compared to $0, for the three-month period ended September
30, 1996. Other income includes $55,224 for certain forgiveness of vendor debt
and $348,727 from the sale of the Company's networking division offset by
$52,672 of other expenses.
Net Income
For the quarter ended September 30, 1997, the Company reported net
income of $413,906, or $0.03 per share, as compared to a net loss of
$(5,657,639), or $(.60) per share, for the quarter ended September 30, 1996.
Results of Operations
Nine-Month Period Ended September 30, 1997 As Compared
With The Nine-Month Period Ended September 30, 1996
Net Sales
Net sales for the nine-month period ended September 30, 1997 (the "97
Period") were $17,839,430 as compared with $11,498,362 for the nine-month period
ended September 30, 1996 (the "96 Period"), an increase of $6,341,068 or 55%.
The growth in net sales is attributable primarily to increased orders from
global reseller customers as a result of increased product awareness and
acceptance of the Company's PC-to-TV products. Specifically, in the 97 Period
net sales to the Company's US resellers increased 72% to $9,138,000 from
$5,321,000 in the 96 Period. Net sales to US resellers include net sales
totalling $3,969,000 to Ingram representing 22% of total net sales in the 97
Period. In the 96 Period, net sales to Ingram totalled $1,741,000 or 15% of
total net sales. Net sales to international resellers in the 97 Period declined
(3)% to $2,170,000 from $2,229,000 for the same period in 1996. Net sales from
OEM/Licensing customers increased 65% to $6,531,000 in the 97 Period from
$3,948,000 for the same period in 1996. The increase in OEM/Licensing revenues
reflects primarily the increase in sales to SCI and to Apple Computer, Inc.
("Apple") during Q2 and Q3 97 and to Zenith during Q3 97. In the 97 Period, net
sales to SCI represented 19% of total net sales as compared to no sales during
the comparable period in 1996. In the 97 Period, net sales to Zenith represented
11% of the Company's revenues as compared to 28% of revenues in the comparable
period in 1996.
Cost of Goods Sold
Cost of goods sold were $12,089,949 or 68% of net sales, for the
nine-month period ended September 30, 1997, as compared with $11,193,421 or 97%
of net sales, for the nine month period ended September 30, 1996, an increase of
$896,528 or 8%. The cost of goods sold for September 30, 1996 includes a write
down and refurbishment of inventory, in the amount of approximately $700,000,
related to the Company's graphics/connectivity products for the Apple PowerBook
190 and 5300. The Company's gross profit margins for the 97 Period and the 96
Period were 32% and 3% of net sales, respectively. The gross profit margin for
the 97 Period represents the approximate margins achievable for the Company's
PC-to-TV products with the present mix of sales to global resellers and OEM
accounts.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $3,112,609 or 17% of net
sales, for the nine-month period ended September 30, 1997, as compared with
$2,917,645 or 25% of net sales, for the nine-month period ended September 30,
1996, an increase of $194,964 or 7%. The increase in absolute dollars is due
primarily to the combination of increased payroll expenses for domestic sales,
marketing and customer service departments and increased sales commission
expenses as a result of increased sales from period to period partially offset
by decreased costs in direct display advertising, mail order promotional
expenditures, and trade show events.
13
<PAGE>
General and Administrative Expenses
General and administrative expenses for the nine-month period ended
September 30, 1997 were $1,384,928 or 8% of net sales, as compared with
$3,192,833 or 28% of net sales for the nine-month period ended September 30,
1996, a decrease of $1,807,905 or 57%. The decrease is due primarily to a Q3 96
write down of intangibles of approximately $1,273,000 associated with the
Company's acquisition of Lapis and Inline, and a reduction in 1997 audit, legal,
consulting, and utilities, of approximately $350,000.
Research and Development Expenses
Research and development expenses for the nine-month period ended
September 30, 1997 were $763,156, or 4% of net sales, as compared to $1,150,260,
or 10% of net sales, for the nine-month period ended September 30, 1996, a
decrease of $387,104 or 34%. The decrease is due principally to a reduction in
consulting expenses of $110,000, product refurbishment of $100,000, product
tooling and testing of $67,000 and other net reductions in company wide
engineering costs. During the nine months ended September 1997, FOCUS completed
the development of the ASIC relating to the Company's PC-to-TV products. The
engineering in-process costs to manufacture the ASIC masks during this period,
amounting to approximately $220,000, have been capitalized as a fixed asset and
will be amortized over the expected life of the ASIC technology, with licensing
and product revenues.
Purchased Research and Development
On September 30, 1996, the Company completed its acquisition of TView,
Inc. in a purchase transaction for approximately $2,570,000. The company issued
$2,000,000 in FOCUS Enhancements, Inc. Common Stock and assumed net liabilities
of approximately $570,000. As a result of the acquisition, the Company charged
$2,000,000 to operations, representing the portion of the purchase for in
process research and development for the technology purchased.
Interest Expense, Net
Net interest expense for the nine-month period ended September 30, 1997
was $209,109, or 1.2% of net sales, as compared to $235,607 or 2% of net sales,
for the nine-month period ended September 30, 1996, a decrease of $26,490, or
11%. 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 $900,000 at September 30, 1996 to $750,000 as of
September 30, 1997. In addition, expenses related to the issuance of warrants to
lenders in 1995 and 1996 are included in interest expense for the period ended
September 30, 1996.
Other Income (Expense)
For the nine-month period ended September 30, 1997, the Company
realized other income of $395,110, primarily as a result of the recognized gain
on the sale of the Company's networking division for $348,727 and the
recognition of vendor forgiveness of $125,427 offset by $79,044 of other
expenses. For the nine month period ended September 30, 1996, the Company
incurred other expenses of $(12,792).
Net Income (Loss)
For the nine months ended September 30, 1997, the Company reported net
income of $662,089, or $0.05 per share, as compared to a net loss of
$(9,220,737), or $(1.09) per share, for the same period in 1996.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine-month period ended
September 30, 1997 and 1996 was $2,831,832 and $5,567,186, respectively. In the
97 Period, net cash used in operating activities consisted primarily of an
increase in accounts receivable and inventory of $4,514,833 and $607,373,
respectively. This was offset by an increase in accounts payable of $1,766,971,
depreciation and amortization (non-cash charge) of $301,267, and net income of
$662,089. As of September 30, 1997, Ingram, Zenith and SCI represented
approximately 31%, 19% and 13%, respectively, of accounts receivable. For the
same period in 1996, net cash used in operations consisted primarily of a net
loss of $(9,220,737) and an increase in accounts receivable of $2,997,584. The
1996 uses were partially offset by increased accounts payable and accrued
liabilities totaling $2,722,957 as well as depreciation and
amortization/non-cash charge of $1,747,824.
Net cash used in investing activities for the nine month period ended
September 30, 1997 and 1996 was $534,132 and $50,959, respectively due to the
purchase of property and equipment.
Net cash from financing activities for the nine-month period ended
September 30, 1997 and 1996 was $5,444,795 and $4,150,318, respectively. In the
97 Period, the Company received $5,650,099 in net proceeds from private
offerings of Common Stock and $133,075 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. During Q3 97, the Company repaid $197,458
on another revolving line of credit. In the same period in 1996, the Company
received $4,363,538 in net proceeds from private offerings of Common Stock and
$994,766 from the exercise of common stock options and warrants. The Q3 96
financing proceeds were offset by $1,207,986 in payments on notes payable and
capital lease obligations.
As of September 30, 1997, the Company had working capital of
$5,160,342, as compared to a working capital deficiency of $(1,007,509) at
December 31, 1996, an increase of $6,167,851. The Company's cash position
increased to $2,492,705 at September 30, 1997, an increase of $2,078,811, or
502%, 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 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 were registered through Form S-3 with
the Securities and Exchange Commission on May 12, 1997. Fees and expenses
associated with this offering amounted to $76,000 yielding net proceeds of
$1,574,000. 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.
15
<PAGE>
On September 10, 1997, the Company completed a financing of
approximately $3,810,000 in gross proceeds from the sale of 1,000,000 shares of
Common Stock in a private placement to the Smith Barney Fundamental Value Fund,
Inc. In the event that the last sale price of the Company's Common Stock is less
than $3.00 per share for 20 consecutive trading days during the 12 month period
following the closing, the Company will also issue seven year warrants to
purchase 333,000 shares of Common Stock exercisable at $3.00 per share. The
shares issued and issuable as part of this transaction will be registered on a
Form S-3 registration statement to be filed with the Securities and Exchange
Commission no later than 90 days from the closing date of the financing. Fees
and expenses associated with this offering amounted to approximately $190,000,
yielding net proceeds of $3,620,000. In connection with this transaction, the
Board of Directors authorized the grant to the Placement Agent of warrants to
purchase 100,000 shares of the Company's Common Stock at $6.00 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.
As of September 30, 1997, the Company has an accumulated deficit of
approximately $19.8 million. 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 continued
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 expected funds to be generated during
1997 through its present business model, and additional funds that may be
received from debt or equity financing will be sufficient to fund operations for
at least 12 months.
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.
16
<PAGE>
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 September 30, 1997, the Company had working
capital of $5,160,342, cash and cash equivalents of $2,492,705 and was fully
drawn on its line of credit (approximately $750,000 at September 30, 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 nine month period ended
September 30, 1997, the Company received approximately $5,783,174 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 effectively in 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. For the nine months ended September 30,
1997, approximately 22% of the Company's revenues were derived from the sales to
Ingram Micro D ("Ingram"), approximately 19% of revenues were derived from sales
to SCI, approximately 12% of revenues were derived from sales to Apple, and
approximately 11% of revenues were derived from sales to Zenith. Management
expects that sales to Ingram, SCI and Zenith 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. For the nine months ended September 30, 1997, the Company shipped
approximately $1,987,000 of PC-to-TV products to Zenith and projects that total
shipments through December 31, 1997 will be less than the $12 million contract
minimum. As a result, under the terms of the agreement Zenith has ceased to be
an exclusive OEM for the Company's PC-to-TV products in the television market.
17
<PAGE>
History of Operating Losses. The Company has experienced limited
profitability since its inception and at September 30, 1997, had an accumulated
deficit of $19,763,443. Although the Company reported net income of $662,089 for
the nine-month period ended September 30, 1997, there can be no assurance that
the Company will remain profitable during the remainder of 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 line of credit with Silicon Valley Bank, which was fully
drawn as of September 30, 1997. At December 31, 1996, the Company was in
violation of certain debt covenants relating to the line of credit. In March
1997, the Company received a waiver of the covenants from the bank, a revision
of the loan covenants and an agreement to extend the line until March 1998. As
of September 30, 1997, approximately $750,000 is owed to the bank under the line
of credit.
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. 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 video-graphics 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 video-graphics and connectivity products.
18
<PAGE>
Reliance on Single Vendor. In the nine months ended September 30, 1997,
approximately 68% 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 was 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.
Dependence on Timely Delivery of the FOCUS Scan 300 Chip. In the third
quarter of 1997, the Company completed 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 video-graphics products. The Company is relying on an
outside vendor to manufacture its requirements for the Chip that it intends to
ship in Q4 97. A significant portion of the Company's anticipated revenues and
gross margins for Q4 1997 are dependent on timely delivery of sufficient
quantities of the FOCUS Scan 300 Chip in order to fill pending orders. In the
event that the Company does not receive sufficient quantities of the chip to
fill orders, the Company's revenues and profitability for 1997 could be
adversely effected.
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 with video-graphic 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 delays 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
three patents and is in the process of filing two additional patents in the
fourth quarter of 1997 with respect to its PC-to-TV video-graphics 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.
19
<PAGE>
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
operations for the nine month period ended September 30, 1997.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In October 1994, the Company borrowed $2,500,000 from an unaffiliated
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 September 30,
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 OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Sale of Common Stock
On September 10, 1997, the Company completed a financing of
approximately $3,810,000 in gross proceeds for the sale of 1,000,000 shares of
Common Stock in a private placement to the Smith Barney Fundamental Value Fund,
Inc. In the event that the last sales price of the Company's Common Stock is
less than $3.10 per share for twenty consecutive trading days during the 12
month period following the closing, the Company will issue seven year warrants
to purchase 333,000 shares of Common Stock exercisable at $3.00 per share. The
shares issued and issuable as part of this transaction will be registered on a
Form S-3 registration statement to be filed with the Securities and Exchange
Commission no later than 90 days from the closing date of the financing. Fees
and expenses associated with this offering amounted to approximately $190,000,
yielding net proceeds of $3,620,000. In connection with this transaction, the
Board of Directors authorized the grant to the Placement Agent of warrants to
purchase 100,000 shares of the Company's Common Stock at $6.00 per share
exercisable for a period of five years.
Sale of Networking Division
Effective September 30, 1997, the Company sold its line of computer
connectivity products to Advanced Electronic Support Products, Inc. (AESP).
Consideration for this purchase totaled 189,701 shares of AESP common stock.
Included in the sale were FOCUS Enhancements networking division's U. S. and
European customer list and the rights to use the Focus Networking brand name to
market the existing FOCUS computer connectivity product line as well as certain
of AESP's complementary products. In connection with this transaction, the
Company recorded other non-operating income in the amount of $348,727,
securities available for sale in the amount of $595,000 (discounted 15% to
reflect restricted common stock), and deferred income of $71,712. In addition
the Company sold networking inventory to AESP in the amount of $159,000 at cost.
Mr. William Coldrich, a director of the Company is also a director of
AESP. The Company's Board of Directors, with Mr. Coldrich abstaining, relied on
the opinion of an independent valuation firm in determining that the sale price
was fair to the Company from a financial point of view.
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 Company issued financial
statements for the quarter ended March 31, 1997 and June 30, 1997 in its Forms
10-QSB, filed with the SEC on May 15, 1997 and August 15, 1997, respectively.
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
20
<PAGE>
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 barter credits totaling 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 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 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
11 Statement Re: Computation of Per Share Earnings
99.1 Press Release dated September 26, 1997 Regarding Investment by
Travelers Group
99.2 Press Release dated October 9, 1997 Regarding Sale of Networking
Division
99.3 Press Release dated, October 20, 1997 Regarding Restatement of 1996
Results.
b. Reports on Form 8-K
During the quarter covered by this report, the following report on form 8-K was
filed:
Date of Form 8-K Summary of Item
September 10, 1997 Registrant reported the sale of 1,000,000
shares of the Company's Common Stock
raising gross proceeds of $3,810,000.
The Company did not file any other reports during the quarter ended September
30, 1997.
21
<PAGE>
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.
November 14, 1997 By: /s/ Thomas L. Massie
Thomas L. Massie
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
November 14, 1997 By: /s/ Harry G. Mitchell
Harry G. Mitchell
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
22
<TABLE>
<CAPTION>
EXHIBIT 11
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Three months ended
September 30, September 30,
1997 1996
------------ ------------
<S> <C> <C>
Net income (loss) $ 413,906 $(5,657,639)
=========== ===========
Primary:
Weighted average number of common shares outstanding 12,936,410 9,476,462
Weighted average common equivalent shares
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 12,936,410 9,476,462
=========== ===========
Fully diluted:
Weighted average number of common shares outstanding 12,936,410 9,476,462
Weighted average common equivalent shares
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 12,936,410 9,476,462
=========== ===========
Net income (loss) per share
Primary $ 0.03 $ (0.60)
=========== ===========
Fully diluted $ 0.03 $ (0.60)
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
Nine months ended
September 30, September 30,
1997 1996
------------ ------------
<S> <C> <C>
Net income (loss) $ 662,089 $(9,220,737)
=========== ===========
Primary:
Weighted average number of common shares outstanding 12,339,323 8,477,011
Weighted average common equivalent shares
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 12,339,323 8,477,011
=========== ===========
Fully diluted:
Weighted average number of common shares outstanding 12,339,323 8,477,011
Weighted average common equivalent shares
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 12,339,323 8,477,011
=========== ===========
Net income (loss) per share
Primary $ 0.05 $ (1.09)
=========== ===========
Fully diluted $ 0.05 $ (1.09)
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,492,705
<SECURITIES> 595,000
<RECEIVABLES> 8,530,892
<ALLOWANCES> 802,494
<INVENTORY> 2,582,754
<CURRENT-ASSETS> 13,814,102
<PP&E> 2,554,753
<DEPRECIATION> 1,584,260
<TOTAL-ASSETS> 16,243,666
<CURRENT-LIABILITIES> 8,653,760
<BONDS> 0
0
0
<COMMON> 138,165
<OTHER-SE> 27,043,064
<TOTAL-LIABILITY-AND-EQUITY> 16,243,666
<SALES> 6,913,013
<TOTAL-REVENUES> 6,913,013
<CGS> 4,764,299
<TOTAL-COSTS> 2,004,071
<OTHER-EXPENSES> (351,279)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,466
<INCOME-PRETAX> 423,456
<INCOME-TAX> 9,550
<INCOME-CONTINUING> 413,906
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 413,906
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
EXHIBIT 99.1
Travelers Group Makes Investment
in FOCUS Enhancements
7% Equity Position Secured by Travelers
SUDBURY, MASS., September 26, 1997 - FOCUS Enhancements, Inc. (NASDAQ: FCSE,
FCSEW) announced today that Travelers Group (NYSE: TRV), through an affiliated
entity, purchased 1 million shares of the Company's common stock in a private
placement pursuant to Regulation D promulgated under the Securities Act of 1933.
The common stock was sold on September 10, 1997 and provides the company total
net proceeds of $3,620,000 which will be used to retire certain short-term debt
as well as for general working capital purposes. Pursuant to the Act, the
Company has agreed to register the common stock issued to the purchaser within
90 days of the closing.
"We value Wall Street's recognition of the accomplishments we have achieved this
year, and are especially pleased that Travelers Group has acknowledged FOCUS'
performance and future prospects with its substantial investment," commented
Thomas L. Massie, chairman and chief executive officer of FOCUS.
- more -
<PAGE>
FOCUS Enhancements, Travelers Group Makes Investment Page 2
Travelers Group is one of the nation's largest diversified financial services
companies, with approximately $159 billion in assets. Through its operating
subsidiaries - Smith Barney, Travelers Life & Annuity, Primerica Financial
Services, Travelers Property Casualty Corp. (NYSE: TAP) and Commercial Credit
Company - the company provides investment and consumer finance services, as well
as a broad range of life and property and casualty insurance.
FOCUS Enhancements, Inc. is an industry leader in the development and marketing
of advanced, proprietary video scan conversion products for the rapidly
converging, multi-billion dollar computer and television industries. The
Company's products, which are sold globally through Original Equipment
Manufacturers (OEMs) and resellers, merge computer-generated graphics and
television displays for presentations, training, education, video
teleconferencing, internet viewing, and home gaming markets. In addition, the
Company is developing a family of products that will enable the current
installed base of televisions, VCRs, and camcorders to remain functional in
upcoming HDTV environments.
Forward-looking statements in this release are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including, without limitation, continued acceptance of the
Company's products, increased levels of competition for the Company; new
products and technological changes, the Company's dependence upon third-party
suppliers, intellectual property rights and other risks detailed from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission.
###
EXHIBIT 99.2
FOCUS Enhancements Sells Networking Product Line
to Advanced Electronic Support Products, Inc.
SUDBURY, MASS., October 9, 1997 - FOCUS Enhancements, Inc. (NASDAQ: FCSE, FCSEW)
today announced that it has sold the complete Focus Networking line of computer
connectivity products to Advanced Electronic Support Products, Inc. (NASDAQ:
AESP, AESPW; CSE: ADS, ADSWS). Consideration for this purchase totaled 189,701
shares of AESP common stock.
Included in the sale were FOCUS Enhancements networking division's U.S. and
European customer lists and the rights to use the Focus Networking brand name to
market the existing FOCUS computer connectivity product line as well as certain
of AESP's complimentary products.
"We are confident that Advanced Electronic Support Products will continue to
deliver the quality products and customer service which the Focus Networking
division has established," stated FOCUS Chairman and CEO Thomas L. Massie. "The
sale of this division, which accounted for approximately 9% of total revenue for
the six month period ended June 30, 1997, represents the final stage of our plan
to concentrate all corporate resources on PC-to-TV development and marketing."
More than 1.5 million FOCUS computer connectivity products have been installed
world-wide through a network of leading distributors and mail order companies
such as MicroWharehouse, PC Zone, Global Direct, and PC Connection. The FOCUS
connectivity products include EtherLAN PDS, NuBus, and PCI cards, as well as
transceivers and hubs based on the latest 10BaseT and 10Mbps Ethernet
technology.
According to AESP President Slav Stein, "FOCUS Enhancements penetrated the
networking industry by developing a line of competitively priced, high
performance connectivity devices that are well regarded within the industry. The
acquisition of the Focus Networking product line including the brand names
Turbonet, EtherLAN, and Lightning Series, offer AESP several opportunities in
distribution, customer base, and product breadth. In addition, we expect that
the synergy of the Focus Networking product line with our networking business
will enable us to expand volume without commensurate overhead increases."
<PAGE>
FOCUS Enhancements, Sells Networking Product Line Page 2
Advanced Electronic Support Products, Inc. (AESP) designs, manufactures,
markets, and distributes computer connectivity and networking products
world-wide through a network of Original Equipment Manufacturers (OEMs) and
resellers. The AESP product line includes computer cables, connectors,
installation products, data sharing devices, fiber-optic cables, as well as
interface cards, hubs, transceivers, and repeaters for a variety of networking
topologies.
FOCUS Enhancements, Inc. is an industry leader in the development and marketing
of advanced, proprietary video scan conversion products for the rapidly
converging, multi-billion dollar computer and television industries. The
Company's products, which are sold globally through Original Equipment
Manufacturers (OEMs) and resellers, merge computer-generated graphics and
television displays for presentations, training, education, video
teleconferencing, internet viewing, and home gaming markets. In addition, the
Company is developing a family of products that will enable the current
installed base of televisions, VCRs, and camcorders to remain functional in
upcoming HDTV environments.
Forward-looking statements in this release are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including, without limitation, continued acceptance of the
Company's products, increased levels of competition for the Company; new
products and technological changes, the Company's dependence upon third-party
suppliers, intellectual property rights and other risks detailed from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission.
###
EXHIBIT 99.3
FOCUS Enhancements Restates
Prior Financial Statements
Restatement Will Not Affect Fiscal 1997 Operating Results
SUDBURY, MASS., October 20, 1997 - FOCUS Enhancements, Inc. (NASDAQ: FCSE,
FCSEW) announced today that the Company will restate previously issued financial
statements for the fiscal year ended December 31, 1996 as well as for the
quarters ended March 31, 1997 and June 30, 1997.
The prior period adjustments result from a review of the Company's financial
statements conducted by The Nasdaq Stock Market. As a result of the review, the
Company concluded that its recording of barter credits totaling 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, the Company will
reduce the amount reported as "Other Assets" by approximately $1.2 million on
the balance sheets for December 31, 1996, March 31, 1997, and June 30, 1997.
In connection with the restatements, the Company will also record at December
31, 1996 additional reserves, totaling approximately $400,000, for potential
stock balancing and other product return transactions. Although the Company
provides allowances for potential uncollectible amounts, estimated future
returns, exchanges and price protection credits (as noted in Note 2 of the
Company's audited financial statements), it did not provide for returns
resulting from stock balancing transactions as required by generally accepted
accounting principles. As a result of the Company's discussions with Nasdaq,
management agreed to provide additional reserves for estimated returns resulting
from stock balancing transactions and amended its revenue recognition accounting
policy.
As restated, the Company's net loss for fiscal 1996 will increase from
$9,208,431 to $10,772,410. The restatements will not affect the operating
results for the quarters ended March 31, 1997 and June 30, 1997.
(a table summarizing the impact of the restatements follows)
<PAGE>
FOCUS Enhancements, Restate Prior Financial Statements Page 2
<TABLE>
<CAPTION>
FOCUS Enhancements, Inc.
Restatements of Financial Statements
Three Months Three Months Three Months Three Months
Year Ended Year Ended Ended Ended Ended Ended
December 31, December 31, March 31, March 31, June 30, June 30,
1996 1996 1997 1997 1997 1997
As Reported As Restated As Reported As Restated As Reported As Restated
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 15,076,368 $ 15,076,368 $ 4,801,550 $ 4,801,550 $ 6,124,867 $ 6,124,867
Net income (loss) (9,208,431) (10,772,410) 16,476 16,476 231,707 231,707
Net income (loss)
Primary $ (1.01) $ (1.18) $ 0 $ 0 $ .02 $ .02
Fully diluted $ (1.01) $ (1.18) $ 0 $ 0 $ .02 $ .02
Total current assets 6,246,669 5,846,669 8,926,570 8,525,570 10,070,488 9,644,998
Total assets 9,471,346 7,907,367 12,319,747 10,755,768 13,533,748 11,969,769
Total current liabilities 6,854,178 6,854,178 7,669,750 7,669,750 8,670,640 8,670,840
Total liabilities 6,934,844 6,934,844 7,744,597 7,744,597 8,711,426 8,711,426
Total liabilities and
stockholders' equity 9,471,346 7,907,367 12,319,747 10,755,768 13,533,748 11,969,769
</TABLE>
FOCUS Enhancements, Inc. is an industry leader in the development and marketing
of advanced, proprietary video scan conversion products for the rapidly
converging, multi-billion dollar computer and television industries. The
Company's products, which are sold globally through Original Equipment
Manufacturers (OEMs) and resellers, merge computer-generated graphics and
television displays for presentations, training, education, video
teleconferencing, internet viewing, and home gaming markets. In addition, the
Company is developing a family of products that will enable the current
installed base of televisions, VCRs, and camcorders to remain functional in
upcoming HDTV environments.
Forward-looking statements in this release are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including, without limitation, continued acceptance of the
Company's products, increased levels of competition for the Company; new
products and technological changes, the Company's dependence upon third-party
suppliers, intellectual property rights and other risks detailed from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission.
###
