FORM 10-QSB/A-1
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: June 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 June 30, 1997, there were outstanding 12,719,019 shares of Common Stock,
$.01 par value per share.
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FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
June 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 June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations
for the Three Months Ended June 30, 1997 and 1996 4
Consolidated Statement of Operations
for the Six Months Ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
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 20-21
Item 5. Other Information 21
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
June 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,262,546 $ 413,894
Accounts receivable, net of allowance of $747,223 and $888,605 5,857,279 3,213,565
Inventories 2,303,744 1,975,381
Prepaid expenses and other current assets 221,429 243,829
------------ ------------
Total current assets 9,644,998 5,846,669
------------ ------------
Property and equipment, net 797,360 483,591
Other assets, net 168,983 110,001
Goodwill, net 1,358,428 1,467,106
------------ ------------
Total assets $ 11,969,769 $ 7,907,367
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,497,458 $ 2,517,458
Obligations under capital leases 118,744 124,132
Accounts payable 5,497,697 3,584,284
Accrued liabilities 556,941 628,304
------------ ------------
Total current liabilities 8,670,840 6,854,178
Obligations under capital leases 40,586 80,666
------------ ------------
Total liabilities 8,711,426 6,934,844
------------ ------------
Commitments
Stockholders' equity
Preferred stock, $.01 par value; 3,000,000 shares authorized, none issued
Common stock, $.01 par value; 20,000,000 shares authorized,
12,719,019 and 11,301,845 shares issues and outstanding at
June 30, 1997 and December 31, 1996, respectively 127,190 113,018
Additional paid-in capital 23,308,503 21,285,037
Accumulated deficit (20,177,350) (20,425,532)
------------ ------------
Total stockholders' equity 3,258,343 972,523
------------ ------------
Total liabilities and stockholders' equity $ 11,969,769 $ 7,907,367
============ ============
The accompanying notes are an integral part of the
condolidated financial statements.
</TABLE>
3
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30, June 30,
1997 1996
----------- -----------
Net sales $ 6,124,867 $ 4,369,255
Cost of goods sold 4,057,809 2,588,476
----------- -----------
Gross profit (loss) 2,067,058 1,780,779
Operating expenses:
Sales, marketing and support 1,012,253 829,656
General and administrative 474,476 463,972
Research and development 252,436 334,689
----------- -----------
Total operating expenses 1,739,165 1,628,317
Income (loss) from operations 327,893 152,462
Interest expense, net (67,703) (65,729)
Other income (expense) (26,883) (2,481)
----------- -----------
Income (loss) before income taxes 233,307 84,252
Income tax expense 1,600 2,500
----------- -----------
Net income (loss) $ 231,707 $ 81,752
=========== ===========
Net income (loss) per common share
Primary $ 0.02 $ 0.01
=========== ===========
Fully Diluted $ 0.02 $ 0.01
=========== ===========
Weighted average common and common
equivalent shares outstanding
Primary 13,337,853 8,561,504
=========== ===========
Fully Diluted 13,319,486 9,102,537
=========== ===========
The accompanying notes are an integral part of the
condolidated financial statements.
4
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30, June 30,
1997 1996
------------ ------------
Net sales $ 10,926,417 $ 8,171,134
Cost of goods sold 7,325,650 7,714,286
------------ ------------
Gross profit (loss) 3,600,767 456,848
Operating expenses:
Sales, marketing and support 1,965,217 1,976,785
General and administrative 859,568 1,232,326
Research and development 431,838 617,941
------------ ------------
Total operating expenses 3,256,623 3,827,052
Income (loss) from operations 344,144 (3,370,204)
Interest expense, net (134,943) (170,103)
Other income (expense) 42,132 (12,792)
------------ ------------
Income (loss) before income taxes 251,333 (3,553,099)
Income tax expense 3,150 10,000
------------ ------------
Net income (loss) $ 248,183 $ (3,563,099)
============ ============
Net income (loss) per common share
Primary $ 0.02 $ (0.45)
============ ============
Fully Diluted $ 0.02 $ (0.45)
============ ============
Weighted average common and common
equivalent shares outstanding
Primary 12,538,386 7,974,362
============ ============
Fully Diluted 12,692,614 7,974,362
============ ============
The accompanying notes are an integral part of the
condolidated financial statements.
5
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30, June 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 248,183 $(3,563,099)
Adjustments to reconcile net income (loss) to net cash provided (used in)
operating activities:
Depreciation and amortization 191,681 390,715
Gain on forgiveness of accounts payable (70,202) --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,643,714) (2,736,188)
(Increase) decrease in notes receivable -- (37,957)
Decrease (increase) in inventories (328,363) (31,989)
Decrease (increase) in prepaid expenses and other assets (11,092) 177,528
Decrease (increase) in other assets (25,490) --
Increase (decrease) in accounts payable 1,983,615 850,503
Increase (decrease) in accrued liabilities (71,364) 609,089
----------- -----------
Net cash provided (used in) operating activities (726,746) (4,341,398)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (396,772) (78,207)
----------- -----------
Net cash used in investing activities (396,772) (78,207)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (20,000) (1,040,000)
Payments under capital lease obligations (45,468) (80,652)
Net proceeds from private offerings of common stock 1,996,813 3,015,528
Net proceeds from exercise of common stock options and warrants 40,825 994,766
----------- -----------
Net cash provided by financing activities 1,972,170 2,889,642
----------- -----------
Net increase (decrease) in cash and cash equivalents 848,652 (1,529,963)
Cash and cash equivalents at beginning of period 413,894 2,140,043
----------- -----------
Cash and cash equivalents at end of period $ 1,262,546 $ 610,080
=========== ===========
The accompanying notes are an integral part of the
condolidated 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 June 30, 1997 and for the three and six month periods ended June
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. and 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 six month periods ended June 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 Company issued financial
statements for the quarters 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
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 the
balance sheets for December 31, 1996, March 31, 1997, and June 30, 1997.
In addition, the Company has also recorded at December 31, 1996
additional reserves, totaling approximately $400,000, for potential stock
balancing and other product return transactions. Although the Company provided
allowances for potential uncollectible amounts, estimated future returns,
exchanges and price protection credits prior to the restatement, it did not
provide for returns resulting from stock balancing transactions as required by
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.
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The impact of the restatement on the Company's Consolidated Balance
Sheet as of June 30, 1997 is summarized as follows:
June 30, 1997
---------------------------------
As Reported As Restated
Accounts receivable $ 6,282,769 $ 5,857,279
Total current assets 10,070,488 9,644,998
Other assets, net 1,307,472 168,983
Total assets 13,533,748 11,969,769
Accumulated deficit (18,613,371) (20,177,350)
Total stockholders' equity 4,822,322 3,258,343
Total liabilities and stockholders' equity 13,533,748 11,969,769
There was no impact on the Company's Consolidated Statements of
Operations for the three months and six months ended June 30, 1997 as a result
of the restatement.
3. 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.
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The Company has elected to disclose pro forma EPS amounts computed
using this Statement, as follows:
Three Months Ended June 30,
-----------------------------------------------------
1997 1996
---- ----
Shares Per Share Shares Per Share
Amount Amount
Basic EPS 12,716,005 $0.02 8,561,504 $.01
========== ===== ========== ====
Diluted EPS 13,337,853 $0.02 9,102,537 $.01
========== ===== ========== ====
Six Months Ended June 30,
-----------------------------------------------------
1997 1996
---- ----
Shares Per Share Shares Per Share
Amount Amount
Basic EPS 12,123,306 $0.02 7,974,362 $(.45)
========== ===== ========= ======
Diluted EPS 12,538,386 $0.02 7,974,362 $(.45)
========== ===== ========= ======
4. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1997 1996
Finished goods $1,683,632 $ 1,555,812
Raw materials 620,112 419,569
------------------- -------------------
$2,303,744 $ 1,975,381
=================== ===================
5. NOTES PAYABLE
Lines of Credit, Banks. The Company maintaines a revolving line of
credit with a bank, which is fully drawn as of June 30, 1997. Borrowings under
the line are payable upon demand and are collateralized by all of the assets of
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the Company, except as noted below. Borrowings, aggregating $800,000 at June 30,
1997, bear interest at the bank's prime rate plus 1% (9.5% at June 30, 1997) and
are personally guaranteed by an investor. In March 1997, the line of credit was
extended to March 8, 1998.
The Company has an additional 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
June 30, 1997). Borrowings outstanding under the line of credit as of June 30,
1997 were $197,458. The Company has not renewed the line.
Term Line of Credit. At June 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 an equity or debt financing.
6. 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.
7. REDEEMABLE COMMON STOCK PURCHASE WARRANTS
In accordance with the anti-dilution provisions of the Company's
Redeemable Common Stock Purchase Warrants (the "Warrants") issued in connection
with the Company's initial public offering in May 1993, the terms of the
Warrants have been amended so that upon exercise, a holder will receive 1.774
shares of Common Stock for each Warrant exercised. The Warrants are exercisable
at a price of $6.75 per Warrant until May 23, 1998.
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 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 June 30, 1997 As Compared
With The Three-Month Period Ended June 30, 1996
Net Sales
Net sales for the three-month period ended June 30, 1997 ("Q2 97") were
$6,124,867 as compared with $4,369,255 for the three-month period ended June 30,
1996 ("Q2 96"), an increase of $1,755,612 or 40%. 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 Q2 97
to the Company's US resellers increased 32% to $3,540,000 from $2,687,000 in Q2
96. In Q2 96, sales to US resellers included $1,568,000 of sales of inventory
related to Apple's Powerbook 190 and 5300 laptop computers, which products have
been discontinued. Net sales to international resellers rose 16% to $648,000
from $558,000 for the same quarter in 1996. Net sales from OEM/Licensing
customers increased 72% to $1,937,000 in Q2 97 from $1,124,000 for the same
quarter in 1996. This increase reflects primarily OEM sales to Apple Computer
("Apple"). In Q2 97, sales to Apple represented 29% of total sales in the
quarter as compared to 1% of total sales in Q2 96.
As of June 30, 1997, the Company had a sales order backlog of
approximately $2.1 million.
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Cost of Goods Sold
Cost of goods sold were $4,057,809 or 66% of net sales, for the
three-month period ended June 30, 1997, as compared with $2,588,476 or 59% of
net sales, for the three-month period ended June 30, 1996, an increase of
$1,469,333 or 57%. The Company's gross profit margins for Q2 97 and Q2 96 were
34% and 41%, 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. As a percentage of sales, cost of goods sold was lower in Q2
96 due to the sale in Q2 96 of previously written-down inventory related to
Apple's Powerbook 190 and 5300 laptop computers.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $1,012,253 or 16.5% of net
sales, for the three-month period ended June 30, 1997, as compared with
$829,656, or 19% of net sales, for the three-month period ended June 30, 1996,
an increase of 182,597 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.
General and Administrative Expenses
General and administrative expenses for the three-month period ended
June 30, 1997 were $474,476 or 7.7% of net sales, as compared with $463,972, or
10.6% of net sales for the three-month period ended June 30, 1996, an increase
of $10,504 or 2.3%. The increase in absolute dollars is due primarily to
increased payroll and benefits.
Research and Development Expenses
Research and development expenses for the three-month period ended June
30, 1997 were $252,436, or 4% of net sales, as compared to $334,689, or 7.7% of
net sales, for three-month period ended June 30, 1996, a decrease of $(82,253)
or (24.6)%. The decrease is due principally to reductions in consulting expenses
of $25,000, in employee recruiting costs of $16,000, in R&D supplies of $15,000
and in travel of $13,000. During Q2 97, the Company capitalized $64,000 as a
fixed asset in connection with the manufacture of the Focus Scan300 ASIC masks,
which amounts are to be amortized over the expected life of the ASIC technology.
Interest Expense, Net
Net interest expense for the three-month period ended June 30, 1997 was
$(67,703), or 1.1% of net sales, as compared to $(65,729), or 1.5% of net sales,
for the three-month period ended June 30, 1996, an increase of $1,974, or 3%.
Other Income (Expense)
Other Income (Expense) for the three-month period ended June 30, 1997
was $(26,883), as compared to $(2,481), for the three-month period ended June
30, 1996, an increase of $24,402.
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Net Income
For the quarter ended June 30, 1997, the Company reported net income of
$231,707, or $0.02 per share, as compared to a net income of $81,752, or $.01
per share, for the quarter ended June 30, 1996.
Six-Month Period Ended June 30, 1997 As Compared
With The Six-Month Period Ended June 30, 1996
Net Sales
Net sales for the six-month period ended June 30, 1997 (the "97
Period") were $10,926,417 as compared with $8,171,134 for the six-month period
ended June 30, 1996 (the "96 Period"), an increase of $2,755,283 or 34%. 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 42% to $6,439,000 from $4,530,000 in the 96
Period. Net sales to international resellers in the 97 Period rose 34% to
$1,418,000 from $1,054,000 for the same period in 1996. Net sales from
OEM/Licensing customers increased 19% to $3,069,000 in the 97 Period from
$2,587,000 for the same period in 1996. The increase in OEM/Licensing reflects
primarily the increase in OEM sales to Apple Computer during Q2 97. In the 97
Period, net sales to Apple represented 16% of the Company's revenues as compared
to 12% of revenues during the comparable period in 1996.
During the 96 Period (principally during Q1 96), the Company
recognized OEM royalty revenues from Apple of approximately $317,000, with 100%
gross margins. If the Company had recognized Apple revenue on a product sale
basis rather than a royalty basis, net sales for the 96 Period on a proforma
basis would have been approximately $9,296,000.
Cost of Goods Sold
Cost of goods sold were $7,325,650 or 67% of net sales, for the
six-month period ended June 30, 1997, as compared with $7,714,286 or 94% of net
sales, for the six month period ended June 30, 1996, a decrease of $388,636 or
5%. The Company's gross profit margins for the 97 Period and the 96 Period were
33% and 6% 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.
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In the 96 Period, the Company experienced a significant reduction in
orders for the Company's L-TV product and graphics/connectivity products for the
Powerbook 190 and 5300 laptop computers. During the first five months of 1996,
management became aware of various product quality and sell-through issues
relating to Apple's Powerbook 190 and 5300 products, including a recall by Apple
of these products in May 1996. Because of the uncertainty with respect to these
Apple products and the likelihood that demand for the Company's
graphic/connectivity products would be significantly below the Company's then
existing inventory levels, management decided to minimize the Company's
inventory exposure and recorded a charge of $2.2 million in the first quarter of
1996, thus negatively impacting cost of goods sold for the 96 Period. However,
cost of goods sold for the 96 Period was favorably impacted by the sale during
Q2 96 of previously written-off inventory related to Apple's Powerbook 190 and
5300 laptop computers.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $1,965,217 or 18% of net
sales, for the six -month period ended June 30, 1997, as compared with
$1,976,785 or 24.2% of net sales, for the six-month period ended June 30, 1996,
a decrease of $11,568 or 1%. The decrease in absolute dollars and as a
percentage of net sales is due primarily to the combination of decreased costs
in direct display advertising, mail order promotional expenditures, and trade
show events, offset by 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.
General and Administrative Expenses
General and administrative expenses for the six-month period ended June
30, 1997 were $859,568 or 7.9% of net sales, as compared with $1,232,326 or
15.1% of net sales for the six-month period ended June 30, 1996, a decrease of
$372,758 or 30.2%. The decrease is due primarily to a decrease in goodwill
amortization costs of $199,000, and a reduction in legal, audit and other public
company fees of approximately $200,000. The reduction in goodwill from period to
period is due the write-down in 1996 of certain intangible costs related to the
Lapis acquisition.
Research and Development Expenses
Research and development expenses for the six-month period ended June
30, 1997 were $431,838, or 4% of net sales, as compared to $617,941, or 7.6% of
net sales, for the six-month period ended June 30, 1996, a decrease of $186,103
or 30.1%. The decrease is due principally to a reduction in consulting expenses
of $44,000, R & D facility expenses of $21,000, travel expense of $22,000,
recruiting costs of $21,000 and other net reductions in company wide engineering
costs. During the 6 months ended June 1997, 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 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, expected to commence in the quarter ended September 30,
1997.
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Interest Expense, Net
Net interest expense for the six-month period ended June 30, 1997 was
$134,943, or 1.2% of net sales, as compared to $170,103 or 2.1% of net sales,
for the six-month period ended June 30, 1996, a decrease of $35,160, or 20.7%.
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 June 30, 1996 to $800,000 as of June
30, 1997.
Other Income (Expense)
For the six month period ended June 30, 1997, the Company realized
other income of $42,132, primarily the net result of favorable settlements of
certain accounts payable obligations. For the six month period ended June 30,
1996, the Company incurred other expenses of $(12,792).
Net Income (Loss)
For the six months ended June 30, 1997, the Company reported net income
of $248,183, or $0.02 per share, as compared to a net loss of $(3,563,099), or
$(.45) per share, for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six-month period ended
June 30, 1997 and 1996 was ($726,746) and ($4,341,398), respectively. In the 97
Period, net cash used in operating activities consisted primarily of an increase
in accounts receivable and inventory of $2,643,714 and $328,363, respectively.
This was offset by an increase in accounts payable of $1,983,615, depreciation
and amortization (non-cash charge) of $191,681, and net income of $248,183. As
of June 30, 1997, Ingram Micro D, a distributor, represented approximately 31.5%
of the Company's accounts receivable. For the same period in 1996, net cash used
in operations was ($4,341,398) consisting primarily of a net loss of $3,563,099
and an increase in accounts receivable of $2,736,188. The 1996 losses were
partially offset by increased accounts payable and accrued liabilities totaling
$1,459,591 as well as depreciation and amortization of $390,715.
Net cash used in investing activities for the six month periods ended
June 30, 1997 and 1996 was ($396,772) and ($78,207), respectively due to the
purchase of property and equipment.
Net cash from financing activities for the six month period ended June
30, 1997 and 1996 was $1,972,170 and $2,889,642, respectively. In the 97 Period,
the Company received $1,996,813 in net proceeds from private offerings of Common
Stock and $40,825 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 the same period in 1996, the Company received
$3,015,528 in net proceeds from private offerings of Common Stock and $994,766
from the exercise of common stock options and warrants. The Q2 96 financing
proceeds were offset by $1,120,652 in payments on notes payable and capital
lease obligations.
15
<PAGE>
As of June 30, 1997, the Company had working capital of $974,158, as
compared to a working capital deficiency of $(1,007,509) at December 31, 1996,
an increase of $1,981,667. The Company's cash position increased to $1,262,546
at June 30, 1997, an increase of $848,652, or 205%, 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.
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 June 30, 1997, the Company has an accumulated deficit of
approximately $20.2 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 those 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.
16
<PAGE>
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.
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 June 30, 1997, the Company had working capital of
$974,158, cash and cash equivalents of $1,262,546 and was fully drawn on its
line of credit (approximately $800,000 at June 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 six month period ended June 30, 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
17
<PAGE>
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 six months ended June 30, 1997,
approximately 26% of the Company's revenues were derived from the sales to
Ingram Micro D, a national distributor, and approximately 5% were derived from
sales to Zenith Electronics, Inc. ("Zenith"). Management expects those 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. For the nine months
ended June 30, 1997, the Company shipped approximately $733,000 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, the Company and
Zenith are reviewing an amendment to the original Agreement that would establish
revised minimum purchases for Zenith and the removal of the exclusivity sales
provision. There can be no assurances, however, that Zenith will agree to the
proposed amendment to the original Agreement or that Zenith will purchase the
minimums per the original Agreement. Further, if the contract were to be
terminated by Zenith, there would be a material adverse effect to the Company
and its business.
For the six months ended June 30, 1997, approximately 16%, of the
Company's net sales were derived from sales of the Company's L-TV product to
Apple Computer, Inc. ("Apple"). The sales were pursuant to volume orders from
Apple for shipment in the first, second and third 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 and at June 30, 1997, had an accumulated
deficit of $20,177,350. Although the Company reported net income of $248,183 for
the six month period ended June 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.
18
<PAGE>
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 June 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 June 30,
1997, approximately $800,000 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.
Reliance on Single Vendor. In the six months ended June 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. 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 video-graphics 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 third calendar quarter of 1997, the
Company's revenues and profitability for 1997 could be adversely effected.
19
<PAGE>
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 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 expects to file two additional patents in the third 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.
20
<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 six month period ended June 30, 1997.
ITEM 2. CHANGES IN SECURITIES
At the Annual Meeting of Stockholders held on July 25, 1997, the
stockholders approved an amendment to the Certificate of Incorporation of the
Company to increase the authorized Common Stock from 20,000,000 to 25,000,000
shares.
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 June 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
On June 20, 1997, the Board of Directors caused to be distributed to
stockholders of record as of May 30, 1997, a Notice of Annual Meeting of
Stockholders, Proxy and Proxy Statement for the Annual Meeting held on July 25,
1997. As of the record date, 12,721,633 of Common Stock (excluding treasury
shares) were entitled to vote.
At the meeting, the stockholders acted upon the following proposals:
(i) election of two Class III directors; (ii) approval of an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 20,000,000 to 25,000,000 shares and (iii)
ratification of the firm of Wolf & Company, P. C. as independent auditors. All
of the above matters were approved by the stockholders.
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 proxy were voted "For" each
proposal in the manner disclosed in the Proxy Statement and Proxy. The voting
results were as follows:
I. Election Of Directors
FOR AGAINST WITHHOLD
------ ------- ---------
U. Haskell Crocker 10,659,834 0 41,912
Daniel Shaver 10,659,759 0 41,987
21
<PAGE>
II. Amendment to Certificate of Incorporation
FOR AGAINST ABSTAIN
------ ------------- ---------
10,289,773 368,514 43,459
III. Ratification of Independent Auditors
FOR AGAINST ABSTAIN
------ ------------- ----------
10,622,680 29,957 49,109
ITEM 5. OTHER INFORMATION
Appointment of New President
Effective April 21, 1997, the Board of Directors appointed Mr. Brett A.
Moyer as President and Chief Operating Officer of the Company. For the past 10
years, Mr. Moyer served in various capacities with Zenith Electronics
Corporation. Most recently, Mr. Moyer was Vice President and General Manager of
Zenith Commercial Products Division, where he directed sales and marketing
activities of television and projection systems for education, hospitality,
healthcare, and professional markets. He also previously served as Vice
President of Sales Planning and Operations at Zenith where he was responsible
for forecasting, customer service, distribution, MIS and regional credit
operations.
Amendment to Terms of Warrants
In accordance with the anti-dilution provisions of the Company's
Redeemable Common Stock Purchase Warrants (the "Warrants") issued in connection
with the Company's initial public offering in May 1993, the terms of the
Warrants have been amended so that upon exercise, a holder will receive 1.774
shares of Common Stock for each Warrant exercised. The Warrants are exercisable
at a price of $6.75 per Warrant until May 23, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
3.1 Certificate of Amendment to Certificate of Incorporation dated July,
25, 1997.
4.1 Certificate of Warrant Adjustment dated August 13, 1997.
10.1 Loan Document Modification Agreement No. 6 dated as of March 7, 1997.
10.2 Amended and Restated Promissory Note dated as of March 7, 1997 in favor
of Silicon Valley Bank
22
<PAGE>
11 Statement Re: Computation of Per Share Earnings
99.1 Press Release dated May 5, 1997 Regarding Appointment of Brett A. Moyer
as President and Chief Operating Officer.
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1997.
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 12, 1997 By: /s/ Thomas L. Massie
Thomas L. Massie
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
November 12, 1997 By: /s/ Harry G. Mitchell
Harry G. Mitchell
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
23
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