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: 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 $321,733 and $488,605 6,282,769 3,613,565
Inventories 2,303,744 1,975,381
Prepaid expenses and other current assets 221,429 243,829
------------ ------------
Total current assets 10,070,488 6,246,669
Property and equipment, net 797,360 483,591
Other assets, net 1,307,472 1,273,980
Goodwill, net 1,358,428 1,467,106
------------ ------------
Total assets $ 13,533,748 $ 9,471,346
============ ============
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 (18,613,371) (18,861,553)
------------ ------------
Total stockholders' equity 4,822,322 2,536,502
------------ ------------
Total liabilities and stockholders' equity $ 13,533,748 $ 9,471,346
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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 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 from operations 327,893 152,462
Interest expense, net (67,703) (65,729)
Other income (expense) (26,883) (2,481)
------------ ------------
Income before income taxes 233,307 84,252
Income tax expense 1,600 2,500
------------ ------------
Net income $ 231,707 $ 81,752
============ ============
Net income 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 consolidated 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 3,600,767 456,848
------------ ------------
Operating expenses:
Sales, marketing and support 1,965,217 1,976,785
General and administrative 859,568 1,232,325
Research and development 431,838 617,941
------------ ------------
Total operating expenses 3,256,623 3,827,051
------------ ------------
Income from operations 344,144 (3,370,203)
Interest expense, net (134,943) (170,103)
Other income (expense) 42,132 (12,792)
------------ ------------
Income (loss) before income taxes 251,333 (3,553,098)
Income tax expense 3,150 10,000
------------ ------------
Net income (loss) $ 248,183 $ (3,563,098)
============ ============
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 consolidated 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 $(3,563,098)
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 (2,669,204) (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
Increase (decrease) in accounts payable 1,983,615 850,503
Increase (decrease) in accrued liabilities (71,364) 609,088
----------- -----------
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
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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. NET INCOME (LOSS) PER SHARE
Per share amounts are calculated using the weighted average number of
common shares and common share equivalents outstanding during periods of net
income. Common share equivalents are attributable to unexercised stock options
and warrants and are computed using the treasury stock method. Per share amounts
are calculated using only the weighted average number of common shares
outstanding during periods of net loss.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 - Earnings Per Share. This
Statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
However, an entity is permitted to disclose pro forma earnings per share (EPS)
amounts computed using this Statement in the notes to the financial statements
in periods prior to required adoption. After the effective date, all prior
period EPS data presented shall be restated to conform with the provisions of
this Statement.
The Company has elected to disclose pro forma EPS amounts computed
using this Statement, as follows:
Three Months Ended 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)
========== ===== ========= ======
7
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3. 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
========== ===========
4. NOTES PAYABLE
Lines of Credit, Banks. The Company maintains 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
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 is fully drawn as of June 30, 1997. 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.
8
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5. COMMON STOCK TRANSACTIONS
In January 1997, the Company sold approximately 75,000 shares of its
common stock, valued at approximately $138,750, in connection with a private
offering to foreign investors. This stock is unregistered and subject to
restrictions on trading in the United States for a period of forty days. In
connection with the offering, the Company paid approximately $26,250 to the
underwriter. Net proceeds of the private offering were approximately $112,500.
On February 12, 1997, the Company sold approximately 218,181 shares of
common stock for gross proceeds of approximately $338,181 in connection with a
private offering to foreign investors. This stock is unregistered and subject to
restrictions on trading in the United States for a period of forty days. In
connection with the offering, the Company incurred fees of $38,181, receiving
net proceeds of $300,000.
On March 27, 1997, the Company completed a financing of approximately
$1,650,000 in gross proceeds for the sale of approximately 1,100,000 shares of
Common Stock in a private placement to unaffiliated accredited investors. The
shares issued as part of this transaction 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.
6. 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.
9
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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.
10
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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 absolutedollars 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
50%. 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.
12
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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 $2,669,204 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 $3,563,098
and an increase in accounts receivable of $2,736,188. The 1996 uses 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.
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<PAGE>
As of June 30, 1997, the Company had working capital of $1,399,648, as
compared to a working capital deficiency of $(607,509) at December 31, 1996, an
increase of $2,006,157. 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 $18.6 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.
15
<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 $1,399,648, 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 Company
16
<PAGE>
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 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 $18,613,371. 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.
17
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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.
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<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.
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 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 the 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
II. Amendment to Certificate of Incorporation
FOR AGAINST ABSTAIN
--- ------- --------
10,289,773 368,514 43,459
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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 the Vice President and General Manager of Zenith
Commercial Products Division, where he directed sales and marketing activities
of television and projection systems products for the 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.
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.
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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.
August 14, 1997 By: \s\ Thomas L. Massie
Thomas L. Massie
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
August 14, 1997 By: \s\ Harry G. Mitchell
Harry G. Mitchell
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
22
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
FOCUS ENHANCEMENTS, INC.
FOCUS Enhancements, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), pursuant to the
provisions of the General Corporation Law of the State of Delaware (the "DGCL"),
DOES HEREBY CERTIFY as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting the first paragraph of Section 4 of the Certificate of
Incorporation in its present form and substituting therefor new first and second
paragraphs of Section 4 in the following form:
A. This corporation is authorized to issue two classes of
stock, to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares this corporation is authorized to
issue is Twenty-Eight Million (28,000,000) shares of capital stock.
B. Of such authorized shares, Twenty-Five Million (25,000,000)
shares shall be designated "Common Stock" and have a par value of $0.01
per share. Three Million (3,000,000) shares shall be designated
"Preferred Stock" and have a par value of $0.01 per share.
SECOND: The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly adopted in
accordance with the provisions of Section 242 of the DGCL by (a) the Board of
Directors of the Corporation having duly adopted a resolution setting forth such
amendment and declaring its advisability and submitting it to the stockholders
of the Corporation for their approval, and (b) the stockholders of the
Corporation having duly adopted such amendment by vote of the holders of a
majority of the outstanding stock entitled to vote thereon at a special meeting
of stockholders called and held upon notice in accordance with Section 222 of
the DGCL.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate of Amendment to be signed by Thomas L.
Massie, its Chief Executive Officer, and attested to by John A. Piccione, Esq.,
its Secretary, this 25th day of July, 1997.
FOCUS ENHANCEMENTS, INC.
By: /s/Thomas L. Massie
Thomas L. Massie
Chief Executive Officer
ATTEST:
/s/John A. Piccione
John A. Piccione
Secretary
Exhibit 4.1
CERTIFICATE OF WARRANT ADJUSTMENT
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
The undersigned, being the Senior Vice President and Chief Financial Officer of
FOCUS Enhancements, Inc. (the "Company") hereby certifies that, pursuant to
Section 4.3 of that certain Warrant Agreement by and among the Company and
Mellon Securities Trust Company, dated May 24, 1993, that the terms of the
Company's Redeemable Common Stock Purchase Warrants issued in connection with
the Company's public offering on May 24, 1993, (the "Public Warrants") are
hereby adjusted as follows:
o Each Public Warrant, with an exercise price of $6.75, entitles
the holder to purchase 1.774 shares of Common Stock, which is
equal to $3.81 per Common Share on a pro-rated basis, until
May 23, 1998.
The foregoing purchase price and numbers of shares of Common Stock issuable upon
exercise are primarily the result of adjustments during the period June 30, 1994
through June 30, 1997 due to: (a) the sale of an aggregate of 5,974,631
additional shares of Common Stock for less than the purchase price of Common
Stock under the Public Warrant at the date of sale relating to Private Placement
Offerings; (b) the issuance of "Non Public Warrants" to purchase 795,000
additional shares of Common Stock for less than the purchase price of Common
Stock under the Public Warrant at the date of issuance relating to Private
Placement Offerings; (c) the issuance of "Non Public Warrants" to purchase
250,000 additional shares of Common Stock for less than the purchase price of
Common Stock under the Public Warrant at the date of issuance relating to debt
refinancing; (d) the issuance of "Non Public Warrants" to purchase 308,545
additional shares of Common Stock for less than the purchase price of Common
Stock under the Public Warrant at the date of issuance relating to debt
conversions; (e) the grant of vested (through June 30, 1997) Non-Qualified Stock
Options to purchase 200,000 additional shares of Common Stock for less than the
purchase price of Common Stock under the Public Warrant at the date of grant
relating to Key Officer and Director Arrangements; and, (f) the sale of an
aggregate of 732,869 additional shares of Common Stock for less than the
purchase price of Common Stock under the Public Warrant at the date of sale
relating to the acquisition of TVIEW, Inc.
IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 13th
day of August, 1997.
/s/ Harry G. Mitchell
Harry G. Mitchell
Senior Vice President and
Chief Financial Officer
Exhibit 10.1
LOAN DOCUMENT MODIFICATION AGREEMENT
(No. 6; dated as of March 7, 1997)
LOAN DOCUMENT MODIFICATION AGREEMENT dated as of March 7, 1997 by and
between FOCUS ENHANCEMENTS, INC., a Delaware corporation and LAPIS TECHNOLOGIES,
INC., a California corporation, (each a "Borrower" and together the "Borrowers")
and SILICON VALLEY BANK (the "Bank"), a California chartered bank with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054,
and with a loan production office located at Wellesley Office Park, 40 William
Street, Wellesley, MA 02181, doing business under the name "Silicon Valley
East".
1. Reference to Existing Loan Documents.
Reference is hereby made to that Credit Agreement dated January 20,
1994 between the Bank and the Borrower as previously amended as of January 24,
1994, March 30,1994, October 6, 1994, June 15, 1995 and April 5, 1996 (with the
attached schedules and exhibits, the "Credit Agreement") and the Loan Documents
referred to therein, including without limitation that certain Amended and
Restated Promissory Note of the Borrower dated April 5, 1996 in the principal
amount of $900,000 (the "Note"), and the Security Documents referred to therein.
Unless otherwise defined herein, capitalized terms used in this Agreement shall
have the same respective meanings as set forth in the Credit Agreement.
2. Effective Date.
This Agreement shall become effective as of March 7, 1997 (the
"Effective Date"), provided that the Bank shall have received the following on
or before May 14, 1997 and provided further, however, in no event shall this
Agreement become effective until signed by an officer of the Bank in California:
a. two copies of this Agreement, duly executed by the Borrower,
with the attached consent letter duly executed by C. Bruce Johnstone, duly
executed thereby; and
b. an amended and restated promissory note in the form enclosed
herewith (the "Amended Note"), duly executed by the Borrower.
By the signature of its authorized officer below, each Borrower is
hereby representing that, except as modified in Schedule A attached hereto, the
representations of the Borrowers set forth in the Loan Documents (including
those contained in the Credit Agreement, as amended by this Agreement) are true
and correct as of the Effective Date as if made on and as of such date. In
addition, the Borrowers confirm their authorization as to the debiting of their
account with the Bank in the amount of $7,500 in order to pay the Bank's
facility fee for the period up to and including the extended Expiry Date and in
the amount of $1,800 to pay the fees of Sullivan & Worcester LLP, special
counsel to the Bank for services rendered to the Bank in connection with this
Agreement. Finally, each Borrower (and each guarantor, if any, signing below)
agrees that, as of the Effective Date, it has no defenses against its
<PAGE>
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obligations to pay any amounts under the Credit Agreement and the other Loan
Documents; and in consideration for the Bank's entering into this Amendment, the
Borrowers hereby also agree to release and forever discharge the Bank and its
affiliates, officers, directors, agents, attorneys, employees, successors and
assigns of and from all manner of actions, causes of action, suits, judgments,
claims and demands whatsoever in law or in equity, which have arisen from the
beginning of time up to the date of the Borrower's acceptance of this Amendment,
whether arising in connection with the transaction contemplated hereby or by the
Credit Agreement or otherwise.
3. Description of Change in Terms.
As of the Effective Date, the Credit Agreement is modified in the
following respects:
a. The figure "$900,000" appearing on the cover page and in the
fifth line of Section 1.1 of the Credit Agreement is hereby deleted and there is
hereby substituted the figure "$800,000."
b. Section 1.5 of the Credit Agreement is hereby amended by
deleting "March 7, 1997" appearing in the second line thereof as the Maturity
Date and substituting in place thereof "March 7, 1998." Section 1.5 is further
amended by restating the last sentence of such sections as follows: "The Bank
shall meet with an officer of the Borrowers on or about January 7, 1998 in order
to discuss (a) an extension to the Guarantee of C. Bruce Johnstone; and (b) a
plan acceptable to the Bank for repayment of the entire outstanding balance of
the Note by the Maturity Date."
c. Numbered paragraphs 7.10 through 7.13 are hereby restated in
their entirety as follows:
"7.10 Ratio of Eligible Accounts Receivable to Aggregate
Extensions of Credit. The Borrowers will not permit the ratio cash plus
of the aggregate amount of Eligible Domestic Accounts Receivable and
Eligible International Accounts Receivable (excluding in any event from
such calculation accounts receivable falling within the definition of
Apple Collateral as such term is defined in the Intercreditor Agreement
dated as of October 18, 1994 between Focus Enhancements, Inc., the Bank
and Fred Kassner) to aggregate Extensions of Credit to exceed 2.5 to 1
at the end of any month.
7.11 Minimum Working Capital. The Borrower will not permit
Working Capital, net of Deferred Revenue, to be less than $800,000 at
the end of any month, commencing May 31, 1997. For purposes hereof, (a)
"Working Capital" shall mean Current Assets less Current Liabilities,
and (b) "Deferred Revenue" shall mean revenue that is deferred in
accordance with GAAP.
7.12 Minimum Profitability. The Borrowers will not permit Net
Losses to be greater than, or Net Income to be less than, the amounts
set forth opposite the respective fiscal quarter ends listed below.
<PAGE>
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Quarter Ending Minimum Profitability
March 31, 1997 ($250,000)
June 30, 1997 $100,000
September 30, 1997 $100,000
December 31, 1997 and each fiscal
quarter thereafter $100,000
7.13 [Not Utilized]"
d. Section 9.1 is hereby amended by inserting the following new
definition in alphabetical order:
"'Current Assets' means, as of any applicable, date, all
amounts that should, in accordance with GAAP, be included as current
assets on the consolidated balance sheet of Borrowers and their
respective Subsidiaries taken as a whole."
e. The form of Compliance Certificate attached to the Credit
Agreement as Exhibit C is hereby restated in its entirety in the form of Exhibit
C hereto.
f. The Credit Agreement and the other Loan Documents are hereby
amended wherever necessary or appropriate to reflect the foregoing changes.
4. Waivers.
The Bank hereby waives any Event of Default arising as a result of
non-compliance by the Borrowers with any financial covenants set forth in
numbered Sections 7.10 through 7.13 for any fiscal period through February 28,
1997.
5. Continuing Validity.
Upon the effectiveness hereof, each reference in each Security
Instrument or other Loan Document to "the Credit Agreement", "thereunder",
"thereof", "therein", or words of like import referring to the Credit Agreement,
shall mean and be a reference to the Credit Agreement, as amended hereby. Except
as specifically set forth above, the Credit Agreement shall remain in full force
and effect and is hereby ratified and confirmed. Each of the other Loan
Documents is in full force and effect and is hereby ratified and confirmed. The
amendments set forth above (i) do not constitute a waiver or modification of any
term, condition or covenant of the Credit Agreement or any other Loan Document,
other than as expressly set forth herein, and (ii) shall not prejudice any
rights which the Bank may now or hereafter have under or in connection with the
Credit Agreement, as modified hereby, or the other Loan Documents and shall not
obligate the Bank to assent to any further modifications.
6. Miscellaneous.
a. This Agreement may be signed in one or more counterparts each
of which taken together shall constitute one and the same document.
<PAGE>
-4-
b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
c. EACH BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN
ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF THIS LOAN MODIFICATION AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY
REASON LENDER CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS, THEN VENUE SHALL LIE IN SANTA CLARA COUNTY, CALIFORNIA.
d. The Borrowers agree, jointly and severally to promptly pay on
demand all costs and expenses of the Bank in connection with the preparation,
reproduction, execution and delivery of this letter amendment and the other
instruments and documents to be delivered hereunder, including the reasonable
fees and out-of-pocket expenses of Sullivan & Worcester LLP, special counsel for
the Bank with respect thereto.
IN WITNESS WHEREOF, the Bank and the Borrower have caused this
Agreement to be signed under seal by their respective duly authorized officers
as of the date set forth above.
SILICON VALLEY EAST, a Division
of Silicon Valley Bank
By: /s/David P. Fischer
Name: David P. Fischer
Title: Senior Vice President
SILICON VALLEY BANK
By: /s/Amy Young
Name: Amy Young
Title: AVP
(signed in Santa Clara, CA)
<PAGE>
-5-
FOCUS ENHANCEMENTS, INC.
By: /s/ Harry G. Mitchell
Name: Harry G. Mitchell
Title: Sr. Vice President & CFO
LAPIS TECHNOLOGIES, INC.
By: /s/ Harry G. Mitchell
Name: Harry G. Mitchell
Title: Sr. Vice President & CFO
Exhibit 10.2
AMENDED AND RESTATED PROMISSORY NOTE
$800,000 Sudbury, Massachusetts
As of March 7, 1997 (Originally
dated January 20, 1994 as
previously amended as of
March 30, 1994, June 15, 1995 and
April 5, 1996)
For value received, the undersigned, FOCUS ENHANCEMENTS, INC., a
Delaware corporation and LAPIS TECHNOLOGIES, INC., a California corporation
(each a "Borrower" and collectively the "Borrowers"), jointly and severally
promise to pay to SILICON VALLEY BANK (the "Bank") at the office of the Bank
located at 3003 Tasman Drive Santa Clara, California 95054, or to its order, the
lesser of Eight Hundred Thousand Dollars ($800,000) or the outstanding principal
amount hereunder, on March 7, 1998 (the "Maturity Date"), together with interest
on the principal amount hereof from time to time outstanding at a fluctuating
rate per annum equal to the Prime Rate (as defined below) plus the Applicable
Margin (as defined in the Credit Agreement) until the Maturity Date, payable
monthly in arrears on the first day of each calendar month occurring after the
date hereof and on the Maturity Date, provided, further, however, the Borrowers
agree to make eleven (11) consecutive monthly prepayments of principal in the
amount of Ten Thousand Dollars ($10,000) each, commencing May 1, 1997 and ending
March 1, 1998, provided, further however, the final payment on the Maturity Date
shall be sufficient in amount to satisfy all outstanding obligations of the
Borrowers hereunder. The Borrowers jointly and severally promise to pay on
demand interest at a per annum rate of interest equal to the Prime Rate plus the
Applicable Margin plus 5% on any overdue principal (and to the extent permitted
by law, overdue interest). The Bank's "Prime Rate" is the per annum rate of
interest from time to time announced and made effective by the Bank as its Prime
Rate (which rate may or may not be the lowest rate available from the Bank at
any given time).
Computations of interest shall be made by the Bank on the basis of a
year of 360 days for the actual number of days occurring in the period for which
such interest is payable.
This promissory note amends and restates the terms and conditions of
the obligations of the Borrower under the promissory note dated as of January
20, 1994 as previously amended as of March 30, 1994, June 15, 1995 and April 5,
1996 (the "Original Note") by the Borrower to the Bank. Nothing contained in
this promissory note shall be deemed to create or represent the issuance of new
indebtedness or the exchange by the Borrower of the Original Note for a new
promissory note. This note is the promissory note referred to in the Credit
Agreement herewith by and among the Bank and the Borrowers (together with all
related exhibits and schedules), as amended as of January 24, 1994, March 30,
1994, October 6, 1994, June 15, 1995, April 5, 1996 and March 7, 1997 and as the
same may be amended, modified or supplemented from time to time (the "Credit
Agreement"), and is entitled to the benefits thereof and of the other Loan
Documents referred to therein, and is subject to optional and mandatory
prepayment as provided therein. This note is secured by Security
<PAGE>
- 2 -
Agreements dated of even date herewith each Borrower in favor of the Bank, as
the same may be amended, modified or supplemented from time to time.
Each reference in each Loan Document (as defined in the Credit
Agreement) to "the Note", "thereof", "therein", "thereunder", or words of like
import referring to the Original Note, shall mean and be a reference to the
Original Note, as amended and restated hereby.
Upon the occurrence of any Event of Default under, and as defined in,
the Credit Agreement, at the option of the Bank, the principal amount then
outstanding of and the accrued interest on the advances under this note and all
other amounts payable under this note shall become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate),
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrowers.
The Bank shall keep a record of the amount and the date of the making
of each advance pursuant to the Credit Agreement and each payment of principal
with respect thereto by maintaining a computerized record of such information
and printouts of such computerized record, which endorsement or computerized
record, and the printouts thereof, shall constitute prima facie evidence of the
accuracy of the information so endorsed.
The undersigned jointly and severally agree to pay all reasonable
out-of-pocket costs and expenses of the Bank (including, without limitation, the
reasonable fees and expenses of attorneys) in connection with the enforcement of
this note and the other Loan Documents and the preservation of their respective
rights hereunder and thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. Each
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THE BORROWERS ACKNOWLEDGE THAT THIS NOTE SHALL BE DEEMED DELIVERED TO
THE BANK AND ACCEPTED BY THE BANK IN THE STATE OF CALIFORNIA.
EACH BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER
HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT) OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
<PAGE>
- 3 -
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, EACH BORROWER ACCEPTS FOR
ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE STATE OF CALIFORNIA OR THE COMMONWEALTH OF MASSACHUSETTS IN
ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH
SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND
BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR
PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER
HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL
AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT,
BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING
ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT,
THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE
ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE
THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH
ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL
LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR
RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF
THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER
SEAL.
FOCUS ENHANCEMENTS, INC.
By: /s/ Harry G. Mitchell
Name: Harry G. Mitchell
Title: Sr. Vice President & CFO
LAPIS TECHNOLOGIES, INC.
By: /s/ Harry G. Mitchell
Name: Harry G. Mitchell
Title: Sr. Vice President & CFO
EXHIBIT 11
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Three months ended
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Net income $ 231,707 $ 81,752
=========== ===========
Primary:
Weighted average number of common shares outstanding 12,716,005 8,561,504
Weighted average common equivalent shares 621,848 541,033
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 13,337,853 9,102,537
=========== ===========
Fully diluted:
Weighted average number of common shares outstanding 12,716,005 8,561,504
Weighted average common equivalent shares 603,481 541,033
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 13,319,486 9,102,537
=========== ===========
Net income per share
Primary $ 0.02 $ 0.01
=========== ===========
Fully diluted $ 0.02 $ 0.01
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
Six months ended
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Net income (loss) $ 248,183 $(3,563,098)
=========== ===========
Primary:
Weighted average number of common shares outstanding 12,123,306 7,974,362
Weighted average common equivalent shares 415,080 --
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 12,538,386 7,974,362
=========== ===========
Fully diluted:
Weighted average number of common shares outstanding 12,123,306 7,974,362
Weighted average common equivalent shares 569,308 --
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 12,692,614 7,974,362
=========== ===========
Net income per share
Primary $ 0.02 $ (0.45)
=========== ===========
Fully diluted $ 0.02 $ (0.45)
=========== ===========
</TABLE>
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,262,546
<SECURITIES> 0
<RECEIVABLES> 6,604,502
<ALLOWANCES> 321,733
<INVENTORY> 2,303,744
<CURRENT-ASSETS> 10,070,488
<PP&E> 2,314,083
<DEPRECIATION> 1,532,962
<TOTAL-ASSETS> 13,533,748
<CURRENT-LIABILITIES> 8,670,840
<BONDS> 0
0
0
<COMMON> 127,190
<OTHER-SE> 4,694,558
<TOTAL-LIABILITY-AND-EQUITY> 13,533,748
<SALES> 10,926,417
<TOTAL-REVENUES> 10,926,417
<CGS> 7,325,650
<TOTAL-COSTS> 3,256,623
<OTHER-EXPENSES> (42,132)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,703
<INCOME-PRETAX> 251,333
<INCOME-TAX> 3,150
<INCOME-CONTINUING> 248,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 248,183
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
Exhibit 99.1
FOCUS Enhancements, Inc. Names New President & Chief
Operating Officer
SUDBURY, MASS., May 5, 1997 - FOCUS Enhancements, Inc. (NASDAQ: FCSE, FCSEW)
announced today that it has named Brett A. Moyer as President & Chief Operating
Officer of the Company. Moyer brings over 10 years of strong experience in
global sales, finance, and general management to FOCUS Enhancements from Zenith
Electronics Corporation, where he was most recently the Vice President and
General Manager of Zenith Commercial Products Division. As head of Zenith's
Commercial Products Division, Mr. Moyer had full P&L responsibilities and
directed its sales and marketing activities of television and projection systems
products for the education, hospitality, healthcare, and professional markets.
Moyer has also 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 for the billion dollar company. He has also
held management positions in Corporate Profit Planning where he directed
Zenith's planning activities including budgeting, P&L forecasting, capital
expenditures, and cash flow.
"We are very pleased to add Brett to our senior management team," said Thomas L.
Massie, Chairman and Chief Executive Officer of FOCUS. "His strong management
experience in all areas of sales, operations, and finance will be a powerful
asset that will help drive FOCUS Enhancements' corporate initiatives and take
FOCUS profitably into the 21st century. Brett's exceptional planning and
executing abilities will help grow our lines of business, and will be
instrumental in executing the Company's PC-to-TV convergence strategy over the
next several years."
"FOCUS has a key strategic position in the PC-to-TV convergence market with its
proprietary video conversion technology," said Mr. Moyer." "The convergence
market is heating up. There is a tremendous upside opportunity for FOCUS to grow
its chip and technology licensing business and its consumer PC-to-TV products
business globally. It is my goal to apply a global business perspective to the
development and execution of an aggressive growth plan throughout the next
several years."
Moyer's responsibilities as President & COO of FOCUS will include global sales,
marketing, customer satisfaction, and OEM and licensing. In addition, the
Company's operational, product manufacturing, quality assurance, and fulfillment
responsibilities will fall under his direction.
Moyer is expected to begin work at FOCUS in mid May.
Thomas Massie, FOCUS's Chairman and Chief Executive Officer will remain very
active in the leadership of the Company concentrating his efforts in product
development, corporate
<PAGE>
initiatives, and strategic alliances. Mr. Moyer, Corporate Finance and
Administration, and Research and Development will report directly to Mr. Massie.
For More Information
Editors seeking more information should contact Suzanne Kimball: voice/FAX:
(801) 567-1895, Internet: [email protected]. For sales information, contact
FOCUS directly at (508) 371- 2000, 142 North Road, Sudbury, Massachusetts 01776,
FAX: (508) 371-8470, Internet: www.FOCUSinfo.com.
FOCUS Enhancements, Inc. is an industry leader in the development and marketing
of advanced, proprietary video scan conversion products and networking 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 limitations, continued acceptance of the
Company 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 form time to time in the
Company's periodic reports filed with the Securities and Exchange Commission.
-2-
