U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1997, or
|_| 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.
(Name of Small Business Issuer in its Charter)
Delaware 04-3186320
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
142 North Road
Sudbury, Massachusetts 01776
(Address of Principal Executive Offices) (Zip Code)
(978) 371-2000
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.01 par value NASDAQ
Common Stock Purchase Warrant NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
------------------------------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such other shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. X Yes No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB[ ].
Issuer's revenues for the fiscal year ended December 31, 1997 were $21,026,011.
The aggregate market value of voting Common Stock held by non-affiliates of the
Registrant was approximately $42,000,000 based on the closing bid price of the
Registrant's Common Stock on March 12, 1998 as reported by NASDAQ ($2.875 per
share).
As of March 12, 1998, there were 15,151,503 shares of Common Stock outstanding.
Document Incorporated by Reference: Part
Proxy Statement for 1998 Annual Meeting of Stockholders III
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TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7. Financial Statements F-1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act 22
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial Owners
and Management 22
Item 12. Certain Relationships and Related Transactions 22
Item 13. Exhibits and Reports on Form 8-K 22
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PART I
ITEM 1. BUSINESS
Business of the Company
FOCUS Enhancements, Inc. (the "Company" or "FOCUS") internally
develops, markets and sells worldwide a line of proprietary PC-to-TV video
conversion products for PC's and Macintoshes(R). Based on an independent survey
by Frost & Sullivan, the Company is an industry leader in the development and
marketing of PC-to-TV video conversion products that make personal computers
"TV-ready" and televisions "PC-ready."
The Company's proprietary PC-to-TV video conversion products include
video output devices marketed and sold under the Company's registered trademark
"TView." All of the Company's PC-to-TV conversion products enable users to
transmit at low-cost, high-quality, computer generated images from any DOS,
Windows or Mac OS based personal computer to any television of any size with a
standard RCA or S-Video interface. FOCUS' PC-to-TV technology provides sharp,
flicker-free, computer-generated images on televisions for multimedia/business
presentations, classroom/training sessions, game playing, collective viewing of
computer applications, and Internet browsing.
The Company markets and sells its FOCUS branded consumer products
globally through a network of distributors, volume resellers, mail order,
value-added resellers ("VARs") and original equipment manufacturers ("OEMs"). In
North America, the Company markets and sells its products through national
distributors such as Ingram Micro D, D & H, Academic and Nuvo; national volume
resellers such as CompUSA, Computer City, Micro Center, Staples and through
third party mail order companies such as MicroWarehouse, Multiple Zones, Global
Direct, PC Connection and CDW.
In addition, the FOCUS branded PC-to-TV products have been selected by
leading personal computer manufacturers to be marketed with the use of their
select brand of personal computers. Compaq and Toshiba have included the
Company's PC-to-TV products on their selected market price lists and promote the
FOCUS PC-to-TV products in their box materials.
The Company also markets and sells its products internationally in over
30 countries by independent distributors in each country. These independent
distributors market and sell the FOCUS branded products to retailers, mail order
companies, and VARs in their respective countries.
In addition to the FOCUS branded products, the Company markets, sells
or licenses its proprietary PC-to-TV technology to television manufacturers such
as Philips Consumer Electronics and Zenith Electronics, and to personal
computer manufacturers such as Apple Computer. The Company is currently in
discussions with several other PC manufacturers, television manufacturers, VGA
chip developers and VGA card developers globally.
The Company was founded in December 1991, as a Massachusetts
corporation and was reincorporated in Delaware in April 1993. In December 1993,
the Company acquired Lapis Technologies Inc. ("Lapis"), a developer of
high-quality, low-cost Macintosh PC to TV video
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graphics products. Effective September 30, 1996, the Company consummated the
acquisition of TView, Inc., a developer of PC-to-TV video conversion ASIC
technology. This acquisition has played a major strategic role in allowing FOCUS
to gain a major technological lead over competitors in the video scan conversion
category and has positioned FOCUS as a leader in PC-to-TV video conversion
technology. On September 30, 1997, the Company sold its line of computer
connectivity products.
The Company's principal executive offices are located at 142 North
Road, Sudbury, Massachusetts 01776. Its research and development center is
located at 9275 SW Nimbus Drive, Beaverton, Oregon 97008. The Company's European
sales and marketing office, FOCUS Enhancements B.V., is located at Schipholweg
118, Kantorenhuis, 2316 XD Leiden, The Netherlands. The Company's general
telephone number is (978) 371-2000 and its Worldwide Web address is
http://www.focusinfo.com.
Business Strategy
In 1995, the Company's long-term business strategy was refined to focus
on the opportunities presented by the PC-to-TV convergence market and by the
emergence of new computing platforms often referred to as "Information
Appliances." FOCUS has increased its research and development activities to
sustain its technological leadership and to continue to grow its PC-to-TV
product line. Management expects that this increased emphasis will provide
additional third-party opportunities for OEM and licensing partnerships with PC
manufacturers, television manufacturers, set top box developers, and VGA chip
developers.
According to a report on the market in the United States for PC-to-TV
scan conversion products published by Frost & Sullivan in 1997, the size of the
market is projected to grow from approximately $57 million in 1997 to $124
million in 2000 and $200 million by 2003. The report also projects an annual
compound growth rate for the PC-to-TV conversion market of approximately 24
percent. In 1997, it was projected that 450,000 units of PC-to-TV products were
sold, and it is expected that by 2000, there will be in excess of 1.4 million
units sold.
The Company has sought to address the growth in this market by
acquiring Lapis in December 1993 and TView in September 1996. As part of the
change in its strategic focus, the Company has also discontinued the sale of any
products that were not targeted to the PC-to-TV video conversion marketplace,
culminating in 1997 with the sale of its line of computer connectivity products.
Since first introducing PC-to-TV video conversion products, the Company
has shipped approximately 18,000 units in 1994, approximately 100,000 units in
1995, approximately 119,000 units in 1996, and approximately 225,000 units in
1997. According to the Frost & Sullivan survey, the Company's revenues of
PC-to-TV video conversion products represent approximately 45% of all PC-to-TV
video conversion product sales in North America.
The Company uses a diversified sales and marketing distribution
strategy both domestically and internationally. Domestically, the Company
markets and sells its products through national
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distributors, including resellers, mail order companies and VARs, through
computer, office/business and consumer electronic superstores and through
computer, television and set top box OEMs. Internationally, the Company markets
and sells its products in over 30 countries by independent distributors in each
country. These independent distributors market and sell the FOCUS products to
retailers, mail order companies and VARs in their respective countries.
In addition, the FOCUS branded PC-to-TV products have been selected by
leading personal computer manufacturers to be marketed with the use of their
select brand of personal computers. Compaq and Toshiba have included the
Company's PC-to-TV products on their selected markets price list and promote the
FOCUS PC-to-TV products in their box materials.
Product Strategy
The Company is committed to developing state-of-the-art products for
the rapidly converging computing and entertainment industries. Management
believes that the PC-to-TV video conversion marketplace shows potentially strong
growth opportunities in the coming decade. Management believes that FOCUS is
well positioned, as the market expands in the next three to five years, to
develop products that will win both market acceptance and technological acclaim.
Research and development expenses were $1,112,487, for the year ended
December 31, 1997 and $1,339,736 (excluding purchased research and development)
for the year ended December 31, 1996. As a percentage of total research and
development expenses, approximately 90% of expenses represent new product
development activities.
Marketing and Sales Strategy
The Company's marketing and sales strategy is to ensure that its
products are well positioned and well received in the high-growth channels where
computers and consumer electronics are sold. Those channels include national
distributors, volume retailers, national mail-order companies, direct retail,
systems integrators and international distributors, resellers and mail-order
companies.
The Company's marketing strategy employs a range of tactics to reach
its customers. The Company seeks to reach retail end users by selected
advertising in leading computer magazines, both in the United States and abroad.
To increase brand awareness, the Company also cross-markets all of its products
across disparate channels to resellers, systems integrators and distributors
through fax transmission delivery of product specifications. These tactics are
outlined below:
o Direct Marketing. The Company markets its products directly to business,
educational and end-user customers. The Company markets to these
customers through independent third party mail-order companies such as
MicroWarehouse, CDW, Global Direct, Multiple Zones, and PC Connection.
o On-line Direct Marketing. The Company is also taking advantage of the
Internet megatrend as an essential element of its marketing plan. FOCUS
has adapted its direct marketing approach to the Internet by providing
complete product and Company information on the World Wide Web and
assists customers and prospects with both pre- and post- sales needs.
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The Company's web site contains an interactive list of resellers and
outlets for its products contributing to the goal of direct access to
end users and building relationships. The Company also offers the
ability to buy direct on-line through various computer resellers
including Global Direct, MicroWarehouse and Multiple Zones
International.
The Company also utilizes a sophisticated 24-hour fax-on-demand system.
Each product specification fax requested by the customer is
cross-marketed for synergistic products.
o Cross-Marketing. The Company ships over 15,000 products a month, and a
FOCUS PC- to-TV product guide is provided in all shipped packages. This
strategy is designed to increase customer awareness of other FOCUS
products, and aids the Company's brand- recognition marketing goals.
o Display Advertising. The Company utilizes target advertising in popular
computer and consumer journals for the development of lead generation
and product brand recognition. The Company has advertised in magazines
such as Windows, Computer Reseller News, Technology & Learning, and
Presentations, and in in-flight magazines for United Airlines, Delta
Airlines, US Airways, and American Airlines.
o Global Distribution. Since the Company began to change its operating
model in 1995, the Company has made significant investments in creating
a global reseller/VAR channel. In 1995, the Company had approximately
250 resellers globally. In March 1998, the Company has over 2,200 active
resellers globally.
In the United States and Canada, the Company markets and sells its
products through national resellers such as CompUSA, Computer City,
Staples, Micro Center, Computer Town, Fry's Electronics, Data Vision,
and J&R Computer. The Company markets and sells its products through
national distributors such as Ingram Micro D, Nuvo of Canada, D&H and
Academic. The Company also markets and sells its products through third
party mail order resellers such as MicroWarehouse, Multiple Zones,
Global Direct, PC Connection and CDW.
In the rest of the world, the Company's products are sold to resellers,
independent mail order companies and distributors in Latin America,
France, the United Kingdom, Scandinavia, Germany, Switzerland, Italy,
the Czech Republic, Russia, Australia, Japan, China, Singapore, and the
Republic of Korea. Additionally, in February 1996, the Company
established a European Sales and Marketing office in Amsterdam to expand
the number of and to service its European partners.
o Telemarketing and Telesales. The Company is receiving and placing over
120,000 calls per year. The Company utilizes telemarketing and telesales
programs.
Telemarketing. The Company gathers valuable marketing data from callers.
This data allows the Company to continuously analyze its market data
such as customer type, media response and product interest. The Company
also receives over 20,000 marketing registration cards annually that
provide the Company with marketing information such as product quality,
service quality and sales representative product knowledge.
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Reactive Telesales. The Company receives calls and product orders from
its lead generation marketing efforts such as advertising, targeted
business reply cards and product guides (catalog) mailings.
Products and Applications
FOCUS Enhancements develops internally all of its PC-to-TV video
conversion products thereby allowing the Company to market and sell a
proprietary suite of products to the PC-to-TV video conversion marketplace. All
of the Company's products are compatible with both Windows and Mac OS personal
computers.
The Company's primary focus within the videographics category is in the
conversion of standard PC video output (VGA) into television video input (NTSC
or PAL). FOCUS' broad line of PC-to-TV products easily allow the user to display
Windows or Mac OS video output directly to a TV monitor or to videotape. These
products are currently available as either a board-level product or an external
set-top device. FOCUS currently sells its PC-to-TV video conversion products
under the L-TV brand for education and under the TView brand in retail and mail
order channels. These products have a variety of features geared toward the
needs of business, education and consumer customer groups. The Company has
developed various proprietary enhancements for its PC-to-TV products including
image stabilization which eliminates all flicker, and TrueScale(TM) video
compression technology which insures proper aspect ratios on the television
screen even when a computer image is compressed to fit on a television.
Consumer PC-to-TV Video Scan Conversion Products
External Set-Top Boxes. The Company currently offers one model of
external set-top boxes under the L-TV brand and three models of external set-top
boxes under the TView brand. Under the L-TV brand, the Company sells the L-TV
Portable Pro, which is compatible with Mac OS based personal computers and
designed to addresses the needs of education customers who are primarily
Macintosh users. The Company sells the TView Micro, the TView Silver and the
TView Gold, all of which are compatible with both Windows and Mac OS based
personal computers. All the external set-top boxes weigh less than 7 ounces, and
are easily connected to the VGA video port of the computer and a television
through the cables provided.
PCMCIA Card. The Company also offers a PCMCIA card under the TView
brand that provides PC-to-TV conversion capabilities to laptop computer users.
Sold as the TView PresoCard, this PCMCIA card fits into any laptop computer with
a type II or type III PC card slot. The PresoCard permits the user to make large
screen presentations without the size and weight associated with presentation
monitors and portable projection devices.
All FOCUS products are shipped with the Company's proprietary
Electronic Marker(TM) software which turns the computer screen cursor into a
drawing tool, allowing the user to highlight or annotate text and graphics
directly on the screen.
Commercial PC-to-TV Video Scan Conversion Products
Internal Board Level Products for PCs and TVs. For those environments
where portability is less important, such as classrooms or home entertainment
systems, the Company offers board level products that can be installed directly
into a personal computer or television. The Company currently offers board level
products for OEM television manufacturers which
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include Zenith and Philips Electronics. The Company also offers a board level
product for Apple Macintosh personal computers for factory installation in
Macintosh Performa or PowerMac 5000 and 6000 series computers. All board level
products are shipped with "mirroring" and compression software to display the
same image on both the computer screen and TV monitor simultaneously.
Integrated Circuits. The Company currently offers two integrated
circuit products: the FOCUS Scan 200 and the TView FS300. Both products are
utilized on the Company's board level products developed for both consumer and
commercial applications. The TView FS300 is the Company's second generation
PC-to-TV video encoder designed to increase the video conversion capabilities of
FOCUS' products while reducing the cost of manufacturing the Company's product.
The FOCUS Scan 200 features three-line averaging and supports resolutions up to
640 x 480. The TView FS300, supports resolutions up to 1024 x 768 and features
proprietary "video scaling" technology whereby the image on the television is
scaled both horizontally and vertically to ensure that the entire contents of
the computer screen are displayed on the television with minimal loss to video
quality. Both of these integrated circuits can be used for the creation of
products for televisions, PCs, information appliances, video- gaming products
and external scan conversion devices. It is this area where the Company intends
to focus its research and development efforts, furthering its core competency in
this type of technology and expanding the application and use of video scan
conversion to address digital television, LCD panels and plasma displays
markets.
PC-to-TV Video Scan Conversion Applications
Television Display Device. The large screen area of a TV monitor makes
it an inexpensive way to present computer graphics and text to a large audience
or classroom environment. The Company's products can be used with a TV monitor
for presentations, education, training, video teleconferencing, Internet
viewing, and video gaming applications.
o Presentations. TView and L-TV products are ideal for sales and business
presentations. In particular, because of the lightweight and small size
of the products, they have been embraced by mobile presenters and sales
forces as a cost-effective and space effective tool.
o Education and Training. In education, teachers and corporate trainers
see the benefit of using computers in the classroom to create an
interactive learning environment. Because TView and L-TV products allow
the use of one computer for multiple students, teachers and curriculum
developers no longer need to be constrained in their use of computers
for instructional purposes.
o Internet Viewing. TView and L-TV products also take advantage of the
rise in popularity of the Internet and the advent of Internet-related
products for television. By allowing current PC owners to adapt their
existing technology to display on a television, TView and L-TV products
bridge the gap between current and future Internet usage by offering
the full functionality of a PC on a television.
o Video Gaming. TView and L-TV products make the PC gaming experience
larger than life by allowing users to play PC games on a television. By
hooking up a PCs sound and video port to a television, the gaming
enthusiast can share in the gaming experience with a group or simply
play along with the impact of a big screen television.
Print to Video. The TView and L-TV systems will output the computer
images directly to a VCR allowing for an inexpensive way to print anything
created on a Windows or Mac OS personal computer to video tape.
Mirroring Mode. The Company's proprietary software allows the presenter
to use the small computer screen as a mirroring console to the same images
displayed on the larger TV monitor. Training of applications can be performed
from the Windows or Mac OS personal computer while the audience observes the
images on the TV monitor.
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Major Customers
Sales to a major television manufacturer in 1997 totaled approximately
$2,345,000 or 11% of the Company's revenues as compared to approximately
$3,472,000, or 23% of revenues for 1996. Sales to a major distributor in 1997
represented approximately $3,319,000, or 16% of the Company's revenues as
compared to approximately $2,287,000 or 15% of revenues for 1996. During 1997,
sales to a major personal computer manufacturer totaled approximately $5.6
million or 27% of net sales for the period as compared to approximately $1.2
million, or 8% of net sales for the year ended December 31, 1996.
Customer Support
Management believes that its future success will depend, in part, upon
the continued strength of customer relationships. To ensure customer
satisfaction, the Company provides customer service and technical support
through a five-days-per-week "hot line" telephone service. The Company uses 800
telephone numbers for customer service and a local telephone number for
technical support (the customer pays for the phone charge on technical support).
The customer service and support lines are currently staffed by technicians who
provide advice free of charge to ensure customer satisfaction and obtain
valuable feedback on new product concepts. In order to educate its own telephone
support personnel, the Company also periodically conducts in-house training
programs and seminars on new products and technology advances in the industry.
The Company offers this same level of support for its entire domestic
market including its direct market customers who purchase the Company's products
through computer superstores or system integrators. The Company also provides
technical support to its international resellers and distributors. The Company's
international resellers and distributors also provide local support to the
customers for their respective markets.
The Company provides customers with a one to three-year warranty on all
products. The Company repairs or replaces a defective product which is still
under warranty coverage, and substantially all the components which the Company
purchases are also covered by vendor warranties of comparable duration. Returned
products with defective components are returned by the Company to the component
vendors for repair or replacement. Product returns, exclusive of reseller stock
balancing, averaged approximately 3% and 5% of total product revenue during the
years ended December 31, 1997 and 1996, respectively.
Competition
The Company currently competes with other developers of PC-to-TV
conversion products and with developers of videographic integrated circuits.
Although the Company believes that it is a leader in the PC-to-TV conversion
product marketplace, the videographic integrated circuit market is intensely
competitive and characterized by rapid technological innovations. This has
resulted in new product introductions over relatively short time periods with
frequent advances in price/performance ratios. Competitive factors in these
markets include product performance, functionality, product quality and
reliability, as well as, volume pricing discounts, customer service, customer
support, marketing capability, corporate reputation, brand recognition and
increases in relative price/performance ratios for products serving these
markets. In the PC-to-TV conversion product market, the Company competes with
companies such as AI Tech and Avermedia. In the videographic integrated circuits
market, the Company competes with Averlogic and Fairchild Semiconductor.
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Certain of the Company's competitors have greater technical and capital
resources, more marketing experience, and larger research and development staffs
than the Company. Management believes that it competes favorably on the basis of
product quality and technical benefits and features. The Company also believes
it provides competitive pricing, extended warranty coverage, and strong customer
relationships, including selling, servicing and after-market support. However,
there can be no assurance that the Company will be able to compete successfully
in the future against existing companies or new entrants to the marketplace.
Manufacturing
In the manufacture of its products, the Company relies primarily on
turnkey subcontractors who utilize components purchased or specified by the
Company. The "turnkey" house is responsible for component procurement, board
level assembly, product assembly, quality control testing, and in some cases,
final pack-out and direct shipment. All subcontracted turnkey houses currently
used by the Company are ISO 9002 certified. During 1997, the Company relied and
currently continues to rely on two turnkey manufacturers for approximately 90%
of the Company's product manufacturing.
Upon receipt of a customer's order, the Company's telemarketing
representative enters the order into the Company's computerized order entry and
inventory management system. Once the customer's credit has been verified and
approved by the finance department, the orders are electronically dispatched to
operations for order fulfillment and shipment. The Company then performs final
packaging and fulfillment of product orders with most customer orders being
shipped in less than three business days from the date they are placed into the
system. For certain commercial PC-to-TV video conversion products, the Company's
turnkey manufacturers ship directly to the OEM customer and forwards shipping
information to the Company for billing purposes.
Quality control is maintained through standardized ISO 9002 quality
assurance practices at the build site and random testing of finished products as
they arrive at the Company's fulfillment center. Management believes that the
turnkey model helps it to lower inventory and staff requirements, maintain
better quality control and product flexibility and achieve quicker product turns
and better cash flow.
All customer returns are processed by the Company in its fulfillment
center. Upon receipt of a returned product, a trained testing technician at the
Company tests the product to diagnose the problem. If a product is found to be
defective the unit is either returned to the turnkey subcontractor for rework
and repair or is repaired by the Company and returned to the customer. The
majority of the Company's defective returns are repaired or replaced and
returned to customers within five business days. In 1997, product returns that
are determined to be defective represented approximately .5% of the Company's
revenues.
Intellectual Property and Proprietary Rights
The Company currently has three patents pending, all with respect to
its PC-to-TV video conversion chips, and anticipates filing another patent
application in the second quarter of this year. Patent applications have also
been filed to secure intellectual property rights in foreign jurisdictions. The
Company has also filed applications to register four trademarks to add to its
one
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currently registered mark. Historically, the Company has relied principally upon
a combination of copyrights, common law trademarks and trade secret laws to
protect the rights to its products that it markets under the FOCUS and TView
brand names.
Upon joining the Company, employees and consultants are required to
execute agreements providing for the non-disclosure of confidential information
and the assignment of proprietary know-how and inventions developed on behalf of
the Company. In addition, the Company seeks to protect its trade secrets and
know-how through contractual restrictions with vendors and certain large
customers. There can be no assurance that these measures will adequately protect
the confidentiality of the Company's proprietary information or that others will
not independently develop products or technology that are equivalent or superior
to those of the Company.
Additionally, in connection with OEM and VAR agreements, the Company
seeks to require manufacturers to display the Company's logo conspicuously on
their product. Management expects that this should increase name recognition and
further the association of the Company's name with the associated goods.
Because of the rapid pace of technological innovation in the Company's
markets, management believes that in addition to its patent pending status, the
Company's success is greatly attributable to the creative skills and experience
of its employees, the frequency of Company product offerings and enhancements,
product pricing and performance features, its diversified marketing strategy,
and the quality and reliability of its support services.
Management Information Systems
The Company has committed significant resources to the purchase and
development of a sophisticated computer system that is used to manage all
aspects of its business. The computer information system is based on a UNIX
hardware platform. This system supports order entry, inventory control,
purchasing, accounting, customer service, warehousing and fulfillment. The
system allows the Company, among other things, to monitor sales trends, make
informed purchasing decisions and provide product availability and order status
information. In addition to the main system, the Company has a system of
networked Macintosh and IBM compatible computers, which facilitates data sharing
and provides an automated office environment. The Company believes that certain
modifications and upgrades to its existing systems and software modules will be
necessary in the future in order to more closely tailor its information system
to its on-going needs.
The Company has conducted a review of its computer systems to identify
the programs that could be affected by the "Year 2000" issue and is developing
an implementation plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
Company presently believes that, with modifications to existing software or
converting to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. The expenditures for the modifications and conversions are not
expected to have a material impact on the operations of the Company. However, if
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
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Personnel
As of December 31, 1997, the Company employed 36 people on a full-time
basis, of whom 7 are in research and development, 15 in sales, marketing and
customer support, 7 in operations, and 7 in finance and administration. In
addition, the Company employed 9 people on a part-time basis, of whom 3 are in
research and development, 3 are in finance and administration and 3 are in
operations.
Backlog
At December 31, 1997, the Company had a backlog of approximately
$4,400,000 for products ordered by customers as compared to a backlog of
$1,167,000 at December 31, 1996. The Company expects to fill these orders in
1998. The increase in backlog in 1997 as compared to 1996 is primarily due to
unanticipated production delays for its FS300 products in the fourth quarter of
1997. Generally, management does not believe backlog for products ordered by
customers is a meaningful indicator of sales that can be expected for a
particular time period.
Item 2. PROPERTIES
As of December 31, 1997, the Company leased approximately 38,000 square
feet of space at four locations. The Company leases approximately 32,000 square
feet of space in Sudbury, Massachusetts, which is used for administration,
sales, marketing, customer service, limited assembly, quality control, packaging
and shipping. This lease expires on July 30, 2001 and requires monthly rent
payments of $17,258. Approximately 5,200 square feet is leased in Berkeley,
California and Beaverton, Oregon, each of which serves as a research and
development center for the Company. The Company is currently a tenant-at-will at
the Berkeley facility with rental payments of $1,482 per month, plus expenses.
The lease on the Beaverton facility expires June 30, 2000 with rental payments
of approximately $3,631 per month, plus expenses. Additionally, the Company's
European sales and marketing subsidiary, FOCUS Enhancements, B.V., occupies
approximately 1,000 square feet of space in Leiden, The Netherlands. The rent on
this facility is approximately $2,735 per month, plus expenses, and the lease
expires June 30, 2001. The Company believes that its existing facilities are
adequate to meet current requirements and that it can readily obtain appropriate
additional space as may be required on comparable terms.
Item 3. LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims and legal
proceedings that arise in the ordinary course of business. Currently there are
no claims or legal proceedings which, in the opinion of management, would have a
material adverse effect on the Company's financial position or results of
operation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1997 to a vote of security holders of the Company, whether through
solicitation of proxies or otherwise.
12
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Trading in the Company's Common Stock and public warrants (the
"Warrants") commenced on May 25, 1993, when the Company completed its initial
public offering, and since that time the Company's Common Stock and Warrants
have traded principally on the NASDAQ SmallCap Market under the symbol "FCSE"
and "FCSEW", respectively. The Company's Common Stock and Warrants were traded
on the Boston Stock Exchange under the symbols "FCS" and "FCSW", respectively,
during the period May 26, 1993 through March 7, 1997. The following table sets
forth the range of quarterly high and low bid quotations for the Company's
Common Stock and Warrants as reported by NASDAQ. The quotations represent
inter-dealer quotations without adjustment for retail markups, markdowns or
commissions, and may not necessarily represent actual transactions. The closing
bid price of the Company's Common Stock and Warrants on the NASDAQ SmallCap
Market on March 12, 1998 were $2 7/8 per share and $11/16 per Warrant,
respectively.
<TABLE>
<CAPTION>
Warrants Common Stock
---------------------------- -------------------------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
Calendar 1997 Quotations
------------------------
<S> <C> <C> <C> <C>
First Quarter $ 7/16 $ 5/16 $ 2 1/4 $ 1 5/8
Second Quarter $ 7/8 $ 1/4 $ 3 5/8 $ 1 9/16
Third Quarter $ 4 5/16 $ 7/16 $ 6 5/16 $ 2 1/16
Fourth Quarter $ 5 9/16 $ 1 1/16 $ 7 1/2 $ 2 7/8
Calendar 1996 Quotations
------------------------
First Quarter $ 3 5/16 $ 15/32 $ 6 3/4 $ 2
Second Quarter $ 1 5/8 $ 3/8 $ 4 5/8 $ 1 3/8
Third Quarter $ 7/8 $ 5/16 $ 3 $ 1 15/16
Fourth Quarter $ 27/32 $ 1/4 $ 3 5/8 $ 1 11/16
</TABLE>
As of March 12, 1998, there were 220 holders of record of the Company's
15,151,503 shares of Common Stock outstanding on that date. The Company
estimates that approximately 2,500 shareholders hold securities in street name.
The Company does not know the actual number of beneficial owners who may be the
underlying holders of such shares.
The Company has not declared nor paid any cash dividends on its Common
Stock since its inception. The Company's bank line of credit prohibits the
payment of cash dividends. The Company intends to retain future earnings, if
any, for use in its business.
13
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company currently develops, markets and sells worldwide a
proprietary line of PC-to-TV video conversion products for PC's and Mac's. The
Company markets and sells its FOCUS branded consumer products globally through a
network of distributors, volume resellers, mail order, value-added resellers
("VARs") and original equipment manufacturers ("OEMs").
In connection with the Company's acquisition in 1996 of TView, Inc.
("TView"), a developer of PC-to-TV conversion products, the Company issued to
the TView stockholders an aggregate of $2,000,000 in FOCUS Common Stock which
aggregated 732,869 shares of such stock and assumed net liabilities of
approximately $716,000. The business combination was accounted for using the
purchase method of accounting resulting in goodwill of $716,000 and a $2,000,000
charge to purchased in-process research and development.
Effective September 30, 1997, the Company sold its line of computer
connectivity products to Advanced Electronic Support Products, Inc. ("AESP") for
189,701 shares of AESP common stock. Included in the sale were customer lists
and the rights to use the "Focus networking" brand name to market the product
line as well as certain of AESP's complementary products. In connection with
this transaction, the Company recorded other income in the amount of $358,288,
securities available for sale in the amount of $595,000 (discounted 15% to
reflect temporary restrictions on the common stock), and deferred income of
$84,212. In addition the Company sold networking inventory to AESP in the amount
of $159,000 at cost.
Results of Operations
Year ended December 31, 1997 as compared to year ended December 31, 1996
The following table sets forth, for the periods indicated, income and
expense items included in the Consolidated Statements of Operations, expressed
as a percentage of net sales:
Year Ended December 31,
-----------------------
1997 1996
---- ----
Net sales 100% 100%
Cost of good sold 72 99
---- ----
Gross profit 28 1
---- ----
Operating expenses:
Sales, marketing and support 22 23
General and administrative 11 25
Research and development 5 9
Purchased research and development -- 13
---- ----
Total operating expenses 38 70
---- ----
Loss from operations (10) (69)
Interest expense, net (1) (2)
Other income (expense) 2 --
---- ----
Net loss (9%) (71%)
==== ====
14
<PAGE>
Net Sales. Net sales for the year ended December 31, 1997 were
$21,026,011, as compared with $15,076,368 for the year ended December 31, 1996,
an increase of $5,949,643, or 39%. During the year ended December 31, 1997, the
Company realized significant growth in sales to US resellers (an increase of
33%), in sales to OEM customers (an increase of 78%) and in sales to
international resellers (an increase of 24%).
The growth in the Company's OEM business in 1997 compared with 1996 was
due primarily to higher sales to a major manufacturer of personal computers.
During the year ended December 31, 1997, sales to this customer and a contract
manufacturer for this customer represented approximately $5,629,000 or 27% of
net sales as compared to approximately $1,206,000 or 8% of net sales for 1996.
The increase in sales to this customer and the contract manufacturer in 1997 was
due to increased purchases of the Company's PC- to-TV video conversion products.
Revenues for the years ended December 31, 1997 and 1996 included sales
to a major television manufacturer totaling approximately $2,345,000 or 11% and
$3,472,000 or 23% of total net sales, respectively. During the fourth quarter of
1996, the Company entered into an exclusive agreement with this manufacturer for
the Company's PC-to-TV conversion products. Under the agreement, the
manufacturer was obligated to 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. In January 1998, the Company and the
manufacturer agreed that the Company would continue to sell PC-to-TV conversion
products to the manufacturer on a non-exclusive basis, without any minimum
purchase requirements.
The Company realized significant growth in sales to its domestic
distributors, resellers and VARs for 1997 as compared to 1996. Net sales to
domestic distributors, resellers and VARs for 1997 were approximately
$10,845,000 as compared to approximately $8,142,000 for 1996, an increase of
$2,703,000 or 33%. Net sales included sales to a major distributor totalling
approximately $3,319,000 or 16% of net sales in 1997 and $2,287,000 or 15% of
net sales in 1996. The increase is the result of greater acceptance by the
marketplace of the Company's PC-to-TV video conversion products. Net sales to
international distributors and resellers for 1997 were approximately $2,969,000
as compared to approximately $2,393,000 for the 1996, an increase of $576,000 or
24%.
During 1997, the Company recorded approximately $4,100,000 in product
returns and allowances, of which $2,500,000 was recorded during the fourth
quarter of 1997. The product returns in the fourth quarter of 1997 were due
primarily to the Company allowing certain distributors and retailers to return
first generation PC-to-TV video conversion products in anticipation of shipment
of new FOCUS Scan 300 Chip PC-to-TV products. Management plans to sell
15
<PAGE>
the returned first generation PC-to-TV video conversion products during 1998 at
reduced prices to targeted markets. The Company has provided valuation
allowances against the carrying value of this inventory.
Cost of Goods Sold. Cost of goods sold was $15,091,641, or 72% of net
sales, for the year ended December 31, 1997, as compared with $14,887,902, or
99% of net sales, for the year ended December 31, 1996, an increase of $203,739
or 1.4%. The increase in cost of goods sold in absolute dollars is due to the
increase in net sales in 1997 compared with 1996. The decrease as a percentage
of net sales in 1997 compared to 1996 is primarily attributable to the
write-down and refurbishment of inventory in 1996 related to the Company's
graphics/connectivity products for the Apple Powerbook 190 and 5300 laptop
computers, the writedown of approximately $1.2 million of barter credits
recorded as an "Other Asset" as of December 31, 1996 and, additional provisions
of approximately $300,000 made for inventory obsolescence. In an effort to
control and improve the cost of goods, management has negotiated and seeks to
continually negotiate favorable pricing and payment terms with its manufacturers
and suppliers.
Sales, Marketing and Support Expenses. Sales, marketing and support
expenses were $4,647,657, or 22% of net sales, for the year ended December 31,
1997, as compared with $3,480,024, or 23% of net sales, for the year ended
December 31, 1996, an increase of $1,167,633 or 34%. The increase in sales,
marketing and support expenses in absolute dollars is primarily the result of
increased marketing and advertising expenditures related to the Company's
efforts to expand its OEM and domestic distribution channels and to introduce
the new FOCUS Scan 300 Chip products during the fourth quarter of 1997. Sales,
marketing and support expenses totalled approximately $1,500,00 in the fourth
quarter of 1997 as compared to approximately $600,000 in the same quarter of
1996.
General and Administrative Expenses. General and administrative
expenses for the year ended December 31, 1997 were $2,399,491 or 11% of net
sales, as compared with $3,797,238 or 25% of net sales, for the year ended
December 31, 1996, a decrease of $1,397,747 or 37%. The decrease in terms of
absolute dollars and as a percentage of net sales is primarily attributable to
the write-down in 1996 of approximately $1,273,000 of intangible assets
associated with the Company's prior acquisitions of Lapis and Inline and the
recording of $400,000 additional reserves for estimated returns resulting from
stock balancing transactions. Eliminating these 1996 expenses for comparison
purposes, general and administrative expenses in 1997 of $2,399,491 increased
$275,253 or 13% compared with the proforma expenses of $2,124,238 in 1996. This
proforma increase between years was the result of increased salaries and wages,
bad debt expense and increased investor relations expenses in 1997. The
write-off in 1996 of goodwill resulted from the Company's evaluation of the
impairment of the Lapis and Inline assets as a result of the Company's
acquisition of TView, the declining Macintosh marketplace and shifting of the
market to PC-based products.
Research and Development Expenses. Research and development expenses
for the year ended December 31, 1997 were $1,112,487 or 5% of net sales, as
compared with $1,339,736, or 9% of net sales, for the year ended December 31,
1996, a decrease of $227,249 or 17%. The decrease in research and development
expenses in both absolute dollars and as a percentage of revenues is due
primarily to a reduction in engineering expense resulting from the relocation of
the Company's engineering activities to Beaverton, Oregon.
Purchased Research and Development. In connection with the Company's
acquisition of TView in 1996, the Company issued $2,000,000 in Common Stock and
assumed net liabilities of approximately $716,000. The acquisition was accounted
for using the purchase method of accounting and accordingly, the purchase price
was allocated based on the estimated fair value of the assets and liabilities
acquired. The Company allocated $2,000,000 of the purchase price to purchased
research and development which was charged to operations, based upon an
evaluation of the purchased research and development prepared by an investment
banking firm.
16
<PAGE>
Interest Expense, Net. Net interest expense for the year ended December
31, 1997 was $266,095, or 1% of net sales, as compared to $312,833, or 2% of net
sales, for the year ended December 31, 1996, a decrease of $46,738 or 15%. The
reduction in interest expense is primarily due to the computed value of imputed
interest costs related to the issuance of certain warrants that was included in
interest expense in the amount of $61,388 for the year ended December 31, 1996.
Other Income/(Expense). For the year ended December 31, 1997, the
Company had other income of $510,378 or 2% of net sales. Other income in 1997 is
related to the recognition of a gain of $358,288 on the sale of the Company's
networking assets and the favorable settlement of certain accounts payable and
release of selected obligations in the amount of $244,176. For the year ended
December 31, 1996, the Company incurred other expenses of $14,504.
Net Loss. For the year ended December 31, 1997, the Company reported a
net loss of $1,986,079, or $0.16 per share (basic), as compared to a net loss of
$10,772,410, or $1.19 per share (basic), for the year ended December 31, 1996.
For the quarter ended December 31, 1997, the Company recorded a net loss of
approximately $2,600,000 due primarily to higher product returns and higher
marketing and other operating expenses associated with the planned introduction
of the Company's FS 300 Chip products and due to the Company's inability to fill
orders for PC-to-TV products as a result of unanticipated production delays for
the FS 300 Chip.
Financial Condition
Total Assets. Total assets increased $6,013,277, or 76%, from December
31, 1996 to December 31, 1997. The increase in assets is primarily the result of
an increase of $2,324,567 in accounts receivable and an increase of $2,014,223
in inventory. Accounts receivable increased 72% in 1997 compared with 1996
primarily due to the increased sales to the Company's distribution partners
resulting from the Company's channel expansion efforts in 1997. In addition, the
Company's accounts receivable increased due to the granting of extended payment
terms to certain resellers in connection with the introduction of the FOCUS
PC-to-TV products in 1997. Inventories increased 102% in 1997 compared with
1996, due to the combination of higher levels of finished goods at December 31,
1997 related to the new FS300 products and the returned first generation
PC-to-TV products. As of December 31, 1997, the Company had securities available
for sale in the amount of $595,000, representing the fair market value of
marketable securities received in connection with the Company's sale of the
networking assets (See Note 7). Property and equipment, net, increased $585,327
or 121% as of December 31, 1997 compared with December 31, 1996, primarily due
to the 1997 purchase of tooling, dies, development and testing equipment, as
well as a capital lease for the purchase of a new telephone system.
Total Liabilities. Total liabilities increased $1,917,417, or 28% from
December 31, 1996 to December 31, 1997. The increase is primarily the result of
an increase in accounts payable of approximately $1,931,629, the recording of
deferred income in 1997 in connection with the sale of the Company's networking
assets and, the decrease in notes payable of $297,458. The increase in accounts
payable is due principally to amounts due as of December 31, 1997 to the
Company's contract manufacturer for FS300 products.
Working Capital. As a result of the changes in current assets and
current liabilities described above, the Company's working capital increased
$3,626,809 from a working capital deficit of $1,007,509 at December 31, 1996 to
working capital of $2,619,300 at December 31, 1997.
Stockholders' Equity. Stockholders' equity increased $4,095,860 from
December 31, 1996 to December 31, 1997. The increase is primarily due to the
issuance of common stock, resulting from the exercise of common stock options
and warrants, as well as several private offerings of the Company's common stock
offset by the Company's net loss of $1,986,079 for the year ended December 31,
1997.
17
<PAGE>
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily
through the public and private sale of common stock, short-term borrowing from
private lenders ($1,500,000 at December 31, 1997), favorable credit arrangements
with vendors and suppliers, and the line of credit with its commercial bank
($720,000 at December 31, 1997).
Net cash used in operating activities for the years ended December 31,
1997 and 1996 was $4,657,041 and $6,228,630, respectively. In 1997, net cash
used in operating activities consisted primarily of the net loss of $1,986,079,
and increases in accounts receivable of $2,324,567 and inventories of
$2,014,223. In addition, the Company had a gain on settlement of accounts
payable of $244,176 and an increase in securities available for sale of $595,000
due to the sale of the Company's networking assets. This was offset by an
increase in accounts payable of $2,175,805 and depreciation and amortization of
$425,989. In 1996, net cash used in operating activities consisted primarily of
the net loss of $10,772,410, and increases in accounts receivable of $1,348,930.
This was offset by an increase in accounts payable of $1,666,212, depreciation
and amortization of $681,408, the write-off of goodwill and other intangible
assets associated with the Lapis and Inline acquisitions of $1,273,000 and the
write-off of purchased research and development cost associated with the
Company's acquisition of TView of $2,000,000.
Net cash used in investing activities for the years ended December 31,
1997 and 1996 was $652,826 and $359,628, respectively. In 1997, cash used in
investing activities consisted primarily of the purchase of property and
equipment. In 1996, cash used in investing activities consisted primarily of
purchases of property and equipment of $306,174 and an increase in notes
receivable of $80,000.
Net cash from financing activities for the years ended December 31,
1997 and 1996 was $5,615,824 and $4,862,109, respectively. In 1997, the Company
received $5,577,500 in net proceeds from private offerings of common stock and
$504,439 in net proceeds from the exercise of common stock options and warrants.
The proceeds in 1997 were offset by $297,458 in payments on notes payable to
banks and $168,657 in payments under capital leases. In 1996, the Company
received $5,158,203 in net proceeds from private offerings of Common Stock and
$957,403 from the exercise of common stock options and warrants. The proceeds in
1996 were offset by $1,120,000 in payments on notes payable and $133,497 in
payments under capital lease obligations.
As of December 31, 1997, the Company had working capital of $2,619,300,
as compared to a working capital deficit of $1,007,509 at December 31, 1996, an
increase $3,626,809. The Company's cash position increased to $719,851 at
December 31, 1997, an increase of $305,957, or 74%, over amounts at December 31,
1996.
During April 1996, the Company renegotiated the terms of the $1,000,000
line of credit with its commercial bank reducing it to $900,000. Certain
covenants were revised, and the line was collateralized by the personal
guarantee of a shareholder of the Company. As of December 31, 1997, the Company
had borrowings under its line of credit of $720,000. Under the terms of the line
of credit agreement, the Company is required to comply with certain restrictive
covenants and was in violation of certain of these covenants at December 31,
1997. The Company has obtained a waiver from the bank on its violation of
restrictive covenants. Further, the bank has notified the Company that the line
of credit will not be extended beyond June 8, 1998. The Company is in
discussions with another lender to refinance this debt. In addition, the Company
is currently negotiating with its unaffiliated lender to extend the due date of
March 1997 for the $1.5 million note payable. In the event that the Company is
unsuccessful in refinancing its bank line of credit or that the unaffiliated
lender does not extend the due date, the Company would be required to pay the
amounts outstanding from working capital or from equity or debt financing.
18
<PAGE>
On March 3, 1998, the Company completed a financing of approximately
$3,000,000 in gross proceeds from the sale of 1,092,150 shares of common stock
and warrants to purchase 327,645 shares of Common Stock in a private placement
to an unaffiliated accredited investor. The warrants are exercisable until March
3, 2005 if during the period ending August 25, 1999, the average of the closing
bid prices of the Company's common stock during any consecutive 20 trading days
is equal to or less than $2.7469. The shares issued as part of this transaction
and issuable upon the exercise of the warrants are not registered under the
Securities Act of 1933, however, the Company has agreed to register the shares
within 90 days of the date of issuance. Fees and expenses associated with this
offering were approximately $200,000 yielding net proceeds of approximately
$2,800,000. In connection with this transaction, the Board of Directors
authorized the grant of warrants to the placement agent to purchase 21,429
shares of the Company's common stock at a price of $4.2118 per share exercisable
for a period of five years.
During 1997, the Company issued 2,100,000 shares of its common stock,
for net proceeds of $5,165,000, in connection with domestic private offerings
and issued 293,181 shares of its common stock, for net proceeds of $412,500, in
connection with private offerings to foreign investors. As of December 31, 1997,
all shares issued in connection with the 1997 private offerings had been
registered under the Securities Act of 1933, as amended, in accordance with
contractual agreements between the Company and the investors.
From its inception through December 31, 1997, the Company has incurred
approximately $22.4 million of accumulated losses. The report of the independent
accountants on the Company's financial statements as of and for the year ended
December 31, 1996 included an explanatory paragraph to the effect that the
Company's ability to continue as a going concern was 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. As of December 31, 1997, the Company has increased its working
capital to $2,619,300 and as of February 27, 1998 had obtained additional equity
financing of $3,000,000 (See Note 13). In addition, the Company increased its
sales and gross profit contribution, while reducing operating expenses in 1997
compared to 1996. In 1998, the Company has adopted a business model to pursue
additional sales growth in distributor and reseller channels as well as in sales
to OEM's, to reduce expenses as a percentage of net sales and to achieve
profitability. The Company projects the expenditure of approximately $350,000 in
1998 for the purchase of engineering equipment for the development and testing
of new ASIC technology. Management anticipates that funds available as of
December 31, 1997, funds generated through its 1998 business model, and
additional funds that may be received from debt or equity financings will be
sufficient to fund operations for at least 12 months. As a result of the
foregoing, the Report of Independent Accountants as of December 31, 1997 and for
the year then ended did not include an explanatory paragraph regarding the
Company's ability to continue as a going concern.
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.
Year 2000
The Company has conducted a review of its computer systems to identify
the programs that could be affected by the "Year 2000" issue and is developing
an implementation plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
Company presently believes that, with modifications to existing software or
converting to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. The expenditures for the modifications and conversions are not
expected to have a material impact on the operations of the Company. However, if
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
19
<PAGE>
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" which requires earnings per share to be calculated on a basic and
dilutive basis. Basic earnings per share represents income available to common
stock divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the assumed
conversion. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and warrants, and are determined using the
treasury stock method. The assumed conversion of outstanding dilutive stock
options and warrants would increase the shares outstanding but would not require
an adjustment to income as a result of the conversion. For the years ended
December 31, 1997 and 1996, options and warrants applicable to 6,681,903 shares
and 4,981,664 shares, respectively, were anti-dilutive and excluded from the
diluted earnings per share computation. The statement is effective for interim
and annual periods ending after December 15, 1997, and requires the restatement
of all prior period earnings per share data presented. Accordingly, the Company
has restated all earnings per share data for prior years presented herein.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997.
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Certain FASB statements, however, require
entities to report specific changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities and foreign
currency items, as a separate component of the equity section of the balance
sheet. Such items, along with net income, are components of comprehensive
income. SFAS No. 130 requires that all items of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. Additionally, SFAS No. 130 requires that the accumulated
balance of other comprehensive income be displayed separately from retained
earnings and additional paid-in-capital in the equity section of the balance
sheet. The Company will adopt these disclosure requirements beginning in the
first quarter of 1998.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management has not yet
determined how the adoption of SFAS No. 131 will impact the Company's financial
reporting.
Certain Factors That May Affect Future Results
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain "forward looking"
information that involve risks and uncertainties. In particular, statements
contained in this Form 10-KSB which are not historical facts (including, but not
limited to, statements concerning international revenues, anticipated operating
expense levels and such expense levels relative to the Company's total revenues)
constitute forward looking statements and are made under the safe harbor
provisions of the
20
<PAGE>
Private Securities Litigation Reform Act of 1995. The Company's actual results
of operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, without limitation, the availability of
capital to fund the Company's future cash needs, reliance on major customers,
history of operating losses, limited availability of capital under credit
arrangements with lenders, market acceptance of the Company's products,
technological obsolescence, competition, component supply problems and
protection of proprietary information, as well as the accuracy of the Company's
internal estimates of revenue and operating expense levels.
21
<PAGE>
Item 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements and the related report of
independent accountants are presented in the following pages. The consolidated
financial statements filed in this Item 7 are as follows:
Page
Report of Independent Accountants...........................................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996..................................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1996..................................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996..................................................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FOCUS Enhancements, Inc.
Sudbury, Massachusetts
We have audited the accompanying consolidated balance sheets of FOCUS
Enhancements, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FOCUS
Enhancements, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
As described in Note 1, the Company restated its December 31, 1996 financial
statements by writing off the balance of certain barter credits and providing
additional reserves for stock balancing return transactions.
WOLF & COMPANY P.C.
Boston, Massachusetts
February 27, 1998, except for Note 13
as to which the date is March 3, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Note 6)
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 719,851 $ 413,894
Securities available for sale (Note 7) 595,000 --
Accounts receivable, net of allowances of $820,998 and $888,605
at December 31, 1997 and 1996, respectively 5,538,132 3,213,565
Inventories (Note 3) 3,989,604 1,975,381
Prepaid expenses and other current assets 470,907 243,829
------------ ------------
Total current assets 11,313,494 5,846,669
Property and equipment, net (Note 4) 1,068,918 483,591
Other assets, net (Notes 5 and 8) 288,482 110,001
Goodwill, net (Note 11) 1,249,750 1,467,106
------------ ------------
Total assets $ 13,920,644 $ 7,907,367
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 6) $ 2,220,000 $ 2,517,458
Obligations under capital leases (Note 8) 102,320 124,132
Accounts payable (Note 7) 5,515,913 3,584,284
Accrued liabilities 855,961 628,304
------------ ------------
Total current liabilities 8,694,194 6,854,178
Deferred Income (Note 7) 84,212 --
Obligations under capital leases, non-current (Note 8) 73,855 80,666
------------ ------------
Total liabilities 8,852,261 6,934,844
------------ ------------
Commitments (Note 8)
Stockholders' equity (Notes 9, 11 and 13)
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 25,000,000 shares authorized,
14,010,186 and 11,301,845 shares issued and outstanding at
December 31, 1997 and 1996, respectively 140,102 113,018
Additional paid-in capital 27,339,892 21,285,037
Accumulated deficit (22,411,611) (20,425,532)
------------ ------------
Total stockholders' equity 5,068,383 972,523
------------ ------------
Total liabilities and stockholders' equity $ 13,920,644 $ 7,907,367
============ ============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1997 1996
------------ -------------
Net sales (Note 12) $ 21,026,011 $ 15,076,368
Cost of goods sold 15,091,641 14,887,902
------------ ------------
Gross profit 5,934,370 188,466
------------ ------------
Operating expenses:
Sales, marketing and support 4,647,657 3,480,024
General and administrative (Note 11) 2,399,491 3,797,238
Research and development 1,112,487 1,339,736
Purchased research and development (Note 11) -- 2,000,000
------------ ------------
Total operating expenses 8,159,635 10,616,998
------------ ------------
Loss from operations (2,225,265) (10,428,532)
Interest expense, net (266,095) (312,833)
Other income (expense), net (Note 7) 510,378 (14,504)
------------ ------------
Income before income taxes (1,980,982) (10,755,869)
Income tax expense (Note 10) 5,097 16,541
------------ ------------
Net loss $ (1,986,079) $(10,772,410)
============ ============
Loss per common share
Basic $ (0.16) $ (1.19)
============ ============
Diluted $ (0.16) $ (1.19)
============ ============
Weighted average common
shares outstanding
Basic 12,727,934 9,020,688
============ ============
Diluted 12,727,934 9,020,688
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 and 1996
Common Stock
-------------------------- Additional Total
Number of Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,171,862 $ 71,719 $ 13,168,730 $ (9,653,122) $ 3,587,327
Issuance of common stock upon exercise
of stock options and warrants, net of
issuance costs of $165,124 873,834 8,738 948,665 -- 957,403
Issuance of common stock from private
offerings, net of issuance costs of
$562,285 (Note 9) 2,523,280 25,233 5,132,970 -- 5,158,203
Issuance of common stock for
acquisition of TView, Inc. (Note 11) 732,869 7,328 1,992,672 -- 2,000,000
Issuance of common stock warrants (Note 9) -- -- 42,000 -- 42,000
Net loss -- -- -- (10,772,410) (10,772,410)
------------ ---------- ------------ ------------ ------------
Balance at December 31, 1996 11,301,845 113,018 21,285,037 (20,425,532) 972,523
Issuance of common stock upon exercise
of stock options and warrants 315,160 3,152 501,287 -- 504,439
Issuance of common stock from private
offerings, net of issuance costs of
$359,431 (Note 9) 2,393,181 23,932 5,553,568 -- 5,577,500
Net loss -- -- -- (1,986,079) (1,986,079)
------------ ---------- ------------ ------------ ------------
Balance at December 31, 1997 14,010,186 $ 140,102 $ 27,339,892 $(22,411,611) $ 5,068,383
============ ========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,986,079) $(10,772,410)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 425,989 681,408
Writedown of Inline and Lapis goodwill and intangibles -- 1,273,000
Purchased research and development -- 2,000,000
Amortization of warrant value -- 61,388
Gain on settlement of accounts payable (244,176) --
Securities received on sale of networking assets (595,000)
Deferred Income 84,212 --
Changes in operating assets and liabilities, net of the
effects of acquisition;
(Increase) decrease in accounts receivable (2,324,567) (1,348,930)
Decrease (increase) in inventories (2,014,223) 21,563
Decrease (increase) in prepaid expenses and other assets (406,659) 65,988
Increase (decrease) in accounts payable 2,175,805 1,666,212
Increase (decrease) in accrued liabilities 227,657 123,151
------------ ------------
Net cash used in operating activities (4,657,041) (6,228,630)
------------ ------------
Cash flows from investing activities:
Cash received from acquisition of TView, Inc. -- 26,546
Purchase of property and equipment (653,926) (306,174)
Decrease (Increase) in notes receivable 1,100 (80,000)
------------ ------------
Net cash used in investing activities (652,826) (359,628)
------------ ------------
Cash flows from financing activities:
Payments on notes payable (297,458) (1,120,000)
Payments under capital lease obligations (168,657) (133,497)
Net proceeds from private offerings of common stock 5,577,500 5,158,203
Net proceeds from exercise of common stock options and warrants 504,439 957,403
------------ ------------
Net cash provided by financing activities 5,615,824 4,862,109
------------ ------------
Net increase (decrease) in cash and cash equivalents 305,957 (1,726,149)
Cash and cash equivalents at beginning of year 413,894 2,140,043
------------ ------------
Cash and cash equivalents at end of year $ 719,851 $ 413,894
============ ============
Supplemental Cash Flow Information:
Interest paid $ 153,549 $ 274,000
Income taxes paid $ 5,414 $ 10,312
Issuance of Common Stock Warrants $ -- $ 42,000
Equipment acquired under capital leases $ 140,034 $ --
Acquisition of TView, Inc. (Note 11)
Sale of networking assets (Note 7)
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business of the Company
FOCUS Enhancements, Inc. (the "Company" or "FOCUS") is involved in the
development and marketing of proprietary PC-to-TV convergence products for
Windows(TM) and Mac(TM)OS based personal computers. The Company's products,
which are sold globally through original equipment manufacturers (OEM's) and
resellers, merge computer generated graphics and television displays for
presentations, training, education, video teleconferencing, Internet viewing and
home gaming markets. Since commencing operations in 1992, the Company has
experienced sales growth through a diversified channel and product strategy that
has allowed it to capitalize on several trends in the personal computer
marketplace. Based on a targeted product plan and its experience in video
conversion technology, FOCUS has developed a strategy to play a major role in
the PC-to-TV convergence industry.
The consolidated financial statements were prepared assuming that the
Company will continue as a going concern. For the year ended December 31, 1996,
the Company incurred a significant net loss and had a deficiency in working
capital that raised substantial doubt about the Company's ability to continue as
a going concern. As of December 31, 1997, the Company has increased its working
capital to $2,619,000, has increased its stockholders' equity from $972,523 at
December 31, 1996 to $5,068,383 at December 31, 1997, and has obtained
additional equity financing of $3,000,000 as of March 3, 1998 (See Note 13). In
addition, the Company has increased its sales and gross profit contribution,
while reducing operating expenses in 1997 compared to 1996. As a result of the
foregoing, the Report of Independent Accountants as of December 31, 1997 and for
the year then ended does not reflect any modification relating to the Company's
ability to continue as a going concern.
Approximately 90% of the components for the Company's products are
manufactured on a turnkey basis by two vendors, Pagg Corporation and Asia ITN
Corp. In the event that these vendors were to cease supplying the Company,
management believes that alternative turnkey manufacturers for the Company's
products could be secured. However, the Company would most likely experience
short-term delays in the shipment of its products.
The personal computer enhancements market is characterized by extensive
research and development and rapid technological change resulting in product
life cycles of nine to eighteen months. Development by others of new or improved
products, processes or technologies may make the Company's products or proposed
products obsolete or less competitive. Management believes it necessary to
devote substantial efforts and financial resources to enhance its existing
PC-to-TV products and to develop new products. There can be no assurance that
the Company will succeed with these efforts.
Restatement of Financial Statements - The Company issued its financial
statements for the year ended December 31, 1996 in its annual report on Form
10-KSB, filed with the Securities and Exchange Commission ("SEC") on March 31,
1997. The financial statements for the year ended December 31, 1996 included the
sale in the fourth quarter of 1996 of certain graphics/connectivity and other
products to a barter exchange organization in exchange for $1,700,000 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
F-7
<PAGE>
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 reported as "Other Assets" by approximately $1.2 million on its
Consolidated Balance Sheet at December 31, 1996.
In addition, the Company has also recorded at December 31, 1996
additional reserves, totaling approximately $400,000, for potential stock
balancing and other product return transactions. Although the Company provided
allowances for potential uncollectible amounts, estimated future returns,
exchanges and price protection credits prior to the restatement, it did not
provide for returns resulting from stock balancing transactions as required by
generally accepted accounting principles. As a result of the Company's
discussions with the NASDAQ Stock Market, management agreed to provide
additional reserves for estimated returns resulting from stock balancing
transactions and amended its revenue recognition accounting policy.
The impact of the restatement on the Company's Consolidated Financial
Statements as of December 31, 1996 and for the year then ended is summarized as
follows:
Consolidated Statement of Operations:
Year Ended
December 31, 1996
-----------------
As Reported As Restated
----------- -----------
Cost of goods sold $ 13,723,923 $ 14,887,902
Gross profit 1,352,445 188,466
General and administrative 3,397,238 3,797,238
Total operating expenses 10,216,998 10,616,998
Loss from operations (8,864,553) (10,428,532)
Loss before income taxes (9,191,890) (10,755,869)
Net loss $ (9,208,431) $(10,772,410)
Loss per common share $ (1.01) $ (1.19)
F-8
<PAGE>
Consolidated Balance Sheet:
As of
December 31, 1996
-----------------
As Reported As Restated
----------- -----------
Accounts receivable $ 3,613,565 $ 3,213,565
Total current assets 6,246,669 5,846,669
Other assets, net 1,273,980 110,001
Total assets 9,471,346 7,907,367
Accumulated deficit (18,861,553) (20,425,532)
Total stockholders' equity 2,536,502 972,523
Total liabilities and stockholders' equity $ 9,471,346 $ 7,907,367
2. Summary of Significant Accounting Policies
Basis of Presentation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries; Lapis
Technologies, Inc., FOCUS Enhancements B.V. (a Netherlands corporation) and
TView, Inc. All intercompany accounts and transactions have been eliminated.
Use of Estimates. The process of preparing financial statements in
conformity with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues and expenses. Actual results may differ from estimated amounts.
Significant estimates used in preparing these financial statements related to
accounts receivable allowances, stock balancing allowances, inventory valuation,
deferred tax asset valuation, the recoverability of goodwill and other
intangible assets related to acquisitions. It is at least reasonably possible
that the estimates used will change within the next year.
Financial Instruments. The carrying amounts reflected in the
consolidated balance sheets for cash, receivables and accounts payable
approximate the respective fair values due to the short-term maturities of these
instruments. Notes payable consists of variable rate instruments at terms that
would be available through similar transactions with other third parties. The
fair value of securities available for sale are based on their quoted market
prices.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
F-9
<PAGE>
Securities Available for Sale. Securities available for sale consist of
marketable equity securities carried at fair value, with unrealized gains and
losses reported as a separate component of stockholders' equity.
Revenue Recognition. Revenue from product sales is recognized when
products are shipped. Revenue from sales to distributors may be subject to
agreements allowing limited rights of return and price protection. The Company
provides allowances for potential uncollectible amounts, estimated stock
balancing and future returns, exchanges and price protection credits.
Concentration of Credit Risk. As of December 31, 1997, a major
distributor represented approximately 35% of the Company's accounts receivable,
and a contract manufacturer customer represented approximately 12% of the
Company's accounts receivable . As of December 31, 1996, a major distributor,
represented approximately 40% of the Company's accounts receivable, with three
other distributors or resellers and a major television manufacturer comprising
approximately 12% and 5% of accounts receivable, respectively. The Company
provides credit to customers in the normal course of business with terms
generally ranging between 30 to 90 days. The Company does not usually require
collateral for trade receivables, but attempts to limit credit risk through its
customer credit evaluation process.
Inventories. Inventories are stated at the lower of cost or market
value using the first-in, first-out method, but not in excess of net realizable
value. The Company periodically reviews its inventories for potential slow
moving or obsolete items and provides valuation allowances for specific items,
as appropriate.
Property and Equipment. Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the related assets as set forth below. Equipment leased under capital leases is
stated at the present value of future lease obligations and is amortized over
estimated useful lives.
Category Depreciation Period
-------- -------------------
Equipment 3 years
Furniture and fixtures 5 years
Tooling and Dies 2 years
Leasehold improvements Lesser of 5 years or the term of the lease
Barter Credits. The Company's barter credits may be redeemed as partial
payment toward the purchase of goods and/or services utilized by the Company.
Benefits received from the use of barter credits are recognized at the time that
such credits are utilized.
F-10
<PAGE>
Goodwill and Intangible Assets. Goodwill resulting from business
combinations is amortized on a straight-line basis over a seven year period.
Other intangible assets acquired through business combinations are amortized on
a straight-line basis over periods ranging from three to seven years. The
Company evaluates the net realizable value of goodwill and other intangible
assets periodically based on a number of factors including operating results,
business plans, budgets and economic projections. The Company's evaluation also
considers non-financial data such as market trends, customer relationships,
product development cycles and changes in management's market emphasis.
Advertising and Sales Promotion Costs. Advertising and sales promotion
costs are expensed as incurred. Advertising expense was approximately $1,262,000
and $504,000 for the years ended December 31, 1997 and 1996, respectively.
Research and Development. Research and development costs are expensed
as incurred.
Product Warranty Costs. The Company's warranty period for its products
is generally one to three years. Estimated future costs for initial product
warranties are not material.
Income Taxes. Deferred taxes are determined based on the differences
between the financial statement and tax basis carrying amounts of assets and
liabilities, using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are provided if, based
upon the weight of available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
Foreign Currency Translation. The functional currency of the Company's
foreign subsidiary, FOCUS Enhancements, B.V., is the local currency. Financial
statements are translated into U.S. dollars using the exchange rates at each
balance sheet date for assets and liabilities and using a weighted average
exchange rate for each period for revenue, expenses, gains and losses. Foreign
exchange gains or losses, which are not material, are recognized in income for
the years presented.
Stock Compensation Plans. In 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." This statement encourages all
entities to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the fair value of the award which is recognized over the service
period, which is usually the vesting period. However, it also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under the Company's stock option
plan have no intrinsic value at the grant date, accordingly, under APB Opinion
No. 25, no compensation cost is recognized. The Company has elected to continue
with the accounting prescribed in APB Opinion No. 25 and, as a result, must make
pro forma disclosures of net income and earnings per share and other disclosures
as if the fair value based method of accounting had been applied.
Net Income (Loss) Per Share. In February 1997, FASB issued SFAS No.
128, "Earnings per Share" which requires earnings per share to be calculated on
a basic and dilutive basis. Basic earnings per share represents income available
to common stock divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed conversion. Potential common shares that may be issued by the
Company relate solely to outstanding stock options and warrants, and are
determined using the treasury
F-11
<PAGE>
stock method. The assumed conversion of outstanding dilutive stock options and
warrants would increase the shares outstanding but would not require an
adjustment to income as a result of the conversion. For the years ended December
31, 1997 and 1996, options and warrants applicable to 6,681,903 shares and
4,981,664 shares, respectively were anti-dilutive and excluded from the diluted
earnings per share computation. The statement is effective for interim and
annual periods ending after December 15, 1997, and requires the restatement of
all prior period earnings per share data presented. Accordingly, the Company has
restated all earnings per share data for prior years presented herein.
Recent Accounting Pronouncements. In June 1997, FASB issued SFAS No.
130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Certain FASB
statements, however, require entities to report specific changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities and foreign currency items, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Additionally, SFAS No. 130 requires
that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in-capital in the equity
section of the balance sheet. The Company will adopt these disclosure
requirements beginning in the first quarter of 1998.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management has not yet
determined how the adoption of SFAS No. 131 will impact the Company's financial
reporting.
3. Inventories
Inventories consist of the following at:
December 31,
-------------------------------
1997 1996
---- ----
Finished goods $3,304,444 $1,555,812
Raw materials 685,160 419,569
---------- ----------
$3,989,604 $1,975,381
========== ==========
F-12
<PAGE>
4. Property and Equipment
Property and equipment consist of the following at:
December 31,
---------------------------
1997 1996
---- ----
Equipment $1,478,696 $1,307,477
Furniture and fixtures 442,749 422,954
Leasehold improvements 179,573 147,823
Tooling and dies 548,639 --
Purchased software 70,632 60,815
---------- ----------
2,720,289 1,939,069
Less accumulated depreciation and
amortization 1,651,371 1,455,478
---------- ----------
Net book value $1,068,918 $ 483,591
========== ==========
Depreciation and amortization expense related to property and equipment
for the years ended December 31, 1997 and 1996 totaled $208,633 and $377,120,
respectively.
5. Other Assets
Notes Receivable. On January 5, 1996, an officer of the Company
borrowed $40,000 under a promissory note bearing interest at 8.5% per annum.
This amount is in addition to an existing $30,000 promissory note to the same
officer. In September 1996, a different officer of the Company borrowed $40,000,
as part of a relocation agreement, under a promissory note bearing interest at
8.5% per annum. During 1997, the Company received repayments of $1,100.
6. Notes Payable / Security Arrangements
Lines of Credit, Banks. As of December 31, 1997, the Company maintained
a revolving line of credit with a bank that permitted borrowings up to $900,000.
Borrowings under the line are payable upon demand and are collateralized by all
of the assets of the Company, except as noted below. Borrowings, aggregating
$720,000 and $820,000 at December 31, 1997 and 1996, respectively, bear interest
at the bank's
F-13
<PAGE>
prime rate plus 1% (9.5% at December 31, 1997) and are personally guaranteed by
an investor. Under the terms of the line of credit agreement, the Company is
required to comply with certain restrictive covenants and was in violation of
certain of these covenants at December 31, 1997. The Company has obtained a
waiver on its violation of these restrictive covenants. Further the bank has
notified the Company that the line of credit will not be extended beyond June 8,
1998. The Company is in discussions with another lender to refinance this debt.
The Company had another revolving line of credit with a bank that
permitted borrowings up to $200,000 through April 1, 1995. Interest was payable
monthly at 1.5% above the prime rate. Borrowings outstanding under the line of
credit as of December 31, 1996 were $197,458. The Company repaid this line of
credit on September 18, 1997.
Term Line of Credit. At December 31, 1997 and 1996, the Company owed
$1,500,000 to an unrelated individual under a term line of credit originated in
October 1994 for $2,500,000. In connection with this line, the Company issued a
promissory note with detachable warrants to purchase 200,000 shares of
unregistered common stock at $2.00 per share. The warrants were exercisable from
April 1, 1995 to October 31, 1997. In June 1995, in consideration for extending
the line, the Company reduced the exercise price of the warrants to $1.05 per
share. The Company recorded interest expense of $40,047, representing the value
of the warrants. In January 1996, the Company repaid $1,000,000 of the amount
owed under the term note. Additionally, the note was extended in June 1996 by
the lender until March 31, 1997. In consideration of the extension, the Company
granted a second security interest in all of the assets of the Company and
issued 50,000 warrants to the lender exercisable for the period of three years
at a price of $2.07 per share. The Company recorded an additional charge in 1996
for interest in the amount of approximately $42,000. The term note accrues
interest at the prime rate plus 4% (12.5% at December 31, 1997), payable
quarterly in arrears. This note was due on March 31, 1997 and was not paid. The
Company is in the process of renegotiating the terms and expiration date of this
loan with the lender. In the event that the unaffiliated lender does not extend
the due date, the Company would be required to pay the amounts outstanding from
its working capital or through equity or debt financing.
Vendor Security Agreement. In June 1996, the Company entered into a
security agreement with its principal contract manufacturer and inventory
supplier regarding certain amounts owed by the Company to the supplier. At
December 31, 1997 and 1996, the outstanding amounts owed the supplier were
approximately $2,533,000 and $806,000, respectively. The amounts owed the
supplier are secured by a tertiary position security interest in certain of the
Company's assets and amounts past due bear interest at 10.25%. Interest expense
on this arrangement amounted to approximately $3,900 for the year ended December
31, 1996. There was no interest expense for the year ended December 31, 1997.
7. Other Income
Sale of Networking Assets - Effective September 30, 1997, the Company
sold its line of computer connectivity products to Advanced Electronic Support
Products, Inc. (AESP) for 189,701 shares of AESP common stock. Included in the
sale were customer lists and the rights to use the FOCUS networking brand name
to market the product line as well as certain of AESP's complementary products.
In connection with this transaction, the Company recorded other income in the
amount of $358,288, securities available for sale in the amount of $595,000
(discounted 15% to reflect temporary restrictions on the common stock), and
F-14
<PAGE>
deferred income of $84,212. In addition, the Company sold networking inventory
to AESP in the amount of $159,000 at cost. A director of the Company is also a
director of AESP. At December 31, 1997, the fair value of the securities
available for sale was approximately $595,000.
Accounts Payable - During the year ended December 31, 1997, the Company
recognized a total of $244,176 of other income in connection with the release of
selected obligations and the reduction of certain accounts payable.
8. Commitments
Leases. The Company leases office facilities and certain equipment
under operating leases. Two of the facility leases have five-year terms that
expire in June 2000 and July 2001. Under the lease agreements, the Company is
obligated to pay for utilities, taxes, insurance and maintenance. Total rent
expense for the years ended December 31, 1997 and 1996 was approximately
$300,000 for each year.
The Company leases certain computer and office equipment under capital
leases with three-year terms. The carrying values of assets under capital leases
were $236,301 and $131,497 at December 31, 1997 and 1996, respectively, which is
net of accumulated amortization of $40,421 and $485,573, respectively. The cost
and net book value of capitalized leased assets are included in property and
equipment.
Minimum lease commitments at December 31, 1997 are as follows:
Capital Leases Operating Leases
-------------- ----------------
1998 $115,838 $ 331,000
1999 26,282 322,000
2000 23,282 298,000
2001 23,282 186,000
2002 16,119 -
-------- ----------
Total minimum lease payments 204,803 $1,137,000
==========
Less amount representing interest 28,628
--------
Present value of minimum obligations 176,175
Less current portion 102,320
--------
Non-current portion $ 73,855
========
Employment Agreements. The Company has employment agreements with
certain corporate officers. The agreements are generally one to three years in
length and provide for minimum salary levels. These agreements include severance
payments of approximately one to three times each officer's annual compensation.
F-15
<PAGE>
Letter of Credit. As part of the Company's acquisition of TView, Inc.
in September 1996, the Company assumed a $125,000 irrevocable stand-by letter of
credit with a bank to secure office space in Beaverton, Oregon. During 1997, the
Company placed $125,000 in an interest bearing account at the Company's bank to
secure the letter of credit. This amount has been recorded as an other asset as
of December 31, 1997.
Purchase Commitment - The Company has agreed to purchase a minimum of
$2,500,000 of cables and other products from Advanced Electronic Support
Products, Inc. ("AESP") during the two year period ending September 29, 1999. In
return, the Company has received certain pricing commitments over the term of
the master purchase agreement. For the period October 1, 1997 through February
10, 1998, the Company purchased approximately $231,000 of products from AESP. In
the event that the Company does not purchase at least $2,500,000 of cables and
other products during the initial two-year term of the master purchase
agreement, the Company must pay AESP an amount equal to 20% of the difference
between $2,500,000 and the aggregate amount of purchases.
9. Stockholders' Equity
Preferred Stock. The stockholders of the Company have authorized
3,000,000 shares of preferred stock. As of December 31, 1997, no shares of
preferred stock were issued or outstanding.
Common Stock. All common stock issued and outstanding has full voting
rights. Dividend and liquidation rights of the common stock are subordinated to
those of preferred stock. On March 18, 1997, the stockholders voted to increase
the authorized shares of common stock from 16,000,000 shares to 20,000,000
shares. On July 25, 1997, the stockholders voted to increase the authorized
shares of common stock from 20,000,000 shares to 25,000,000 shares.
On January 15, 1997, the Company sold 75,000 shares of its common stock
for gross proceeds of $138,750, in connection with a private offering to foreign
investors. This stock is unregistered and was subject to restrictions on trading
in the United States for a period of forty days. In connection with the
offering, the Company paid $26,250 to the placement agent. Net proceeds of the
private offering were approximately $112,500. On February 12, 1997, the Company
sold 218,181 shares of common stock for gross proceeds of $338,181 in connection
with a private offering to foreign investors. This stock is unregistered and was
subject to restrictions on trading in the United States for a period of forty
days. In connection with the offering, the Company incurred fees of $38,181
receiving net proceeds of $300,000.
On March 27, 1997, the Company completed a financing of $1,650,000 in
gross proceeds for the sale of 1,100,000 shares of common stock in a private
placement to unaffiliated accredited investors. The shares issued as part of
this transaction 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 $55,000 yielding net proceeds of $1,595,000. 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 $1.6875 per share exercisable for a period of five years.
F-16
<PAGE>
On September 10, 1997, the Company sold 1,000,000 shares of common
stock for $3,810,000 in gross proceeds in a private placement to Smith Barney
Fundamental Value Fund, Inc. In the event that the last sale price of the
Company's common stock is less than $3.00 per share for 20 consecutive trading
days during the 12 month period following the closing, the Company will also
issue seven year warrants to purchase 333,000 shares of common stock at $3.00
per share. The shares issued and issuable, as part of this transaction were
registered on a Form S-3 with the Securities and Exchange Commission. Fees and
expenses associated with this offering amounted to approximately $240,000,
yielding net proceeds of $3,570,000. In connection with this transaction, the
Board of Directors authorized the grant of warrants to the placement agent to
purchase 100,000 shares of the Company's common stock at $6.00 per share
exercisable for a period of five years.
During the year ended December 31, 1997, the Company issued at various
times, 121,596 shares of common stock resulting from the exercise of public and
private warrants, receiving proceeds of approximately $209,700. Additionally,
during the year ended December 31, 1997, stock options to purchase 193,564
shares of common stock were exercised for proceeds of approximately $294,700.
During the year ended December 31, 1996, the Company sold at various
times, 2,523,280 shares of common stock receiving gross proceeds of
approximately $5,721,000 through private placements to foreign investors. This
stock was unregistered and was subject to restrictions on trading in the United
States for a period of forty days. In connection with these offerings, the
Company incurred fees of approximately $563,000. Net proceeds from these
offerings were approximately $5,158,000.
During the year ended December 31, 1996, the Company issued, at various
times, 793,029 shares of common stock resulting from the exercise of public and
private warrants, receiving gross proceeds of approximately $1,021,000.
Additionally, during the year ended December 31, 1996, stock options to purchase
80,805 shares of common stock were exercised for gross proceeds of approximately
$102,000. Net proceeds from these transactions were approximately $957,000.
Effective September 30, 1996, the Company consummated the acquisition
of all the capital stock of TView, Inc. ("TView"), a Delaware corporation. In
consideration for the capital stock of TView, the Company issued to TView
stockholders an aggregate of 732,869 shares of FOCUS Enhancements common stock,
valued at $2,000,000. (See Note 11.)
Common Stock Purchase Warrants. In April 1996, the Company issued
warrants in conjunction with the private placement made in December 1995. The
warrants granted are for the purchase of 100,000 shares of common stock at
$2.063 per share and are exercisable for a period of 36 months from the date of
the grant. Additionally, the Company issued warrants in June 1996 for the
purchase of 50,000 shares of common stock in consideration of the extension of
its $1.5 million term note with its unrelated lender. The warrants are
exercisable for a period of 36 months at a price of $2.07 per share.
In June 1995, in consideration for the personal guarantee by an
investor for certain borrowings, the Company issued warrants for the purchase of
265,000 shares of common stock at an exercise price of $.90 per share,
exercisable until June 30, 2000. The Company valued the warrants at $77,553,
recording interest expense of $58,165 and $19,388 in 1995 and 1996 respectively.
IPO Warrants. In June 1993, the Company completed an initial public
offering of 1,655,055 units at $4.25 per unit. Each unit consisted of one share
of common stock and one redeemable common stock purchase warrant (the
"Warrant"). The Warrants expire on May 23, 1998 and are subject to redemption by
the Company at $0.05 per Warrant, upon 30 days written notice. In accordance
with the anti-dilution provisions of the Warrants, the number of shares issuable
upon exercise of each Warrant outstanding at December 31, 1997, has been
increased to 1.774 shares per Warrant resulting in an effective exercise price
per share of $3.81 per share. At December 31, 1997, there were 1,631,855
warrants outstanding.
In connection with the initial public offering, the Company issued a
warrant to the underwriter
F-17
<PAGE>
(the "Underwriter's Warrant") for the purchase of 150,000 units, exercisable one
year after the effective date of the public offering over a four-year period, at
$5.74 per unit. Each unit subject to the Underwriter's Warrant consists of one
share of common stock and one redeemable common stock purchase warrant. The
common stock purchase warrants included in the Underwriter's Warrant are
exercisable from May 24, 1995 to May 24, 1999 at an exercise price of 135% of
the per share exercise price of the Warrants ($9.11). The Underwriter's Warrant
is not transferable prior to its exercise date. The Underwriter's Warrant and
the securities issuable thereunder may not be offered for sale to the public
unless registered by the Company pursuant to certain registration rights
attached thereto. The Underwriter's Warrant, similar to the Warrants, contain
anti-dilution provisions in the event of certain common stock transactions.
Common stock purchase warrant activity, including the IPO Warrants,
since January 1, 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------------
Shares Grant Price Shares Grant Price
Range Range
<S> <C> <C> <C> <C>
Warrants outstanding at
beginning of year 3,218,060 $0.90 - $9.11 3,648,711 $0.90 - $9.11
Anti-dilution adjustment 298,910 247,857
Warrants granted 323,333 $1.69 - $6.00 150,000 $2.06 - $2.07
Warrants exercised (121,596) $1.69 - $1.69 (793,029) $0.90 - $4.00
Warrants canceled (3,200) $1.29 - $2.35 (35,479) $1.29 - $7.76
--------- ---------
Warrants outstanding at
end of year 3,715,507 $0.90 - $9.11 3,218,060 $0.90 - $9.11
========= =========
Warrants exercisable
at end of year 3,657,174 $0.90 - $9.11 3,218,060 $0.90 - $9.11
========= =========
Weighted average fair value
of warrants granted during the year $1.87 $1.40
</TABLE>
1992 Stock Option Plan. The Company's 1992 Stock Option Plan (the
"Plan"), provides for the granting of incentive and non-qualified options to
purchase up to approximately 1,800,000 shares of common stock. Incentive stock
options may be granted to employees of the Company. Non-qualified options may be
granted to employees, directors or consultants of the Company. Incentive stock
options may not be granted at a price less than 100% (110% in certain cases) of
the fair-market value of common stock at date of grant. Non-qualified options
may not be granted at a price less than 85% of fair-market value of common stock
at date of grant. As of December 31, 1997, all options granted under the plan
were issued at market
F-18
<PAGE>
value at the date of grant. Options generally vest annually over a three-year
period and are exercisable over a five-year period from date of grant. The term
of each option under the Plan is for a period not exceeding ten years from date
of grant. During 1997 and 1996, the Board of Directors authorized reductions in
the exercise price of certain options granted under the plan to prices
reflecting the fair market value on the repricing date. As of December 31, 1997,
options under the 1992 Plan to purchase 721,396 shares of the Company's common
stock were outstanding with exercise prices ranging between $0.23 to $5.19 per
share.
1993 Director Stock Option Plan. The 1993 Director Plan offers
non-qualified stock options to members of the Board of Directors who are neither
employees nor officers of the Company. The 1993 Director Plan authorized the
grant of options to purchase up to an aggregate of 125,000 shares of common
stock. The exercise price per share of options granted under the 1993 Director
Plan is 100% of the market value of the common stock of the Company on the date
of grant. Options granted under the 1993 Director Plan are exercisable in
installments, with one-third becoming exercisable on each anniversary of the
date of grant. As of December 31, 1997, options under the 1993 Plan to purchase
75,000 shares of the Company's common stock were outstanding with an exercise
price of $2.63 per share.
1995 Director Stock Option Plan. In August 1995, the Board of Directors
adopted the 1995 Director Stock Option Plan (the "1995 Director Plan"), subject
to stockholder approval that was received on July 15, 1996. The 1995 Director
Plan authorized the grant of options to purchase up to an aggregate of 400,000
shares of common stock. On March 19, 1997, the options granted under the 1995
Plan were canceled and a new 1997 Director Stock Option Plan was established.
1995 Non Qualified Stock Options. In April 1995, the Board of Directors
authorized and ratified on June 26, 1995, the issuance to two officers warrants
to purchase an aggregate of 500,000 shares of Series A Preferred Stock at $1.10
per share. In accordance with their terms, the Series A warrants were
automatically exchanged for non-qualified options to purchase an equivalent
number of shares of common stock at $1.10 per share in August 1995. The options
are 100% vested and expire in April 2002. As of December 31, 1997, options to
purchase 500,000 shares of the Company's common stock were outstanding with an
exercise price of $1.10 per share.
1997 Director Stock Option Plan. In March 1997, the Board of Directors
adopted the 1997 Director Stock Option Plan (the "1997 Director Plan"), subject
to stockholder approval which was received on July 25, 1997. The 1997 Director
Plan authorized the grant of options to purchase up to an aggregate of 800,000
shares of common stock. Each non-employee director who was in office on March
19, 1997 received an automatic grant of an option to purchase shares of common
stock ranging between 100,000 and 200,000 shares based on time of service. The
exercise price per share of options granted under the 1997 Director Plan is 100%
of the market value of the common stock of the Company on the date of grant.
Options granted under the 1997 Director Plan are exercisable over a five-year
period with vesting determined at varying amounts over a three year period. As
of December 31, 1997, options under the 1997 Plan to purchase 750,000 shares of
the Company's common stock were outstanding with an exercise price of $1.88 per
share.
F-19
<PAGE>
Key Officer Non Qualified Stock Options. In March 1997, the Board of
Directors authorized the grant of non-qualified stock options to certain key
officers of the Company (the "1997 Key Officer Agreements"). The 1997 Key
Officer Agreements related to the grant of options to purchase up to an
aggregate of 920,000 shares of common stock. The exercise price per share of
options granted under the 1997 Key Officer Agreements equaled 100% of the market
value of the common stock of the Company on the date of grant. Options granted
under the 1997 Key Officer Agreements are exercisable in installments over a
three year period. As of December 31, 1997, options under the 1997 Key Officer
Agreements to purchase 920,000 shares of the Company's common stock were
outstanding with exercise prices ranging between $1.75 and $1.88 per share.
A summary of the status of the Company's outstanding stock options as
of December 31, 1997 and 1996, and the changes during the years then ended, is
presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ---------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,763,604 $ 2.57 1,389,407 $ 2.32
Options Granted 1,923,750 1.88 761,237 2.80
Options Exercised (193,564) 1.52 (80,805) 1.30
Options Canceled (527,394) 3.17 (306,235) 3.49
---------- ---------
Options outstanding at
end of year 2,966,396 $ 1.81 1,763,604 $ 2.57
========== =========
Options exercisable at end of 954,830 $ 1.54 790,940 $ 1.94
year ========== =========
Weighted average fair value of
options granted during the year $ 1.12 $ 1.14
</TABLE>
F-20
<PAGE>
Information pertaining to options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
EXERCISABLE
------------------------------------------------------- ------------------------------
Weighted Average Weighted Average Weighted Average
Range of Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices 12/31/97 Life Price 12/31/97 Price
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.24 - 0.91 12,766 0.0 $0.24 12,766 $0.24
$0.91 - 1.82 800,284 4.1 $1.32 549,867 1.12
$1.83 - 2.73 2,142,846 3.9 $2.00 391,947 2.18
$2.74 - 3.64 4,500 4.3 $2.84 250 3.12
$3.65 - 4.56 3,000 4.7 $4.06 -- --
$4.57 - 5.47 3,000 4.7 $5.19 -- --
--------- -------
Outstanding at
December 31, 1997 2,966,396 4.0 $1.81 954,830 $1.54
========= =======
</TABLE>
Stock-based Compensation. At December 31, 1997, the Company has three
plans and non plan stock options that are described above. The Company applies
APB Opinion No. 25 and related interpretations in accounting for the plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans. Had compensation cost for the Company's stock-based compensation plans
and non-plan stock options outstanding been determined based on the fair value
at the grant dates for awards under those plans consistent with the method
prescribed by SFAS No. 123, the Company's net loss and loss per share would have
been adjusted to the pro forma amounts indicated below:
Years Ended December 31,
------------------------
1997 1996
---- ----
Net loss As reported $(1,986,079) $(10,772,410)
Pro forma $(2,840,079) $(11,144,410)
Basic loss per share As reported $(0.16) $(1.19)
Pro forma $(0.22) $(1.24)
Diluted loss per share As reported $(0.16) $(1.19)
Pro forma $(0.22) $(1.24)
F-21
<PAGE>
Common stock equivalents have been excluded from all calculations of
loss per share and pro forma loss per share in 1997 and 1996 because the effect
of including them would be anti-dilutive.
The fair value of each grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively; dividend yield of
0.0 percent; expected volatility of 66% and 51%, risk-free interest rates of
5.0% and 6.4% and expected lives of 5.0 and 5.0 years.
10. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. Allocation of the provision for income taxes between federal and state
income taxes is as follows:
Years Ended December 31,
------------------------
1997 1996
---- ----
Current: Federal income taxes $ -- $ 8,000
State income taxes 5,097 8,541
------ -------
5,097 16,541
Deferred federal and state income taxes -- --
------ -------
$5,097 $16,541
====== =======
The differences between the provision for income taxes from the benefit
computed by applying the statutory Federal income tax rate are as follows:
Years Ended December 31,
------------------------
1997 1996
---- ----
Benefit computed at statutory rate (34%) $(673,500) $(3,657,000)
State income tax benefit, net of federal tax (124,000) (674,400)
Increase in valuation allowance on
deferred tax asset 536,000 4,854,000
Other, net 266,597 (506,059)
--------- ----------
$ 5,097 $ 16,541
========= ==========
F-22
<PAGE>
The net deferred tax asset consists of the following:
Years Ended December 31,
------------------------
1997 1996
---- ----
Deferred tax asset $ 10,036,000 $ 9,500,000
Deferred tax liability -- --
Valuation allowance on deferred tax asset (10,036,000) (9,500,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
The tax effects of each type of income and expense item that give rise
to deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforward $ 6,872,000 $ 6,585,000
Income tax credit carryforward 173,000 123,000
Tax basis in excess of book basis of fixed assets 137,000 117,000
Book inventory cost less than tax basis 157,000 139,000
Reserve for bad debts not deductible for income taxes 328,000 355,000
Tax basis in excess of book basis of other assets 465,000 465,000
Tax basis in subsidiaries in excess of book value 1,904,000 1,716,000
------------ ------------
10,036,000 9,500,000
Valuation allowance on deferred tax asset (10,036,000) (9,500,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
F-23
<PAGE>
A summary of the change in the valuation allowance on deferred tax
assets is as follows:
Years Ended December 31,
------------------------
1997 1996
---- ----
Balance at beginning of year $ 9,500,000 $ 3,696,000
Increase in allowance due to loss carryforwards
of TView, Inc. at date of acquisition -- 950,000
Addition to the allowance for the benefit of net
operating loss carryforwards not recognized 536,000 4,854,000
----------- -----------
Balance at end of year $10,036,000 $ 9,500,000
=========== ===========
At December 31, 1997, the Company has the following carryforwards
available for income tax purposes:
Federal net operating loss carryforwards
expiring in various amounts through 2012 $17,179,000
===========
State net operating loss carryforwards
expiring in various amounts through 2002 $17,179,000
===========
Credit for research activities $ 173,000
===========
Due to the uncertainty surrounding the realization of these favorable
tax attributes, the Company has placed a valuation allowance against its
otherwise recognizable net deferred tax assets. The net operating loss
carryforwards may be subject to annual limitations based on ownership changes in
the Company's common stock as provided in Section 382 of the Internal Revenue
Code.
11. Business Combinations
Lapis Technologies, Inc. On December 16, 1993, FOCUS issued 500,000
shares of its common stock, subject to adjustment based on the value of the
common stock, in exchange for all of the outstanding common stock of Lapis
Technologies, Inc. ("Lapis"). The business combination was accounted for using
the purchase method of accounting.
F-24
<PAGE>
From May to August 1995, the Company settled substantially all claims
by the former Lapis shareholders arising from the Company's acquisition of Lapis
by issuing 123,879 shares of common stock to the former Lapis shareholders. This
stock issuance was accounted for as an adjustment to the purchase price.
Negotiations are ongoing to settle the claims of two remaining Lapis
shareholders but the outcome is not expected to be material to the Company's
financial position.
In the third quarter of 1996, as a result of its evaluation of the
impairment of intangible assets related to this acquisition, the Company
wrote-off a portion of the goodwill in the amount of $1,214,000, recording the
charge in general and administrative expense. The evaluation considered the
Company's acquisition of TView, Inc. on September 30, 1996, the declining
Macintosh marketplace, shifting of the market to PC based products and
technological advances and projected future sales of Lapis products. At December
31, 1997 and 1996, the balance of the goodwill was $657,140 and $771,428 net of
accumulated amortization and write-offs of $2,341,607 and $2,227,319,
respectively.
TView, Inc. Effective September 30, 1996, FOCUS acquired all of the
capital stock of TView, Inc. ("TView"), a Delaware corporation, for 732,869
shares of common stock valued at $2,000,000, and assumed net liabilities of
approximately $716,000. The shares issued were initially placed into an escrow
account to ensure the attainment of certain performance criteria of TView's ASIC
chip. In addition, two former officers and principal stockholders of TView,
became Vice Presidents of the Company. Each of these individuals received
options to purchase 80,000 shares of common stock under the Company's 1992 Stock
Option Plan. The options, which expire 5 years from the date of grant, were
granted at $2.73 per share with vesting over a three-year period.
The business combination has been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired based on their estimated fair value. This accounting treatment
resulted in approximately $716,000 of goodwill that will be amortized over its
estimated benefit period of seven years. Approximately $2,000,000 of the
acquisition cost represented purchased research and development, which was
charged to expense at the date of acquisition.
A summary of the acquisition is as follows:
Fair value of tangible assets acquired $ 223,047
Fair value of liabilities assumed (939,071)
-----------
Fair value of net assets acquired (716,024)
Purchased research and development 2,000,000
Common stock issued (2,000,000)
-----------
Excess of cost over fair value of net assets acquired $ 716,024
===========
At December 31, 1997 and 1996, the balance of the goodwill was $592,610
and $695,678, net of accumulated amortization of $123,414 and $20,346,
respectively.
F-25
<PAGE>
The results of operations of TView, Inc., have been included in the
accompanying consolidated financial statements since the date of the
acquisition. The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and TView, Inc. as if the
acquisition had occurred at the beginning of the year ended December 31, 1996.
These results include certain pro forma adjustments to give effect to purchased
research and development and amortization of intangibles and are not necessarily
indicative of what results would have occurred had the Company owned TView
during the period presented:
Pro forma Results
Year Ended
December 31, 1996
-----------------
Net Sales $ 17,177,000
Loss from operations $(11,256,000)
Net Loss $(11,454,000)
Loss per common share $(1.17)
12. Segment Information
The Company operates in one business segment: the development,
manufacturing, marketing and sale of computer enhancement devices for personal
computers and televisions. Sales to a major television manufacturer in 1997
totaled approximately $2,345,000 or 11% of the Company's revenues as compared to
approximately $3,472,000, or 23% of revenues for 1996. Sales to a major
distributor in 1997 represented approximately $3,319,000, or 16% of the
Company's revenues as compared to approximately $2,287,000 or 15% of revenues
for 1996. During 1997, sales to a major manufacturer of personal computers and
its contract manufacturer totaled approximately $5.6 million or 27% of net sales
for the period as compared to approximately $1.2 million, or 8% of net sales for
the year ended December 31, 1996.
Sales outside North America for the year ended December 31, 1997 were
approximately $2,969,000, principally to Europe ($1,667,000), Asia ($1,267,000)
and Latin America ($35,000). Sales outside North America for the year ended
December 31, 1996 were approximately $2,393,000, principally to Europe
($1,769,000), Asia ($579,000) and Latin America ($45,000).
13. Subsequent Events
Equity Financing - On March 3, 1998, the Company completed a financing
of approximately $3,000,000 in gross proceeds from the sale of 1,092,150 shares
of common stock and warrants to purchase
F-26
<PAGE>
327,645 shares of Common Stock in a private placement to an unaffiliated
accredited investor. The warrants are exercisable until March 3, 2005 if during
the period ending August 25, 1999, the average of the closing bid prices of the
Company's common stock during any consecutive 20 trading days is equal to or
less than $2.7469. The shares issued as part of this transaction and issuable
upon the exercise of the warrants are not registered under the Securities Act of
1933, however, the Company has agreed to register the shares within 90 days of
the date of issuance. Fees and expenses associated with this offering were
approximately $200,000 yielding net proceeds of approximately $2,800,000. In
connection with this transaction, the Board of Directors authorized the grant of
warrants to the placement agent to purchase 21,429 shares of the Company's
common stock at a price of $4.2118 per share exercisable for a period of five
years.
Acquisition of Digital Vision - On March 2, 1998, the Company entered
into a letter of intent with Digital Vision, Inc. for the acquisition of certain
of its assets and the assumption of certain of its liabilities. If the
acquisition is consummated, the Company would issue to Digital Vision, Inc.
350,000 shares of common stock and assume approximately $400,000 of liabilities
of Digital Vision, Inc. The Company would acquire all of Digital Vision's
accounts receivable, inventory, all tangible assets including equipment and
computer hardware and all intellectual property rights including tradenames,
customer lists, contracts and contract rights.
F-27
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
The information required hereunder is incorporated by reference from
the Company's Proxy Statement to be filed within 120 days of December 31, 1997
in connection with the Company's 1998 Annual Meeting of Stockholders.
Item 10. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed to be filed within 120 days of December 31,
1997 in connection with the Company's 1998 Annual Meeting of Stockholders.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed to be filed within 120 days of December 31,
1997 in connection with the Company's 1998 Annual Meeting of Stockholders.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed to be filed within 120 days of December 31,
1997 in connection with the Company's 1998 Annual Meeting of Stockholders.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits, required by Item 601 of Regulation S-B, are filed as a
part of this Annual Report on Form 10-KSB or are incorporated by reference to
previous filings as indicated by the footnote immediately following the exhibit.
Exhibit numbers, where applicable, in the left column correspond to those of
Item 601 of Regulation S-B.
Exhibit
Item No. Item and Description
1.4 Form of Stock Escrow Agreement (1)
22
<PAGE>
2.1 Agreement of Merger, dated April 12, 1993, between FOCUS Enhancement,
Inc., a Massachusetts corporation, and the Company (1)
2.2 Certificate of Merger, as filed with the Delaware Secretary of State on
April 12, 1993 (1)
2.3 Articles of Merger, as filed with the Massachusetts Secretary of State
on April 14, 1993 (1)
2.4 Agreement and Plan of Reorganization and Merger between the Company,
FOCUS Acquisition Corporation and Lapis Technologies, Inc. dated as of
November 29, 1993 (2)
3.1 Second Restated Certificate of Incorporation of the Company (1)
3.2 Certificate of Amendment to Second Restated Certificate of
Incorporation of the Company (3)
3.3 Restated By-laws of the Company (1)
4.1 Specimen certificate for Common Stock of the Company (1)
4.2 Specimen certificate for Redeemable Common Stock Purchase Warrant (1)
4.3 Form of Warrant Agreement between the Company, Mellon Securities Trust
Company and Thomas James Associates, Inc. (1)
4.4 Form of Warrant issued to Thomas James Associates, Inc. (1)
10.1 Amended and Restated Employment Contract between the Company and Thomas
L. Massie, effective January 1, 1992 (1)
10.2 1992 Stock Option Plan, as amended (4)
10.3 Form of Incentive Stock Option Agreement, as amended, under the 1992
Stock Option Plan, as amended (1)
10.4 Form of Non-Qualified Stock Option Agreement, as amended, under the
1992 Stock Option Plan, as amended (1)
10.5 1993 Non-Employee Director Stock Option Plan (4)
10.6 Form of Non-Qualified Stock Option Agreement under the 1993
Non-Employee Director Stock Option Plan (4)
23
<PAGE>
10.7 Credit Agreement between the Company, Lapis and Silicon Valley Bank
dated January 20, 1994 (4)
10.8 Promissory Note in the principal amount of $2,000,000, dated as of
January 20, 1994, made by the Company and Lapis to the other of Silicon
Valley Bank (4)
10.9 Security Agreement, dated as of January 20, 1994, by the Company in
favor of Silicon Valley Bank (4)
10.10 Security Agreement, dated as of January 20, 1994, by Lapis in favor of
Silicon Valley Bank (4)
10.11 Pledge Agreement, dated as of January 20, 1994, by the Company in favor
of Silicon Valley Bank (4)
10.12 Purchase and Sale Agreement, dated as of May 25, 1994, between the
Company and Inline Software, Inc. (5)
10.13 Master Purchase Agreement, dated as of August 12, 1994, between the
Company and Apple Computer, Inc. (5)
10.14 Forbearance Letter, dated as of October 6, 1994, to the Company from
Silicon Valley Bank (5)
10.15 Note and Warrant Subscription Agreement, dated as of October 18, 1994,
between the Company and Fred Kassner (5)
10.16 Security Agreement, dated as of October 18, 1994, between the Company
and Fred Kassner (5)
10.17 Term Line of Credit Note, dated October 18, 1994, by the Company in
favor of Fred Kassner (5)
10.18 Warrant W-K issued to Fred Kassner, dated as of October 18, 1995 (5)
10.19 Intercreditor and Subordination Agreement, dated as of October 18,
1994, by and between the Company, Fred Kassner and Silicon Valley Bank
(5)
10.20 Debt Extension Agreement, dated as of February 22, 1995, by and between
the Company and Fred Kassner (5)
24
<PAGE>
10.21 1995 Non-Employee Director Stock Plan (7)
10.22 Form of Non-Qualified Stock Option Agreement under the 1995
Non-Employee Director Stock Plan (6)
10.23 Form of Settlement Agreement between the Company and Lapis
Technologies, Inc. Shareholders (7)
10.24 Manufacturing Agreement between the Company and Pagg Corporation (7)
10.25 Loan Document Modification Agreement dated as of April 5, 1996 by and
between the Company, Lapis Technologies, Inc. and Silicon Valley Bank
(8)
10.26 Amended and Restated Promissory Note dated as of April 5, 1996 in favor
of Silicon Valley Bank (8)
10.27 Amendment No. 2 to the Note and Warrant Subscription Agreement dated as
of June 28, 1996 between the Company and Fred Kassner (8)
10.28 Amended and Restated Term Line of Credit Note dated as of June 28, 1996
in favor of Fred Kassner (8)
10.29 Security Agreement dated as of June 28, 1996 between the Company and
Fred Kassner (8)
10.30 Warrant W96/6, dated June 28, 1996, issued to Fred Kassner (8)
10.31 Agreement dated as of June 28, 1996 between the Company and PAGG
Corporation (8)
10.32 Security Agreement dated as of June 28, 1996 between the Company and
PAGG Corporation (8)
10.33 Amendment to Master Purchase Agreement between the Company and Zenith
Electronics, Inc. (10)
10.34 Lease Agreement between the Company and Cummings Properties for the
facility at 142 North Road, Sudbury, Massachusetts (10)
10.35 Agreement of Plan of Merger dated September 30, 1996, by and among the
Company, FOCUS Acquisition Corp., and TView, Inc. (9)
25
<PAGE>
10.36 Form of Stock Subscription Agreement between the Company and various
investors in the December 95 Offering (11)
10.37 Form of Amendment No. 1 to Stock Subscription Agreement dated April
1996 between the Company and various investors in the December 95
Offering (11)
10.38 Form of Warrant issued to various investors pursuant to Amendment No. 1
(11)
10.39 Form of Subscription Agreement between the Company and various
investors in the March 97 Offering (11)
10.40 Form of Warrant issued to the placement agent in the March 97 Offering
(11)
10.41 1997 Director Stock Option Plan (12)
10.42 Form of Director Stock Option Agreement (12)
10.43 Key Officer Non-Qualified Stock Option Agreement for Thomas L. Massie
(12)
10.44 Key Officer Non-Qualified Stock Option Agreement for Brett A. Moyer
(12)
10.45 Key Officer Non-Qualified Stock Option Agreement for Harry G. Mitchell
(12)
10.46 Subscription Agreement between the Company and Smith Barney Fundamental
Value Fund, Inc. dated September 8, 1997 (13)
10.47 Form of Warrant dated September 10, 1997 issued to designees of the
placement agent (13)
11.1 Statement re Computation of Earnings [Loss] Per Share
21.1 Subsidiaries of the Company (10)
23.1 Consent of Wolf & Company P.C., Independent Accountants
27.1 Financial Data Schedule for year ended December 31, 1997
27.2 Restated Financial Data Schedules for year ended December 31, 1996 and
quarters ended March 31, 1996, June 30, 1996 and September 30, 1996
27.3 Amended Financial Data Schedules for quarters ended June 30, 1997 and
September 30, 1997
- -----------
1 Filed as an exhibit to the Company's Registration Statement on Form SB-2, No.
33-60248-B, and incorporated herein by reference.
2 Filed as an exhibit to the Company's Current Report on Form 8-K dated November
29, 1993, and incorporated herein by reference.
26
<PAGE>
3 Filed as an exhibit to the Company's Form 10-QSB for the period ended
September 30, 1995, and incorporated herein by reference.
4 Filed as an exhibit to the Company's Form 10-KSB for the year ended December
31, 1993, and incorporated herein by reference.
5 Filed as an exhibit to the Company's Form 10-KSB for the year ended December
31, 1994, and incorporated herein by reference.
6 Filed as an exhibit to the Company's Registration Statement on Form S-8, No.
33-80651, filed with the Commission on December 19, 1995, and incorporated
herein by reference.
7 Filed as an exhibit to the Company's Registration Statement on Form SB-2, No.
33-80033, and incorporated herein by reference.
8 Filed as an exhibit to the Company's Form 10-QSB for the period ended June 30,
1995, and incorporated herein by reference.
9 Filed as an exhibit to the Company's Form 8-K dated November 4, 1996
10 Filed as an exhibit to the Company Form 10-KSB for the year ended December
31, 1995 and incorporated herein by reference.
11 Filed as an exhibit to the Company's Registration Statement on Form S-3, No.
333-26911, filed with the Commission on May 12, 1997, and incorporated herein by
reference.
12 Filed as an exhibit to the Company's Registration Statement on Form S-8, No.
333-33243, filed with the Commission on August 8, 1997, and incorporated herein
by reference.
13 Filed as an exhibit to the Company's Form 8-K dated September 10, 1997
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
FOCUS ENHANCEMENTS, INC.
By: /s/ Thomas L. Massie
Thomas L. Massie
Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas L. Massie Chief Executive Officer March 31, 1998
Thomas L. Massie and Director (Principal
Executive and Accounting Officer)
/s/ John C. Cavalier Director March 31, 1998
John C. Cavalier
/s/ William B. Coldrick Director March 31, 1998
William B. Coldrick
/s/ Timothy E. Mahoney Director March 31, 1998
Timothy E. Mahoney
28
EXHIBIT 11
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF LOSS PER SHARE
Years Ended December 31,
1997 1996
----------- -------------
<S> <C> <C>
Net loss $(1,986,079) $(10,772,410)
=========== ============
Basic:
Weighted average number of common shares outstanding 12,727,934 9,020,688
=========== ============
Diluted:
Weighted average number of common shares outstanding 12,727,934 9,020,688
Weighted average common equivalent shares
----------- ------------
Weighted average number of common
shares outstanding used to calculate per share data 12,727,934 9,020,688
=========== ============
Loss per share
Basic $ (0.16) $ (1.19)
=========== ============
Diluted $ (0.16) $ (1.19)
=========== ============
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
FOCUS Enhancements, Inc. on Form S-8 (Nos. 33-80498, 33-80651 and 333-33243) and
on Form S-3 (Nos. 33-80033, 333-26911 and 333-43285) of our report, dated
February 27, 1998, (except for Note 13 as to which the date is March 3, 1998),
on our audit of the consolidated financial statements of FOCUS Enhancements,
Inc. as of December 31, 1997 and for the year ended, which report is included in
this Annual Report on Form 10-KSB.
WOLF & COMPANY, P.C.
Boston, Massachusetts
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 719,851
<SECURITIES> 595,000
<RECEIVABLES> 6,359,130
<ALLOWANCES> 820,998
<INVENTORY> 3,989,604
<CURRENT-ASSETS> 11,313,494
<PP&E> 2,720,289
<DEPRECIATION> (1,651,371)
<TOTAL-ASSETS> 13,920,644
<CURRENT-LIABILITIES> 8,694,194
<BONDS> 0
0
0
<COMMON> 140,102
<OTHER-SE> 27,339,892
<TOTAL-LIABILITY-AND-EQUITY> 13,920,644
<SALES> 21,026,011
<TOTAL-REVENUES> 21,026,011
<CGS> 15,091,641
<TOTAL-COSTS> 8,159,635
<OTHER-EXPENSES> (510,378)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 266,095
<INCOME-PRETAX> (1,980,982)
<INCOME-TAX> 5,097
<INCOME-CONTINUING> (1,986,079)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,986,079)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-30-1996
<CASH> 413,894 672,216 610,080 1,006,468
<SECURITIES> 0 0 0 0
<RECEIVABLES> 4,102,170 5,399,286 4,794,155 3,640,238
<ALLOWANCES> 888,605 499,110 159,418 246,499
<INVENTORY> 1,975,381 1,925,496 1,894,324 1,766,703
<CURRENT-ASSETS> 5,846,669 7,764,238 7,308,071 6,636,474
<PP&E> 1,939,069 1,797,699 1,574,415 341,215
<DEPRECIATION> 1,455,478 1,400,187 1,293,081 1,190,764
<TOTAL-ASSETS> 7,907,367 9,531,478 9,746,514 9,208,873
<CURRENT-LIABILITIES> 6,854,178 7,648,606 5,701,587 7,408,895
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 113,018 107,971 92,747 83,538
<OTHER-SE> 859,505 1,596,413 3,941,776 3,917,509
<TOTAL-LIABILITY-AND-EQUITY> 7,907,367 9,746,514 9,746,514 9,208,873
<SALES> 15,076,368 11,498,362 8,171,134 3,801,879
<TOTAL-REVENUES> 15,076,368 11,498,362 8,171,134 3,724,949
<CGS> 14,887,902 11,193,421 7,714,286 5,125,810
<TOTAL-COSTS> 10,616,998 9,260,738 3,827,051 2,198,735
<OTHER-EXPENSES> 14,504 12,792 12,792 10,311
<LOSS-PROVISION> 888,605 499,110 159,418 246,499
<INTEREST-EXPENSE> 312,833 235,607 170,103 104,374
<INCOME-PRETAX> (10,755,869) (9,204,196) (3,553,098) (3,637,351)
<INCOME-TAX> 16,541 16,541 10,000 7,500
<INCOME-CONTINUING> (10,772,410) (9,220,737) (3,563,098) (3,694,851)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (10,772,410) (9,220,737) (3,563,098) (3,644,851)
<EPS-PRIMARY> (1.19) (1.09) (0.45) (0.49)
<EPS-DILUTED> (1.19) (1.09) (0.45) (0.49)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> JUN-30-1997 SEP-30-1997
<CASH> 1,262,546 2,492,705
<SECURITIES> 0 595,000
<RECEIVABLES> 6,604,502 8,530,892
<ALLOWANCES> 747,223 802,494
<INVENTORY> 2,303,744 2,582,754
<CURRENT-ASSETS> 9,644,998 13,814,102
<PP&E> 2,314,083 2,554,753
<DEPRECIATION> 1,532,962 1,584,260
<TOTAL-ASSETS> 11,969,769 16,243,666
<CURRENT-LIABILITIES> 8,670,840 8,653,760
<BONDS> 0 0
0 0
0 0
<COMMON> 127,190 138,165
<OTHER-SE> 3,131,153 27,043,064
<TOTAL-LIABILITY-AND-EQUITY> 11,969,769 16,243,666
<SALES> 10,926,417 17,839,430
<TOTAL-REVENUES> 10,926,417 17,839,430
<CGS> 7,325,650 12,089,949
<TOTAL-COSTS> 3,256,623 5,260,693
<OTHER-EXPENSES> (42,132) (395,110)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 134,943 209,109
<INCOME-PRETAX> 251,333 674,789
<INCOME-TAX> 3,150 12,700
<INCOME-CONTINUING> 251,333 662,089
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 248,183 662,089
<EPS-PRIMARY> 0.02 0.05
<EPS-DILUTED> 0.02 0.05
</TABLE>
