FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-11860
FOCUS Enhancements, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 04-3186320
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
142 North Road
Sudbury, MA 01776
(Address of principal executive offices)
(978) 371-2000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No_____
As of March 31, 1998, there were outstanding 15,551,086 shares of Common Stock,
$.01 par value per share.
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FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
March 31, 1998
TABLE OF CONTENTS
Page
Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations
for the Three Months Ended March 31, 1998
and 1997 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998
and 1997 5
Statement of Changes in Equity for the
Three Months Ended March 31, 1998 6
Statement of Changes in Equity for the
Three Months Ended March 31, 1997 7
Notes to Consolidated Financial Statements
8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15-16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,164,624 $ 719,851
Securities available for sale 652,097 595,000
Accounts receivable, net of allowances of $447,837 and $820,998
at March 31, 1998 and December 31, 1997, respectively 7,000,359 5,538,132
Inventories 3,983,066 3,989,604
Prepaid expenses and other current assets 362,063 470,907
------------ ------------
Total current assets 13,162,209 11,313,494
Property and equipment, net 1,149,519 1,068,918
Other assets, net 283,173 288,482
Goodwill, net 2,477,238 1,249,750
------------ ------------
Total assets $ 17,072,139 $ 13,920,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,519,953 $ 2,220,000
Obligations under capital leases 66,010 102,320
Accounts payable 4,060,468 5,515,913
Accrued liabilities 690,707 855,961
------------ ------------
Total current liabilities 7,337,138 8,694,194
Notes payable
Deferred Income 84,212 84,212
Obligations under capital leases 69,439 73,855
------------ ------------
Total liabilities 7,490,789 8,852,261
------------ ------------
Stockholders' equity
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 25,000,000 shares authorized,
15,551,086 and 14,010,186 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively 155,511 140,102
Additional paid-in capital 31,415,605 27,339,892
Accumulated deficit (22,046,863) (22,411,611)
Accumulated other comprehensive income 57,097 --
------------ ------------
Total stockholders' equity 9,581,350 5,068,383
------------ ------------
Total liabilities and stockholders' equity $ 17,072,139 $ 13,920,644
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31, March 31,
1998 1997
------------ ------------
Net sales $ 5,251,948 $ 4,801,550
Cost of goods sold 2,781,936 3,267,841
------------ ------------
Gross profit 2,470,012 1,533,709
------------ ------------
Operating expenses:
Sales, marketing and support 1,166,327 952,964
General and administrative 541,231 385,092
Research and development 310,801 179,402
------------ ------------
Total operating expenses 2,018,359 1,517,458
------------ ------------
Income from operations 451,653 16,251
Interest expense, net (77,039) (67,240)
Other income, net 634 69,015
------------ ------------
Income before income taxes 375,248 18,026
Income tax expense 10,500 1,550
------------ ------------
Net income $ 364,748 $ 16,476
============ ============
Net income per common share
Basic $ 0.03 $ 0.00
============ ============
Diluted $ 0.02 $ 0.00
============ ============
Weighted average common and common
equivalent shares outstanding
Basic 14,528,419 11,530,607
============ ============
Diluted 15,875,315 12,158,128
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
4
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, March, 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 364,748 $ 16,476
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 153,272 92,319
Gain on the forgiveness of accounts payable -- (71,304)
Changes in operating assets and liabilities, net of the
effects of acquisition;
(Increase) decrease in accounts receivable (1,297,886) (2,007,873)
Decrease (increase) in inventories 67,154 224,087
Decrease (increase) in prepaid expenses and other assets 108,844 (35,305)
Decrease (increase) in accounts payable (1,455,445) 909,071
Decrease (increase) in accrued liabilities (205,254) (2,195)
----------- -----------
Net cash used in operating activities (2,264,567) (874,724)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (188,452) (234,806)
Cash paid in acquisition of Digital Vision, Inc. (6,980) --
----------- -----------
Net cash used in investing activities (195,432) (234,806)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (30,000) (20,000)
Payments under capital lease obligations (40,725) (5,819)
Net proceeds from private offerings of common stock 2,827,355 1,996,813
Net proceeds from exercise of common stock options and warrants 148,142 25,359
----------- -----------
Net cash provided by financing activities 2,904,772 1,996,353
----------- -----------
Net increase in cash and cash equivalents 444,773 886,823
Cash and cash equivalents at beginning of period 719,851 413,894
----------- -----------
Cash and cash equivalents at end of period $ 1,164,624 $ 1,300,717
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 77,039 $ 274,000
Income taxes paid $ 6,411 $ 10,312
Issuance of Common Stock Warrants $ -- $ 42,000
Supplemental schedule of noncash investing and financing activities:
On March 31, 1998, the Company purchased certain assets and assumed certain
liabilities of Digital Vision, Inc. as follows:
Fair value of tangible assets acquired 224,957
Fair value of liabilities assumed (329,953)
-----------
Fair value of net assets acquired (104,996)
Common stock issued (1,115,625)
Cash paid (6,980)
Accrued cash payments (40,000)
===========
Excess of cost over fair value of net assets acquired ($1,267,601)
===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
Accumulated
Other
Comprehensive Accumulated Comprehensive Common Paid-in
Total Income Deficit Income Stock Capital
------------ ------------- ------------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 5,068,383 $ 0 ($22,411,611) $ 0 $ 140,102 $ 27,339,892
Comprehensive Income
Net income 364,748 364,748
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment 57,097 57,097
------------
Comprehensive income $ 421,845 421,845
============
Common stock issued 4,091,122 15,409 4,075,713
------------ ------------ ------------ --------- ------------
Ending balance $ 9,581,350 ($22,411,611) $ 421,845 $ 155,511 $ 31,415,605
============ ============ ============ ========= ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
Accumulated
Other
Comprehensive Accumulated Comprehensive Common Paid-in
Total Income Deficit Income Stock Capital
------------ ------------- ------------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 2,536,502 $ 0 ($18,861,553) $ 0 $113,018 $ 21,285,037
Comprehensive Income
Net income 16,476 16,476
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment 0 0
------------
Comprehensive income $ 16,476 16,476
============
Common stock issued 2,022,172 14,128 2,008,044
------------ ------------ ------------ --------- ------------
Ending balance $ 4,575,150 ($18,861,553) $ 16,476 $127,146 $ 23,293,081
============ ============ ============ ========= ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
7
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FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of FOCUS Enhancements, Inc. ("the
Company") as of March 31, 1998 and for the three month periods ended March 31,
1998 and 1997 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1997 included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries Lapis Technologies,
Inc., TView, Inc., FOCUS Enhancements b. v. and Focus Networking, Inc. On March
31, 1998, the Company acquired certain assets and assumed certain liabilities of
Digital Vision, Inc. in a transaction accounted for under the purchase method of
accounting. These assets and liabilities are included in the balance sheet as of
March 31, 1998. The operations pursuant to this acquisition will be recorded in
the Company's financial statements beginning April 1, 1998, In the opinion of
management, the consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of the interim periods. The results of operations
for the three month period ended March 31, 1998 are not necessarily indicative
of the results that may be expected for any future period.
2. ACCOUNTING POLICY
Securities - Available for Sale
Securities - available for sale consist of common stock carried at fair
value, with unrealized gains and losses as a separate component of stockholders'
equity.
3. NET INCOME PER SHARE
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 three months
ended March 31, 1998 and 1997, options and warrants applicable to 5,460,505
shares and 6,011,659 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.
8
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4. COMPREHENSIVE INCOME
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, 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 form retained earnings and additional paid-in-capital in
the equity section of the balance sheet. The Company adopted these disclosure
requirements in the first quarter of 1998 and has presented comparative
disclosure for the quarter ended March 31, 1997. In 1997, the Company had no
other components of comprehensive income other than net income.
5. INCOME TAXES
The Company has utilized its net operating loss carryforwards in
estimating its provision for income taxes in the three month period ended March
31,1998.
6. INVENTORIES
Inventories consist of the following:
March 31, December 31,
1998 1997
---------- -----------
Finished goods $3,498,716 $3,304,444
Raw materials 484,350 685,160
---------- ----------
$3,983,066 $3,989,604
========== ==========
7. NOTES PAYABLE
Lines of Credit, Banks. The Company maintains a revolving line of
credit with a bank, which is fully drawn as of March 31, 1998. 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 $690,000 at March
31, 1998, bear interest at the bank's prime rate plus 1% (9.5% at March 31,
1998) and are personally guaranteed by an investor. In March 1998, the line of
credit was extended to June 8, 1998.
Term Line of Credit. At March 31, 1998, the Company owed $1,500,000 to
an unrelated individual under a term line of credit originated in October 1994
in the principal amount of $2,500,000. Borrowings under the line of credit were
made pursuant to a promissory note that was due on March 31, 1997 and was not
paid. The Company is in the process of renegotiating the terms and expiration
date of this loan with the lender. Pending an agreement pertaining to the
payment or renegotiation of this line of credit, the Company continues to make
quarterly payments of interest under the original terms of this note. In the
event that the unaffiliated lender does not extend the due date, the Company
would be required to pay the amounts outstanding from working capital or from
equity or debt financing.
9
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Term Loan, Bank. At March 31, 1998, the Company owed $329,953 to a bank
resulting from the purchase of certain assets and the assumption of certain
liabilities of Digital Vision, Inc. The borrowings bear interest at the Wall
Street Journal prime rate plus 2% (10.5% at March 31, 1998). The terms of the
note require payment of interest only through September 30, 1998. The
outstanding balance at September 30, 1998 is payable thereafter in monthly
installments, with interest, until the loan expiration date of March 31, 1999.
8. COMMON STOCK TRANSACTIONS
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 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 in connection with this
transaction and issuable upon exercise of the warrants were registered under the
Securities Act of 1933 on April 22, 1998. Fees and expenses associated with this
offering amounted to approximately $172,600 yielding net proceeds of $2,827,400.
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.
On March 31, 1998, the Company issued approximately 350,000 shares of
common stock valued at approximately $1,115,600 in conjunction with the
acquisition of certain assets of Digital Vision, Inc. Under the terms of the
asset purchase agreement, the shares issued as part of this transaction will be
registered under the Securities Act of 1933 on or before June 30, 1998. In
addition, the Company agreed to pay approximately $47,000 in cash for the net
assets with a preliminary estimated fair value of approximately ($105,000),
consisting of accounts receivable ($164,400), inventory ($60,600) offset by the
assumption of notes payable ($330,000). The resulting goodwill of approximately
$1,267,000 will be amortized over its estimated benefit period of ten years. The
preliminary fair value of the assets are included in the balance sheet at March
31, 1998, with the operations of Digital Vision, Inc. to be included in the
financial statements of the Company beginning April 1, 1998.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain "forward looking"
information that involves risks and uncertainties. In particular, statements
contained in this Form 10-QSB which are not historical facts constitute forward
looking statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Each forward looking statement should
be read in conjunction with the consolidated financial statements and notes
thereto in Part I, Item 1, of this Quarterly Report and with the information
contained in Item 2, including, but not limited to, "Certain Factors That May
Affect Future Results" contained herein, together with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997, including, but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Three-Month Period Ended March 31, 1998 As Compared
With The Three-Month Period Ended March 31, 1997
Net Sales
Net sales for the three-month period ended March 31, 1998 ("Q1 98")
were $5,251,948 as compared with $4,801,550 for the three-month period ended
March 31, 1997 ("Q1 97"), an increase of $450,398 or 9%. The growth in net sales
is attributed to increased sales to US resellers offset by decreased sales to
international resellers and OEM/Licensing customers. Specifically, net sales in
Q1 98 to the Company's US resellers increased 48% to $4,280,000 from $2,899,000
in Q1 97. Net sales to international resellers declined 45% to $425,000 from
$770,000 for the same quarter in 1997. Net sales to OEM/Licensing customers
decreased 52% to $547,000 in Q1 98 from $1,133,000 for the same quarter in 1997.
This decrease reflects primarily a reduction in OEM sales to a major
manufacturer of personal computers. During Q1 97, net sales to this customer
represented 4% of the Company's revenues compared to 15% of revenues during a
comparable quarter in 1997.
As of March 31, 1998, the Company had a sales order backlog of
approximately $2.2 million.
11
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Cost of Goods Sold
Cost of goods sold were $2,781,936 or 52% of net sales, for the
three-month period ended March 31, 1998, as compared with $3,267,841 or 68% of
net sales, for the three-month period ended March 31, 1997, a decrease in
absolute dollars of $485,905 or 15%. The Company's gross profit margins for Q1
98 and Q1 97 were 48% and 32%, respectively. The decrease in cost of goods sold
in absolute dollars and as a percentage of sales is due principally to reduced
manufacturing costs achieved as a result of the use of the Company's FS300
integrated circuit in manufacturing of the Company's products, combined with a
decrease in OEM sales on which margins are typically lower.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $1,166,327 or 22% of net
sales, for the three-month period ended March 31, 1998, as compared with
$952,964, or 20% of net sales, for the three-month period ended March 31, 1997,
an increase of $213,363 or 22%. The increase in absolute dollars is due
primarily to increased sales commissions as a result of increased sales from
period to period and, an increase in advertising and trade show events as well
as increased domestic channel expansion efforts.
General and Administrative Expenses
General and administrative expenses for the three-month period ended
March 31, 1998 were $541,231 or 10% of net sales, as compared with $385,092, or
8% of net sales for the three-month period ended March 31, 1997, a increase of
$156,139 or 41%. The increase in absolute dollars is due primarily to a
increases in depreciation of $52,000, goodwill amortization associated with
TView, Inc. and Lapis of $9,000 and increased costs of employee benefits,
recruiting and temporary services of $60,000.
Research and Development Expenses
Research and development expenses for the three-month period ended
March 31, 1998 were $310,801, or 6% of net sales, as compared to $179,402, or 4%
of net sales, for three-month period ended March 31, 1997, an increase of
$131,399 or 73%. The increase is due principally to increases in payroll and
employee benefits of $70,000, in recruiting expenses of $18,000, and in
consulting expenses of $39,000.
Interest Expense, Net
Net interest expense for the three-month period ended March 31, 1998
was $77,039, or 1.5% of net sales, as compared to $67,240, or 1.4% of net sales,
for the three-month period ended March 31, 1997, an increase of $9,799, or
14.5%. The increase is primarily attributable to fees incurred for the extension
of the Company's revolving line of credit.
Other Income
Other Income for the three-month period ended March 31, 1998 was $634
as compared to $69,015, for the three-month period ended March 31, 1997. Other
income for Q1 97 of $69,015 resulted from the settlement of certain accounts
payable obligations.
Net Income
For the quarter ended March 31, 1998, the Company reported net income
of $364,748, or $0.03 per share, as compared to $16,476, or $0.00 per share, for
the quarter ended March 31, 1997
12
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three-month periods ended
March 31, 1998 and 1997 was ($2,264,567) and ($874,724), respectively. In Q1 98,
net cash used in operating activities consisted primarily of an increase in
accounts receivable of $1,297,886 and decreases in accounts payable and accrued
liabilities of $1,455,445 and $205,254, respectively. This was offset by
increases in prepaid expenses of $108,844, in depreciation and amortization
(non-cash charge) of $153,272, and net income of $364,748. As of March 31, 1998,
accounts receivable from a major distributor and from a major national retailer
represented approximately 31% and 10%, respectively, of total accounts
receivable. In Q1 98, the Company wrote-off approximately $400,000 of
uncollectable accounts receivable against a reserve established at December 31,
1997. In Q1 98, the Company continued to record provisions for potential future
uncollectable accounts. The Company continually monitors inventory levels at its
resellers, and during Q1 98 experienced improved sell-through and lower
inventory levels of its products in its distribution channels.
In the three months ended March 31, 1997, net cash used in operations
consisted primarily of an increase in accounts receivable of $2,007,873. This
was offset by an increase in accounts payable of $909,071.
Net cash used in investing activities for the three month periods ended
March 31, 1998 and 1997 was ( $195,432) and ($234,806) respectively. In Q1 98
and Q1 97, cash used in investing activities was principally for the purchase of
property and equipment.
Net cash from financing activities for the three-month periods ended
March 31, 1998 and 1997 was $2,904,772 and $1,996,353, respectively. In Q1 98,
the Company received $2,827,355 in net proceeds from private offerings of common
stock and $148,142 from the exercise of common stock options and warrants. The
Company's financing proceeds were offset by payments on notes payable and
capital lease obligations. In the same period in 1997, the Company received
$1,996,813 in net proceeds from private offerings of Common Stock and $25,359
from the exercise of common stock options and warrants. The Q1 97 financing
proceeds were offset by payments on notes payable and capital lease obligations.
As of March 31, 1998, the Company had working capital of $5,825,071, as
compared to $2,619,300 at December 31, 1997, an increase of $3,298,412. The
Company's cash position increased to $1,164,624 at March 31, 1998, an increase
of $444,773, or 62%, over amounts at December 31, 1997.
On March 3, 1998, the Company sold 1,092,150 shares of common stock and
warrants to purchase 327,645 of common stock for gross proceeds of $3,000,000 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
in connection with this transaction and issuable upon exercise of the warrants
were registered under the Securities Act of 1933 on April 22, 1998. Fees and
expenses associated with this offering amounted to approximately $172,600
yielding net proceeds of $2,827,400. 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.
Although the Company has been successful in the past in raising
sufficient capital to fund its operations, there can be no assurance that the
Company will achieve sustained profitability or obtain sufficient financing in
the future to provide the liquidity necessary for the Company to continue
operations.
At March 31, 1998, the Company was in violation of certain debt
covenants relating to the line of credit with its commercial bank. In March
1998, the Company received a waiver of the covenants from the commercial bank, a
revision of the loan covenants and an agreement to extend the line until June 8,
13
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1998. In addition, the Company is currently negotiating with its unaffiliated
lender to extend the March 1998 due date for the $1.5 million note payable which
was in default as of the date of this report. In the event that the unaffiliated
lender does not extend the due date, the Company would be required to pay the
amounts outstanding from working capital or from equity or debt financing.
Effects of Inflation and Seasonality
The Company believes that inflation has not had a significant impact on
the Company's sales or operating results. The Company's business does not
experience substantial variations in revenues or operating income during the
year due to seasonality.
Environmental Liability
The Company has no known environmental violations or assessments.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The 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-QSB 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 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 obsolesence, 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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings, other than
routine litigation that is incidental to the business, which would have a
material adverse effect on the Company's financial position or results of
operations for the three month period ended March 31, 1998.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In October 1994, the Company borrowed $2,500,000 from an unaffiliated
lender under a term note due February 1, 1996. The term note accrues interest at
the prime rate plus 2%, payable quarterly in arrears, and is collateralized by a
second security interest in all the assets of the Company. At March 31, 1998,
the Company owed $1,500,000 to the lender under the term note. This note was due
on March 31, 1997 and was not paid. The Company is in the process of
renegotiating the terms and expiration date of this loan with the lender.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
None
ITEM 5. OTHER INFORMATION
Sale of Common Stock
On March 3, 1998, the Company completed a financing of $3,000,000 in
gross proceeds from the sale of 1,092,150 shares of Common Stock and warrants to
purchase 327,645 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 in connection with this transaction and
issuable upon exercise of the warrants were registered under the Securities Act
of 1933 on April 22, 1998. Fees and expenses associated with this offering
amounted to approximately $172,600 yielding net proceeds of $2,827,400. 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.
15
<PAGE>
Purchase of Digital Vision, Inc.
On March 31, 1998, the Company acquired certain assets and assumed
certain liabilities of Digital Vision, Inc. The Company issued approximately
350,000 shares of common stock and agreed to pay approximately $47,000 in cash
to acquire all of Digital Vision's accounts receivable, inventory, all tangible
assets including equipment and computer hardware and all intellectual property
rights including trademarks, customer lists and contract rights. The Company
also assumed approximately $330,000 of liabilities in conjunction with this
acquisition, resulting in goodwill of approximately $1,267,600, which will be
amortized over its estimated benefit period of ten years. The preliminary fair
value of the assets purchased and liabilities assumed are included in the
balance sheet as of March 31, 1998. The operations of Digital Vision, Inc will
be included in the financial statements of the Company beginning April 1, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
11 Statement Re: Computation of Per Share Earnings
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K reports during the
quarter ended March 31, 1998.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOCUS Enhancements, Inc.
May 15, 1998 By: \s\ Thomas L. Massie
Thomas L. Massie
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
May 15, 1998 By: \s\ Gary M. Cebula
Gary M. Cebula
Vice President of Finance
and Administration
(Principal Accounting Officer)
17
EXHIBIT 11
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF INCOME PER SHARE
Three Months Ended
-------------------------
March 31, March 31,
1998 1997
----------- -----------
<S> <C> <C>
Net income $ 364,748 $ 16,476
=========== ===========
Basic:
Weighted average number of common shares outstanding 14,528,419 11,530,607
=========== ===========
Diluted:
Weighted average number of common shares outstanding 14,528,419 11,530,607
Weighted average common equivalent shares 1,346,896 627,521
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 15,875,315 12,158,128
=========== ===========
Net income per share
Basic $ 0.03 $ 0.00
=========== ===========
Diluted $ 0.02 $ 0.00
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,164,624
<SECURITIES> 652,097
<RECEIVABLES> 7,448,196
<ALLOWANCES> 447,837
<INVENTORY> 3,983,066
<CURRENT-ASSETS> 13,162,209
<PP&E> 2,943,493
<DEPRECIATION> (1,793,974)
<TOTAL-ASSETS> 17,072,139
<CURRENT-LIABILITIES> 7,337,138
<BONDS> 0
0
0
<COMMON> 155,511
<OTHER-SE> 31,415,605
<TOTAL-LIABILITY-AND-EQUITY> 17,072,139
<SALES> 5,251,948
<TOTAL-REVENUES> 5,251,948
<CGS> 2,781,936
<TOTAL-COSTS> 2,018,359
<OTHER-EXPENSES> (634)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,039
<INCOME-PRETAX> 375,248
<INCOME-TAX> 10,500
<INCOME-CONTINUING> 364,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 364,748
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.02
</TABLE>
