FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
[ ] 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.)
600 Research Drive
Wilmington, MA 10887
(Address of principal executive offices)
(978) 988-5888
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No_____
As of June 30, 1999, there were outstanding 18,608,898 shares of Common Stock,
$.01 par value per share.
<PAGE>
FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
June 30, 1999
TABLE OF CONTENTS
Page
Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations
for the Three Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Operations
for the Six Months Ended June 30, 1999 and 1998 5
Statement of Changes in Equity for the Six
Months Ended June 30, 1999 6
Statement of Changes in Equity for the Six
Months Ended June 30, 1998 7
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998 8-9
Notes to Consolidated Financial Statements 10-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21-22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,129 $ 1,128,380
Certificate of deposit 90,000 253,067
Securities available for sale 6,423 248,983
Accounts receivable, net of allowances of $641,058 and $649,987 at
June 30, 1999 and December 31, 1998, respectively 3,512,802 2,553,139
Inventories 4,405,527 5,948,624
Prepaid expenses and other current assets 307,423 217,092
------------ ------------
Total current assets 8,359,304 10,349,285
Property and equipment, net 2,384,682 1,272,477
Other assets, net 274,650 304,498
Goodwill, net 717,476 810,673
------------ ------------
Total assets
$ 11,736,112 $ 12,736,933
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,127,403 $ 702,057
Obligations under capital leases 127,691 119,536
Current portion of long-term debt 297,539 283,180
Accounts payable 4,307,585 5,999,694
Accrued liabilities 647,175 1,810,025
------------ ------------
Total current liabilities 7,507,393 8,914,492
Deferred income -- 84,212
Obligations under capital leases 270,696 321,760
Long-term debt, net of current portion 386,158 538,597
------------ ------------
Total liabilities 8,164,247 9,859,061
------------ ------------
Stockholders' equity
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 25,000,000 shares authorized,
18,608,898 and 18,005,090 shares issued at June 30, 1999 and
December 31, 1998, respectively 186,089 180,051
Additional paid-in capital 39,446,369 38,913,304
Accumulated deficit (35,041,253) (35,198,935)
Accumulated other comprehensive income 1,427 --
Note receivable, common stock (320,637) (316,418)
Treasury stock at cost, 450,000 shares (700,130) (700,130)
------------ ------------
Total stockholders' equity 3,571,865 2,877,872
------------ ------------
Total liabilities and stockholders' equity $ 11,736,112 $ 12,736,933
============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
3
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30, June 30
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 4,440,257 $ 6,872,086
Cost of goods sold 2,490,986 4,065,355
------------ ------------
Gross profit 1,949,271 2,806,731
------------ ------------
Operating expenses:
Sales, marketing and support 996,789 1,281,010
General and administrative 427,228 420,691
Research and development 270,325 244,923
Depreciation and amortization expense 133,856 170,060
------------ ------------
Total operating expenses 1,828,198 2,116,684
------------ ------------
Income from operations 121,073 690,047
Interest expense, net (145,496) (60,371)
Other income, net 79,115 5,134
------------ ------------
Income before income taxes 54,692 634,810
Income tax expense -- 19,161
------------ ------------
Net income $ 54,692 $ 615,649
============ ============
Net income per common share
Basic $ 0.00 $ 0.04
============ ============
Diluted $ 0.00 $ 0.04
============ ============
Weighted average common shares outstanding
Basic 18,011,725 15,367,771
============ ============
Diluted 18,012,361 16,604,378
============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
4
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30, June 30
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 9,507,336 $ 12,124,034
Cost of goods sold 5,428,120 6,847,291
------------ ------------
Gross profit 4,079,216 5,276,743
------------ ------------
Operating expenses:
Sales, marketing and support 2,020,484 2,447,337
General and administrative 781,170 775,483
Research and development 762,806 555,724
Depreciation and amortization expense 273,226 356,499
------------ ------------
Total operating expenses 3,837,686 4,135,043
------------ ------------
Income from operations 241,530 1,141,700
Interest expense, net (166,861) (137,410)
Other income, net 83,013 5,768
------------ ------------
Income before income taxes 157,682 1,010,058
Income tax expense -- 29,661
------------ ------------
Net income $ 157,682 $ 980,397
============ ============
Net income per common share
Basic $ 0.01 $ 0.06
============ ============
Diluted $ 0.01 $ 0.06
============ ============
Weighted average common shares outstanding
Basic 18,008,426 16,203,388
============ ============
Diluted 18,009,062 17,407,893
============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
5
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Accum-
ulated
Other Notes
Additional Compre- Receivable
Common Paid-in Accumulated hensive Common Treasury
Stock Capital Deficit Income Stock Stock Total
-------- ----------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $180,051 $38,913,304 $(35,198,935) $ -- $(316,418) $(700,130) $2,877,872
Comprehensive income:
Net income -- -- 157,682 -- -- -- 157,682
Other comprehensive income, net of tax
Unrealized gains on securities -- -- -- 1,427 -- -- 1,427
----------
Comprehensive income 159,109
----------
Reclassification of common stock 38 (38) --
Common stock issued 6,000 533,103 539,103
Notes receivable, common stock (4,219) (4,219)
-----------------------------------------------------------------------------------------
Ending balance $186,089 $39,446,369 $(35,041,253) $1,427 $(320,637) $(700,130) $3,571,865
=========================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
6
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
Accum-
ulated
Other Notes
Additional Compre- Receivable
Common Paid-in Accumulated hensive Common Treasury
Stock Capital Deficit Income Stock Stock Total
-------- ----------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $140,102 $27,339,892 $(22,411,611) $ -- $ -- $ -- $ 5,068,383
Comprehensive income:
Net income -- -- 980,397 -- -- -- 980,397
Other comprehensive income, net of tax
Unrealized gains on securities -- -- -- 199,373 -- -- 199,373
----------
Comprehensive income 1,179,770
----------
Common stock issued 34,482 10,710,912 -- -- -- -- 10,745,394
-----------------------------------------------------------------------------------------
Ending balance $174,584 $38,050,804 $(21,431,214) $199,373 $ -- $ -- $16,993,547
=========================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
7
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 157,682 $ 980,397
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 273,226 356,499
Deferred Income (84,212) --
Increase in accrued interest on notes receivable, common stock (4,219) --
Changes in operating assets and liabilities, net of the effects of acquisition:
(Increase) decrease in accounts receivable (715,676) (3,866,784)
Decrease (increase) in inventories 1,543,097 1,042,728
Decrease (increase) in prepaid expenses and other assets (60,483) 84,162
(Decrease) increase in accounts payable 148,447 (1,622,462)
(Decrease) increase in accrued liabilities (1,162,850) (680,735)
----------- -----------
Net cash used in operating activities 95,012 (3,706,195)
----------- -----------
Cash flows from investing activities:
Decrease (increase) in certificates of deposit 163,067 --
Purchase of property and equipment (1,292,234) (382,584)
Cash paid in acquisitions, net of cash received -- (46,980)
----------- -----------
Net cash used in investing activities (1,129,167) (429,834)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (1,027,057) (120,477)
Payments under capital lease obligations (42,909) (64,134)
Payments on long-term debt (138,080) --
Net changes in accounts receivable financing 611,847 --
Net proceeds from private offerings of common stock 539,103 2,827,355
Net proceeds from exercise of common stock options and warrants -- 6,802,414
----------- -----------
Net cash provided by financing activities (57,096) 9,445,158
----------- -----------
Net increase in cash and cash equivalents (1,091,251) 5,309,129
Cash and cash equivalents at beginning of period 1,128,380 719,851
----------- -----------
Cash and cash equivalents at end of period $ 37,129 $ 6,028,980
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 166,861 $ 137,410
Income taxes paid -- 29,661
</TABLE>
8
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Supplemental schedule of non-cash 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 (384,495)
-----------
Fair value of net assets acquired (159,538)
Common stock issued (1,115,625)
Cash paid (46,980)
Excess of cost over fair value of net assets acquired $(1,322,143)
===========
The accompanying notes are an integral part of the consolidated financial
statements.
9
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of FOCUS Enhancements, Inc. ("the
Company") as of June 30, 1999 and for the three, and six-month periods ended
June 30, 1999 and 1998 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998 included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries PC Video Conversion,
Inc., Lapis Technologies, Inc., TView, Inc., and FOCUS Enhancements B.V. 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. On July 29, 1998, the Company acquired certain
assets and assumed certain liabilities of PC Video Conversion, Inc. in a
transaction accounted for under the purchase method of accounting. All
intercompany accounts and transactions have been eliminated upon consolidation.
The results of operations of Digital Vision, Inc. have been included in
the accompanying consolidated financial statements since April 1, 1998. The
results of operations of PC Video Conversion, Inc. have been included in the
accompanying consolidated financial statements since July 29, 1998. The
following unaudited pro forma information presents a summary of the consolidated
results of operations of the Company as if the acquisitions had occurred at the
beginning of the six-month period presented
Six Months Ended
----------------
June 30,
--------
1998
----
Net sales $12,475,000
Income from operations 1,175,000
Net income 1,000,000
Net income per common share
Basic $ .06
Diluted $ .06
In the opinion of management, the consolidated financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of the interim periods. The
results of operations for the three and six month periods ended June 30, 1999
are not necessarily indicative of the results that may be expected for any
future period.
2. 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 six-months ended
June 30, 1999 and 1998, options and warrants applicable to 4,447,671 shares and
6,881,303 shares, respectively were anti-dilutive and excluded from the diluted
earnings per share computation.
10
<PAGE>
3. INCOME TAXES
The Company has utilized its net operating loss carryforwards in
estimating its provision for income taxes in the six-month period ended June 30,
1999 and 1998.
4. INVENTORIES
Inventories consist of the following:
June 30, December 31,
-------- ------------
1999 1998
---- ----
Finished goods $4,245,959 $5,718,260
Raw materials 159,568 230,364
---------- ----------
$4,405,527 $5,948,624
========== ==========
5. NOTES PAYABLE
Line of Credit, Bank. As of December 31, 1998, the Company maintained a
revolving line of credit with a bank with outstanding borrowings of $620,000.
Borrowings bear interest at the bank's prime rate plus 1% (8.75% at December 31,
1998), are payable upon demand and are collateralized by all of the assets of
the Company, except as noted below. Under the terms of the line of credit
agreement, the Company was required to comply with certain restrictive covenants
and was in violation of certain of these covenants at December 31, 1998. On
March 31, 1999, the Company repaid all monies owed on this line of credit
totaling approximately $637,000 from proceeds received under a $2,000,000
accounts receivable financing agreement with its commercial bank. The agreement
allows for advances on accounts receivable not to exceed 80% of qualified
invoices. Interest is charged on the outstanding balance at a rate of the prime
lending rate plus 4.5% (12.5% at June 30, 1999). Under the terms of this
agreement the bank has been issued warrants to purchase 100,000 shares of the
Company's common stock at a price of $1.70 per share. The Company recorded stock
option compensation charges of $6,900 for the six months ended June 30, 1999
pursuant to this issuance. At June 30, 1999, the Company had borrowings under
this agreement of approximately $611,850.
Long-Term Debt. On July 29, 1998, the Company issued a $1,000,000 note
payable to a related party in conjunction with the acquisition of PC Video
Conversion providing for the payment of principal and interest at 3.5 % over a
period of 36 months. The Company computed a discount of $89,915 on this note
based on its incremental borrowing rate. The balance owed on this note payable,
net of discount at June 30, 1999 was $683,696. Maturities of this note at June
30, 1999 are as follows:
1999 $145,099
2000 312,556
2001 226,041
--------
Total $683,696
========
11
<PAGE>
Term Loan, Vendor. On April 20, 1999, the Company converted certain
accounts payable due to a contract manufacturer to a term note in the amount of
$1,700,000. Interest at a rate of 12% per annum is payable weekly until the loan
expiration date of June 30, 1999. In addition, Mr. Thomas L. Massie, President
and CEO of the Company, agreed to personally guarantee payment of this term note
up to an amount not to exceed $600,000. However, the holder of the note defers
recourse on the guarantee provision until December 31, 1999. At June 30, 1999,
the Company was in violation of the payment provisions and maintained a balance
due of $1,282,981.
6. COMMON STOCK TRANSACTIONS
On February 22, 1999, the Company issued warrants to purchase 30,000
shares of common stock as partial compensation to an unaffiliated investor
relations firm. The warrants are exercisable until February 22, 2002 at an
exercise price of $1.063 per share. These warrants were terminated on May 31,
1999 as a result of the termination of the agreement with this investor
relations firm.
On February 22, 1999, the Company issued warrants to purchase 100,000
shares of common stock as partial compensation to an unaffiliated investment
advisor. The warrants are exercisable until September 9, 2002 at an exercise
price of $1.063 per share. The Company recorded stock option compensation
charges of $5,000 for the six months ended June 30, 1999 purusant to this
issuance.
On February 22, 1999, the Company issued warrants to purchase 50,000
shares of common stock pursuant to a debt financing arrangement with an
unrelated individual. The warrants are exercisable until February 22, 2004 at an
excise price of $1.063. The Company recorded stock option compensation charges
of $1,500 for the six months ended June 30, 1999 purusant to this issuance.
On March 22, 1999, the Company issued warrants to purchase 100,000
shares of common stock representing partial fees pursuant to a debt financing
arrangement with an unaffiliated commercial bank. The warrants are exercisable
until March 22, 2006 at an excise price of $1.70. The Company recorded stock
option compensation charges of $6,900 for the six months ended June 30, 1999
purusant to this issuance.
On June 4, 1999, the Company completed a financing of approximately
$1,200,000 in gross proceeds from the sale of 1,200,000 shares of Common Stock
and warrants to purchase 120,000 of common stock in a private placement to an
unaffiliated accredited investor. The warrants are exercisable until June 30,
2004 at an excise price of $1.478125. The Company recorded stock option
compensation charges of $6,600 for the six months ended June 30, 1999 purusant
to this issuance. The Registration Statement for the shares to be issued in
connection with this transaction and issuable upon exercise of the warrants
under the Securities Act of 1933 was filed June 21, 1999. The Company will
receive proceeds from this transaction in two tranches of $600,000, less
applicable fees. The first tranche for 600,000 shares was funded on June 14,
1999 for $600,000 less fees and expenses associated with this offering of
$60,897 yielding net proceeds of $539,103. The second tranche for 600,000 shares
valued at $600,000 less applicable fees will be funded upon the approval of the
Registration Statement filed on June 21, 1999.
On June 30, 1999, as a result of a reconciliation with its transfer
agent, the Company determined that 3,808 shares of common stock were
misclassified between common stock and additional paid-in capital. Accordingly,
on June 30, 1999 the Company adjusted its records to properly reflect its common
stock outstanding.
12
<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, 1998.
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, 1998, including, but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Three-Month Period Ended June 30, 1999 As Compared
With The Three-Month Period Ended June 30, 1998
Net Sales
Net sales for the three-month period ended June 30, 1999 ("Q2 99") were
$4,440,257 as compared with $6,872,086 for the three-month period ended June 30,
1998 ("Q2 98"), a decrease of $2,431,829 or 35%. The decrease in net sales is
principally attributable to the consolidation and restructuring of a segment of
the Company's retail channel that resulted in the elimination of certain
non-performing resellers of the Company's video conversion product line in North
America effective in fourth quarter of 1998. Specifically, net sales in Q2 99 to
the Company's US resellers decreased 40% to $3,140,000 from $5,263,000 in Q2 98.
Net sales to OEM/Licensing customers decreased 57% to $631,000 in Q2 99 from
$1,461,000 for the same quarter in 1998. This decrease is primarily the result
of a delay in the development and production of the Company's new FS400 ASIC.
Net sales of the Company's professional AV products totaled $611,000 in Q2 99
versus $ -0- in Q2 98. The Company began distributing this product line on
August 1, 1998 as a result of the acquisition of PC Video Conversion, Inc.
As of June 30, 1999, the Company had a sales order backlog of
approximately $500,000.
13
<PAGE>
Cost of Goods Sold
Cost of goods sold were $2,490,986 or 56% of net sales, for the
three-month period ended June 30, 1999, as compared with $4,065,355 or 59% of
net sales, for the three-month period ended June 30, 1998, an decrease in
absolute dollars of $1,574,369 or 39%. The Company's gross profit margins for Q2
99 and Q2 98 were 44% and 41%, respectively. As a percentage of sales, cost of
goods sold was lower in Q2 99 principally due to reduced manufacturing costs of
consumer products combined with incremental sales of professional AV products at
margins that are considerably greater. Sales to OEM customers on which margins
are typically lower declined in Q2 99 also contributing to higher margins as a
percentage of sales.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $996,789 or 22% of net sales,
for the three-month period ended June 30, 1999, as compared with $1,281,010 or
19% of net sales, for the three-month period ended June 30, 1998, an decrease of
$284,221 or 22%. The decrease in absolute dollars is due primarily to reductions
in channel marketing expenditures resulting from market restructuring efforts.
General and Administrative Expenses
General and administrative expenses for the three-month period ended
June 30, 1999 were $427,228 or 10% of net sales, as compared with $420,691, or
6% of net sales for the three-month period ended June 30, 1998, an increase of
$6,537 or 2%. The increase in absolute dollars is principally due to increases
in consulting fees ($26,700), legal fees ($18,400), investor relations fees
($25,700) and stock option compensation charges ($20,000) offset by a decrease
in payroll and employee benefits of $83,300.
Research and Development Expenses
Research and development expenses for the three-month period ended June
30, 1999 were $270,325, or 6% of net sales, as compared to $244,923, or 4% of
net sales, for three-month period ended June 30, 1998, an increase of $25,402 or
10%. The increases were due principally to increased staffing, employee benefits
and operating expenses resulting from the acquisition of PC Video Conversion in
July 1998.
Interest Expense, Net
Net interest expense for the three-month period ended June 30, 1999 was
$145,496, or 3% of net sales, as compared to $60,371, or 1% of net sales, for
the three-month period ended June 30, 1998, an increase of $85,125, or 141%. The
increase is primarily attributable to an increase in outstanding interest
bearing debt for the three months ended June 30, 1999.
Other Income (Expense)
Other Income (Expense) for the three-month period ended June 30, 1999
was $79,115 as compared to $5,134, for the three-month period ended June 30,
1998. The increase is principally due to approximately $85,000 from gains on the
sales of marketable securities in Q2 99.
Net Income
For the quarter ended June 30, 1999, the Company reported net income of
$54,692, or $0.00 per share, as compared to $615,649, or $0.04 per share, for
the quarter ended June 30, 1998.
14
<PAGE>
Six-Month Period Ended June 30, 1999 As Compared
With The Six-Month Period Ended June 30, 1998
Net Sales
Net sales for the six-month period ended June 30, 1999 (the "99 Period")
were $9,507,336 as compared with $12,124,034 for the six-month period ended June
30, 1998 (the "98 Period"), a decrease of $2,616,698 or 22%. The decrease in net
sales is primarily due to the consolidation and restructuring of a segment of
the Company's retail channel that resulted in the elimination of certain
non-performing resellers of the Company's video conversion product line in North
America in fourth quarter of 1998. Specifically, net sales in the 99 Period to
the Company's US resellers decreased 31% to $6,536,000 from $9,463,000 in the 98
Period. Net sales to OEM/Licensing customers decreased 35% to $1,308,000 in the
99 Period from $2,001,000 for the 98 period. This decrease is primarily the
result of a delay in the development and production of the Company's new FS400
ASIC. Net sales of the Company's professional AV products totaled $1,035,000 in
the 99 Period versus $ -0- in the 98 Period. The Company began distributing this
product line on August 1, 1998 as a result of the acquisition of PC Video
Conversion, Inc.
Cost of Goods Sold
Cost of goods sold were $5,428,120 or 57% of net sales, for the six-month
period ended June 30, 1999, as compared with $6,847,291 or 56% of net sales, for
the six-month period ended June 30, 1998, a decrease in absolute dollars of
$1,419,171 or 21%. The decrease in cost of sales in absolute dollars was
principally the result of a decrease in revenues in the 99 Period as compared to
the 98 Period.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $2,020,484 or 21% of net
sales, for the six-month period ended June 30, 1999, as compared with $2,447,337
or 20% of net sales, for the six-month period ended June 30, 1998, an decrease
of $426,853 or 17%. The decrease in absolute dollars is due primarily to
reductions in channel marketing expenditures resulting from market restructuring
efforts.
General and Administrative Expenses
General and administrative expenses for the six-month period ended June
30, 1999 were $781,170 or 8% of net sales, as compared with $775,483, or 6% of
net sales for the six-month period ended June 30, 1998, an increase of $5,687 or
1%.
Research and Development Expenses
Research and development expenses for the six-month period ended June 30,
1999 were $762,806 or 8% of net sales, as compared to $555,724, or 5% of net
sales, for six-month period ended June 30, 1998, an increase of $207,082 or 37%.
The increase was due principally to increased staffing, employee benefits and
operating expenses resulting from the acquisition of PC Video Conversion in July
1998.
15
<PAGE>
Interest Expense, Net
Net interest expense for the six-month period ended June 30, 1999 was
$166,861, or 2% of net sales, as compared to $137,410, or 1% of net sales, for
the six-month period ended June 30, 1998, a increase of $29,451, or 21%. The
increase is primarily attributable to an increase in outstanding debt balances
for the 99 period compared to the 98 Period.
Other Income
Other Income for the six-month period ended June 30, 1999 was $83,013 as
compared to $5,768, for the six-month period ended June 30, 1998. The increase
is principally due to gains on the sales of marketable securities in the 99
Period.
Net Income
For the six-month period ended June 30, 1999, the Company reported net
income of $157,682 or $0.01 per share, as compared to $980,397, or $0.06 per
share, for the six-month period ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities for the six-month
periods ended June 30, 1999 and 1998 was $95,012 and ($3,706,195), respectively.
In the 99 Period, net cash provided by operating activities consisted primarily
of a decrease in invetory of $1,543,097, and an increase in accounts payable of
$148,447, combined with non-cash charges for depreciation and amortization of
$273,226 and net income of $157,682. This was offset by increases in accounts
receivable of $715,676 and prepaid expenses of $60,483, combined with a decrease
in accrued liabilities of $1,162,850. As of June 30, 1999, accounts receivable
from a major distributor represented approximately 35% of total accounts
receivable. In the 99 Period, the Company continued to record provisions for
potential future uncollectable accounts and continually monitors inventory
levels at its resellers and maintains reserves for potential product returns.
For the six months ended June 30, 1998, net cash used in operations
consisted primarily of increases in accounts receivable of $3,866,784 and
decreases in accounts payable and accrued expenses of $1,622,462 and $680,735,
respectfully. This was offset by a decrease in inventory of $1,042,728.
Net cash used in investing activities for the six-month periods ended
June 30, 1999 and 1998 was ( $1,129,167) and ($429,834), respectively. In the 99
Period and the 98 Period, cash used in investing activities was principally for
the purchase of property and equipment and capitalized ASIC development costs.
Net cash provided by (used in) financing activities for the six-month
periods ended June 30, 1999 and 1998 was ($57,096) and $9,445,158, respectively.
In the 99 Period, the Company received $539,103 in net proceeds from private
offerings of common stock. The Company's financing proceeds were offset by
payments on notes payable, accounts receivable financing and capital lease
obligations. In the same six-month period in 1998, the Company received
$2,827,355 in net proceeds from private offerings of Common Stock and $6,802,414
from the exercise of common stock options and warrants. The 98 Period financing
proceeds were offset by payments on notes payable and capital lease obligations.
16
<PAGE>
As of June 30, 1999, the Company had working capital of $851,911, as
compared to $1,434,793 at December 31, 1998, a decrease of $582,882. The
Company's cash position at June 30, 1999 was $37,129 , a decrease of $1,091,251,
from cash balances at December 31, 1998.
At June 30, 1999, the Company was in violation of the payment
provisions of a term note payable to a contract manufacturer in the amount of
$1,282,981. The Company is in negotiation with the holder to amend the terms of
the note. The note is secured by certain inventory manufactured by the holder.
In addition, Mr. Thomas L. Massie, President and CEO of the Company, personally
guaranteed payment of this term note up to an amount not to exceed $600,000.
However, the holder of the note defers recourse on the guarantee provision until
December 31, 1999. In addition, the Company is pursuing additional capital
funding to improve working capital.
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.
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
General
The Company's Year 2000 compliance project ("The Project") is proceeding
on schedule. The Project is addressing the issue of computer programs and
embedded computer chips being unable to distinguish between the year 1900 and
the year 2000. In early 1999, in order to improve access to business information
and to strengthen its infrastructure through common, integrated computing
systems across the Company, the Company began a business systems replacement
project with systems that use programs from a nationally known business software
company ("System"). The installation of the new systems, which are expected to
make approximately 90 percent of the Company's business computer systems Year
2000 compliant, is scheduled for completion by September 30, 1999. The System
will replace a non-compliant accounting and manufacturing system. Implementation
of the System is on schedule and approximately 90 percent complete. To
facilitate the Project, The Company has retained outside consultants with
expertise in wide area networking ("WAN"), systems integration and
business/contact data management.
The Company has developed a contingency plan to make the programs that
are scheduled to be replaced by the System Year 2000 compliant. The contingency
plan includes contracted on-site support, workflow modification, and integration
of Year 2000 compliant systems. At the end of first quarter 1999, management
agreed that there was no need to implement the contingency plan at that time.
The decision will be re-evaluated monthly through year-end. Remaining business
software programs are expected to be made Year 2000 compliant through The
Project, including those supplied by vendors, or they will be retired. None of
the Company's other information technology ("IT") projects have been delayed due
to the implementation of The Project.
17
<PAGE>
Project
The Project is being implemented in two phases: Phase I, installation
of the hardware and business applications, preceded the WAN installation and the
integration of various communications systems. Phase I was 95% completed on June
30, 1999. Phase II is expected to be completed by September 30, 1999.
The Project is divided into two major sections - infrastructure and
applications software (sometimes collectively referred to as "IT Systems") and
third-party suppliers and customers ("External Agents"). The general phases
common to all sections are: (1) inventorying Year 2000 items; (2) assigning
priorities to identified items; (3) assessing the Year 2000 compliance of items
determined to be material to the Company; (4) repairing or replacing material
items that are determined not to be Year 2000 compliant; (5) testing material
items; and (6) designing and implementing contingency and business continuation
plans for each organization and Company location.
At September 30, 1998, the inventory and priority assessment phases of
each section of the Project had been completed. While substantially complete,
the process of assessing Year 2000 compliance of its material items and
repairing or replacing such items continues on an ongoing basis. Material items
are those believed by the Company to have a risk involving the safety of
individuals, or that may cause damage to property or the environment, or that
have a material effect on the Company's revenues. The testing phases of the
Project will be performed by the Company and will be ongoing as hardware or
system software is remedied, upgraded or replaced.
The infrastructure portion of the IT section consists of hardware and
systems software other than applications software. The Company estimates that
approximately 95 percent of the activities required to achieve infrastructure
Year 2000 compliance had been completed at June 30, 1999. All infrastructure
activities are expected to be completed by August 31, 1999. Contingency planning
for infrastructure is also substantially complete.
The application software portion of the IT section includes both the
conversion of applications software that is not Year 2000 compliant and, where
available from the supplier, the replacement of such software. The Company
estimates that the software conversion phase was approximately 90 percent
complete at June 30, 1999, and the remaining conversions are expected to be
completed by September 30, 1999.
The testing phase for application software is ongoing and is expected
to be completed by September 30, 1999. The vendor software replacements and
upgrades are installed as of July 19, 1999 and the testing of this applications
is expected to be completed by September 30, 1999. Contingency planning for
application software has begun and is scheduled for completion by mid-1999.
The External Agents section includes the process of identifying and
prioritizing critical suppliers and customers at the direct interface level, and
communicating with them about their plans and progress in addressing their own
Year 2000 issues. Detailed evaluations of the most critical third parties have
been initiated. These evaluations will be followed by the development of
contingency plans, which are scheduled for completion by September 30, 1999. The
Company estimates that this section was on schedule at June 30, 1999. Follow-up
reviews of External Agents are expected to be undertaken through the remainder
of 1999.
18
<PAGE>
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The estimated total cost of the Project is approximately $300,000. The total
amount expended on the Project through June 30, 1999, was $250,000, of which
approximately $200,000 related to the cost to repair or replace software and
related hardware problems, and approximately $50,000 related to the cost of
identifying and communicating with External Agents. The estimated future cost of
completing the Project is estimated to be approximately $50,000; $25,000 to
repair or replace software and related hardware and $25,000 to identify and
communicate with External Agents. Funds for the Project are provided from a
separate budget of $300,000 for all items other than External Agent costs, which
are included in existing operating budgets. Ancillary costs of implementing the
System are not included in these cost estimates.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Project is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material External Agents. The Company believes that, with the implementation of
new business systems and completion of the Project as scheduled, the possibility
of significant interruptions of normal operations should be reduced.
Readers are cautioned that forward-looking statements contained in the
year 2000 Update should be read in conjunction with the Company's disclosures
under the heading: "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS" herein.
The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 for any forward-looking statement made by, or on behalf of,
the Company. The factors identified in this cautionary statement are important
factors (but not necessarily all important factors) that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or bases to be reasonable and
makes them in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending on the circumstances. Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result, or be achieved or accomplished.
Taking into account the foregoing, the following are identified as
important risk factors that could cause actual results with respect to the
Company's Year 2000 compliance to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
19
<PAGE>
o The dates on which the Company believes the Project will be completed
and the System will be implemented are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the Project.
o A delay in the implementation of the System could impact the Company's
readiness for transactions involving the Euro currency in connection with the
Company's European sales activities.
o Other specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties.
o Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of
third-parties and the interconnection of global businesses, the Company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the Year 2000 issue that may materially and adversely affect its operations
and business, or expose it to third-party liability.
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 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 and the Company's
ability to achieve Year 2000 compliance on a timely basis as more fully
described above.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings, other than
routine litigation that is incidental to the business, which would have a
material adverse effect on the Company's financial position or results of
operations for the six month period ended June 30, 1999.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At June 30, 1999, the Company was in violation of the payment
provisions of a term note payable to a contract manufacturer in the amount of
$1,282,981. The Company is in negotiation with the holder to amend the terms of
the note. The note is secured by certain inventory manufactured by the holder.
In addition, Mr. Thomas L. Massie, President and CEO of the Company, personally
guaranteed payment of this term note up to an amount not to exceed $600,000.
However, the holder of the note defers recourse on the guarantee provision until
December 31, 1999. As of August 16, 1999, the unpaid arrearge of principal and
interest totaled $1,282,981.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
On June 25, 1999, the Board of Directors caused to be distributed to
stockholders of record as of June 21, 1999, a Notice of Annual Meeting of
Stockholders, Proxy and Proxy Statement for the Annual Meeting held on July 26,
1999. As of the record date, 18,608,898 of Common Stock (excluding treasury
shares) were entitled to vote.
At the meeting, the stockholders acted upon the following proposals: (I)
election of two Class I directors; (II) approval of FOCUS Enhancements, Inc.
Employee Stock Purchase Plan; (III) approval of 1998 Non-qualified Stock Option
Plan; (IV) approval of Amendment to Certificate of Incorporation to increase
authorized shares of common stock; and (V) ratification of the firm of Wolf &
Company, P.C. as independent auditors. All of the above matters were approved by
the shareholders.
Votes "For" represent affirmative votes and do not represent
abstentions or broker non-votes. In cases where a signed proxy was submitted
without direction, the shares represented by proxy were voted "For" each
proposal in the manner disclosed in the Proxy Statement and Proxy. The voting
results were as follows:
<TABLE>
<CAPTION>
FOR AGAINST WITHHOLD BROKER NON-VOTES
--- ------- -------- ----------------
<S> <C> <C> <C> <C>
I. Election of Class I Directors
Thomas L. Massie 15,790,078 -- 570,947 --
John C. Cavalier 15,790,078 -- 570,947 --
II. Approval of Employee
Stock Option Plan 4,965,216 661,587 116,050 10,618,172
III. Approval of 1998 Non-
Qualified Stock Option
Plan 4,510,032 1,121,845 110,976 10,618,172
21
<PAGE>
<CAPTION>
FOR AGAINST WITHHOLD BROKER NON-VOTES
--- ------- -------- ----------------
<S> <C> <C> <C> <C>
IV. Approval to Amend Certificate
of Incorporation 14,944,296 1,244,535 172,194 --
V. Ratification of
Independent Auditors 15,908,857 244,443 227,725 --
</TABLE>
ITEM 5. OTHER INFORMATION
Sale of Common Stock
On June 4, 1999, the Company completed a financing of approximately
$1,200,000 in gross proceeds from the sale of 1,200,000 shares of Common Stock
and warrants to purchase 120,000 of common stock in a private placement to an
unaffiliated accredited investor. The warrants are exercisable until June 30,
2004 at an exercise price of $1.478125. The Registration Statement for the
shares to be issued in connection with this transaction and issuable upon
exercise of the warrants under the Securities Act of 1933 was filed June 21,
1999. The Company will receive proceeds from this transaction in two tranches of
$600,000, less applicable fees. The first tranche for 600,000 shares was funded
on June 14, 1999 for $600,000 less fees and expenses associated with this
offering of $60,897 yielding net proceeds of $539,103. The second tranche for
600,000 shares valued at $600,000 less applicable fees will be funded upon the
approval of the Registration Statement filed on June 21, 1999.
Closure of FOCUS Enhancements B.V.
On July 26, 1999, in a continued effort to consolidate operations and
reduce expenses, the Company closed its European sales office in Leiden, The
Netherlands. In conjunction with this closure, the Company dissolved its
subsidiary FOCUS Enhancements B.V. The cost of closing the European operation
totaled approximately $53,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
11. Statement Re: Computation of Per Share Earnings
27. Financial data schedule
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K reports during the
quarter ended June 30, 1999.
22
<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.
August 15, 1999 By: \s\ Thomas L. Massie
Thomas L. Massie
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
August 15, 1999 By: \s\ Gary M. Cebula
Gary M. Cebula
Vice President of Finance
and Administration
(Principal Accounting Officer)
23
<TABLE>
<CAPTION>
EXHIBIT 11
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF INCOME PER SHARE
Three months ended Three months ended
June 30, June 30,
1999 1998
------------------ -------------------
<S> <C> <C>
Net income $ 54,692 $ 615,649
=========== ===========
Basic:
Weighted average number of common shares outstanding 18,011,725 15,367,771
=========== ===========
Diluted:
Weighted average number of common shares outstanding 18,011,725 15,367,771
Weighted average common equivalent shares 636 1,236,607
Weighted average number of common and common equivalent ----------- -----------
shares outstanding used to calculate per share data 18,012,361 16,604,378
=========== ===========
Net income per share
Basic $ 0.00 $ 0.04
=========== ===========
Diluted $ 0.00 $ 0.04
=========== ===========
<PAGE>
<CAPTION>
EXHIBIT 11
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF INCOME PER SHARE
Six months ended Six months ended
June 30, June 30,
1999 1998
1999 1998
------------------ -------------------
<S> <C> <C>
Net income $ 157,682 $ 980,397
=========== ===========
Basic:
Weighted average number of common shares outstanding 18,008,426 16,203,388
=========== ===========
Diluted:
Weighted average number of common shares outstanding 18,008,426 16,203,388
Weighted average common equivalent shares 636 1,204,505
Weighted average number of common and common equivalent ----------- -----------
shares outstanding used to calculate per share data 18,009,062 17,407,893
=========== ===========
Net income per share
Basic $ 0.01 $ 0.06
=========== ===========
Diluted $ 0.01 $ 0.06
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,129
<SECURITIES> 6,423
<RECEIVABLES> 4,153,860
<ALLOWANCES> (641,058)
<INVENTORY> 4,405,527
<CURRENT-ASSETS> 8,359,304
<PP&E> 2,954,266
<DEPRECIATION> (569,584)
<TOTAL-ASSETS> 11,736,112
<CURRENT-LIABILITIES> 7,507,393
<BONDS> 0
0
0
<COMMON> 186,089
<OTHER-SE> 3,385,776
<TOTAL-LIABILITY-AND-EQUITY> 11,736,112
<SALES> 9,507,336
<TOTAL-REVENUES> 9,507,336
<CGS> 5,428,120
<TOTAL-COSTS> 3,837,686
<OTHER-EXPENSES> 83,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (166,861)
<INCOME-PRETAX> 157,682
<INCOME-TAX> 0
<INCOME-CONTINUING> 157,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157,682
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
