<PAGE>
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, 2000
[_] 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 01887
(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, 2000, there were outstanding 26,307,871 SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE.
<PAGE>
FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
June 30, 2000
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, 2000
and December 31, 1999 3
Consolidated Statements of Operations
for the Three Months Ended June 30, 2000
and 1999 4
Consolidated Statements of Operations 5
for the Six Months Ended June 30, 2000
and 1999
Statement of Changes in Equity for the Six
Months Ended June 30, 2000 6
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000
and 1999 7
Notes to Consolidated Financial Statements 8-11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities 17
ITEM 3. Defaults Upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,083,922 $ 3,736,517
Certificate of deposit 1,267,871 534,091
Accounts receivable, net of
allowances of $731,832 and
$1,402,176 at June 30, 2000 and
December 31, 1999, respectively 2,909,487 2,913,005
Inventories 3,307,638 3,588,702
Prepaid expenses and other current assets 296,929 240,732
------------ ------------
Total current assets 8,865,847 11,013,047
Property and equipment, net 835,803 968,594
Capitalized software development costs 2,814,098 2,122,450
Other assets, net 241,648 287,116
Goodwill, net 530,744 624,277
------------ ------------
Total assets $ 13,288,140 $ 15,015,484
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 0 $ 1,006,258
Obligations under capital leases 68,694 129,451
Current portion of long-term debt 312,556 312,556
Accounts payable 3,195,066 3,413,285
Accrued liabilities 577,802 518,726
------------ ------------
Total current liabilities 4,154,118 5,380,276
Obligations under capital leases 201,984 202,002
Long-term debt, net of current portion 63,560 226,041
------------ ------------
Total liabilities 4,419,662 5,808,319
------------ ------------
Stockholders' equity
Preferred stock, $.01 par value; 3,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value;
30,000,000 shares authorized,
26,307,871 and 24,504,203 shares
issued at June 30, 2000 and December 31,
1999, respectively 263,079 245,042
Additional paid-in capital 48,675,716 46,340,891
Accumulated deficit (39,370,187) (36,678,638)
Treasury stock at cost, 450,000 shares (700,130) (700,130)
------------ ------------
Total stockholders' equity 8,868,478 9,207,165
------------ ------------
Total liabilities and stockholders' equity $ 13,288,140 $ 15,015,484
============ ============
</TABLE>
See accompanying notes to Unaudited Consolidated Financial Statements
3
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
2000 1999
(Note 2)
----------- -----------
<S> <C> <C>
Net revenues $ 4,399,974 $ 4,077,304
Cost of goods sold 3,334,953 2,128,033
----------- -----------
Gross profit 1,065,021 1,949,271
----------- -----------
Operating expenses:
Sales, marketing and support 959,067 996,789
General and administrative 706,465 427,228
Research and development 285,359 270,325
Depreciation and amortization expense 237,061 133,856
----------- -----------
Total operating expenses 2,187,952 1,828,198
----------- -----------
Income from operations (1,122,931) 121,073
Interest expense, net (34,312) (145,496)
Other income, net 43,211 79,115
----------- -----------
Income before income taxes (1,114,032) 54,692
Income tax expense 1,854 --
----------- -----------
Net income $(1,112,178) $ 54,692
=========== ===========
Net income per common share
Basic $ (0.04) $ 0.00
=========== ===========
Diluted $ (0.04) $ 0.00
=========== ===========
Weighted average common shares outstanding
Basic 24,785,659 18,011,725
=========== ===========
Diluted 24,785,659 18,012,361
=========== ===========
</TABLE>
*See accompanying notes to Unaudited Consolidated Financial Statements
4
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
2000 1999
(Note 2)
----------- -----------
<S> <C> <C>
Net revenues $ 8,014,244 $ 9,144,383
Cost of goods sold 5,664,585 5,065,167
----------- -----------
Gross profit 2,349,659 4,079,216
----------- -----------
Operating expenses:
Sales, marketing and support 1,986,844 2,020,484
General and administrative 1,853,639 781,170
Research and development 545,187 762,806
Depreciation and amortization expense 450,673 273,226
Restructuring Expenses 202,252 --
----------- -----------
Total operating expenses 5,038,595 3,837,686
----------- -----------
Income/(loss) from operations (2,688,936) 241,530
Interest expense, net (54,078) (166,861)
Other income, net 53,611 83,013
----------- -----------
Income/(Loss) before income taxes (2,689,403) 157,682
Income tax expense (2,146) --
----------- -----------
Net Loss $(2,691,549) $ 157,682
=========== ===========
Net Loss per common share
Basic $ (0.11) $ 0.01
=========== ===========
Diluted $ (0.11) $ 0.01
=========== ===========
Weighted average common shares outstanding
Basic 24,556,510 18,008,426
=========== ===========
Diluted 24,556,510 18,009,062
=========== ===========
*See accompanying notes to Unaudited Financial Statements
</TABLE>
5
<PAGE>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Total
----------------------- Additional Accumulated Treasury Stockholders'
Shares Amount Paid-in Capital Deficit Stock Equity
----------------------- --------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 24,504,203 $245,042 $ 46,340,891 $ (36,678,638) $ (700,130) $ 9,207,165
Issuance of common stock 403,668 4,037 1,064,825 1,068,862
upon exercise of stock
options and warrants
Issuance of common stock 1,400,000 14,000 1,270,000 1,284,000
from private offerings,
net of issuance cost of
$
Common stock issued in
settlement of accounts
payable
Common stock warrants
issued for services
and debt
Net loss (2,691,549) (2,691,549)
---------- ----------- --------------- ---------------- ----------- -------------
Balance at June 30, 2000 26,307,871 $ 263,079 $ 48,675,716 $ (39,370,187) $ (700,130) $ 8,868,478
========== =========== =============== ================ =========== =============
</TABLE>
See accompanying notes to Unaudited Financial Statements
6
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(2,691,549) $ 157,682
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 450,673 273,226
Deferred Income 0 (84,212)
Increase in accrued interest on notes receivable, common stock 0 (4,219)
Changes in operating assets and liabilities, net of the effects of acquisition:
(Increase) decrease in accounts receivable (3,518) (498,993)
Decrease (increase) in inventories (281,064) 1,326,414
Decrease (increase) in prepaid expenses and other assets 82,805 (60,483)
(Decrease) increase in accounts payable 123,960 148,447
(Decrease) increase in accrued liabilities (59,075) (1,162,850)
----------- -----------
Net cash used (Provided)in operating activities (2,377,768) 95,012
----------- -----------
Cash flows from investing activities:
Decrease (increase) in certificates of deposit (733,780) 163,067
Purchase of property and equipment (570,137) (1,292,234)
----------- -----------
Net cash used in investing activities (1,303,917) (1,129,167)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (1,100,517) (1,027,057)
Payments under capital lease obligations (223,256) (42,909)
Payments on long-term debt -- (138,080)
Net proceeds from accounts receivable factoring -- 611,847
Net proceeds from private offerings of common stock 1,284,000 539,103
Net proceeds from exercise of common stock options and warrants 1,068,862 --
----------- -----------
Net cash provided by financing activities 1,029,089 (57,096)
----------- -----------
Net increase in cash and cash equivalents (2,652,596) (1,091,251)
Cash and cash equivalents at beginning of period 3,736,517 1,128,380
----------- -----------
Cash and cash equivalents at end of period $ 1,083,921 $ 37,129
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 54,078 $ 166,861
Income taxes paid
-- --
</TABLE>
7
<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, 2000 and for the three and six-month periods ended June
30, 2000 and 1999 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1999 included in the Company's Annual Report on Form 10-KSB/A for the year
ended December 31, 1999.
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, 2000 are not
necessarily indicative of the results that may be expected for any future
period.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary PC Video Conversion, Inc. The companies other
subsidiaries, Lapis Technologies, Inc., T-View, Inc and Focus Enhancements, B.V.
(Netherlands corporation) became inactive or were merged into Focus in 1999. All
intercompany accounts and transactions have been eliminated upon consolidation.
2. RESTATEMENT
The company is in the process of reviewing and evaluating the impact of
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition", which provides
guidance for applying generally accepted accounting principles to revenue
recognition in financial statements filed with the Commission.
Historically, the company provided a gross margin reserve for estimated
sales returns each quarter. In connection with its review of the impact of SAB
101, the Company found that certain transactions that were recorded as sales in
the second and third quarters of 1999 should not have been recorded as sales. As
a result, the company has restated the financial statements of the
aforementioned quarters to correct the amount of revenue previously reported in
those quarters.
As indicated above, the Company has provided gross margin reserves for
estimated sales returns and the Company believes that such estimated reserves
were adequate to cover the gross margins on the restated sales and other sales
returns. Accordingly, the restatement of the financial statements for the second
and third quarters of 1999 did not have any impact on the previously reported
net income of those quarters.
In addition, in its quarterly financial statements for the year 2000, the
Company is providing a reserve for estimated sales returns based on the
estimated sales value of the sales returns rather than a gross margin reserve.
The second and third quarters of 1999 have been restated to reflect this change
to be consistent with the financial statement presentation in 2000.
The items in the financial statements that are affected by the restatement
are as follows:
<TABLE>
<CAPTION>
(In Thousands)
6/30/99 6/30/99 9/30/99 9/30/99
Previously AS Previously AS
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
INCOME STATEMENT
-----------------------------------------------------------------------------------------
Revenue $4,440 $4,077 $4,106 $3,198
Cost of Goods Sold 2,491 2,128 2,165 1,257
Net Income 55 55 141 141
BALANCE SHEET
-----------------------------------------------------------------------------------------
Accounts Receivable $3,513 $3,296 $3,511 $2,996
Inventory 4,406 4,622 3,515 4,030
Current Assets 8,359 8,359 8,325 8,325
</TABLE>
The Company is in the process of amending the Form 10QSB for each of these
quarters to reflect this restatement
8
<PAGE>
3. NET INCOME 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
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, 2000 and 1999, options and warrants applicable to 2,890,742 shares and
4,447,671 shares, respectively were anti-dilutive and excluded from the diluted
earnings per share computation.
4. 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, 2000 and
1999.
5. INVENTORIES
Inventories consist of the following:
June 30,2000 December 31,1999
--------------- ----------------
Finished goods $2,770,280 $2,377,709
Work In Process $ 42,557 $ 171,637
Raw Materials $ 494,801 $1,039,356
--------------- ----------------
$3,307,638 $3,588,702
=============== ================
6. CLOSURE OF THE MORGAN HILL FACILITY
During Q2 00 the Company successfully completed the closure of its Morgan
Hill facility. In conjunction with the closing and movement of materials, the
company wrote off an additional $40,000 worth of materials.
7. NOTES PAYABLE / SECURITY ARRANGEMENTS
Note Payable, 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 with interest at a rate of 12% per annum. The balance of the Note was
$1,006,258 at December 31, 1999. On December 31, 1999, the Company and the
holder of the note reached an agreement as to the settlement of the note and
related accounts payable. On January 5, 2000 the Company repaid $1,000,000 of
these obligations and on January 28, 2000, escrowed $669,000 to be paid to the
holder in three equal installments on February 5, March 5, and April 5, 2000.
This term loan was paid in full as of June 30, 2000.
9
<PAGE>
8. 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 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. Maturities of long-term debt at June 30, 2000 are as follows:
2000 376,116
--------
To be booked in July 4,811
Total $380,927
========
On July 28, 2000, the Company entered into a Separation Agreement with
Steve Wood. Mr. Wood was the Vice President of Pro AV engineering, former sole
shareholder of PC Video Conversion, Inc., and leader of the Company's Morgan
Hill facility. On June 15, 2000, the Company closed the Morgan Hill facility. On
July 28, 1998, the Company purchased from PC Video Conversion, Inc., selected
assets and liabilities and, in return, issued a promissory note and entered an
employment agreement with Mr. Wood. As part of the Separation agreement which
terminated Mr. Wood's employment agreement, Mr. Wood remained a consultant until
an upgrade to one of the Companies Pro AV products is completed. In return, Mr.
Wood received a right to convert the promissory note into common stock of the
Company. Under terms of the deal, the election must be made within five days
following the shareholder meeting at which time the outstanding balance would be
converted at a price of ninety-three percent (93%) of the average closing price
of the Company common stock on the five trading days prior to the conversion
date, up to a maximum of 500,000 shares of common stock.
9. COMMON STOCK TRANSACTIONS
On January 18, 2000, the Company received gross proceeds of $990,000 from
the issuance of 330,000 shares of common stock resulting from the exercise of
common stock warrants issued pursuant to a private placement with an
unaffiliated investor on September 10, 1997.
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 exercised on February 23, 2000 (15,000
shares) and March 2, 2000 (15,000 shares).
During the quarter ended June 30, 2000, the Company issued at various
times, 11,667 shares of common stock resulting from other exercises of options
and warrants, receiving cash of approximately $12,700. Additional Paid-in
Capital of 1,282,584 ($1,270,000 for the private placement and $12,584 from the
exercise of stock options and warrants) for the quarter is net of $216,000 of
related legal expenses.
On June 9, 2000, the Company entered into a financing agreement resulting
in $1,500,000 in gross proceeds from the sale of 1,400,000 shares of common
stock and the issuance of a warrant to purchase an additional 140,000 shares of
common stock in a private placement, to an unaffiliated accredited investor. The
warrant is exercisable until June 30, 2005 at a per-share exercise price of
$1.625. In addition, Union Atlantic received a warrant to purchase 45,000 shares
of common stock as compensation for brokering the private placement. The warrant
is exercisable until June 30, 2005 at a per-share exercise price of $1.625. The
Company intends to file a registration statement under the Securities Act of
1933 for the shares issued in connection with this transaction and for those to
be issued upon exercise of the warrants. The Company received proceeds from this
transaction on June 9, 2000. The fees and expenses associated with this offering
was $216,000 yielding net proceeds of $1,284,000.
For the six-month period ended June 30, 2000, the Company issued at various
times, 403,668 shares of common stock resulting from other exercises of options
and warrants, receiving cash of approximately $1,068,862. Additional Paid-in
Capital of 2,334,825 ($1,270,000 for the private placement and $1,064,825 from
the exercise of stock options and warrants) for this period is net of $245,440
of related legal expenses.
On July 28, 2000, the Company entered into an equity line of credit
agreement with Euston Investments Holdings Limited, a British Virgin Islands
Corporation for the future issuance and purchase of shares of our common stock.
The equity line of credit agreement establishes what is sometimes termed an
equity drawdown facility.
In general, the investor, Euston Investments, has committed to provide the
Company up to $5 million as the Company requests it over a 24 month period, in
return for common stock the Company issues to Euston Investments. The number of
shares issued to Euston Investments in return for that money is determined by
dividing the contracted price per share into the amount of money requested by
the Company. The per share dollar amount Euston Investments is 10% less than the
average closing bid price of our common stock during a valuation period. A
"valuation period" is defined as the period of fifteen trading days beginning
seven trading days immediately before the Trading Day on which a drawdown is
requested and ending seven trading days immediately after such date. We will
receive the amount of the drawdown less an escrow agent fee of $750 and 7%
placement fee payable to the placement agent, Union Atlantic, LC, which
introduced Euston Investments to the Company. The aggregate total of all draws
cannot exceed $5 million. We are under no obligation to request a draw for any
period. In lieu of providing Euston Investments with a minimum aggregate
drawdown commitment, we have issued to Euston Investments a stock purchase
warrant to purchase 250,000 shares of our common stock with an exercise price of
$1.625. The warrant expires June 12, 2005.
On May 1, 2000, the Board of Directors approved by unanimous written
consent, an increase in the authorized shares of common stock to 43,000,000
shares.
On May 1, 2000, the Board of Directors approved by unanimous written
consent, the establishment of the 2000 Non-Qualified Stock Option Plan, subject
to stockholder approval. In addition, the Board authorized 3,000,000 shares to
be reserved for the 2000 Plan. On May 5, 2000, the Company granted 2,473,375
Stock Options under the 2000 Plan.
10. SEPARATION AGREEMENTS AND CONSULTING AGREEMENTS
On May 1, 2000, the Company entered into a Separation Agreement with Thomas
L.Massie, President and CEO, whereby the Company and Mr. Massie agreed to sever
Mr.Massie's employment relationship effective April 30, 2000.
10
<PAGE>
On May 1, 2000, the Company entered into a Separation Agreement with Gary
M. Cebula, Vice President of Finance and Administration, whereby the Company and
Mr. Cebula agreed to sever Mr. Cebula's employment relationship effective April
30, 2000.
On May 1, 2000, the Company entered into a Consulting Agreement with
William B. Coldrick, Vice Chairman, to provide management services to the
Company for the period of May 1, 2000 to December 31, 2000.
On May 1, 2000, the Company entered into a Consulting Agreement with Thomas
L. Massie, Chairman, to provide management services to the Company for the
period of May 1, 2000 to December 31, 2000.
On May 1, 2000, the Company entered into a Consulting Agreement with Gary
Cebula to provide financial management services to the Company for the period of
May 1, 2000 to December 31, 2000.
The Company estimates that the aggregate financial impact to the Company of
the above agreements for the year ended December 31, 2000 will be approximately
$260,000 comprised of $176,000 in compensation and $84,000 of debt forgiveness
for the year ended December 31, 2000.
11. LITIGATION
As noted in PART II-OTHER INFORMATION, ITEM 1., LEGAL PROCEEDINGS, the
Company has disclosed certain legal proceedings. The class action suits included
therein are in their early stages and it is not yet possible to estimate an
outcome. In the CRA case, a verdict was returned in May 2000 requiring Focus to
pay a judgement of approximately $1.8m. Since mediation is scheduled for late
August, it is not possible at this time to estimate the final amount that will
ultimately be paid. In the event that mediation is unsuccessful, Focus intends
to contest the verdict through an appeal. It is common practice that the Court
will withhold its judgement until completion of mediation.
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/A for the year ended December 31, 1999.
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/A for the year ended
December 31, 1999, including, but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."
In its quarterly financial statements for the year 2000, the Company is
providing a reserve for estimated sales returns based on the estimated sales
value of the sales returns rather than only a gross margin reserve. The second
and third quarters of 1999 have been restated to reflect this change to be
consistent with the financial statement presentation in 2000. The financial
statement accounts for Q2
11
<PAGE>
and Q3 of 1999 that have been changed to reflect these changes for comparative
purposes are Revenue, Cost, Accounts Receivable and Inventory.
Historically, the company provided a gross margin reserve for estimated
sales returns each quarter. In connection with its review of the impact of SAB
101, the Company found that certain transactions that were recorded as sales in
the second and third quarters of 1999 should not have been recorded as sales. As
a result, the company has restated the financial statements of the
aforementioned quarters to correct the amount of revenue previously reported in
those quarters.
RESULTS OF OPERATIONS
Three-Month Period Ended June 30, 2000 As Compared
With The Three-Month Period Ended June 30, 1999
Net Revenues
Net revenues for the three-month period ended June 30, 2000 ("Q2 00") were
$4,399,974 as compared with $4,077,304 for the three-month period ended June 30,
1999 ("Q2 99"), an increase of $322,670 or 8%. The increase in sales is
primarily attributed to OEM/Licensing and Professional Product customers.
Specifically, net revenues in Q2 00 to OEM/Licensing customers increased 81% to
$1,145,000 in Q2 00 from $631,000 in Q2 99. Net Revenues in Q2 00 to
Professional Product customers increased 42% to $868,000 from $611,000 in Q2 99.
The increases in net revenues were offset by a decrease in the consumer video
conversion product line of 16% to $2,386,000 in Q2 00 from $2,835,000 in Q2 99.
As referenced herein, a restatement of Q2 99 financial information resulted in a
$363,000 reduction to net revenues for 1999 comparative purposes.
Sales Backlog
As of June 30, 2000, the Company had a sales order backlog of approximately
$510,000.
Cost of Goods Sold
Cost of goods sold were $3,334,953 or 76% of net revenues, for the three-
month period ended June 30, 2000, as compared with $2,128,033 or 52% of net
revenues, for the three-month period ended June 30, 1999, an increase in
absolute dollars of $1,206,920 or 55%. The Company's gross profit margins for Q2
00 and Q2 99 were 24% and 48%, respectively. The decrease in Q2 00 gross margin
is primarily due to a $603,000 writedown of inventory as a result of a physical
inventory taken at the end of Q2 00. The Company also provided for additional
reserves of $207,000 for liquidation of the InVideo Conferencing product line,
the repair of returned products, and potential inventory obsolescence in Q2 00.
compared to $0 in Q2 99. Additionally, the Company is selling slow moving
inventory at cost, which has generated $400,000 in cash but has eroded margins
on the remainder of the consumer product line. As referenced herein, a
restatement of Q2 99 financial information resulted in a $363,000 decrease to
cost of goods sold for 1999 comparative purposes.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $959,067 or 22% of net
revenues, for the three-month period ended June 30, 2000, as compared with
$996,789 or 24% of net revenues, for the three-month period ended June 30,
1999, a decrease of $37,722.
General and Administrative Expenses
General and administrative expenses for the three-month period ended June
30, 2000 were $706,465 or 16% of net revenues, as compared with $427,228 or 10%
of net revenues for the three-month period ended June 30, 1999, an increase of
$279,237 or 65%. The increase in absolute dollars is due primarily to increases
in payroll (approximately $68,000), accounts receivable reserves (approximately
$73,000), consulting fees (approximately $66,000), investor relations
(approximately $28,000) and banking fees (approximately $24,000).
Research and Development Expenses
Research and development expenses for the three-month period ended June 30,
2000 were $285,359, or 6% of net revenues, as compared to $270,325, or 7% of net
revenues, for three-month period ended June 30, 1999, an increase of $15,034 or
6%.
Interest Expense, Net
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Net interest expense for the three-month period ended June 30, 2000 was
$34,312, or 1% of net revenues, as compared to $145,496, or 4% of Net revenues,
for the three-month period ended June 30, 1999, a decrease of $111,184, or 76%.
The decrease is primarily attributable to decreases in interest paying
obligations for the quarter ended June 30, 2000 as compared to the quarter ended
June 30, 1999.
Other Income
Other Income for the three-month period ended June 30, 2000 was $43,211 as
compared to $79,115, for the three-month period ended June 30, 1999, a decrease
of $35,904.
Net Loss
For the quarter ended June 30, 2000, the Company reported a net loss of
($1,112,178), or ($0.04) per share, as compared to net income of $54,692, or
$0.00 per share, for the quarter ended June 30, 1999. The net loss is primarily
due to the physical inventory adjustment and increased inventory reserves.
RESULTS OF OPERATIONS
Six-Month Period Ended June 30, 2000 As Compared
With The Six-Month Period Ended June 30, 1999
Net Revenues
Net revenues for the six-month period ended June 30, 2000 ("Q2 00") were
$8,014,244 as compared with $9,144,383 for the six-month period ended June 30,
1999 ("Q2 99"), a decrease of $1,130,139 or 12%. The decrease in sales is
primarily attributed to the discontinuation of sales to certain resellers of the
Company's consumer video conversion product line. Net sales to consumer video
conversion customers through Q2 00 were $4,793,000, compared to $6,801,000 for
the same period in 1999. These sales decreased 30% or $2,008,000. The decrease
was offset by an increase in sales to the OEM/Licensing and Professional Product
customers. Specifically, net revenues through Q2 00 to the Company's
OEM/Licensing customers increased 28% to $1,676,000 from $1,308,000 for the same
period in 1999. Net Revenues through Q2 00 to Professional Product customers
increased 49% to $1,544,000 from $1,035,000 through Q2 99.
Cost of Goods Sold
Cost of goods sold were $5,664,585 or 71% of net revenues, for the six-
month period ended June 30, 2000, as compared with $5,065,167 or 55% of net
revenues, for the six-month period ended June 30, 1999, an increase in absolute
dollars of $599,418 or 12%. The Company's gross profit margins through Q2 00 and
Q2 99 were 29% and 45%, respectively. The decrease in gross margins is due
principally to a $603,000 writedown of inventory as a result of a physical
inventory taken at the end of Q2 00.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $1,986,844 or 25% of net
revenues, for the six-month period ended June 30, 2000, as compared with
$2,020,484 or 22% of net revenues, for the six-month period ended June 30, 1999,
a decrease of $33,640.
General and Administrative Expenses
General and administrative expenses for the six-month period ended June 30,
2000 were $1,853,639 or 23% of net revenues, as compared with $781,170 or 9% of
net revenues for the six-month period ended June 30, 1999, an increase of
$1,072,469 or 137%. The increase in absolute dollars is due primarily to
increases in accounting fees (approximately $302,000) and legal fees
(approximately $292,000) in conjunction with the completion of the 1999 annual
audit and review of
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accounting practices and the special investigation conducted by the Board of
Directors with respect to the financial controls of the Company, combined with
increases in payroll (approximately $122,000), accounts receivable reserves
(approximately $118,000), consulting fees (approximately $97,000), investor
relations (approximately $48,000) and banking fees (approximately $24,000).
Research and Development Expenses
Research and development expenses for the six-month period ended June 30,
2000 were $545,187, or 7% of net revenues, as compared to $762,806, or 7% of net
revenues, for six-month period ended June 30, 1999, a decrease of $217,619 or
29%.
Interest Expense, Net
Net interest expense for the six-month period ended June 30, 2000 was
$54,078, or 1% of net revenues, as compared to $166,861, or 2% of net revenues,
for the six-month period ended June 30, 1999, a decrease of $112,783, or 68%.
The decrease is primarily attributable to decreases in interest paying
obligations for the quarter ended June 30, 2000 as compared to the quarter ended
June 30, 1999.
Other Income
Other Income for the six-month period ended June 30, 2000 was $53,611 as
compared to $83,013, for the six-month period ended June 30, 1999, a decrease of
$29,402.
Net Loss
For the six-month period ended June 30, 2000, the Company reported a net
loss of ($2,691,549), or ($0.11) per share, as compared to net income of
$157,682, or $0.01 per share, for the six-month period ended June 30, 1999. The
net loss is primarily due to the physical inventory variance of consigned goods,
increased inventory reserves, discontinuation of sales to certain resellers,
one-time restructuring expenses for the closure of the Morgan Hill, CA operation
and significant non-recurring accounting and legal fees pursuant to the 1999
annual audit and related review of accounting practices and the special
investigation of the Board of Directors.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided for (used in) operating activities for the six-month
periods ended June 30, 2000 and 1999 was ($2,377,767) and $95,012, respectively.
In the year 2000 period, net cash used in operating activities consisted
primarily of increases in inventory of $281,064, prepaid expenses and other
assets of $82,805,and accounts receivable of $3,518, a decrease in accrued
liabilities of $59,075 and a net loss of $2,691,549. This was offset by an
increase in accounts payable of $123,960 and depreciation and amortization
(non-cash charge) of $450,673. As of June 30, 2000 and 1999, accounts receivable
from a major distributor represented approximately 26% and 35%, respectively of
total accounts receivable. In Q2 00, the Company continued to record provisions
for potential future uncollectable accounts and maintained reserves for
potential product returns.
In the six months ended June 30, 1999, net cash used in operations
consisted primarily of an increase in accounts receivable of $498,993 and
prepaid expense of $60,483 and a decrease in accrued liabilities of $1,162,850.
This was offset by a decrease in inventory of $1,326,414, an increase in
accounts payable of 148,447, depreciation and amortization (non-cash charge) of
$273,226, and net income of $157,682.
Net cash used in investing activities for the six-month periods ended June
30, 2000 and June 30,1999 was ($1,303,917) and ($1,129,167) respectively. In
2000 and 1999 period, cash used in investing activities was principally for the
purchase of property and equipment and capitalized software development costs.
Additionally, Standby Letters of Credit are currently utilized to establish
credit facilities for a manufacturer of the companies products.
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Net cash provided by (used in) financing activities for the six-month
periods ended June 30, 2000 and 1999 was $1,029,089 and ($57,096), respectively.
In the 2000 period, the Company received $2,352,862 in net proceeds from the
exercise of common stock options and warrants and from private offerings. The
Company's financing proceeds were offset by payments on notes payable and
capital lease obligations. In the same period in 1999, the Company received
$539,103 in net proceeds from private offerings of common stock, and $611,847 in
net proceeds from the factoring of accounts receivable. The Company's financing
proceeds were offset by payments on notes payable, accounts receivable financing
and capital lease obligations.
As of June 30, 2000, the Company had working capital of $4,711,729, as
compared to $5,632,771 at December 31, 1999, a decrease of $921,042. The
Company's cash position at June 30, 2000 was $1,083,921, a decrease of
$2,883,239 over cash and equivalents at December 31, 1999. As noted herein, the
Company has disclosed a potential judgement or settlement with CRA Associates
that will have an impact on the cash balance of the Company. Please reference
the following disclosure under PART II - OTHER INFORMATION, ITEM 1., LEGAL
PROCEEDINGS.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued a proposed interpretive release, Stock Compensation-
Interpretation of APB Opinion 25 ("Interpretation"). The Interpretation will
provide accounting guidance on several issues that are not specifically
addressed in Accounting Principles Board ("APB") No. 25, "Accounting for Stock
Issued to Employees. Of the many questions addressed in the Interpretation, the
most significant is the clarification of the definition of the term "employee"
for the purposes of applying the opinion and the accounting for options that
have been repriced.
The Interpretation is generally effective beginning July 1, 2000. The
Interpretation applies prospectively at the date for repricings that occurs
after December 15, 1998. It also applies prospectively on July 1, 2000 to new
awards granted after December 15, 1998 for purposes of applying the definition
of "employee".
In December 1999, the Securities and Exchange Commission (the "Commission")
published Staff Accounting Bulleting ("SAB") No. 101, "Revenue Recognition",
which provides guidance for applying generally accepted accounting principles to
revenue recognition in financial statements filed with the Commission, including
income statement presentation and disclosure. As originally issued SAB 101 was
to be applied no later than the first quarter of the fiscal year beginning after
December 15, 1999. However, the Commission has delayed the effective date of
the SAB for companies with fiscal years beginning between December 16, 1999 and
March 15, 2000. For such entities, the mandatory implementation date may now be
no later than the fourth quarter of the fiscal year beginning after December 15,
1999.
The company is in the process of reviewing and continuing its evaluation of the
pronouncements detailed above to determine the potential impact on the financial
statements of the company.
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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 involves risks and uncertainties. In particular, statements contained in
this Form 10-KSB/A 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.
16
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of it's Officers and Directors have been named as
defendants in two alleged class-actions pending in United States District Court
for the District of Massachusetts, on or about November 9, 1999, on behalf of
Frank E. Ridel and other currently-unnamed person(s) who are alleged to have
purchased shares of our common stock from July 17, 1997 to February 19, 1999.
Consolidated amended complaints have been filed in each alleged class action.
The first complaint alleges a claim of shareholders who purchased Focus shares
during the July 17,1997 to February, 1999 period. The second complaint alleges a
class of shareholders who purchased shares between November 15, 1999 and March
1, 2000. The first complaint was initially filed in November of 1999: The second
complaint was initially filed in March of 2000. Both complaints purport to
allege violations of the federal securities laws.
The Company was named as a defendant in a lawsuit filed in U.S. District
Court for the District of Texas, on or about November 1, 1999, by CRA
Associates, Inc. The complaint alleged that the company breached a contract,
committed fraud, and engaged in misrepresentation and deceptive trade practices.
In May, a verdict was returned against Focus which require Focus to pay to CRA
approximately $1.8m. Subsequent filed motions are seeking to increase this
amount by adding pre- and post-judgement interest, as well as attorney's fees.
The Company has since filed post-judgement motions and both parties have agreed
to mediation, which will occur in late August. It is our expectation that the
court will refrain from rendering judgement on the verdict pending completion of
mediation. In the event that mediation is unsuccessful and judgement is against
Focus, then the Company intends to contest the verdict through an appeal.
From time to time, the Company is party to certain other claims and legal
proceedings that arise in the ordinary course of business of which, in the
opinion of management, has a material adverse effect on the Company's financial
position or results of operation.
ITEM 2. CHANGES IN SECURITIES
On June 9, 2000, the Company entered into a financing agreement resulting
in $1,500,000 in gross proceeds from the sale of 1,400,000 shares of common
stock and the issuance of a warrant to purchase an additional 140,000 shares of
common stock in a private placement, to an unaffiliated accredited investor. The
warrant is exercisable until June 30, 2005 at a per-share exercise price of
$1.625. In addition, Union Atlantic received a warrant to purchase 45,000 shares
of common stock as compensation for brokering the private placement. The warrant
is exercisable until June 30, 2005 at a per-share exercise price of $1.625. The
Company intends to file a registration statement under the Securities Act of
1933 for the shares issued in connection with this transaction and for those to
be issued upon exercise of the warrants. The Company received proceeds from this
transaction on June 9, 2000. The fees and expenses associated with this offering
was $216,000 yielding net proceeds of $1,284,000.
No person acted as an underwriter with respect to this transaction. The
Company relied on Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), for the exemption from the registration requirements of the
Securities Act, since no public offering was involved.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. The following exhibits are filed herewith:
10.1 Consulting Agreement dated March 1, 2000 between the Company and
William B. Coldrick
10.2 Consulting Agreement dated May 1, 2000 between the Company and Thomas
L. Massie
10.3 Consulting Agreement dated May 1, 2000 between the Company and Gary M.
Cebula
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10.4 Separation Agreement dated May 1, 2000 between the Company and Thomas
L. Massie
10.5 Separation Agreement dated April 30, 2000 between the Company and Gary
M. Cebula
10.6 Separation Agreement dated July 10, 2000 between the Company and
J. Stephen Wood
10.7 Consulting Agreement dated July 10, 2000 between the Company and Red &
White Enterprises, Inc.
10.8 Private Equity Line of Credit Agreement dated July 28, 2000 between
the Company and Euston Investments Holdings Limited
10.9 Registration Rights Agreement dated June 9, 2000 between the investor
and the Company
10.10 Registration Rights Agreement dated July 28, 2000 between Euston
Investments Holdings Limited and the Company
10.11 Common Stock Warrant and Purchase Agreement dated June 9, 2000
11. Statement Re: Computation of Per Share Earnings
27. Financial data schedule
b. Reports on Form 8-K
The Company on March 2, 2000 filed a Form 8-K related to the period ending
December 31, 1999.
The Company did not file any reports on Form 8-K during the quarters
ended March 31 and June 30, 2000.
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 21, 2000 By: /s/ Brett A. Moyer
----------------------
Brett A. Moyer
Executive Vice President
& Chief Operating Officer
August 21, 2000 By: /s/ Richard A. Nardella
---------------------------
Richard A. Nardella
Principal Accounting Officer
18
