<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: September 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 September 30, 2000, there were outstanding 25,900,203 SHARES OF COMMON
STOCK, $.01 PAR VALUE PER SHARE.
<PAGE>
FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
September 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 September 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations
for the Three Months Ended September 30, 2000
and 1999 4
Consolidated Statements of Operations 5
for the Nine Months Ended September 30, 2000
and 1999
Statement of Changes in Equity for the Nine
Months Ended September 30, 2000 6
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000
and 1999 6
Notes to Consolidated Financial Statements 7-10
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 18
SIGNATURES 20
2
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,285,610 $ 3,736,517
Certificate of deposit 1,280,635 534,091
Accounts receivable, net of
allowances of $417,860 and
$1,402,176 at September 30, 2000 and
December 31, 1999, respectively 2,801,828 2,913,005
Inventories 1,983,662 3,588,702
Prepaid expenses and other current assets 340,474 240,732
------------ ------------
Total current assets 7,692,209 11,013,047
Property and equipment, net 781,342 968,594
Capitalized software development costs 3,147,890 2,122,450
Other assets, net 293,980 287,116
Goodwill, net 483,944 624,277
------------ ------------
Total assets $ 12,399,365 $ 15,015,484
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 1,006,258
Obligations under capital leases 46,337 129,451
Current portion of long-term debt 317,367 312,556
Accounts payable 2,767,497 3,413,285
Accrued liabilities 463,136 518,726
Accrued legal judgement expense 2,147,722 --
------------ ------------
Total current liabilities 5,742,059 5,380,276
Obligations under capital leases 190,469 202,002
Long-term debt, net of current portion 63,560 226,041
------------ ------------
Total liabilities 5,996,088 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,
26,350,203 and 24,504,203 shares
issued at September 30, 2000 and December 31,
1999, respectively 263,502 245,042
Additional paid-in capital 48,726,937 46,340,891
Accumulated deficit (41,887,032) (36,678,638)
Treasury stock at cost, 450,000 shares (700,130) (700,130)
------------ ------------
Total stockholders' equity 6,403,277 9,207,165
------------ ------------
Total liabilities and stockholders' equity $ 12,399,365 $ 15,015,484
============ ============
See accompanying notes to Unaudited Consolidated Financial Statements
3
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30, September 30,
2000 1999
----------- -----------
Net sales $ 4,116,181 $ 2,998,031
Licensing fees -- 200,000
----------- -----------
Net revenues $ 4,116,180 $ 3,198,031
Cost of goods sold 2,714,705 1,257,490
----------- -----------
Gross profit 1,401,476 1,940,541
----------- -----------
Operating expenses:
Sales, marketing and support 760,721 886,620
General and administrative 523,779 387,942
Research and development 212,757 305,762
Depreciation and amortization expense 282,753 144,638
----------- -----------
Total operating expenses 1,780,010 1,724,962
----------- -----------
(Loss)Income from operations (378,534) 215,579
Interest expense, net (3,628) (156,890)
Other income, net 13,038 82,670
Legal judgement Expense (CRA) (2,147,722) --
----------- -----------
(Loss)Income before income taxes (2,516,846) 141,359
Income tax expense -- --
----------- -----------
Net (Loss)Income $(2,516,846) $ 141,359
=========== ===========
Net (Loss)Income per common share
Basic $ (0.10) $ 0.01
=========== ===========
Diluted $ (0.10) $ 0.01
=========== ===========
Weighted average common shares outstanding
Basic 25,863,036 19,061,111
=========== ===========
Diluted 25,863,036 19,389,684
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
4
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
September 30, September 30,
2000 1999
------------- -------------
Net sales $12,130,425 $12,142,413
Licensing fees -- 200,000
----------- -----------
Net revenues $12,130,425 $12,342,413
Cost of goods sold 8,379,290 6,322,656
----------- -----------
Gross profit 3,751,135 6,019,757
----------- -----------
Operating expenses:
Sales, marketing and support 2,747,566 2,907,104
General and administrative 2,377,417 1,169,112
Research and development 757,943 1,068,568
Depreciation and amortization expense 733,426 417,864
Restructuring expense 202,252 --
----------- -----------
Total operating expenses 6,818,604 5,562,648
----------- -----------
(Loss)Income from operations (3,067,469) 457,109
Interest expense, net (57,706) (323,751)
Other income, net 66,649 165,683
Legal judgement expense (CRA) (2,147,722) --
----------- -----------
(Loss)Income before income taxes (5,206,248) 299,041
Income tax expense (2,146) --
----------- -----------
Net(Loss)Income $(5,208,394) $ 299,041
=========== ===========
Net (Loss)Income per common share
Basic $ (0.21) $ 0.02
=========== ===========
Diluted $ (0.21) $ 0.02
=========== ===========
Weighted average common shares outstanding
Basic 25,003,382 18,210,783
=========== ===========
Diluted 25,003,382 18,673,763
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
5
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FOCUS ENHANCEMENTS, INC.
STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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>
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 446,000 4,460 1,116,046 1,120,506
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
$216,000
Net loss (5,208,394) (5,208,394)
Balance at September 30, 2000 26,350,203 $ 263,502 $48,726,937 $(41,887,032) $(700,130) $6,403,277
========== =========== ============ ============= ========== ===========
</TABLE>
See accompanying notes to Unaudited Financial Statements
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(5,208,394) $ 299,041
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 733,426 417,864
Deferred Income 0 (84,212)
Amortization of discount on note payable 5,563 5,563
Increase in accrued interest on notes receivable,
common stock 0 (10,547)
Changes in operating assets and liabilities, net
of the effects of acquisition:
(Increase) decrease in accounts receivable 111,177 (957,528)
Decrease in securities available for sale -- 248,983
Decrease (increase) in inventories 1,605,040 2,433,675
Decrease (increase) in prepaid expenses and other assets (1,132,034) (1,356,551)
(Decrease) increase in accounts payable (551,530) (254,510)
(Decrease) increase in accrued liabilities 2,092,132 (1,416,474)
----------- -----------
Net cash used (Provided)in operating activities (2,305,183) (674,696)
----------- -----------
Cash flows from investing activities:
Decrease (increase) in certificates of deposit (746,544) 113,067
Purchase of property and equipment (405,851) (484,026)
----------- -----------
Net cash used in investing activities (1,152,395) (370,959)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (1,100,517) (1,447,057)
Payments under capital lease obligations (252,318) (73,963)
Payments on long-term debt . -- (209,733)
Net proceeds from accounts receivable factoring -- 451,730
Net proceeds from private offerings of common stock 1,284,000 1,784,588
Net proceeds from exercise of common stock options and warrants 1,120,506 163,756
----------- -----------
Net cash provided by financing activities 1,051,672 669,321
----------- -----------
Net increase in cash and cash equivalents (2,450,907) (376,334)
Cash and cash equivalents at beginning of period 3,736,517 1,128,380
----------- -----------
Cash and cash equivalents at end of period $ 1,285,610 $ 752,046
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 54,078 $ 364,091
Income taxes paid
</TABLE>
6
<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 September 30, 2000 and for the three and nine-month periods
ended September 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 nine month periods ended September 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
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. This was announced in the June 30,2000 10QSB filed August
21,2000.
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.
to be consistent with the quarterly financial statement presentation in 2000.
The items in the financial statements that are affected by the restatement
are as follows:
(In Thousands)
6/30/99 6/30/99 9/30/99 9/30/99
Previously As Previously As
Reported Restated Reported Restated
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
The Company is in the process of amending the Form 10QSB for each of these
quarters to reflect this restatement
7
<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 nine months ended
September 30, 2000 and 1999, options and warrants applicable to 2,054,069 shares
and 4,261,221 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 nine-month period ended September 30, 2000
and 1999.
5. INVENTORIES
Inventories consist of the following:
September 30,2000 December 31,1999
----------------- ----------------
Finished goods $ 782,850 $2,377,709
Work In Process $ 19,067 $ 171,637
Raw Materials $1,181,745 $1,039,356
---------- ----------
$1,983,662 $3,588,702
========== ==========
6. 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 September 30, 2000 are as follows:
Year Ended 12/31/00 $317,367
Year Ended 12/31/01 63,560
--------
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 Agreement, 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.
8
<PAGE>
7. 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 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).
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.
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.
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 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.
9
<PAGE>
During the quarter ended September 30, 2000, the Company issued at various
times, 42,332 shares of common stock resulting from exercises of options
and warrants, receiving cash of approximately $423, and additional Paid-in
Capital of $51,222.
For the nine month period ended September 30, 2000, the Company issued at
various times, 446,000 shares of common stock resulting from exercises of
options and warrants, receiving cash of approximately $1,120,507. Additional
Paid-in Capital of 2,386,047($1,270,000 for the private placement and $1,116,047
from the exercise of stock options and warrants) for this period is net of
$245,440 of related legal expenses.
8. SEPARATION AGREEMENTS AND CONSULTING AGREEMENTS
On September 6,2000, Mr. Chris Ricci resigned from his position as Senior
Vice President, General Counsel and Secretary. Mr. Ricci's employment
agreement was terminated on that date and replaced with a new agreement
providing for his employment by Focus as a part-time consultant terminating
April 30, 2001, unless sooner terminated by both parties. The part-time
consulting agreement provides that Mr. Ricci shall continue to hold all of the
stock options previously granted to him and requires the acceleration of
vesting of all options held by Mr. Ricci so as to be immediately
exercisable if Mr. Ricci is terminated without cause during the term of the
contract.
9. 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.
CRA Litigation
On October 10, 2000, the court rendered a judgment on the verdict in favor
of CRA for actual damages, punitive damages, attorneys fees, costs and interest;
the judgment totaled approximately $2,000,000. Focus intends to file an
appropriate post-judgment motion requesting that this judgment be reduced
significantly, and will pursue an appeal to the United States Court of Appeals
for the Fifth Circuit in New Orleans, Louisiana. To suspend enforcement of the
judgment pending determination of its post-judgment motion and appeal, Focus is
required to post a bond in the approximate amount of $2.3 million (being the
approximate amount of the judgment plus 10% to cover interest and costs of CRA).
On October 27, 2000, Focus submitted a bond and filed its post-judgement motion.
In connection with this judgment, Focus has recorded a legal judgement expense
of approximately $2,147,000 in the period ended September 30, 2000.
10. SUBSEQUENT EVENTS
On October 26, 2000, in connection with the posting of a bond for the CRA
legal judgement, Focus borrowed approximately $2.3 million and issued a secured
promissory note in the principal amount of $2.3 million in favor of
Carl Berg, a shareholder and director of Videonics. In the event the
Focus/Videonics previously announced merger is not completed, the promissory
note can be called and become payable in full upon 90-days notice from Mr. Berg,
at his sole discretion. The promissory note is secured by a security
agreement in favor of Mr. Berg granting him a security interest in first
priory over substantially all of the assets of Focus. In the event that the
merger is not completed, there is no assurance that Mr. Berg will not seek
repayment of the promissory note.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-KSB/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 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 September 30, 2000 As Compared
With The Three-Month Period Ended September 30, 1999
Net Revenues
Net revenues for the three-month period ended September 30, 2000 ("Q3 00")
were $4,116,181 as compared with $3,198,031 for the three-month period ended
September 30, 1999 ("Q3 99"), an increase of $918,149 or 29%. The increase in
sales is primarily attributed to OEM/Licensing and Professional Product
customers. Specifically, net revenues in Q3 00 to OEM product sales increased
351% to $1,102,000 in Q3 00 from $229,000 in Q3 99. Net Revenues in Q3 00 to
Professional Product customers increased 93% to $1,111,000 from $576,000 in Q3
99. The increases in net revenues were offset by a decrease in the consumer
video conversion product line of 7% to $2,539,000 in Q3 00 from $2,722,000 in Q3
99. As referenced herein, a restatement of Q3 99 financial information resulted
in a $908,000 reduction to net revenues for 1999 comparative purposes.
11
<PAGE>
Sales Backlog
As of September 30, 2000, the Company had a sales order backlog of
approximately $646,000.
Cost of Goods Sold
Cost of goods sold were $2,714,705 or 65% of net revenues, for the three-
month period ended September 30, 2000, as compared with $1,257,490 or 39% of net
revenues, for the three-month period ended September 30, 1999, an increase in
absolute dollars of $1,457,215 or 116%. The Company's gross profit margins for
Q3 00 and Q3 99 were 35% and 61%, respectively. The decrease in Q3 00 gross
margin is primarily due to a $908,000 decrease to cost of goods sold for 1999
comparative purposes,no licensing revenue in Q3 00 and an increase in OEM chip
revenue in Q3 00.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $760,721 or 18% of net
revenues, for the three-month period ended September 30, 2000, as compared with
$886,620 or 28% of net revenues, for the three-month period ended September 30,
1999, a decrease of $125,899. This was primarily due to a diminishment of
expenditures for mail order advertising and direct mail advertising.
General and Administrative Expenses
General and administrative expenses for the three-month period ended
September 30, 2000 were $523,779 or 13% of net revenues, as compared with
$387,942 or 12% of net revenues for the three-month period ended September 30,
1999, an increase of $135,837 or 35%. The increase in absolute dollars is due
primarily to increases in legal fees (approximately $87,000), consulting fees
(approximately $73,000), and banking fees (approximately $11,000). Payroll was
reduced by $44,000.
Research and Development Expenses
Research and development expenses for the three-month period ended
September 30, 2000 were $212,757, or 5% of net revenues, as compared to
$305,762, or 10% of net revenues, for three-month period ended September 30,
1999, a decrease of $93,005 or 30%.
Interest Expense, Net
Net interest expense for the three-month period ended September 30, 2000
was $3,628, or 0% of net revenues, as compared to $156,890, or 5% of net
revenues, for the three-month period ended September 30, 1999, a decrease of
$153,262, or 98%. The decrease is primarily attributable to decreases in
interest paying obligations for the quarter ended September 30, 2000 as compared
to the quarter ended September 30, 1999.
Other Income
Other Income for the three-month period ended September 30, 2000 was
$13,038 as compared to $82,760, for the three-month period ended September 30,
1999, a decrease of $69,632.
Legal Judgement Expense
On October 27, 2000, Focus submitted a bond and filed its post-judgement
motion in regard to the CRA litigation. In connection with this judgment,
Focus has recorded a Legal judgement expense of approximately $2,147,000 in the
period ended September 30, 2000.
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Net Loss
For the quarter ended September 30, 2000, the Company reported a net loss
of ($2,516,846), or ($0.10) per share, as compared to net income of $141,359, or
$0.01 per share, for the quarter ended September 30, 1999. The net loss is
primarily due to the physical inventory adjustment, increased inventory reserves
and the recording of the CRA legal judgement expense of approximately
$2,147,000.
RESULTS OF OPERATIONS
Nine-Month Period Ended September 30, 2000 As Compared
With The Nine-Month Period Ended September 30, 1999
Net Revenues
Net revenues for the nine-month period ended September 30, 2000 ("Q3 00")
were $12,130,425 as compared with $12,342,413 for the nine-month period ended
September 30, 1999 ("Q3 99"), a decrease of $211,988 or 2%. 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 Q3 00 were $6,117,000, compared to
$9,596,000 for the same period in 1999. These sales decreased 36% or $3,478,000.
The decrease was offset by an increase in sales to the OEM/Licensing and
Professional Product customers. Specifically, net revenues through Q3 00 to the
Company's OEM/Licensing customers increased 66% to $2,498,000 from $1,501,000
for the same period in 1999. Net Revenues through Q3 00 to Professional Product
customers increased 54% to $2,410,000 from $1,568,000 through Q3 99.
Cost of Goods Sold
Cost of goods sold were $8,379,290 or 69% of net revenues, for the nine-
month period ended September 30, 2000, as compared with $6,322,656 or 51% of net
revenues, for the nine-month period ended September 30, 1999, an increase in
absolute dollars of $2,056,634 or 33%. The Company's gross profit margins
through Q3 00 and Q3 99 were 31% and 49%, 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. 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. In Q3 a
$180,000 writedown of inventory resulting from obsolesence and an increase of
marketing development funds of $25,000 occurred. As referenced herein, a
restatement of Q3 99 financial information resulted in a $908,000 decrease to
cost of goods sold for 1999 comparative purposes.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $2,747,566 or 23% of net
revenues, for the nine-month period ended September 30, 2000, as compared with
$2,907,104 or 24% of net revenues, for the nine-month period ended September 30,
1999, a decrease of $159,538.This decrease was due primarily to a reduction in
marketing expenditures pertaining to direct mail and mail order advertising.
General and Administrative Expenses
General and administrative expenses for the nine-month period ended
September 30, 2000 were $2,377,417 or 20% of net revenues, as compared with
$1,169,112 or 9% of net revenues for the nine-month period ended September 30,
1999, an increase of $1,208,305 or 103%. 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
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audit and review of 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 $78,000), accounts receivable
reserves (approximately $118,000), consulting fees (approximately $170,000),
investor relations (approximately $59,000) and banking fees (approximately
$24,000).
Research and Development Expenses
Research and development expenses for the nine-month period ended September
30, 2000 were $757,943, or 6% of net revenues, as compared to $1,068,568, or 9%
of net revenues, for nine-month period ended September 30, 1999, a decrease of
$310,625 or 29%.This reduction was promarily due to an increased capitalization
rate during Q1 00 and Q2 00 as well as a reduction in labor expense due to a
shortage of engineers in the tight northwest labor market.
Restructuring Expense
During Q2 00 the company successfully completed the closing 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 in Q2 00.
Interest Expense, Net
Net interest expense for the nine-month period ended September 30, 2000 was
$57,706, or 1% of net revenues, as compared to $323,751, or 3% of net revenues,
for the nine-month period ended September 30, 1999, a decrease of $266,045, or
82%. The decrease is primarily attributable to decreases in interest paying
obligations for the quarter ended September 30, 2000 as compared to the quarter
ended September 30, 1999.
Other Income
Other Income for the nine-month period ended September 30, 2000 was $57,706
as compared to $165,683, for the nine-month period ended September 30, 1999, a
decrease of $99,034. This was primarily due to a decrease in cash availability
for deposit purposes that would generate interest income.
Judgement Expense
On October 27, 2000, Focus submitted a bond and filed its post-judgement
motion in regard to the CRA litigation. In connection with this judgment, Focus
has recorded an expense of approximately $2,147,000 in the period ended
September 30, 2000.
Net Loss
For the nine-month period ended September 30, 2000, the Company reported a
net loss of ($5,208,394), or ($0.21) per share, as compared to net income of
$299,041, or $0.02 per share, for the nine-month period ended September 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. The CRA legal judgement
accounted for $2,147,000 of the to date loss.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided for (used in) operating activities for the nine-month
periods ended September 30, 2000 and 1999 was ($2,350,183) and $674,696,
respectively. In the year 2000 period, net cash used in operating activities
consisted primarily of increases in prepaid expenses and other assets of
$1,132,034 and a decrease in accounts payable of $551,530. This was offset by
decreases in inventory of $1,658,803 and accounts receivable of $111,177 and an
increase in accrued liabilities of $2,092,132 and depreciation and
amortization(non-cash charge) of $733,426. As of September 30, 2000 and 1999,
accounts receivable from a major distributor represented approximately 24% and
26%, respectively of total accounts receivable. In Q3 00, the Company continued
to record provisions for potential future uncollectable accounts and maintained
reserves for potential product returns.
In the nine months ended September 30, 1999, net cash used in operations
consisted primarily of an increase in accounts receivable of $957,528 and
prepaid expense of $1,356,551 and a decrease in accrued liabilities of
$1,416,474 and accounts payable of $254,510. This was offset by a decrease in
inventory of $2,433,675 and securities available for sale of $248,983 and
depreciation and amortization (non-cash charge) of $417,864, and net income of
$299,041.
Net cash used in investing activities for the nine-month periods ended
September 30, 2000 and September 30,1999 was ($1,152,395) and ($370,959)
respectively. In 2000 and 1999 period, cash used in investing activities was
principally for the purchase of property and equipment. Additionally, Standby
Letters of Credit are currently utilized to establish credit facilities for a
manufacturer of the companies products.
Net cash provided by (used in) financing activities for the nine-month
periods ended September 30, 2000 and 1999 was $1,051,671 and $669,321,
respectively. In the 2000 period, the Company received $2,404,506 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 $1,948,344 in net proceeds from private offerings of common stock, and
$451,730 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 September 30, 2000, the Company had working capital of $1,950,150, as
compared to $5,632,771 at December 31, 1999, a decrease of $3,682,621. The
Company's cash position at September 30, 2000 was $1,285,610, a decrease of
$2,450,907 over cash and equivalents at December 31, 1999. As noted herein, the
Company has disclosed a judgement in the litigation with CRA that will have a
significant impact on the cash requirements 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.
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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.
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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Class Action Suits
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 Defendants have moved to
dismiss the amended complaint in the Ridel actions, and are in process of moving
to dismiss the amended complaint in the James actions,for,inter alia failure to
plead with the specificity required both by rule 9(b) of the Federal Rules of
Civil Procedure, and the Private Securities Litigation Reform Act of 1995.
CRA Systems, Inc.
In 1996 CRA Systems, Inc., a Texas corporation, and Focus entered into an
agreement, the terms and nature of which were subsequently disputed by the
parties. Focus contended the transaction was simply a sale of inventory for
which Focus was never paid. CRA contended otherwise. CRA brought suit against
Focus for breach of contract contending that Focus grossly exaggerated the
demand for the product, and the margin of profit which was available to CRA
regarding this project. CRA sought to recover out-of-pocket losses exceeding
$100,000, and lost profits of $400,000 to $1,000,000. A jury trial in May 2000
in federal district court in Waco, Texas, resulted in a verdict in favor of CRA
for $848,000 actual damages and 1,000,000 punitive damages. On October 10, 2000,
the court rendered a judgment on the verdict in favor of CRA for actual damages,
punitive damages, attorneys fees, costs and interest; the judgment totaled
approximately $2,000,000. Focus intends to file an appropriate post-judgment
motion requesting that this judgment be reduced significantly, and will pursue
an appeal to the United States Court of Appeals for the Fifth Circuit in New
Orleans, Louisiana. To suspend enforcement of the judgment pending determination
of its post-judgment motion and appeal, Focus is required to post a bond in the
approximate amount of $2.3 million (being the approximate amount of the judgment
plus 10% to cover interest and costs of CRA).
On October 27, 2000, Focus submitted a bond and filed its post-judgement
motion. In connection with this judgment, Focus has recorded an expense of
approximately $2,147,000. in the period ended September 30, 2000.
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
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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.
During the month of September,2000, 42,332 shares of stock available to
current and former employees thru their stock option plan were exercised for a
share price of $1.22 resulting in $51,221 of additional paid in Capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
None
ITEM 5. OTHER INFORMATION/SUBSEQUENT EVENTS
On October 30, 2000 the Company filed an S-4 Registration Statement with
the Securities and Exchange Commission relating to securities of the Registrant
exchangeable for shares of common stock of Videonics, Inc., a California
corporation, no par value, in the proposed merger of Videonics with and into a
wholly-owned subsidiary of the Registrant.
On October 26, 2000, in connection with the posting of a bond for the CRA
legal judgement, Focus borrowed approximately $2.3 million and issued a secured
promissory note in the principal amount of $2.3 million in favor of Carl Berg, a
shareholder and director of Videonics. In the event the Focus/Videonics
previously announced merger is not completed, the promissory note can be called
and become payable in full upon 90-days notice from Mr. Berg, at his sole
discretion. The promissory note is secured by a security agreement in favor of
Mr. Berg granting him a security interest in first priory over substantially all
of the assets of Focus. In the event that the merger is not completed, there is
no assurance that Mr. Berg will not seek repayment of the promissory note.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
11.0 Statement Re: Computation of Per Share Earnings
27.0 Financial data schedule
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarters ended
March 31 and June 30, 2000.
The Company filed an 8k on October 31,2000 to announce the issuance of a
secured promissory note in the principal amount of $2,362,494 inorder to
collateralize a $2.3 million bond to be posted in connection with Focus'
litigation with CRA Systems Inc. Focus also announced that it had submitted
a supersedeas bond in the Federal District Court of Waco Texas to suspend
the enforcement of a $1.8 million judgement in favor of CRA Systems, Inc.
The Company filed an 8k/A on November 2,2000 to attach additional exhibits
to the previously filed Form 8K, filed on October 31, 2000.
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SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOCUS ENHANCEMENTS, INC.
August 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
20
