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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 1-11860
FOCUS Enhancements, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 04-3144936
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1370 Dell Ave
Campbell, CA 95008
(Address of Principal Executive Offices)
(408) 866-8300
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of Act:
Title of Each Class
-------------------
Common Stock, $.01 par value
Name of Exchange on which Registered
------------------------------------
Nasdaq
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such 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: |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes: |_| No: |X|
Based on the closing sales price as of June 30, 2003 (the last business day
of the registrant's most recently completed second quarter), the aggregate
market value of the voting stock held by non-affiliates of the registrant was
approximately $44,224,443.
As of March 10, 2004, there were 43,177,902 shares of common stock
outstanding.
Document Incorporated by Reference: None.
Part I
Item 1. Description of Business
Forward Looking Statements
Some of the statements contained or incorporated by reference in this Report,
including those relating to our strategy and other statements that are
predictive in nature, that depend upon or refer to future events or conditions,
or that include words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates" and similar expressions, are forward-looking statements
within the meaning of Section 21E of the Exchange Act. These statements are not
historical facts but instead represent only the Firm's expectations, estimates
and projections regarding future events. These statements are not guarantees of
future performance and involve certain risks and uncertainties that are
difficult to predict, which may include, but are not limited to, the factors
discussed in "Risk Factors" found elsewhere in this Report. The nature of our
business makes predicting the future trends of revenues difficult. Caution
should be used when extrapolating historical results to future periods.
Our actual results and financial condition may differ, perhaps materially, from
the anticipated results and financial condition in any such forward-looking
statements and, accordingly, readers are cautioned not to place undue reliance
on such statements. We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
General
Incorporated in 1992, we develop and market proprietary video technology in
two areas: semiconductors and video systems. We market our products globally to
OEM Manufacturers, and dealers and distributors in the consumer and professional
channels. Our semiconductor products include several series of Application
Specific Integrated Circuit (ASICs) that process digital and analog video to be
used with televisions, computer motherboards, graphics cards, video conferencing
systems, Internet TV, media center and interactive TV applications. We market
our ASICs through semiconductor distribution channels. Our system products are
designed to provide solutions in PC-to-TV scan conversion, video presentation,
digital-video conversion, video production and home theater markets. We market
our system products through both consumer and professional channels. Our system
products include video scan converters, video mixers, character generators, and
video processors.
Since our inception, we have emphasized gaining market awareness for our
products and increasing our intellectual property through both internal market
and product development as well as through acquisition. In September of 1996, we
acquired TView, Inc., a developer of PC-to-TV video conversion semiconductor
technology. We believe the acquisition was a strategic milestone in our
transition to the video convergence market. In July of 1998 we acquired PC Video
Conversion, Inc., a manufacturer of professional high-end video conversion
products. We later restructured this entity into a Professional Products
Research & Development group and consolidated its operations into our corporate
headquarters.
Our PC-to-TV technology provides sharp, flicker-free, computer-generated
images on televisions for multimedia/business presentations, classroom/training
sessions, game playing and Internet browsing.
In January of 2001, we completed our merger with Videonics, Inc.
(previously NASDAQ: VDNX). Videonics, a leading designer of affordable,
high-quality, digital video post-production equipment, developed and marketed
products for the expanding markets of Internet production and streaming, desktop
video editing and video presentations. Following the merger, we have taken
advantage of the complementary strategic fit of the businesses to build
attractively priced digital video solutions for an expanded customer base.
After the merger, we put in place a new management team and executed a
restructuring plan, which has significantly reduced our post-merger staffing in
the areas of operations, marketing, customer support and finance. In September
2002, we closed our Chelmsford facility and Brett Moyer, our former Chief
Operating Officer moved from Chelmsford to Campbell, California to accept the
role as Focus' President and Chief Executive Officer.
On January 28, 2004, we announced that we had entered into an Agreement and
Plan of Reorganization (pursuant to Section 368(a)(1)(C) of the Internal Revenue
Code) to acquire substantially all the assets and assume certain liabilities of
Visual Circuits Corporation (Visual Circuits), located in Minneapolis,
Minnesota, solely in exchange for 3,805,453 shares of our voting common stock,
subject to certain adjustments. Founded in 1991, Visual Circuits is a leading
manufacturer and developer of integrated hardware, software and network products
that manage, schedule, distribute, store and present digital video in
commercial-market media applications. Visual Circuits' products are found
worldwide in retail, entertainment, education and healthcare facilities and
range from circuit boards to standard and high-definition network-storage media
2
appliances. Its products are sold primarily through system integrators and
commercial AV dealers. Visual Circuits' products are designed to serve both Pro
AV and IT requirements. The acquisition is subject to the approval of Visual
Circuits' shareholders. The acquisition is anticipated to close by April 30,
2004, and will require approval and a declaration of effectiveness by the SEC of
an S-4 registration statement covering the FOCUS Enhancements voting common
shares to be issued to Visual Circuits.
On March 2, 2004 we announced that we had completed the acquisition of COMO
Computer & Motion GmbH (COMO), located in Kiel, Germany, through the issuance of
approximately 795,000 shares of the our common stock. We may also issue an
additional approximately 46,000 shares of our common stock, to COMO's
shareholders in the event certain conditions are met at the end of fiscal 2004
and fiscal 2005. Founded in 1990, COMO manufactures and distributes digital
video solutions. COMO's key products are Digital Media Management Server
Systems, Hard Disk Video Recorder, Videomixer PCI Boards, and Videosignal
Transcoder. COMO products are sold worldwide and can be found in Broadcast and
Industrial Applications.
Our executive offices are located at 1370 Dell Avenue, Campbell, CA
95008-6604 and our Semiconductor Group is located at 22867 Northwest Bennett
Rd., Hillsboro, Oregon 97124. Focus' general telephone number is (408) 866-8300,
and our Worldwide Web address is http://www.Focusinfo.com. Information contained
on the Website is not part of this document.
Business Strategy
In 2003, we continued to concentrate on the Semiconductor and System
product groups. ASIC chip products are targeted for the scan conversion,
commercial television, video conferencing, media gateway and set top boxes for
the cable, Internet appliance, gaming, and home gateway industries. These are
industries that require the best video conversion technology available in the
market. We continue to design complete products for the professional audio video
and home theater markets using our proprietary software and ASIC designs to
deliver feature rich products to the market.
During the years ended December 31, 2002 and 2001, the Company only had
operations in the United States. During 2003, we established a semiconductor
sales office in Taiwan, with a total of two employees. Property plant and
equipment purchases to date have been insignificant. All orders taken by our
Taiwan sales office are approved by our U.S. headquarters and shipped from the
U.S.
The following table summarizes revenue by geographic area (in thousands):
2003 2002 2001
------- ------- -------
United States.................................. $21,066 $12,828 $18,170
Americas (excluding the United States)......... 208 288 837
Europe......................................... 1,745 1,513 1,323
Asia........................................... 3,556 2,683 2,978
------- ------- -------
Total..................................... $26,575 $17,312 $23,308
======= ======= =======
Our Products
We market two distinctive product lines: semiconductors and video system
products. Our system products (professional and consumer) target video
production and home entertainment and our semiconductor products target the
video convergence market.
Semiconductor Products
Our ASIC (Application Specific Integrated Circuit) chips are custom
designed for a specific application rather than a general-purpose chip like a
microprocessor. The use of ASIC chips improves performance over general-purpose
CPUs, because the chips are "hardwired" to do a specific job. Our products
provide solutions for customers who need high quality digital images on a
television screen. The PC-to-TV video convergence market exists as a result of
incompatibility between a PC's progressive scan image and the TV's interlace
image. Our ASIC products include the FS400, FS450, FS453/4 and FS460 series used
for scaling, mixing, blending, scan conversion, Internet TV and interactive TV
applications. These chips, due to their features and applicability, are used in
many of the Company's consumer systems products. The following is a listing of
the many applications for our chips:
o Media Centers
o Gaming Consoles
3
o Graphic Design and Animation Hardware
o Information Appliances
o Interactive Home Entertainment
o Interactive Television
o PC Video Out (TV-Ready PC's)
o Point of Sales Terminals
o Seamless Switchers
o Set Top Boxes
o Teleconferencing Systems
o Television Broadcast and Video Design
o Video Kiosks
o Web Appliances
o Automotive Video
The wide expanse of applications for our semiconductor products provides us
with the opportunity to grow our business.
In early 1999, we introduced our fourth generation proprietary NTSC/PAL
digital video co-processor technology to designers of video and large display
monitor products. Our FS400 series of ASICs has patented designs that
dramatically improve video quality while reducing cost for the manufacturer. Our
consumer electronics product line marketed under the TView brand uses the FS400
ASIC chip. The chips are marketed to manufacturers of video-conferencing
equipment and commercial television OEMs.
We began shipping the FS450, an advanced PC-to-TV co-processor, to OEM
customers in May of 2000. The FS450 chip incorporates a broadcast quality
encoder and programmable, flat, artifact-free scaling and an advanced 2D-flicker
filter. The FS450 is targeted for Internet set-top boxes, Cable/DVD Player
set-top boxes, Internet appliances, graphic cards and laptops.
In May of 2001, we launched the FS460, our second ASIC chip co-developed
with Intel. This ASIC was designed for Multimedia Gateways and Interactive
Television applications. It allows our customers to build products that merge
computer generated graphics with up to two other independent video sources into
one television signal. This allows products with interactive buttons to overlay
video, for PIP (picture in picture) and Program guide information to
simultaneously exist on the video screen, or to play games while maintaining
internet access and monitoring video. The chip allows user interaction with
on-screen content for applications such as advanced interactive TV, web surfing,
online games and e-commerce. The chip supports the European MHP standard, and is
a cost-effective solution for use with Intel architecture. The FS460 complements
Intel's graphic systems and is supported by the Intel 810, 815 and certain
future graphic chip-sets and is compatible with Intel Celeron processors, Intel
Pentium III processors and Intel Pentium IV processors.
In August of 2002, we announced the FS454. The FS454 is the latest chip in
the series, and was designed for use in the Microsoft Xbox. Microsoft funded
$2.1 million for the development of the FS454. In July of 2003, we began
production shipments of the FS454 to Microsoft, just in time to meet the
Microsoft's Xbox peak production period (August - November). Although we will
continue shipments into first quarter of 2004, shipments will be at
significantly reduced levels when compared to the third and fourth quarters of
2003. In January 2004, we were informed by Microsoft that we should not expect
further orders for the FS454. Shipments of the FS454 in 2003, which were
primarily to Microsoft, represented 37% of the Company's total net revenues. In
addition to compatibility with the Microsoft Xbox, the FS454 has broad
applications in other products that need TV-Out, such as PC's, media centers and
media adaptors. The chip provides normal TV and HDTV outputs, has a small
footprint, and has low power consumption for notebook PC requirements.
During 2003, we have been developing UltraWide Band (UWB) technology for
use in transmitting wireless video. We are a founding member of the Multiband
OFDM Alliance (MBOA), which announced the formation of the MBOA Special Interest
Group (SIG) at the Intel Developer Forum on February 18, 2004. We intend to
develop chips and system products for this emerging market. During 2003,
approximately 37% of our total research and development expenses have been
invested in developing UWB technology. The Company anticipates that it will
continue to invest a significant amount of its research and development efforts
in UWB technology over the next two years. Based on its current development
activities, the Company anticipates its first UWB production chip in the second
half of 2005.
4
System Products
Professional Products
The professional product line provides a broad range of digital video
solutions for the specialized video consumer, videographer and broadcast
professional. Our product line includes products in the categories of Video
Acquisition, Processing and Conversion, and Display and Distribution -- typical
steps associated with video content production. Specific product functionality
includes, recording video to disk, character generating, digital video mixing,
digital video file conversion, and format/resolution scaling.
Video Acquisition. FireStoreTM, is the first direct to disk converter that
can format the DV video format into an instantly editable format for all major
editing programs and record this to a standard an IEEE-1394 computer hard drive
at the time of acquisition. During the 2003, we broadened the FireStore product
line. In August 2003, we introduced the camera -mounted FireStore FS-3, and the
FireStore DRDV-5000 variation, which we manufacture for JVC Corporation. In
September 2003 we acquired DVUnlimited, a small Hungarian company to assimilate
their digital video file conversion programs into the FireStore line, as a suite
of utility software.
The FireStore DR-DV5000 DV disk recorder was given the Vidy Award for Best
of Show at this year's National Association of Broadcasters (NAB) Expo from the
Videography Division of United Entertainment Media, which includes Videography,
DigitalTV, Government Video and Digital Cinema magazines.
Processing and Conversion. Post-acquisition intermediate steps in the video
production process are served by our MXPro family of digital video mixers and
our TitleMaker video titling products.
Display and Distribution. On the presentation side of the Video production
workflow, our CenterStage video processors bring high quality video to front or
rear-projection, plasma, CRT, and LCD displays used in today's home theaters and
professional presentation rooms. The CenterStage CS-1 received the Scaler Of The
Year Award from The Perfect Vision magazine based on its performance, innovation
and value. The CenterStage CS-HD received the EXCITE Award, given for Excellence
in Custom-Install Products by CustomRetailer magazine.
These products are sold through a network of national and international
distributors in more than 90 countries worldwide.
Consumer Products
TView, our consumer line of scan converters, builds on PC-to-TV convergence
technology. The TView products, which are sub-categorized Gold, Silver and Micro
for performance and description, turn any standard television into a large
screen computer display. The product line targets presenters, educators,
trainers and the rapidly expanding gamers market. The iTView Mac, targets the
Apple iMac and eMac, and is our latest product release for these channels. The
majority of the products in the consumer line integrate the core technology
provided by our FS400 family of Semiconductors. The TView Gold product accepts
computer desktop resolutions up to 1600x1280 at millions of colors on both
Window and Mac platforms. Much like the professional products, the TView line is
offered in multiple forms including a portable version for mobile users.
Research and Development
We continue to invest heavily in research and development. Of the $4.3
million invested on research and development in 2003, approximately 56% was in
ASIC chip development and support activities, with the remainder to support new
products for the professional and home theater markets.
Intellectual Property and Proprietary Rights
As of March 10, 2004, we held four patents and one pending application
(combining five previous provisional patent applications) in the United States.
Certain of these patents have also been filed and issued in countries outside
the United States. Historically, we have relied principally upon a combination
of copyrights, common law trademarks and trade secret laws to protect the
proprietary rights to products that we market under the FOCUS, Videonics and
TView brand names.
Upon joining us, employees and consultants are required to execute
agreements providing for the non-disclosure of confidential information and the
assignment of proprietary know-how and inventions developed on our behalf. In
addition, we seek to protect trade secrets and know-how through contractual
restrictions with vendors and certain large customers.
5
There can be no assurance that these measures will adequately protect the
confidentiality of our proprietary information or that others will not
independently develop products or technology that are equivalent or superior to
ours.
Because of the rapid pace of technological innovation in our markets, we
believe that our success must generally rely upon the creative skills and
experience of our employees, the frequency of new product offerings and
enhancements, product pricing and performance features, a diversified marketing
strategy, and the quality and reliability of support services.
Marketing and Sales Strategy
Most electronic equipment manufacturers launch new technologies at industry
conferences such as COMDEX, the International Consumer Electronics Show (CES),
and the National Association of Broadcasters (NAB) Expo. In addition to
attending these events, we also visit major conferences in our target markets.
It is our experience that attendance at these conferences adds to our name
recognition and market acceptance.
In 2003, we continued to concentrate on the semiconductor and video system
product lines. While we believe that the semiconductor market offers the best
potential for future growth, we also recognize our video system products remain
an important and substantial contributor to our growth. Our semiconductor
products target the cable, Internet appliance, gaming and home entertainment
industries. We plan to continue our marketing efforts and vigorously pursue the
semiconductor market for its technology in 2004, building on our existing
agreements in the TV, PC, Video Conferencing and Internet appliance markets. We
also expect to concentrate our marketing efforts toward those OEMs which
dominate their respective markets and which have the manufacturing, sales and
distribution networks in place to capitalize on the forecasted growth for the
TV-to-PC convergence products over the next five years.
Distribution
In the United States and Canada, we market and sell our products through the
following channels:
o National resellers such as Micro Center, Fry's Electronics, and J&R
Music World;
o National distributors such as Ingram Micro, D&H Distributing and DBL
Distributing;
o Third-party mail order resellers such as B&H Photo and CDW;
o Video Value Added Resellers for ProAV Products;
o Direct to our customers via our Web site;
o Direct to our semiconductor customers, and
o Sales through OEM relationships
Internationally, our products are sold directly to certain large semiconductor
customers, resellers, independent mail order companies and system and
semiconductor distributors in numerous countries, including France, the United
Kingdom, Scandinavia, Germany, Switzerland, Italy, Australia, Mexico, Japan,
Taiwan, Hong Kong, China, Singapore, and the Republic of Korea.
Customer Support
We believe that our future success will depend, in part, upon the continued
strength of customer relationships. In an effort to ensure customer
satisfaction, we currently provide customer service and technical support
through a five-days-per-week "hot line" telephone service. We use 800 telephone
numbers for customer service and a local telephone number for technical support
(the customer pays for the phone charge on technical support). The customer
service and support lines are currently staffed by technicians who provide
advice free of charge to ensure customer satisfaction and obtain valuable
feedback on new product concepts. In order to educate our telephone support
personnel, we periodically conduct in-house training programs and seminars on
new products and technology advances in the industry.
We offer this same level of support for our entire domestic market
including direct market customers who purchase our products through computer
superstores or system integrators. Internationally, we also provide technical
support to international resellers and distributors who, in turn, give local
support to their customers.
We provide customers with a one to three-year warranty on all products and
will repair or replace a defective product still under warranty coverage. The
majority of defective product returns are repaired or replaced and returned to
customers within ten business days.
Our semiconductor group provides application support to its customers
through its own application engineers located both in the United States and in
Taiwan as well as through application engineers employed by our representatives
and distributors.
6
Competition
We currently compete with other developers of PC-to-TV conversion products
and of videographic integrated circuits. Although we believe that we are a
leader in the PC-to-TV conversion product marketplace, the video graphic
integrated circuit market is intensely competitive and characterized by rapid
technological innovations. This has resulted in new product introductions over
relatively short time periods with frequent advances in price/performance
ratios. Competitive factors in these markets include product performance,
functionality, product quality and reliability, as well as volume pricing
discounts, customer service, customer support, marketing capability, corporate
reputation, brand recognition and increases in relative price/performance ratios
for products serving these markets. In the PC-to-TV scan converter market, our
biggest competitor is AVerMedia. In the video graphic integrated circuits
market, we compete with Conexant, Philips, and Chrontel.
Many of our system products are marketed to professional broadcast studios,
post-production houses, video conferencing centers and the elite videographer.
Our system products compete for market share with Datavideo, Extron, and other
niche manufacturers.
Some of our competitors have greater technical and capital resources, more
marketing experience, and larger research and development staffs than we have in
the video graphic integrated circuits market. With an aggressive effort, our
competitors could severely affect our business.
We believe that we compete favorably on the basis of product quality and
technical benefits and features. We also believe we provide competitive pricing,
extended warranty coverage, and strong customer relationships, including
selling, servicing and after-market support for our finished products. However,
there can be no assurance that we will be able to compete successfully in the
future against existing companies or new entrants to the marketplace.
Manufacturing
We rely on subcontractors who operate under two different models in the
process of manufacturing our systems products. The first subcontractor type
utilizes components that we purchase and then send to the sub manufacturer who
in turn manufactures and tests board level subassemblies. The products that
incorporate these subassemblies are completed, tested and distributed at our
facility in Campbell, California. This model provides for higher margin and
control in a lower volume product
The second subcontractor type builds the entire product as designed and
specified by us for a fixed price. The second is a true turnkey manufacturer.
The turnkey house is responsible for component procurement, board level
assembly, product assembly, quality control testing and final pack-out. For
certain commercial PC-to-TV video conversion products, turnkey manufacturers
ship directly to the OEM customer and forward-shipping information to us for
billing. Non-turnkey manufacturing for system products is subcontracted to a
company located in Mexico.
We believe that the turnkey model is applicable to our higher-volume
products, and that it helps lower inventory and staffing. Our three turnkey
manufacturers accounted for approximately over 65% of our product manufacturing
capabilities in 2003. One manufacturer, based in Taiwan, supplies set top box
finished products. A manufacturer in Korea provides 100% of our ASIC production.
Another manufacturer in California supplies certain of our professional
products. Under the turnkey model, quality control is maintained through
standardized quality assurance practices at the build site and random testing of
finished products as they arrive at our fulfillment center. Management believes
that the turnkey model helps us to lower inventory and staff requirements,
maintain better quality control and product flexibility, achieve quicker product
turns and improved cash flow.
All customer returns are processed through our fulfillment center. Upon
receipt of a returned product, a trained technician tests the product to
diagnose the problem. If a product is found to be defective the unit is either
returned to the turnkey subcontractor for rework and repair or is repaired by us
and returned to the customer. The majority of defective product returns are
repaired or replaced and returned to customers within ten business days.
Personnel
As of December 31, 2003, we employed 77 people on a full-time basis, of
whom 25 are in research and development, 21 in marketing and sales, 3 in
customer support, 22 in operations, and 6 in finance and administration.
7
Backlog
At December 31, 2003, we had a backlog of approximately $1,076,000 for
products ordered by customers as compared to a backlog of $223,000 at December
31, 2002, an increase of $853,000 or 383%. We do not believe backlog for
products ordered by customers is a meaningful indicator of sales that can be
expected for a particular time period since the order patterns of our customers
in the past have demonstrated that backlog is episodic. See also Risk Factors
"Backlog should not be construed as indicative of future revenue or
performance."
Recent Developments
On January 28, 2004, we announced that we had entered into an Agreement and
Plan of Reorganization (pursuant to Section 368(a)(1)(C) of the Internal Revenue
Code) to acquire substantially all the assets and assume certain liabilities of
Visual Circuits Corporation (Visual Circuits), located in Minneapolis,
Minnesota, solely in exchange for 3,805,453 shares of our voting common stock,
subject to certain adjustments. Founded in 1991, Visual Circuits is a leading
manufacturer and developer of integrated hardware, software and network products
that manage, schedule, distribute, store and present digital video in
commercial-market media applications. Visual Circuits' products are found
worldwide in retail, entertainment, education and healthcare facilities and
range from circuit boards to standard and high-definition network-storage media
appliances. Its products are sold primarily through system integrators and
commercial AV dealers. Visual Circuits' products are designed to serve both Pro
AV and IT requirements. The acquisition is subject to the approval of Visual
Circuits' shareholders. The acquisition is anticipated to close by April 30,
2004, and will require approval and a declaration of effectiveness by the SEC of
an S-4 registration statement covering the FOCUS Enhancements voting common
shares to be issued to Visual Circuits.
On March 2, 2004 we announced that we had completed the acquisition of COMO
Computer & Motion GmbH (COMO), located in Kiel, Germany, through the issuance of
approximately 795,000 shares of the our common stock. We may also issue an
additional approximately 46,000 shares of our common stock, to COMO's
shareholders in the event certain conditions are met at the end of fiscal 2004
and fiscal 2005. Founded in 1990, COMO manufactures and distributes digital
video solutions. COMO's key products are Digital Media Management Server
Systems, Hard Disk Video Recorder, Videomixer PCI Boards, and Videosignal
Transcoder. COMO products are sold worldwide and can be found in Broadcast and
Industrial Applications.
These acquisitions will have a material impact on Focus' operations and
financial condition. We anticipate costs associated with these acquisitions,
including legal, accounting and associated finder's fees to exceed $400,000. It
is not possible at this time to predict the actual costs because of the ongoing
nature of the acquisitions. Furthermore, although it is not possible to
determine the amount, we expect increased compensation and general
administrative costs due to the acquisitions as we add employees and additional
offices. These costs should be offset somewhat by increased revenues, however,
it is not possible to determine the revenues that will be generated by the
acquisitions. For a further discussion these forward-looking statements and the
risks associated with the acquisitions, see "Item 7. Management's Discussion And
Analysis of Financial Condition and Results of Operation - Year ended December
31, 2003 compared to December 31, 2002 - Liquidity and Capital Resources," and
"-Risk Factors."
8
Item 2. Properties
Property Location and Primary Use Lease Expires Square Feet Monthly Rent
- --------------------------------- ------------- ----------- ------------
2 Milliston Rd. January 31, 2005 1,000 $ 945
Millis, MA
R&D
250 Village Sq. January 31, 2006 500 $ 1,350
Orinda, CA
R&D
22867 N.W. Bennet St December 31, 2005 7,400 $ 7,392
Hillsboro, OR
R&D
1370 Dell Avenue July 31, 2005 27,500 $27,500
Campbell, CA
Company Headquarters (Manufacturing, Sales, R&D, Marketing,
Customer Support, Administration)
- ---------------------
We believe that our existing facilities are adequate to meet current
requirements and that additional space, if needed, can be readily obtained on
comparable terms.
Item 3. Legal Proceedings
From time to time, we are party to certain other claims and legal
proceedings that arise in the ordinary course of business of which, in the
opinion of management, do not have a material adverse effect on our financial
position or results of operation.
Item 4. Submission Of Matters To A Vote Of Security Holders
At the Focus Annual Meeting of Stockholders on December 19, 2003, the following
proposals were approved:
Votes
----------------------------------------------------
For Withheld Abstained
--- -------- ---------
Election of the following as
a director of Focus:
Name Term
- ---- ----
William Coldrick (3 years) 37,798,727 2,380,751 780,207
Michael D'Addio (3 years) 38,979,726 1,199,752 780,207
The following directors' terms continued
after the meeting: Carl E. Berg, N.
William Jasper Jr., Timothy E. Mahoney
and Brett Moyer.
For Against Abstained
--- ------- ---------
Proposal to amend the Focus Enhancements
Inc., Certificate of Incorporation to
increase the number of shares of common
stock from 60,000,000 to 100,000,000. 35,874,934 4,233,727 70,817
Proposal to amend the Focus
Enhancements, Inc. 2002 Non-Qualified
Stock Option Plan. 5,517,477 4,485,446 78,695
Ratify the selection of Deloitte &
Touche LLP as Focus' accountants for the
year ending December 31, 2003. 39,868,768 158,133 152,577
9
Part II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
(a) Trading in our common stock commenced on May 25, 1993 when we completed our
initial public offering. Since that time our common stock traded
principally on the Nasdaq SmallCap Market under the symbol "FCSE". The
following table sets forth the range of quarterly closing high and low bid
quotations for our common stock as reported by Nasdaq. The quotations
represent inter-dealer quotations without adjustment for retail markups,
markdowns or commissions, and may not necessarily represent actual
transactions. The closing price of our common stock on the Nasdaq SmallCap
Market on March 10, 2004 was $1.56 per share.
Common Stock
-------------------------
High Bid Low Bid
-------- -------
Calendar 2003 Quotations
Fourth Quarter $4.20 $1.85
Third Quarter 2.75 1.30
Second Quarter 1.46 0.60
First Quarter 1.35 0.50
Calendar 2002 Quotations
Fourth Quarter $1.69 $1.01
Third Quarter 1.70 1.01
Second Quarter 1.84 1.25
First Quarter 2.12 1.11
Calendar 2001 Quotations
Fourth Quarter $1.89 $0.77
Third Quarter 1.19 0.79
Second Quarter 1.42 0.72
First Quarter 1.78 0.75
As of March 10, 2004, Focus had approximately 175 holders of record and
43,177,902 shares of common stock outstanding on that date. As of March 10,
2004, approximately 10,000 stockholders held Focus voting common stock in street
name. It is not possible to determine the actual number of beneficial owners who
may be the underlying holders of such shares.
We have not declared nor paid any cash dividends on our common stock since
our inception. We intend to retain future earnings, if any, for use in our
business.
(b) See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - Stock Issuances," for a description of securities we sold
during fiscal 2003 pursuant to one or more exemptions from registration under
the Securities Act of 1933, as amended.
Except as indicated therein, we relied on one or more exemptions from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), for each of the foregoing transactions, including without limitation the
exemption provided by Section 4(2) of the Securities Act. We used all of the net
cash proceeds raised by the sale of unregistered securities to repay
indebtedness and for working capital.
10
Item 6. Selected Financial Data
The following table presents selected historical financial data of Focus for the
periods indicated. The financial data for each of the five fiscal years in the
period ended December 31, 2003 have been derived from the audited consolidated
financial statements of Focus for such periods. The data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information of Focus in this Form 10-K.
In thousands, except per share data.
Year Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Statement of Operations Data:
Net revenues...................................... $26,575 $17,312 $23,308 $15,233 $17,183
Cost of revenues.................................. 17,428 11,015 14,837 11,836(1) 10,544(1)
Gross profit...................................... 9,147 6,297 8,471 3,397 6,639
Total operating expenses.......................... 10,889 12,041 14,830 13,090(2) 7,806
Loss from operations.............................. (1,742) (5,744) (6,359) (9,693) (1,167)
Net loss.......................................... (1,698) (5,957) (6,658) (12,029) (1,480)
Balance Sheet Data:
Total Assets...................................... 16,100 12,034 18,097 9,781 15,015
Long term debt and capital lease.................. 3,867 3,868 4,057 2,528 428
Total Liabilities................................. 8,148 7,790 12,384 10,198 5,808
Accumulated Deficit............................... (63,021) (61,323) (55,366) (48,708) (36,679)
Total Stockholders' Equity (Deficit).............. 7,952 4,244 5,713 (417) 9,207
Per Share Data:
Net Loss ......................................... (0.04) (0.17) (0.21) (0.48) (0.08)
Book Value Per Share.............................. 0.19 0.11 0.17 (0.02) 0.38
Weighted average number of shares outstanding..... 39,121 35,697 31,702 25,225 18,744
- ----------------
(1) Included in cost of revenues are inventory obsolescence charges of
$1,532,000 for 2000 and $906,000 for 1999.
(2) Included in operating expenses for the year 2000, are:
a) $594,000 of legal and accounting fees associated with a special
investigation
b) $724,000 in restructuring expense for closure of the Company's
Morgan Hill facility
c) $2,289,000 for the write-down of capitalized software
d) $2,147,772 in a legal judgment expense associated with CRA Systems
Inc.
11
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Certain Factors That May Affect Future Results
Discussions of certain matters in this Annual Report on Form 10-K may
constitute forward-looking statements within the meaning of the Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve
risks and uncertainties. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of words or phrases such as "believe", "plan",
"expect", "intend", "anticipate", "estimate", "project", "forecast", "may
increase", "may fluctuate", "may improve" and similar expressions or future or
conditional verbs such as "will", "should", "would", and "could".
In particular, statements contained in this document which are not
historical facts (including, but not limited to, statements concerning
anticipated revenues, anticipated operating expense levels, potential new
products and orders, and such expense levels relative to our total revenues)
constitute forward looking statements and are made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Our 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 our future cash needs, reliance on major customers, history of
operating losses, market acceptance of our products, technological obsolescence,
competition, component supply problems and protection of proprietary
information, as well as the accuracy of our internal estimates of revenue and
operating expense levels. For a discussion of these factors and some of the
factors that might cause such a difference see also " - Risks Factors." These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements. We do not undertake, and
specifically disclaim any obligation, to update any forward-looking statements
to reflect occurrences or unanticipated events or circumstances after the date
of such statements.
Critical Accounting Policies
The following discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, we evaluate our estimates, including those
related to contract revenues, customer programs and incentives, product returns,
accounts receivable allowances, inventory valuation allowances, deferred tax
asset valuation allowances, recoverability of capitalized software development
costs, the value of equity instruments issued for services, the recoverability
of goodwill and other intangibles related to acquisitions, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We record estimated reductions to revenue for product
returns based primarily on historical return rates, return policies and price
protection arrangements. In addition, we sometimes accept returns for stock
balancing and negotiate accommodations to customers, which includes price
discounts, credits and returns when demand for specific products fall below
expectations. If market conditions were to decline, we could experience an
increase in the volume of returns. Beginning in 2001 we recognized contract
revenue and profit as work progressed on a long-term, fixed price contract using
the percentage-of-completion method, which relies on estimates of total expected
contract revenue and costs. We followed this method since reasonably dependable
estimates of the revenue and costs applicable to various stages of the contract
could be made. Recognized revenues and profit are subject to revisions as the
contract progresses to completion. Revisions in profit estimates are charged to
income in the period in which the facts that give rise to the revision become
known. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
assess collectibility based on a number of factors, including credit-worthiness
and past transaction history with the customer. Although collateral is generally
not requested, the Company, in certain situations, will require confirmed
letters of credit or cash in advance of shipping to its customers. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We provide for the estimated cost of product warranties at the time
revenue is recognized. While we engage in product quality programs and
processes, including actively monitoring and evaluating the quality of its
component suppliers, our warranty obligation is affected by product
12
failure rates. Should actual product failure rates differ from our estimates,
revisions to the estimated warranty liability would be required. We write down
our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than our projections, additional inventory
write-downs may be required. Our policy on capitalized software costs determines
the timing of our recognition of certain development costs. In addition, this
policy determines whether the cost is classified as development expense or cost
of revenues. We use professional judgment in determining whether development
costs meet the criteria for immediate expense or capitalization. Our business
acquisitions have resulted in goodwill and other intangible assets, which affect
the amount of future period amortization expense and possible impairment expense
that we will incur. In assessing the recoverability of our goodwill and other
intangibles we must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, we may be required
to record impairment charges for these assets not previously recorded. We
performed our annual impairment assessment of goodwill in the fourth quarter of
2003. We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. In the event we were to
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made.
Year ended December 31, 2003 compared to December 31, 2002
The following table sets forth, for the periods indicated, income and
expense items included in the Consolidated Statements of Operations, expressed
as a percentage of net sales (amounts in thousands, except percentages):
December 31, % of December 31, % of Percent
2003 Sales 2002 Sales Change Change
-------- ----- -------- ------ -------- ------
Net revenues ...................... $ 26,575 100% $ 17,312 100% $ 9,263 54%
Cost of revenues .................. 17,428 66 11,015 64 6,413 58
-------- --- -------- --- -------- ----
Gross profit ...................... 9,147 34 6,297 36 2,850 45
-------- --- -------- --- -------- ----
Operating expenses:
Sales, marketing and support .... 4,313 16 4,878 28 (565) (12)
General and administrative ...... 1,751 7 2,103 12 (352) (17)
Research and development ........ 4,277 16 4,022 23 255 6
Amortization .................... 577 2 942 5 (365) (39)
Restructuring (recovery) expense (29) -- 96 1 (125) (130)
-------- --- -------- --- -------- ----
Total operating expenses .......... 10,889 41 12,041 70 (1,152) (10)
-------- --- -------- --- -------- ----
Loss from operations .............. (1,742) (7) (5,744) (33) 4,002 (70)
-------- --- -------- --- -------- ----
Interest expense .................. (200) (1) (246) (1) 46 (19)
Interest income ................... 7 -- 2 -- 5 250
Other expense ..................... -- -- (336) (2) 336 100
Other income ...................... 239 1 357 2 (118) (33)
-------- --- -------- --- -------- ----
Loss before income taxes .......... (1,696) (6) (5,967) (34) 4,271 (72)
-------- --- -------- --- -------- ----
Income tax expense (benefit) ...... 2 -- (10) -- 12 (120)
-------- --- -------- --- -------- ----
Net loss ........................ $ (1,698) (6)% $ (5,957) (34)% $ 4,259 (71)%
======== === ======== ==== ======== ====
Net Revenues
Net revenues for the year ended December 31, 2003 were $26,575,000 as
compared with $17,312,000 for the year ended December 31, 2002, an increase of
$9,263,000, or 54%.
For the year ended December 31, 2003, net sales of system products
(professional and consumer) to distributors, retailers and VAR's were
approximately $13,986,000 as compared to $14,401,000 in 2002, a decrease of
$415,000 or 2%. The decrease between comparison periods is primarily the result
of a decrease in sales of our consumer products as a result of reduced
educational spending due to budgetary constraints at the state and local level
and the discontinuance of sales of certain of our products. Our systems business
has decreased as a result of the discontinuance of certain of our older products
as a result of obsolete components but has been offset by increased sales of the
Company's newest product introductions, including FireStore.
13
For the year ended December 31, 2003, net sales of semiconductor products
to distributors and OEM customers, which includes contract revenues, were
approximately $12,589,000 as compared to $2,911,000 for the same period in 2002,
an increase of $9,678,000 or 332%. The increase in semiconductor sales for the
year comparison periods is primarily attributable to sales of our FS454
semiconductor chip, which were primarily to Microsoft, a significant customer.
Sales of our FS454 accounted for approximately $9,918,000 or 37% of the
Company's total revenue for the year ended December 31, 2003. No such product
sales were made to Microsoft in the year ended December 31, 2002. Offsetting the
increase in revenues between comparison periods was a decrease in contract
revenues of $759,000 as the Company completed the development of an Application
Specific Integrated Circuit (ASIC) for the same significant customer that began
in June 2001 and finished in June 2002. Under this development contract the
Company recorded total revenues of $2.1 million. In January 2004, the Company
issued a press release indicating that it does not expect further orders from
Microsoft with respect to the FS454 semiconductor chip. See Risk Factors - " We
depend on a few customers for a high percentage of our revenues and the loss or
failure to pay of any one of these customers could result in a substantial
decline in our revenues and profits".
As of December 31, 2003, the Company had a sales order backlog of
approximately $1,076,000 compared to $223,000 as of December 31, 2002, an
increase of $853,000. Backlog consists primarily of semiconductor chip orders,
including FS454 orders from Microsoft. The increase between December 31, 2003
and December 31, 2002 is primarily the result of FS454 orders from Microsoft.
See Risk Factors - "Backlog should not be construed as indicative of future
revenue or performance".
See also "Liquidity and Capital Resources" regarding recent acquisition
activity.
Cost of Revenues
Cost of revenues were $17,428,000, or 66% of net revenues, for the year
ended December 31, 2003, as compared with $11,015,000, or 64% of net revenues,
for the year ended December 31, 2002. Included in cost of revenues for 2002, are
costs of $499,000 related to contract revenues.
The Company's gross profit margin as a percentage of net revenues for the
years 2003 and 2002 was 34% and 36%, respectively. Although the Company had
anticipated higher margins in 2003 when compared to 2002, because of below
average gross margin business the Company conducted with one of its significant
customers, as mentioned above, this did not occur. This significant customer
represented approximately 37% of the Company's revenues for 2003. Sales to this
customer were made at a gross profit margin percentage of less than 30%,
primarily as a result of volume discounts provided.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $4,313,000, or 16% of net
revenues, for the year ended December 31, 2003, as compared with $4,878,000, or
28% of net revenues, for the year ended December 31, 2002, a decrease of
$565,000 or 12%.
The decrease in sales, marketing and support expenses is primarily the
result of reduced advertising and tradeshow expenses as the Company reduced its
expenses to accommodate its tight cash position.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2003
were $1,751,000 or 7% of net revenues, as compared with $2,103,000 or 12% of net
revenues for the year ended December 31, 2002, a decrease of $352,000 or 17%.
The decrease in general and administrative expense for the year ended
December 31, 2003 is primarily attributable to reduced personnel expenditures
and consulting expenses. Personnel expenditures are lower year over year as the
Company's Chief Executive Officer retired in September 2002 and was replaced by
the Company's Chief Operating Officer. This resulted in reduced executive
compensation in 2003. For the year ended December 31, 2002, the Company also
incurred moving expenses of approximately $65,000 associated with the relocation
of the Chief Operating Officer to California and charges of approximately
$238,000 associated with the issuance of warrants in connection with consulting
services.
For a discussion of pending and recent acquisitions, and their potential
impact on the Company's financial condition and results of operations, see
"-Risk Factors" and "Item 1. Description of Business - Recent Developments."
14
Research and Development Expenses
Research and development expenses for the year ended December 31, 2003
were approximately $4,277,000 or 16% of net revenues, as compared with
$4,022,000 or 23% of net revenues, for year ended December 31, 2002, an increase
of $255,000 or 6%.
The increase in research and development expenses between the comparison
periods is primarily because no engineering work was performed under contract
for the year ended December 31, 2003 and, as such, no research and development
personnel expenses were allocated from research and development expenses to
costs of revenues during such period. For the year ended December 31, 2002,
costs related to contract revenues, which included research and development
personnel expenses totaled $499,000.
Amortization Expense
Amortization expenses for the year ended December 31, 2003 were $577,000
or 2% of net revenues, as compared with $942,000 or 5% of net revenues, for the
year ended December 31, 2002, a decrease of $365,000 or 39%.
The decrease in terms of absolute dollars and as a percentage of net
revenues is primarily the result of the Company's completing amortization of its
remaining capitalized software development expenses. As of December 31, 2003, no
impairment of goodwill had been recognized.
Restructuring Expense
For the year ended December 31, 2003, the Company reduced its
restructuring expense accrual by $29,000 as it was able to settle amounts due on
the closure of its Chelmsford facility for an amount less than originally
estimated.
For the year ended December 31, 2002, the Company recorded restructuring
expenses totaling $96,000 related to the closure of its Chelmsford, MA,
facility. This amount is comprised of the remaining lease obligations and
property fees for the Chelmsford facility.
Interest Expense
Interest expense for the year ended December 31, 2003 was $200,000, or 1%
of net revenues, as compared to $246,000 or 1% of net revenues for the year
ended December 31, 2002, a decrease of $46,000.
The decrease in interest expense is primarily attributable to lower
interest rates and a decrease in debt obligations.
Other Expense
Other expense for the year ended December 31, 2002 was $336,000 (none for
the year ended December 31, 2003), which was primarily comprised of a charge of
$334,000 related to the repricing of warrants associated with the termination of
an equity line of credit.
Other Income
Other income for the year ended December 31, 2003 was $239,000, as
compared $357,000 for the year ended December 31, 2002, a decrease of $118,000.
Other income for the year ended December 31, 2003 and 2002 are primarily
attributable to the settlement of debts to various trade vendors for less than
original amounts accrued.
15
Year ended December 31, 2002 compared to December 30, 2001
The following table sets forth, for the periods indicated, income and
expense items included in the Consolidated Statements of Operations, expressed
as a percentage of net sales (amounts in thousands, except percentages):
December 31, % of December 31, % of Percent
2002 Sales 2001 Sales Change Change
-------- ----- --------- ----- ------- ------
Net revenues $ 17,312 100% $ 23,308 100% $(5,996) (26)%
Cost of revenues..................... 11,015 64 14,837 64 (3,822) (26)
-------- ----- --------- ----- ------- ------
Gross profit......................... 6,297 36 8,471 36 (2,174) (26)
-------- ----- --------- ----- ------- ------
Operating expenses:
Sales, marketing and support....... 4,878 28 5,989 26 (1,111) (19)
General and administrative......... 2,103 12 2,191 9 (88) (4)
Research and development........... 4,022 23 3,352 14 670 20
Amortization....................... 942 5 2,760 12 (1,818) (66)
Restructuring Expense.............. 96 1 33 -- 63 191
Write-off of in-process technology. -- -- 505 2 (505) 100
-------- ----- --------- ----- ------- ------
Total operating expenses............. 12,041 70 14,830 64 (2,789) (19)
-------- ----- --------- ----- ------- ------
Loss from operations................. (5,744) (33) (6,359) (27) 615 (10)
-------- ----- --------- ----- ------- ------
Interest expense..................... (246) (1) (323) (1) 77 (24)
Interest income...................... 2 -- 16 -- (14) (88)
Other expense........................ (336) (2) (438) (2) 102 (23)
Other income......................... 357 2 446 2 (89) (20)
-------- ----- --------- ----- ------- ------
Loss before income taxes............. (5,967) (34) (6,658) (29) 691 (10)
-------- ----- --------- ----- ------- ------
Income tax benefit (10) -- -- -- (10) n/a
-------- ----- --------- ----- ------- ------
Net loss........................... $ (5,957) (34)% $ (6,658) (29)% $ 701 (11)%
======== ===== ========= ===== ======= ======
Net Revenues
Net revenues for the year ended December 31, 2002 were $17,312,000 as
compared with $23,308,000 for the year ended December 31, 2001, a decrease of
$5,996,000, or 26%.
For the year ended December 31, 2002, net sales of system products
(professional and consumer) to distributors, retailers and VAR's were
approximately $14,401,000 as compared to $19,519,000 in 2001, a decrease of
$5,118,000 or 26%. Overall sales of our system products has been trending lower
as a result of a reduction of nationwide computer sales, decreased educational
spending, a decrease in business to business sales as a result of the slowdown
in the economy and the Company's discontinuance of sales of its products to
certain retail accounts.
For the year ended December 31, 2002, net sales of semiconductor products
to distributors and OEM customers, which includes contract revenues, were
approximately $2,911,000 as compared to $3,789,000 for the same period in 2001,
a decrease of $878,000 or 23% The decrease in OEM sales is primarily
attributable to a decrease in contract revenues as the Company reported contract
revenues of $759,000 for the year ended December 31, 2002, a decrease of
$633,000 from the $1,392,000 the Company reported for the year ended December
31, 2001. In addition, semiconductor sales have declined due primarily to a
decrease in scan converter sales as a result of the slowdown in the economy.
As of December 31, 2002, the Company had a sales order backlog of
approximately $223,000.
Cost of Revenues
Cost of revenues were $11,015,000, or 64% of net revenues, for the year
ended December 31, 2002, as compared with $14,837,000, or 64% of net revenues,
for the year ended December 31, 2001. Included in cost of revenues are $499,000
and $1,110,000 of costs related contract revenues for the years ended December
31, 2002 and 2001, respectively. The Company's gross profit margin as a
percentage of net revenues for the years 2002 and 2001 was 36%.
16
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $4,878,000, or 28% of net
revenues, for the year ended December 31, 2002, as compared with $5,989,000, or
26% of net revenues, for the year ended December 31, 2001, a decrease of
$1,111,000 or 19%.
The decrease in sales, marketing and support expenses is primarily the
result of reduced personnel expenditures including payroll, and travel expenses
as we reduced our full time sales, marketing and support personnel from 31
employees at December 31, 2001 to 21 employees at December 31, 2002, decreased
commissions primarily as a result of decreased revenue and revisions to our
commission structure, and reduced marketing expenses as we adjusted our
advertising and tradeshow expenses to better match our revenue.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2002
were $2,103,000 or 12% of net revenues, as compared with $2,191,000 or 9% of net
revenues for the year ended December 31, 2001, a decrease of $88,000 or 4%.
The decrease in general and administrative expense for the year ended
December 31, 2002 is primarily attributable to reduced personnel expenditures
including payroll, and travel expenses as we reduced our full time general and
administrative personnel from nine employees at December 31, 2001 to four
employees at December 31, 2002, reduced legal expenses, and the receipt of an
insurance deductible refund of $100,000. The decrease was partially offset by
charges of approximately $238,000 associated with the issuance of warrants in
connection with consulting services and increased investor relations expenses as
we hired an outside investor relations firm beginning in March 2002.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2002
were approximately $4,022,000 or 23% of net revenues, as compared with
$3,352,000 or 14% of net revenues, for year ended December 31, 2001, an increase
of $670,000 or 20%.
The increase in research and development expenses was due primarily to a
reduction in engineering work performed under contract and, as such, less
research and development personnel expenses were allocated to costs of sales
than in the prior year.
Amortization Expense
Amortization expense for the year ended December 31, 2002 was $942,000 or
5% of net revenues, as compared with $2,760,000 or 12% of net revenues, for the
year ended December 31, 2001, a decrease of $1,818,000 or 66%.
The decrease in terms of absolute dollars and as a percentage of net
revenues is primarily due to the Company's adoption of FAS 142 on January 1,
2002, under which goodwill and assembled workforce is no longer amortized. On a
pro forma basis had the amortization of goodwill and the assembled workforce
intangible asset ceased on January 1, 2001, the Company's amortization expense
for the year ended December 31, 2001, would have decreased by $1,880,000, and
the Company would have reported a net loss of $4,778,000 or $0.15 per share. As
of December 31, 2002, no impairment of goodwill had been recognized.
Restructuring Expense
For the year ended December 31, 2002, the Company recorded restructuring
expenses totaling $96,000 related to the closure of its Chelmsford, MA,
facility. This amount is comprised of the remaining lease obligations and
property fees for the Chelmsford facility.
For the year ended December 31, 2001, the Company recorded restructuring
expenses totaling $33,000 related to the closure of its Wilmington, MA,
facility.
17
Write-off of In-Process Technology
In connection with the acquisition of Videonics during the first quarter
of 2001, the Company recorded a charge for purchased in-process technology of
$505,000.
Interest Expense
Interest expense for the year ended December 31, 2002 was $246,000, or 1%
of net revenues, as compared to $323,000 or 1% of net revenues for the year
ended December 31, 2001, a decrease of $77,000.
The decrease in interest expense is primarily attributable to lower
interest rates and a decrease in debt obligations.
Other Expense
Other expense for the year ended December 31, 2002 was $336,000, as
compared $438,000 for the year ended December 31, 2001, a decrease of $102,000.
Other expense for the year ended December 31, 2002 is primarily comprised
of a charge of $334,000 related to the repricing of warrants associated with the
termination of an equity line of credit. Other expense for the year ended
December 31, 2001 is primarily attributable to charges of $438,000 associated
with the untimely registering of AMRO Investment International's shares. See
"Note 12.-Stockholders Equity - Common Stock on page F-19 for more information."
Other Income
Other income for the year ended December 31, 2002 was $357,000, as
compared $446,000 for the year ended December 31, 2001, a decrease of $89,000.
Other income for the year ended December 31, 2002 and 2001 are primarily
attributable to the settlement of debts for less than original amounts accrued
Liquidity and Capital Resources
As of December 31,
2003 2002
------ ------
(In thousands)
Cash and cash equivalents................................. $3,731 $1,310
Net cash used in operating activities..................... (2,614) (5,004)
Net cash provided by (used in) investing activities....... (277) 2,297
Net cash provided by financing activities................. 5,312 3,568
The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. For the years
ended December 31, 2003, 2002 and 2001, the Company incurred net losses of
$1,698,000, $5,957,000 and $6,658,000, and reported net cash used in operating
activities of $2,614,000, $5,004,000 and $3,452,000, respectively. These factors
indicate that the Company may potentially be unable to continue as a going
concern.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flows
to meet its obligations on a timely basis, to obtain additional financing as may
be required, and ultimately to return to profitability and significant positive
cash flows.
Since inception, the Company has financed its operations primarily
through the public and private sale of common stock, proceeds from the exercise
of options and warrants, short-term borrowing from private lenders, and
favorable credit arrangements with vendors and suppliers. We do not have a bank
line of credit.
18
In 2003, net cash used in operating activities consisted primarily of a
net loss of $1,698,000 adjusted for depreciation and amortization of $743,000
and other income associated with the settlement of debt totaling $239,000, an
increase in accounts payable of $363,000 an increase in accrued liabilities of
$279,000 offset by an increase in accounts receivable totaling $757,000,
primarily related to the increase in revenues associated with sales of the FS454
to Microsoft, and an increase in inventory totaling $1,143,000, primarily
related to inventory positions in the Company's newest products including the
FS454 and FireStore. In 2002, net cash used in operating activities consisted
primarily of a net loss of $5,957,000 adjusted for depreciation and amortization
of $1,226,000, deferred compensation expense of $122,000, general and
administrative expenses associated with the issuance of stock and warrants for
consulting and other services totaling $238,000, other income associated with
settlement of debt totaling $311,000, other expense associated with repricing
and acceleration of warrants totaling $350,000, a decrease in accounts
receivable totaling $1,686,000, a decrease in inventory totaling $1,659,000
offset by a decrease in accounts payable of $1,795,000 and the payment of a
legal judgment totaling $2,073,000. In 2001, net cash used in operating
activities consisted primarily of a net loss of $6,658,000 adjusted for
depreciation and amortization of $3,166,000, the write-off of in-process
technology related to the acquisition of Videonics totaling $505,000, deferred
compensation expense of $113,000, other expense associated with a delayed
registration of $438,000, a decrease in account payable totaling $178,000 and an
increase in accounts receivable of $1,378,000 offset partially by an decrease in
inventories of $590,000.
In January 2004, we were informed that the Company should not expect
further orders of the FS454 from Microsoft. This customer represented 37% of the
Company's revenues for the year ended December 31, 2003 and 64% and 40% of the
Company's revenues for the third and fourth quarter of 2003, respectively. The
Company recorded gross margins as a percentage of sales, before commissions and
selling expenses below 30% to this customer. The loss of this customer will have
a material adverse effect on the Company's revenues, operating profit and
liquidity, especially when compared to the third and fourth quarter of 2003, as
the Company began its initial shipments to the customer in the third quarter of
2003 and continued sales through the fourth quarter for the customer's seasonal
holiday sales. However, as the product was manufactured by one of our contract
manufacturers, we were able to meet the customer's requirements without an
increase in our staffing and operations. Although there can be no assurances, we
do not anticipate any significant adjustments to the Company's staffing or
operations or significant adjustments to the carrying value of our FS454
inventory, as a result of this loss.
Net cash used in investing activities for the year ended December 31,
2003 was $277,000 as compared to net cash provided by investing activities for
the years ended December 31, 2002 and 2001 of $2,297,000 and 1,397,000,
respectively. In 2003, net cash used in investing activities was related to the
purchase of property and equipment of $122,000, the acquisition of developed
technology from DVUnlimited, which resulted in a net cash outflow of $57,000 and
costs incurred with the pending acquisition of Visual Circuits Corporation and
COMO Computer and Motion GmbH of $98,000. In 2002, cash provided in investing
activities was principally from the decrease in restricted collateral deposit of
$2,363,000, offset by the purchase of property and equipment of $66,000. In
2001, cash was provided by a reduction in restricted certificates of deposit of
approximately $1,263,000 and net cash of $360,000 provided through the
acquisition of Videonics on January 16, 2001, offset partially by additions of
$196,000 to property and equipment. The acquisition of Videonics was accounted
for as a purchase and made through the issuance of approximately 5,135,000
shares of the Company's common stock.
Net cash provided from financing activities for the years ended December
31, 2003, 2002 and 2001 was $5,312,000, $3,568,000 and $2,152,000, respectively.
In 2003, the Company received $1,920,000 in net proceeds from private offerings
of common stock and $3,436,000 from the exercise of common stock options and
warrants offset by $44,000 of capital lease obligation repayments. In 2002, the
Company received $3,121,000 in net proceeds from private offerings of common
stock and $634,000 from the exercise of common stock options and warrants which
were partially offset by $145,000 in repayments on convertible notes to a
stockholder. In 2001, cash provided by financing activities occurred primarily
from the issuance of notes payable to a stockholder and director of the Company
of $2,650,000 and from the exercise of options and warrants of $199,000 offset
by repayments of $400,000 to a bank and costs incurred in registration of common
stock of $182,000.
As of December 31, 2003, the Company had working capital of $5,696,000 as
compared to working capital of $1,551,000 at December 31, 2002, an increase of
$4,145,000.
The Company has incurred losses and negative cash flows from operations
in each of the three years ended December 31, 2003 and as such has been
dependent upon raising money for short and long-term cash needs through debt,
proceeds from the exercise of options and warrants, and the sale of common stock
in private placements as discussed above.
19
At December 31, 2003, the Company owed Carl Berg, a Company director and
shareholder, approximately $4.4 million in principal and accrued interest on
various notes. In September 2003, Mr. Berg agreed to convert such debt and
accrued interest into preferred and common stock on conversion terms agreed to
more than two years ago. As of December 31, 2003, the conversion would result in
the issuance of approximately 2,201,139 shares of common stock and 1,257 shares
of preferred stock convertible into an additional 1,257,000 shares of common
stock. The conversion is expected to be completed as soon as practical, but in
no event sooner than March 15, 2004. See "Note 8 - Notes Payable" beginning on
page F-15 for more information.
Additionally, in December 2002, Mr. Berg provided Samsung Semiconductor
Inc., the Company's contracted ASIC manufacturer, with a personal guarantee to
secure the Company's working capital requirements for ASIC purchase order
fulfillment. Mr. Berg agreed to provide the personal guarantee on the Company's
behalf without additional cost or collateral, as Mr. Berg maintains a secured
priority interest in substantially all the Company's assets. At December 31,
2003, the Company owed Samsung $562,000, under net 30 terms.
In addition to regularly reviewing its cost structure, management is
continually reviewing its product lines to identify how to enhance existing or
create new distribution channels. During 2003, the Company released several new
products. Many of these new products are expected to take hold in their
respective markets and provide additional revenue to the Company in 2004.
Additionally, although no assurances can be given, the Company expects to
release three more new products in 2004. There can be no assurances as to the
amount of revenue these new products will produce. Even if the Company's new
products are introduced as planned and are modestly successful, the Company
anticipates that its continued significant investment in research and
development, primarily in the area of Ultra Wideband will require the Company to
find a partner to fund a portion of the continued development and or raise
additional funds to support its working capital needs and meet existing debt
obligations.
There is no assurance that management's plans will be successful or if
successful, that they will result in the Company continuing as a going concern.
During the year ended December 31, 2003, Focus raised a significant
amount of its working capital through the issuance of its common stock. In July
2003, Focus sold 2,200,000 shares of its common stock in a private placement to
two independent third parties, receiving net proceeds of approximately
$1,920,000. The shares were sold at a 20% discount to the 5-day average closing
bid prices of our common stock prior to closing. In connection with the private
placement, Focus also issued warrants to purchase 467,500 shares of its common
stock at an exercise price of $1.44 per share.
Ultimate future capital requirements will depend on many factors,
including cash flow from operations, continued progress in research and
development programs, competing technological and market developments, and our
ability to market our products successfully. Additionally, subsequent to
December 31, 2003, the Company has announced the acquisition of COMO and its
intent to acquire Visual Circuits. The costs associated with these acquisitions,
including legal, accounting and associated finder's fees, are expected to exceed
$400,000. The Company believes that it is likely that additional financings will
be required in 2004 as the Company continues to implement its business plan. As
of December 31, 2003, the Company had no commitments from any other sources to
provide additional equity or debt financing. As such, there can be no assurance
that sufficient funds will be raised. Moreover, any equity financing would
result in dilution to our then-existing stockholders and any additional debt
financing may result in higher interest expense.
20
Summary of Certain Contractual Obligations as of December 31, 2003
Amount of Commitment Expiration Per Period (in thousands)
---------------------------------------------------------
Less Than After 5
Total 1 year 2-3 Years 4-5 Years Years
------- ------- --------- --------- ------
Notes payable to stockholder(1) $ 3,867 $ -- $3,867 $ -- $ --
Operating leases 788 468 $ 318 2 --
------- ------ ------ ----- ----
Total $ 4,655 $ 468 $4,185 $ 2 $ --
======= ====== ====== ===== ====
- ----------------------
(1) In September 2003, Mr. Berg agreed to convert his approximately $3.9
million of debt and $500,000 of accrued interest into preferred and common
stock on conversion terms agreed to more than two years ago. As of December
31, 2003, the conversion would result in the issuance of approximately
2,201,139 shares of common stock and 1,257 shares of preferred stock,
convertible into 1,257,000 shares of common stock. The conversion is
expected to occur in March 2004.
Stock Issuances
Although we have been successful in the past in raising sufficient
capital to fund our operations, there can be no assurance that we will achieve
sustained profitability or obtain sufficient financing in the future to provide
the liquidity necessary for us to continue operations.
On July 2, 2003, we completed the sale of 2,200,000 shares of our common
stock in a private placement to two independent third party accredited
investors, receiving proceeds of approximately $1,920,000, net of offering costs
of $280,000. The shares were sold at an approximate 20% discount to the 5-day
average closing bid prices of our common stock prior to closing. In connection
with the private placement, we issued warrants to the two investors and a
placement agent to purchase a total of 467,500 shares of common stock at an
exercise price of $1.44 per share. No compensation expense was recorded given
that the warrants were issued in connection with the issuance of common stock.
The securities issued in connection with this transaction were subsequently
registered on a Form S-3, deemed effective on September 17, 2003. Such proceeds
were used for general corporate purposes.
Effects of Inflation and Seasonality
We believe that inflation has not had a significant impact on our sales
or operating results. Our business generally has a modestly stronger second and
third quarter seasonality. In 2003, our third quarter was accentuated by
Microsoft's holiday production schedule.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS No. 146"), which addresses
accounting for restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force ("EITF") Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)
("EITF 94-3"). SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred
and that the liability should initially be measured and recorded at fair value.
Under EITF 94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. The Company adopted the provisions of SFAS
No. 146 for restructuring activities initiated after December 31, 2002.
Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The Company adopted the
disclosure requirements of FIN 45 in the current year. The recognition and
measurement provisions will be applied to guarantees issued or modified after
December 31, 2002. The adoption did not have a material effect on the Company
operating results or financial condition.
The FASB issued FIN 46, Consolidation of Variable Interest Entities in
January 2003, and a revised interpretation of FIN 46 ("FIN 46-R") in December
2003. FIN 46, as modified by FIN 46-R, requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The Company has not invested in any
21
entities it believes are variable interest entities for which the Company is the
primary beneficiary. As such, the Company does not expect the adoption of FIN
46, as modified by FIN 46-R to have an impact on its financial position or
results of operations.
In April 2003 the FASB issued SFAS No. 149, Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts. The
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative, clarifies when a derivative
contains a financing component, amends the definition of an underlying
derivative to conform it to language used in FASB Interpretation FIN No. 45, and
amends certain other existing pronouncements. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. All provisions of the Statement,
except those related to forward purchases or sales of "when-issued" securities,
should be applied prospectively. The Company is currently evaluating the impact
of adopting SFAS No. 149. However, the Company does not believe that it has
entered into any contracts that would fall within the scope of SFAS No. 149.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company currently has no financial
instruments which meet these requirements.
In December 2003, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104), which codifies,
revises and rescinds certain sections of SAB 101, Revenue Recognition in
Financial Statements, in order to make this interpretive guidance consistent
with current authoritative accounting and auditing guidance and SEC rules and
regulations. The adoption did not have a material effect on the Company's
operating results or financial condition.
Risk Factors
You should carefully consider the following risks relating to our
business and our common stock, together with the other information described
elsewhere in this prospectus. If any of the following risks actually occur, our
business, results of operations and financial condition could be materially
affected, the trading price of our common stock could decline, and you might
lose all or part of your investment.
Risks Related to Our Business
We have a long history of operating losses.
As of December 31, 2003, we had an accumulated deficit of $63,021,000. We
incurred net losses of $1,698,000, $5,957,000, and $6,658,000 for the years
ended December 31, 2003, 2002 and 2001, respectively. There can be no assurance
that we will become profitable. Additionally, our auditors have included an
explanatory paragraph in their report on our financial statements for the year
ended December 31, 2003 that recurring losses from operations and our
accumulated deficit raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
A significant portion of our revenues are from products that are designed for
consumer goods that have seasonal sales.
A significant portion of our revenues are subject to risks associated
with the sales of certain end products at retail that are seasonal, with a
majority of retail sales occurring during the period of September through
December. As a result, our annual operating results with respect to sales of
semiconductor chips designed into newly introduced products, including
Microsoft's Xbox depend, in large part, on sales during the relatively brief
holiday season. In January 2004, we announced that we did not expect further
orders from Microsoft with respect to Xbox. See "We depend on a few customers
for a high percentage of our revenues and the loss or failure to pay of any one
of these customers could result in a substantial decline in our revenues and
profits" for further information.
22
We may need to raise additional capital, which will result in further dilution
of existing and future stockholders.
Historically, we have met our short-and long-term extra cash needs
through debt and the sale of common stock in private placements because cash
flow from operations has been insufficient to fund our operations. Set forth
below is information regarding net proceeds received recently:
Private Offerings Of Issuance of Exercise of Stock
Common Stock Debt Options and Warrants
------------ ---- --------------------
Fiscal 2003 $1,920,000 -- $3,437,000
Fiscal 2002 $3,121,000 -- $625,000
Fiscal 2001 -- $2,650,000 $199,000
Future capital requirements will depend on many factors, including cash
flow from operations, continued progress in research and development programs,
competing technological and market developments, and our ability to market our
products successfully. If we require additional equity or debt financing in the
future, there can be no assurance that sufficient funds will be raised.
Moreover, any equity financing or convertible debt would result in dilution to
our then-existing stockholders and could have a negative effect on the market
price of our common stock. Furthermore, any additional debt financing may result
in higher interest expense.
We anticipate costs associated pending and recently announced
acquisitions, including legal, accounting and associated finder's fees to exceed
$400,000. Furthermore, because these businesses are not currently profitable,
additional cash may be needed to fund operations. Therefore, we believe
additional financings will be required in 2004. As of December 31, 2003, we did
not have any commitments from any other sources to provide additional equity or
debt financing.
In the event we are unable to raise additional capital, we may not be
able to fund our operations, which could result in the inability to execute our
current business plan.
We are dependent upon a significant stockholder to meet our interim financing
needs.
We have relied upon the ability of Carl Berg, a director and significant
owner of the Company's common stock for interim financing needs. As of December
31, 2003, we had an aggregate of approximately $4.4 million in debt and accrued
interest outstanding to Mr. Berg. Additionally, Mr. Berg has provided Samsung
Semiconductor Inc., our contracted ASIC manufacturer, with a personal guarantee
to secure our working capital requirements for ASIC purchase order fulfillment.
There can be no assurances that Mr. Berg will continue to provide such interim
financing or personal guarantees, should we need additional funds or increased
credit facilities with its vendors.
We have a significant amount of convertible securities that will dilute existing
stockholders upon conversion.
At December 31, 2003, we had 42,303,185 and 1,904 shares of common and
preferred shares issued and outstanding, respectively, and 429,500 warrants and
5,188,150 options that are exercisable into shares of common stock. The 1,904
shares of preferred stock are convertible into 1,904,000 shares of the Company's
voting common stock. Furthermore, we may grant 1,523,045 additional stock
options to our employees, officers, directors and consultants under our current
stock option plans. We also may issue additional shares in acquisitions. Any
additional grant of options under existing or future plans or issuance of shares
in connection with an acquisition will further dilute existing stockholders.
In addition, in September 2003, Mr. Berg agreed to convert his
approximate $4.4 million of debt and accrued interest into preferred and common
stock on conversion terms agreed to more than two years ago. As of December 31,
2003, the conversion would result in the issuance of approximately 2,201,136
shares of common stock and 1,257 shares of preferred stock convertible into an
additional 1,257,000 shares of common stock. Due to a recently negotiated sale
of a portion of Mr. Berg's position in Focus to an institutional investor, the
conversion is expected to be completed as soon as practical, but in no event
sooner than March 15, 2004, which is six months from the date of the recent
sale, the earliest date permitted by SEC Section 16(b) and appropriate
securities laws.
23
Any acquisitions of companies or technologies by us, including our proposed
acquisition of Visual Circuits' assets, and recently announced acquisition of
COMO Computer and Motion GmbH may result in distraction of our management and
disruptions to our business.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise, as was
the case in January 2004 when we announced that we had entered into a definitive
agreement to acquire substantially all the assets of Visual Circuits
Corporation, and in March 2004 when we announced that we had acquired the stock
of COMO Computer & Motion GmbH. From time to time, we may engage in discussions
and negotiations with companies regarding the possibility of its acquiring or
investing in their businesses, products, services or technologies. We may not be
able to identify suitable acquisition or investment candidates in the future, or
if we do identify suitable candidates, we may not be able to make such
acquisitions or investments on commercially acceptable terms or at all. If we
acquire or invest in another company, we could have difficulty assimilating that
company's personnel, operations, technology or products and service offerings.
In addition, the key personnel of the acquired company may decide not to work
for us. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect the results
of operations. Furthermore, we may incur indebtedness or issue equity securities
to pay for any future acquisitions and/or pay for the legal, accounting or
finders fees, typically associated with an acquisition. The issuance of equity
securities could be dilutive to our existing stockholders. In addition, the
accounting treatment for any acquisition transaction may result in significant
goodwill, which, if impaired, will negatively affect our consolidated results of
operations.
We rely on certain vendors for a significant portion of our manufacturing.
Approximately 65% of the components for our products are manufactured on
a turnkey basis by three vendors, Furthertech Company Ltd., Samsung
Semiconductor Inc., and Asemtec Corporation. In addition, certain of our
products are assembled by a single vendor in Mexico. If these vendors experience
production or shipping problems for any reason, we in turn could experience
delays in the production and shipping of the Company's products, which would
have an adverse effect on its results of operations.
We are dependent on our suppliers.
We purchase all of the Company's parts from outside suppliers and from
time to time experience delays in obtaining some components or peripheral
devices. Additionally, we are dependent on sole source suppliers for certain
components. There can be no assurance that labor problems, supply shortages or
product discontinuations will not occur in the future which could significantly
increase the cost, or delay shipment, of our products, which in turn could
adversely affect our results of operations.
We depend on a few customers for a high percentage of our revenues and the loss
or failure to pay of any one of these customers could result in a substantial
decline in our revenues and profits.
For the year ended December 31, 2003, one customer represented 37% of our
total revenues and 24% of our accounts receivable as of December 31, 2003. We
presently have no reason to believe that this customer lacks the financial
resources to pay. We do not have long-term contracts requiring any customer to
purchase any minimum amount of products. There can be no assurance that we will
continue to receive orders of the same magnitude as in the past from existing
customers or will be able to market our current or proposed products to new
customers. However, the loss of any major customers, the failure of any such
identified customer to pay us, or to discontinue issuance of additional purchase
orders would have a material adverse effect on our revenues, results of
operation, and business as a whole absent the timely replacement of the
associated revenues and profit margins associated with such business.
Furthermore, many of our products are dependent upon the overall success of our
customers' products, over which we often have no control. To that point, in
January 2004, we were informed that we should not expect further FS454 chip
orders from Microsoft for the Xbox. FS454 orders, which were primarily to
Microsoft, represented 37% of our revenues for the year ended December 31, 2003
and 64% and 40% of our revenues for the third and fourth quarters of 2003,
respectively. The loss of Microsoft orders for the FS454 will have a material
adverse effect on our revenues and operating profit, especially when compared to
the third and fourth quarter of 2003, as we began our initial shipments to the
customer in the third quarters of 2003 and continued sales through the fourth
quarter for the customer's seasonal holiday sales. However, as the product was
manufactured by one of our contract manufacturers, we were able to meet the
customer's requirements without an increase in our staffing and operations.
Although there can be no assurances, we do not anticipate any significant
adjustments to our staffing or operations or significant adjustments to the
carrying value of our FS454 inventory, as a result of this loss.
24
Backlog should not be construed as indicative of future revenue or performance.
In the past we have experienced quarterly fluctuations in operating
results due to the contractual nature of our business and the consequent timing
of product orders. In addition, we have historically operated with a small
amount of backlog and accordingly its revenues in any quarter have been
substantially dependent upon orders booked in that quarter. However, as of
December 31, 2003, our total backlog was approximately $1,076,000 compared to
$223,000 at December 31, 2002. There can be no assurance that the rate of growth
in backlog will continue. For example, on January 28, 2004, we announced that we
did not expect further orders from Microsoft with respect to Xbox. This will
significantly decrease backlog in the near-term. Furthermore, only a small
portion of our backlog is fully funded and many of its customers have the
ability to delay delivery or cancel contracts, therefore, there can be no
assurance that orders comprising the backlog will be realized as revenue. In any
event, quarterly sales and operating results will continue to be affected by the
volume and timing of contracts received and performed within the quarter, which
are difficult to forecast. Any significant deferral or cancellation of a
contract could have a material adverse effect on our operating results in any
particular period. Because of these factors, the period-to-period comparisons of
our operating results are not necessarily indicative of future performances.
Our quarterly financial results are subject to significant fluctuations.
We have been unable in the past to accurately forecast its operating
expenses or revenues. Revenues currently depend heavily on volatile customer
purchasing patterns. If actual revenues are less than projected revenues, we may
be unable to reduce expenses proportionately, and its operating results, cash
flows and liquidity would likely be adversely affected.
Our products may become obsolete very quickly.
The computer peripheral markets are characterized by extensive research
and development and rapid technological change resulting in short product life
cycles. Development by others of new or improved products, processes or
technologies may make our products or proposed products obsolete or less
competitive. We must devote substantial efforts and financial resources to
enhance our existing products and to develop new products. There can be no
assurance that we will succeed with these efforts.
We may not be able to protect our proprietary information.
As of December 31, 2003, we held four patents and one pending application
(combining five previous provisional patent applications) in the United States.
Certain of these patents have also been filed and issued in countries outside
the United States. We treat our technical data as confidential and rely on
internal non-disclosure safeguards, including confidentiality agreements with
employees, and on laws protecting trade secrets, to protect its proprietary
information. There can be no assurance that these measures will adequately
protect the confidentiality of our proprietary information or prove valuable in
light of future technological developments.
Delays in product development could adversely affect our market position or
customer relationships.
We have experienced delays in product development in the past and may
experience similar delays in the future. Given the short product life cycles in
the markets for our products, any delay or unanticipated difficulty associated
with new product introductions or product enhancements could cause us to lose
customers and damage its competitive position. Prior delays have resulted from
numerous factors, such as:
o changing product specifications;
o difficulties in hiring and retaining necessary personnel;
o difficulties in reallocating engineering resources and other
resource limitations;
o difficulties with independent contractors;
o changing market or competitive product requirements;
o unanticipated engineering complexity;
o undetected errors or failures in software and hardware; and
25
o delays in the acceptance or shipment of products by customers.
If we are unable to respond to rapid technological change in a timely manner,
then we may lose customers to our competitors.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our products. Our industry is
characterized by rapid technological change, changes in user and customer
requirements and preferences and frequent new product and service introductions.
If competitors introduce products and services embodying new technologies, or if
new industry standards and practices emerge, then our existing proprietary
technology and systems may become obsolete. Future success will depend on our
ability to do the following:
o both license and internally develop leading technologies useful in
its business;
o enhance existing technologies;
o develop new services and technology that address the increasingly
sophisticated and varied needs of prospective customers; and
o respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
Developing proprietary technology entails significant technical and
business risks. We may use new technologies ineffectively, or we may fail to
adapt proprietary technology and transaction processing systems to customer
requirements or emerging industry standards. If we face material delays in
introducing new services, products and enhancements, then our customers may
forego the use of our services and use those of our competitors.
During much of the first half of 2003, our common stock did not meet the minimum
bid price requirement to remain listed on the Nasdaq SmallCap Market. If we were
to be delisted, it could make trading in our stock more difficult.
Our voting common stock is traded on the Nasdaq SmallCap Market. There
are various quantitative listing requirements for a company to remain listed on
the Nasdaq SmallCap Market.
We are required to maintain a minimum bid price of $1.00 per share for
our common stock. Between January 1, 2003 and December 31, 2003, Focus voting
common stock closed below $1.00 a share on 64 of 252 trading days. On March 18,
2003, we were notified by the Nasdaq that our common stock did not meet the
minimum bid price requirement to remain listed on the Nasdaq SmallCap Market.
However, on May 21, 2003, we received notification from Nasdaq that we had
regained compliance and the matter was closed.
We must maintain stockholders' equity of $2,500,000. At December 31,
2003, we had total stockholders' equity of $7,952,000. To the extent we incur
net losses and do not raise additional capital, our stockholders' equity will be
reduced.
If we fail to meet these Nasdaq SmallCap requirements, our common stock
could be delisted, eliminating the only established trading market for our
shares. Any sales of our voting common stock at a discount to market may reduce
the trading price of its common stock to a level below the Nasdaq minimum bid
price requirement.
In the event we are delisted from Nasdaq, we would be forced to list our
shares on the OTC Electronic Bulletin Board or some other quotation medium, such
as pink sheets, depending on our ability to meet the specific listing
requirements of those quotation systems. As a result an investor might find it
more difficult to dispose of, or to obtain accurate price quotations for, such
shares. Delisting might also reduce the visibility, liquidity, and price of our
voting common stock.
Our common stock price is volatile.
The market price for our voting common stock is volatile and has
fluctuated significantly to date. For example, between January 1, 2003 and
December 31, 2003, the per share price has fluctuated between $0.50 and $4.20
per share, closing at $1.56 at March 10, 2004. The trading price of our voting
common stock is likely to continue to be highly volatile and subject to wide
fluctuations in response to factors including the following:
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