Filed pursuant to Rule 424(b)(5)
(File No. 333-139224)
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED DECEMBER 20,
2006
2,034,092
Shares
Focus
Enhancements, Inc.
Common
Stock
This prospectus supplement relates to the issuance by us from time to
time of up to 2,034,092 shares of our common stock, par value $0.01 per share,
issuable upon the exercise of warrants that we previously issued on February 20,
2007, September 14, 2007 and September 24, 2007, respectively. On February 20, 2007, we issued an
aggregate of 500,000 warrants, and we refer to those warrants as the “February Warrants.” On September 14, 2007, we issued 568,182
warrants and, on September 24, 2007, we issued 965,910 warrants. We refer to those warrants that we issued in September 2007
as the “September Warrants.” We
refer to the February Warrants and September Warrants, collectively,
as the “February and September Warrants.” Each of the February and September Warrants
is exercisable for one share of our common stock, subject to the adjustment
provisions therein. The February and
September Warrants were each issued as part of a registered offering
(which covered both warrants and common stock) under a shelf registration
statement declared effective by the Securities and Exchange Commission in December 2006. Because the aggregate market value of our
common stock held by nonaffiliates was less than $75 million when we filed our Form 10-K
for the year ended December 31, 2007, we are using this prospectus in
compliance with the new rules of the Securities and Exchange Commission
relating to limited primary offerings by certain registrants whose aggregate
market value of voting and nonvoting common equity held by non-affiliates is
under $75 million.
We will pay all expenses of this offering and will not receive any
proceeds from the sale of our common stock by the holders of the February and
September Warrants. We will,
however, receive the proceeds from the exercise of the February and September Warrants. The exercise price of each of the February Warrants
is $2.00 per share of common stock and the exercise price of each of the September Warrants
is $1.05 per share of common stock.
Our common stock is listed on the NASDAQ Capital Market, under the
ticker symbol “FCSE.” The last reported
sale price of our common stock on the NASDAQ Capital Market on May 20,
2008 was $0.40 per share. The aggregate
market value of our outstanding voting and non-voting common equity computed by
reference to the price at which the common equity was sold, or the average bid
and asked price of such common equity held by non-affiliates, as of May 14,
2008, was $33,952,000. The amount of all
securities offered pursuant to General Instruction I.B.6. of Form S-3
during the prior 12 calendar month period that ends on, and includes, the date
of this prospectus is 2,034,092 shares of our common stock.
Investing in our common stock involves significant
risks. See “Risk Factors” beginning on page S-4
of this prospectus supplement and on page 3 of the accompanying
prospectus.
Neither the Securities and Exchange Commission nor
any state securities commission has approved or disapproved of these securities
or determined if this prospectus supplement or the accompanying prospectus is
truthful or complete. Any representation
to the contrary is a criminal offense.
The date of this
prospectus supplement is May 22, 2008.
TABLE OF
CONTENTS
You should rely only on
the information contained in or incorporated by reference in this prospectus
supplement and the accompanying prospectus.
We have not authorized anyone to provide you with additional or
different information. We are not making
an offer to sell these securities in any jurisdiction where the offer or sale
is not permitted. You should not assume
that the information contained in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date of this
prospectus supplement or the accompanying prospectus, respectively, or that
information contained in any document incorporated or deemed to be incorporated
by reference is accurate as of any date other than the date of that document.
This document is in two
parts. The first part is this prospectus
supplement, which describes the terms of this offering of our common stock upon
the exercise of the February and September Warrants and also adds to
and updates information contained in or incorporated by reference into the
accompanying prospectus. The second part
is the accompanying prospectus, which gives more information about us and the
type of securities we may offer from time to time under our shelf registration
statement. The information in this
prospectus supplement updates information in the accompanying prospectus and, to
the extent it is inconsistent with the information in the accompanying
prospectus, replaces such information.
i
FORWARD-LOOKING
STATEMENTS
This prospectus
supplement and the accompanying prospectus contain or incorporate by reference
certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), 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 “should,” “would,” and “could.”
These forward-looking
statements relate to, among other things, expectations of the business
environment in which we operate, opportunities and expectations regarding
technologies, anticipated performance or contributions from new and existing
employees, proposed acquisitions, projections of future performance, possible
changes in laws and regulations, potential risks and benefits arising from the
implementation of our strategic and tactical plans, perceived opportunities in
the market, potential actions of significant stockholders and statements
regarding our mission and vision. Our actual results, performance, and
achievements may differ materially from the results, performance, and
achievements expressed or implied in such forward-looking statements due to a
wide range of factors. 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, failure to integrate new
acquisitions, the actual amount of charges and transaction expenses associated
with the acquisitions, the ability to recognize expected synergies upon
acquisition and the related benefits envisioned by us, 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.
Each forward looking
statement should be read in conjunction with the “Risk Factors” included in
this supplement and the accompanying prospectus and incorporated by reference
herein, together with the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated financial statements
and notes thereto, contained in our periodic reports filed with the SEC and
incorporated by reference herein. 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, except as required by law.
S-1
PROSPECTUS SUPPLEMENT
SUMMARY
The
following summary highlights information contained elsewhere or incorporated by
reference in this prospectus supplement and the accompanying prospectus. It may not contain all of the information
that is important to you. Before making
a decision to invest in our common stock, you should read carefully this entire
prospectus supplement. This summary is
qualified in its entirety by the more detailed information and financial
statements, including the notes thereto, appearing elsewhere or incorporated by
reference in this prospectus supplement and the accompanying prospectus. Unless the context otherwise requires, the
terms “Focus,” “Company,” “we,” “us” and “our” refer to Focus Enhancements, Inc.,
a Delaware corporation, and our subsidiaries.
Focus
Enhancements, Inc.
Incorporated in 1992,
Focus Enhancements, Inc. and its subsidiaries develop and market
proprietary video technology in two areas: semiconductor and systems. Focus
markets its products globally to original equipment manufacturers (“OEMs”), and
dealers and distributors in the consumer and professional channels.
Semiconductor products include several series of Application Specific Standard
Products (“ASSPs”), which address the wireless video and data market using
Ultra Wideband (“UWB”) technology and the video convergence market. The UWB
chipsets are targeted for the wireless USB market while the video convergence
chips are deployed into portable media players, video conferencing systems,
Internet TV, media center and interactive TV applications. Focus’ systems
products are designed to provide solutions for the professional video
production market particularly for the video acquisition, media asset
management and digital signage markets. Focus markets its systems products
primarily through the professional channel. Focus production products include
video scan converters, video mixers, standard and high definition digital video
disk recorders, MPEG (Moving Picture Experts Group) recorders and file format
conversion tools. Focus media asset management systems products include
network-based video servers, long-duration program monitors and capture/playout
components. Focus digital signage and retail media solutions products include
standard and high definition MPEG players, servers.
General Information
We
were incorporated in 1992. Our main address is 1370 Dell Avenue,
Campbell, California 95008 and our telephone number is (408) 866-8300.
Our Web site is located at http://www.Focusinfo.com. Information
contained in our Web site is not part of this prospectus.
S-2
THE OFFERING
|
Issuer
|
|
Focus
Enhancements, Inc.
|
|
|
|
|
|
Securities Offered
|
|
2,034,092 shares of
common stock issuable upon exercise of the February and
September Warrants.
|
|
|
|
|
|
Shares of common stock
to be outstanding immediately after this offering
|
|
87,033,082
|
|
|
|
|
|
NASDAQ Capital Markets
Symbol
|
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FCSE
|
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Use of Proceeds
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We will use the net
proceeds from this offering for general corporate purposes and working
capital requirements.
|
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Warrant terms
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The
February Warrants will be exercisable at a price of $2.00 per share of
common stock and the September Warrants will be exercisable at a price
of $1.05 per share of common stock.
|
Except as otherwise indicated herein, the
information above and elsewhere in this prospectus supplement regarding
outstanding shares of our common stock is based on 84,998,990 shares of common
stock outstanding as of May 14, 2008 and excludes the following shares of
common stock:
·
5,519,128 shares of common
stock issuable upon the exercise of stock options outstanding as of May 14,
2008, with a weighted-average exercise price of $1.14 per share;
·
31,255,785 shares of
common stock issuable upon the exercise of warrants outstanding as of May 14,
2008 with a weighted-average exercise price of $0.85 per share;
·
2,533,984 shares of common
stock reserved for future awards under our stock option plans as of May 14,
2008;
·
3,161,000 shares of common
stock issuable upon the conversion of 3,161 shares of preferred stock as of May 14,
2008.
S-3
RISK FACTORS
An
investment in our common stock involves various risks, including those in the
accompanying prospectus beginning on page 3. You should carefully consider such risk
factors, together with all of the information contained in or incorporated by
reference in this prospectus supplement, the accompanying prospectus, our
Annual Report on Form 10-K, as amended by the Form 10-K/A, for the fiscal
year ended December 31, 2007 and other periodic and current reports we
file with the Securities and Exchange Commission, in determining whether to
purchase our common stock. The risks and
uncertainties described in the accompanying prospectus are not the only risks
and uncertainties we face. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations. If any of the risks described in the
accompanying prospectus actually occur, our business, operating results,
prospects and financial condition could be harmed. This could cause the market price of our
common stock to decline and could cause you to lose all or part of your
investment.
We
have a long history of operating losses.
As of March 31,
2008, we had an accumulated deficit of $128.7 million. We incurred net losses
of $17.4 million, $15.9 million and $15.4 million for the years ended December 31,
2007, 2006 and 2005, respectively. There can be no assurance that we will ever
become profitable. Additionally, our independent registered public accounting
firm has included an explanatory paragraph in its report on our consolidated
financial statements for the year ended December 31, 2007 with respect to
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
We will need to raise additional capital, which
may not be available when we need it.
Historically,
we have met our short- and long-term cash needs through debt issuances, the
sale of common stock or other convertible securities in private placements,
because cash flow from operations has been insufficient to fund our operations.
We received net proceeds
of $9.3 million from the issuance of secured notes and warrants to a group of
private investors in February 2008. We received net proceeds of $6.2
million and $4.9 million from the issuances of common stock to groups of
private investors in February 2007 and September 2007, respectively.
We believe that we will need to raise additional amounts before September 30,
2008 to continue development and launch commercialization of our next
generation UWB products. The amount necessary will depend upon the results of
ongoing UWB development efforts and our Semiconductor and Systems businesses.
Our future capital requirements will remain dependent upon these and other
factors, including cash flow from operations, maintaining our gross margins at current
or increased levels, continued progress
in research and development programs, competing technological and market
developments, and our ability to market our new products successfully. There
can be no assurance that additional equity or debt financing, if required, will
be available on acceptable terms or at all. If we are unable to access equity
or debt financings when we need it, our business will be substantially harmed.
Our future capital raising
activities may dilute the ownership of our existing stockholders.
We may sell securities in
the public and private equity markets if and when conditions are
favorable. Raising funds through the
issuance of common stock will dilute the ownership of our existing
stockholders. Furthermore, we may issue
common stock, or securities convertible into or exercisable for our common
stock, at prices that represent a substantial discount to the market price of
our common stock, which could result in a decline in the trading price of our
common stock.
Currently we do not meet the
requirements to remain listed on the Nasdaq Capital Market. If we are
delisted, it could, among other things, decrease the liquidity of our common
stock, limit our ability to raise additional capital and potentially accelerate the
amounts due under our $20.8 million outstanding principal amount of senior
secured notes at the option of the holders of such notes.
Our voting common stock
is traded on the Nasdaq Capital Market. There are various quantitative listing
requirements for a company to remain listed on the Nasdaq Capital Market,
including maintaining a minimum bid price of $1.00 per share of common stock
and stockholders’ equity of $2.5 million or market capitalization of at least
$35 million. On August 15, 2007, the Nasdaq Stock Market notified us that
for the previous 30 consecutive business days, the bid price of our common
stock had closed below the minimum $1.00 per share price requirement for
continued inclusion under Nasdaq Marketplace Rules. We were initially given
until February 11, 2008 to regain compliance. On February 12, 2008,
we were then advised of an additional six months extension or until August 11,
2008 to attain compliance with the Nasdaq Capital Market $1.00 minimum bid
price rule. At March 31, 2008, we had total stockholders’ deficit of
$753,000. If we do not maintain a market value in our securities of at least
$35 million, we would likely receive an additional notification from the Nasdaq
Capital Market that we were not in compliance with its continued listing criteria.
S-4
If we do not regain
compliance with the continued listing requirements within the allotted
compliance period (including the minimum bid price per share and the market
capitalization requirement), including any extensions that may be granted by
the Nasdaq Capital Market, the Nasdaq Capital Market would notify us that our
common stock will be delisted from the Nasdaq Capital Market, eliminating the
only established trading market for our shares. While we would then be entitled
to appeal this determination to a Nasdaq Listing Qualifications Panel and to
request a hearing, if we fail at such hearing in our efforts to retain our
listing, we would be delisted.
If we are delisted from
the Nasdaq Capital Market, our shares may be quoted on the OTC Electronic
Bulletin Board or some other quotation medium, such as the pink sheets,
depending on our ability to meet the specific listing requirements of the
specific quotation system and market makers’ willingness to quote our shares on
either of these mediums. As a result, an investor might find it more difficult
to trade, or to obtain accurate price quotations for, such shares. Delisting
might also reduce our ability to raise capital as well as the visibility, liquidity,
and price of our voting common stock. If our common stock were not listed on
the Nasdaq Capital Market or another established automated over-the-counter
trading market in the United States, all amounts outstanding under our $20.8
million senior secured notes would become due and payable at the option of the
holders. We do not now have such capital, and we may not have sufficient
resources or access to additional capital at the time such demand is made, to
satisfy those note obligations at the time they would become due, which would
have a material adverse impact on our financial condition and results of
operations.
We
have a significant number of outstanding securities that will dilute existing
stockholders upon conversion or exercise.
At May 9,
2008, we had 3,161 shares of preferred stock issued and outstanding, 31,255,785
warrants and 5,519,128 options outstanding which are all exercisable for or
convertible into shares of common stock. The 3,161 shares of preferred stock
are convertible into 3,161,000 shares of our voting common stock. Furthermore,
at May 9, 2008, 2,533,984 additional shares of common stock were available
for grant to our employees, officers, directors and consultants under our
current stock option and incentive 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.
S-5
USE OF PROCEEDS
The proceeds to be received from the exercise of the February and September Warrants
described in this prospectus supplement, assuming all of the February and September Warrants
are exercised for cash, will be approximately $2,610,797.
We currently intend to
use the net proceeds we receive from the exercise of the February and September Warrants
for general corporate purposes, that may include:
·
working
capital;
·
capital
expenditures;
·
research
and development expenditures;
·
sales
and marketing expenditures; and
·
acquisitions
of new businesses, technologies or products that we believe complement or
expand our business.
Our management will retain broad discretion as to the allocation of the
net proceeds from the exercise of the February and September Warrants. Pending the use of the net proceeds, we
intend to invest the net proceeds in interest-bearing, investment-grade and
U.S. government securities.
PLAN
OF DISTRIBUTION
This prospectus
relates to the issuance by us from time to time of shares of our common stock
issuable upon the exercise of the February and September Warrants. We
will bear the costs of registering, issuing and maintaining an effective
registration for the shares of common stock underlying these February and September Warrants.
LEGAL MATTERS
The validity of
our securities offered in this prospectus supplement and accompanying
prospectus has been passed upon for us by Manatt, Phelps & Phillips,
LLP, Palo Alto, California.
EXPERTS
The consolidated
financial statements incorporated in this prospectus by reference to the Annual
Report on Form 10-K for the year ended December 31, 2007, have been so
incorporated in reliance on the report (which contains an explanatory paragraph
relating to the Company’s ability to continue as a going concern as described
in Note 2 to the consolidated financial statements) of Burr, Pilger & Mayer
LLP, an independent registered public accounting firm, given on the authority
of said firm as experts in auditing and accounting.
S-6
PROSPECTUS
$45,000,000
FOCUS
ENHANCEMENTS, INC.
By
this prospectus, we may offer, from time to time —
Common Stock
Warrants
Units
We may from time
to time issue up to an aggregate of $45,000,000 of common stock, warrants and
units comprised of any or all of these securities in one or more
issuances. We may sell these securities
directly to you, through underwriters or through agents or dealers we
select. This prospectus describes the
general manner in which our common stock, warrants and units may be offered
using this prospectus. We will provide
you with specific terms of the offerings in one or more supplements to this
prospectus. If we use agents,
underwriters or dealers to sell the securities, we will name them and describe
their compensation in a prospectus supplement.
Our common stock
is listed on the NASDAQ Capital Market under the ticker symbol “FCSE.” The last
reported sale price of our common stock on the NASDAQ Capital Market on
December 4, 2006 was $1.41 per share.
Investing in these securities involves significant risks. See “Risk Factors” beginning on page 3 for
information you should consider before buying our securities. We urge you to read the information included
and incorporated by reference in this prospectus and any prospectus supplement
carefully before you invest.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
This prospectus
may not be used to consummate sales of securities unless it is accompanied by a
prospectus supplement.
The date of this
Prospectus is December 20, 2006.
TABLE OF CONTENTS
You should rely only on the information incorporated by reference or
provided in this prospectus or any applicable supplement. We have not authorized anyone else to provide
you with different information. You
should assume that the information contained in this prospectus and any
applicable supplement is accurate only as of their respective dates even though
this prospectus may be delivered or shares may be sold under this prospectus on
a later date. We are not making an offer
of the common stock, warrants and units in any state where the offer is not
permitted.
SUMMARY
The
following summary is qualified by more detailed information, including our
consolidated financial statements and related notes, included in this
prospectus and incorporated in this prospectus by reference. You should carefully consider the information
set forth in this entire prospectus, including the “Risk Factors” section, the
applicable prospectus supplement for our securities offered hereby and the
other documents we refer to and incorporate by reference, including but not
limited to, the section entitled “Risk Factors” in our Annual Report on Form
10-K for the fiscal year ended December 31, 2005 and in our other filings with
the Securities and Exchange Commission.
Unless the context otherwise requires, the terms “Focus,” “Company,”
“we,” “us” and “our” refer to Focus Enhancements, Inc., a Delaware corporation,
and our subsidiaries.
This
prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission, or SEC, using a “shelf” registration
process. Under this shelf registration process, from time to time, we may offer
up to $45,000,000 of common stock, warrants and units comprised of any or all
of these securities in one or more offerings and in any combination. This
prospectus provides you with a general description of the common stock,
warrants and units we may offer. Each time we offer shares of common stock,
warrants and units, you will be provided with a prospectus supplement that will
describe specific information about the terms of that offering. The prospectus
supplement may also add, update or change information contained in this
prospectus. This prospectus, together with the prospectus supplements, will
include all material information relating to that offering. You should read both this prospectus and any
prospectus supplement, including the Risk Factors, together with the additional
information described under the heading “Where You Can Find More Information.”
Focus
Enhancements, Inc.
We are a
technology company that develops and markets proprietary video technology in
two areas: semiconductors and systems. We market our products globally to
original equipment manufacturers (“OEMs”), and dealers and distributors in the
consumer and professional channels. Semiconductor products include several series
of Application Specific Integrated Circuits (“ASICs”), which 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. In addition, o
ur
semiconductor group is currently developing a wireless integrated circuit
(“IC”) chip set based on the WiMedia Ultra Wideband (“UWB”) standard, designed
to be compatible with Wireless USB, and used in personal computer, consumer
electronics (“CE”), and mobile electronics applications. Our systems
products are designed to provide solutions in PC-to-TV scan conversion, video
presentation, digital-video (“DV”) conversion, video production and home
theater markets. We market these systems products through both consumer and
professional channels. Our consumer and production systems products include
video scan converters, video mixers, DV and high definition digital video disk
recorders, Moving Picture Experts Group (“MPEG”) recorders, and file format
conversion tools. Our digital asset management system products include
network-based video servers with video capture and play-out components. Our
digital signage and retail media solutions products include both standard and
high definition MPEG players, servers and associated control software.
We were
incorporated in 1992. Our main address
is 1370 Dell Avenue, Campbell, California 95008 and our telephone number is
(408) 866-8300. Our Web site is located
at http://www.Focusinfo.com. Information
contained in our Web site is not part of this prospectus.
The Securities We May Offer
We may offer up to
$45,000,000 of common stock, warrants and units in one or more offerings and in
any combination. A prospectus
supplement, which we will provide each time we offer securities hereunder, will
describe the specific amounts, prices and terms of such securities.
We may sell these
securities to or through underwriters, dealers or agents or directly to
purchasers. We, as well as any agent
acting on our behalf, reserve the sole right to accept or reject in whole or in
part any proposed purchase of securities.
Each prospectus supplement will set forth the names of any underwriters,
dealers or agents included in the sale of securities described in that
prospectus supplement and any applicable fee, commission or discount
arrangements with them.
2
Common Stock
We may offer
shares of our common stock either alone or underlying other registered
securities convertible into our common stock.
Holders of our common stock are entitled to receive dividends subject to
rights, if any, of preferred stockholders, and debt holders.
Warrants
We may issue
warrants for the purchase of common stock.
We may issue warrants independently or together with other securities.
Units
We may issue units
comprised of common stock and warrants to purchase common stock. We may issue units independently or together
with other securities.
RISK FACTORS
You
should carefully consider the following risks relating to our business, our
common stock, warrants and units, together with the other information described
elsewhere in this prospectus before making an investment decision. If any
of the following risks actually occur, our business could be harmed, the
trading price of our common stock could decline, and you might lose all or part
of your investment. Additional risks not
presently known to us or that we currently believe are immaterial also may harm
our business.
We have
a long history of operating losses.
As of September
30, 2006, we had an accumulated deficit of $102.3 million. We incurred net
losses of $15.4 million, $11.0 million and $1.7 million for the years ended
December 31, 2005, 2004 and 2003, respectively and $12.9 million for the
first nine months of 2006. There can be no assurance that we will ever become
profitable. Additionally, our independent registered public accounting firm has
included an explanatory paragraph in its report on our consolidated financial
statements for the year ended December 31, 2005 with respect to substantial
doubt about our ability to continue as a going concern. The consolidated
financial statements incorporated by reference herein do not include any
adjustments that might result from the outcome of that uncertainty.
We will likely
need to raise additional capital.
Historically, we
have met our short- and long-term cash needs through debt issuances and the
sale of common stock in private placements, because cash flow from operations
has been insufficient to fund our operations. Set forth below is information
regarding net proceeds received through private placements of our common stock
and exercise of stock options and warrants in 2005, 2004 and 2003:
|
(In thousands)
|
|
Private Placements
of Common Stock
|
|
Exercise of Stock
Options and Warrants
|
|
|
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|
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2005
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$
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4,531
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$
|
152
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2004
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$
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10,741
|
|
$
|
192
|
|
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2003
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$
|
1,920
|
|
$
|
3,437
|
|
We received gross
proceeds of $10,000,000 from the issuance of senior secured convertible notes
to a group of private investors in January 2006. While we believe that
these funds, along with the cash flow generated by our expanding Systems
business, should be adequate to enable us to complete our UWB engineering
development and launch commercialization of UWB products, depending upon the
results and timing of our UWB initiative and the profitability of our Systems
business, we will likely need to raise further capital in 2007. 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. There can be no assurance
that additional equity or debt financing, if required, will be available on
acceptable terms or at all. Moreover, any equity financing or convertible debt
3
financing would result in
dilution to our existing stockholders and could have a negative effect on the
market price of our common stock.
From
November 2005 to early May 2006 and late May 2006 to mid July 2006, our common
stock did not meet the minimum bid price requirement to remain listed on the
NASDAQ Capital Market. If we were to be delisted, it could make trading in our
stock more difficult and our $10.4 million outstanding principal amount of
convertible notes would be deemed payable at the option of the holders
Our voting common
stock is traded on the NASDAQ Capital Market. There are various quantitative
listing requirements for a company to remain listed on the NASDAQ Capital
Market, including maintaining a minimum bid price of $1.00 per share of common
stock and maintaining stockholders’ equity of $2.5 million. On June 27, 2006,
the NASDAQ Stock Market notified us that for the previous 30 consecutive
business days, the bid price of our common stock had closed below the minimum
$1.00 per share price requirement for continued inclusion under NASDAQ
Marketplace Rules. We were given until December 26, 2006 to regain compliance
with the NASDAQ Capital Market $1.00 minimum bid price rule. On July 28, 2006,
we received notification from the NASDAQ Stock Market that we had regained
compliance and the matter was closed.
At September 30,
2006, we had total stockholders’ equity of $5.9 million. To the extent we incur
net losses and do not raise additional capital, our stockholders’ equity will
be reduced. If the minimum bid price of
our common stock were to close below $1.00 for 30 consecutive days, we would
likely again receive notification from the NASDAQ Capital Market that we were
not in compliance with the $1.00 minimum bid price rule. If we do not regain
compliance within the allotted compliance period, including any extensions that
may be granted by the NASDAQ Capital Market, the NASDAQ Capital Market would
notify us that our common stock would be delisted from the NASDAQ Capital
Market, eliminating the only established trading market for our shares. We
would then be entitled to appeal this determination to a NASDAQ Listing
Qualifications Panel and request a hearing.
In the event we
are delisted from the NASDAQ Capital Market, we would be forced to list our
shares on the OTC Electronic Bulletin Board or some other quotation medium,
such as the 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 trade, or to obtain accurate price quotations for, such
shares. Delisting might also reduce the visibility, liquidity, and price of our
voting common stock. In the event our common stock was not listed on the NASDAQ
Capital Market or another established automated over-the-counter trading market
in the United States, all amounts outstanding under our $10.4 million senior
secured convertible notes would become due and payable at the option of the
holders.
We are
dependent upon a significant stockholder to meet our financing needs and there
can be no assurance that this stockholder will continue to provide financing.
We have relied
upon the ability of Carl Berg, a director and significant owner of our common
stock, for interim financing needs. Mr. Berg has provided a personal
guarantee to Samsung Semiconductor Inc., our contracted ASIC manufacturer, to
secure our working capital requirements for ASIC purchase order fulfillment and
a personal guarantee to Greater Bay Bank, N.A. in connection with our $4.0
million accounts receivable-based line of credit facility and $2.5 million term
loan. In connection with these guarantees, Mr. Berg maintains a security
interest in all the Company’s assets, subject to the bank’s lien on our
accounts receivable, and subordinating that security interest in accounts
receivable to holders of our convertible debt as described below. 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 our vendors.
We have
a significant amount of convertible securities and equity instruments that will
dilute existing stockholders upon conversion or exercise.
At November 30, 2006, we had 3,161 shares of preferred shares issued and
outstanding, 4,645,395 warrants and 5,535,577 options outstanding, and $10.4
million of convertible notes outstanding, which are all exercisable into shares
of common stock. The 3,161 shares of preferred stock are convertible into
3,161,000 shares of our voting common stock and the convertible notes are
convertible into 10,425,000 shares of common stock. Furthermore, at November
30, 2006, 2,956,326 additional shares of common stock were available for grant
to our employees, officers, directors and consultants under our current stock
option and incentive plans. We also may issue additional shares in acquisitions
and additional convertible notes as interest payments on our outstanding
convertible notes.
4
Any
additional grant of options under existing or future plans or issuance of
shares in connection with an acquisition
or issuance of additional
convertible notes will further dilute existing stockholders.
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 certain products, any delay or unanticipated difficulty associated
with new product introductions or product enhancements could cause us to lose
customers and damage our competitive position. Prior delays have resulted
from numerous factors, such as:
·
changing
product specifications;
·
the
discontinuation of certain third party components;
·
difficulties
in hiring and retaining necessary personnel;
·
difficulties
in reallocating engineering resources and other resource limitations;
·
difficulties
with independent contractors;
·
changing
market or competitive product requirements;
·
unanticipated
engineering complexity;
·
undetected
errors or failures in software and hardware; and
·
delays
in the acceptance or shipment of products by customers.
The development of
new, technologically advanced products, including our significant investment in
UWB, is a complex and uncertain process requiring high levels of innovation and
highly skilled engineering and development personnel, as well as the accurate
anticipation of technological and market trends. In order to compete, we must
be able to deliver products to customers that are highly reliable, operate with
the customer’s existing equipment, lower the customer’s costs of acquisition,
installation and maintenance, and provide an overall cost-effective solution.
We may not be able to identify, develop, manufacture, market or support new or
enhanced products successfully, if at all, or on a timely basis. Further, our
new products may not gain market acceptance or we may not be able to respond
effectively to product announcements by competitors, technological changes or
emerging industry standards. Our failure to respond effectively to
technological changes would significantly harm our business. Finally, there can
be no assurances we will be successful in these efforts.
We rely
on certain vendors for a significant portion of our manufacturing. If these
vendors experience delays in the production and shipping of our products, this
would have an adverse effect on our results of operations.
At September 30,
2006, approximately 85% of the components for our products are manufactured on
a turnkey basis by four vendors: BTW Inc., Furthertech Company Ltd., Samsung
Semiconductor Inc. and Veris Manufacturing. If these vendors experience
production or shipping problems for any reason, we in turn could experience
delays in the production and shipping of our products, which would have an
adverse effect on our results of operations.
A
significant portion of our semiconductor revenue is from products that are
designed for consumer goods that have seasonal sales.
A significant
portion of our semiconductor revenue is subject to risks associated with the
sales of certain end products through retail outlets that are seasonal, with a
majority of such sales occurring October
through December. As a result, our annual operating results with respect to
sales of our semiconductor chips designed into newly introduced products
depend, in large part, on sales during the relatively brief holiday season.
5
We are
dependent on our suppliers. If our suppliers experience labor problems, supply
shortages or product discontinuations, this would have an adverse effect on our
results of operations.
We purchase all of
our 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.
If we
fail to meet certain covenants required by our credit facilities, we may not be
able to draw down on such facilities and our ability to finance our operations
could be adversely affected
.
We have access to
a $4.0 million credit line under which we can borrow up to 90% of our eligible
outstanding accounts receivable and a $2.5 million term loan with the same
bank. The various agreements in connection with such credit line and term loan
require us to maintain certain covenants. At September 30, 2006, we were not in
compliance with the net loss covenant. On November 8, 2006, we received a
waiver from Greater Bay Bank with respect to compliance with this covenant. In
the event we again violate this covenant, or we violate any other covenants and
are not able to obtain a waiver, we will not be able to draw down on the line
of credit or term loan, and any amounts outstanding under such line of credit
or term loan may become immediately due and payable, either of which could have
a material adverse impact on our financial condition and results of operation.
Furthermore, the
restrictions contained in the line of credit and term loan documents, as well
as the terms of other indebtedness we may incur from time-to-time, could limit
our ability to plan for or react to market conditions or meet capital needs or
otherwise restrict our activities or business plans. These restrictions could
also adversely affect our ability to finance our operations or other capital
needs, or to engage in other business activities that would be in our interest.
Certain events will result in our
senior secured convertible notes becoming due and payable prior to maturity or
will require us to repurchase our senior secured convertible notes prior to
maturity, either of which would adversely affect our ability to finance our
operations.
The provisions of
our senior secured convertible notes, due January 1, 2011, provide that if we,
among other things: (i) default on any principal or interest payment on our
senior secured convertible notes; (ii) fail to comply with any of our covenants
in the documents governing the issuance of our senior secured convertible
notes; (iii) do not pay at final maturity (either at stated maturity or upon
acceleration) any of our other indebtedness with an aggregate principal amount
of $1,000,000, the outstanding principal and accrued interest on such notes
will become due and payable. In addition, our senior secured convertible notes
provide, that, upon the occurrence of any of the following events, the holders of
the notes will have the right to require us to repurchase any or all of such
notes at a purchase price equal to 101% of the principal amount of notes to be
repurchased plus accrued and unpaid interest: (i) failure of our common stock
to be traded on a national securities exchange, NASDAQ Stock Market or another
established automated over-the-counter trading market in the United States or
(ii) acquisition of more than 50% of our outstanding voting stock or merger
with another company if our then shareholders do not continue to own a majority
of our outstanding voting stock. At September 30, 2006, we owed $10.4 million
under our senior secured convertible notes. Repayment of this amount prior to
stated maturity would adversely impact our ability to finance our operations or
other capital needs.
If we
are unable to renew or extend our existing line of credit or term loan when
each expires on its own terms, our ability to finance our operations could be
adversely affected
.
We have access to
a $2.5 million term loan and a $4.0 million credit line facility with the same
bank. Both these credit facilities expire on December 24, 2006. If we are
unable to renew the term loan or credit line on favorable terms upon the
expiration, we would be required to immediately pay all outstanding obligations
under such term loan and credit line. Repayment of the principal amounts and
interest due under these facilities could adversely affect our other capital
requirements, as well as our ability to finance our operations on an ongoing
basis.
6
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, 2005, our five largest customers in the aggregate provided
26% of our total revenues and as of December 31, 2005, comprised 45% of
our accounts receivable balance. For the nine months ended September 30, 2006,
our five largest customers in the aggregate provided 54% of our total revenues,
and as of September 30, 2006, comprised 46% of our accounts receivable balance.
Sales to one customer accounted for 48% and 26% of our revenue in the three and
nine month periods ended September 30, 2006, respectively. 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. The loss of any major
customer, 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.
Our
quarterly financial results are subject to significant fluctuations, and if
actual revenues are less than projected revenues, we may be unable to reduce
expenses proportionately, and our operating results, cash flows and liquidity
would likely be adversely affected.
We have been
unable in the past to forecast accurately our 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 our operating results, cash flows and liquidity
would likely be adversely affected.
Our
markets are subject to rapid technological change, and to compete effectively,
we must continually introduce new products, requiring significant influx of
additional capital until our overall operations generate sufficient profit to
fund such products internally.
Many of our
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, including our significant investment in UWB
technology. To fund such ongoing research and development, we will require a
significant influx of additional capital. There can be no assurance that we will
succeed with these efforts. Failure to effectively develop such products,
notably our UWB technology, could have a material adverse effect on our
financial condition and results of operations.
We may
not be able to protect our proprietary technology or information.
As of September
30, 2006, we held five patents and four pending 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 our 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.
There can be no
assurance that third parties will not assert infringement claims against us or
that such assertions will not result in costly litigation or require us to
license intellectual proprietary rights from third parties. In addition, there
can be no assurance that any such licenses would be available on terms
acceptable to us, if at all.
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
7
proprietary technology
and systems may become obsolete. Our future success will depend on our
ability to do the following:
·
both
license and internally develop leading technologies useful in our business;
·
enhance
our existing technologies;
·
develop
new services and technology that address the increasingly sophisticated and
varied needs of our prospective customers; and
·
respond
to technological advances and emerging industry standards and practices on a
cost-effective and timely basis.
To develop our
proprietary technology entails significant technical and business risks. We may
use new technologies ineffectively, or we may fail to adapt our 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.
We
typically operate without a significant amount of backlog, which could have an
adverse impact on our operating results
.
We typically
operate with a small amount of backlog. Accordingly, we generally do not have a
material backlog of unfilled orders, and revenues in any quarter are
substantially dependent on orders booked in that quarter. Any significant
weakening in current customer demand would therefore have, and has had in the
past, an almost immediate adverse impact on our operating results.
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 June 1, 2006 and November 30, 2006, the per share
price has fluctuated between $0.83 and $1.85 per share, closing at $1.41 on
December 4, 2006. 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:
·
actual
or anticipated variations in our quarterly operating results;
·
announcements
of technological innovations or failures, new sales formats or new products or
services by us or our competitors;
·
cyclical
nature of consumer products using our technology;
·
changes
in financial estimates by us or securities analysts;
·
changes
in the economic performance and/or market valuations of other multi-media,
video scan companies;
·
announcements
by us of significant acquisitions, strategic partnerships, joint ventures or
capital commitments;
·
additions
or departures of key personnel;
·
additions
or losses of significant customers; and
·
sales
of common stock or dilutive issuance of other securities.
In addition, the
securities markets have experienced extreme price and volume fluctuations in
recent times, and the market prices of the securities of technology companies
have been especially volatile. These broad market and industry factors may
adversely affect the market price of common stock, regardless of actual
operating performance. In the past, following periods of volatility in the
market price of stock, many companies have been the object of
8
securities class action
litigation, including us. If we are sued in a securities class action, then it
could result in additional substantial costs and a diversion of management’s
attention and resources.
We are
subject to various environmental laws and regulations that could impose
substantial costs upon us and may adversely affect our business.
Some of our
operations are subject to state, federal, and international laws governing
protection of the environment, human health and safety, and regulating the use
of certain chemical substances. We endeavor to comply with these environmental
laws, yet compliance with such laws could increase our operations and product
costs. Any violation of these laws can subject us to significant liability,
including fines and penalties, and prohibit sales of our products in one or
more states or countries, and result in a material adverse effect on our
financial condition.
Recent
environmental legislation within the European Union (EU) may increase our cost
of doing business internationally and impact our revenues from EU countries as
we comply with and implement these new requirements. The European Parliament
has enacted the Restriction on Use of Hazardous Substances Directive, or “RoHS
Directive,” which restricts the use of certain hazardous substances in
electrical and electronic equipment. We need to redesign products containing
hazardous substances regulated under the RoHS Directive to reduce or eliminate
regulated hazardous substances contained in our products. As an example,
certain of our products include lead, which is included in the list of
restricted substances.
As of November 30,
2006, our semiconductor products and many of our system products now comply
with the RoHS Directive. However, due to the level of effort and cost in
redesigning products, certain system products will not be redesigned to become
RoHS compliant. Such decisions have been made based on the products estimated
remaining life and the products primary sales regions being located outside the
EU. For certain of our mixer and digital signage products, we continue working
towards compliance but do not expect to meet the requirements of the RoHS
Directive until March 31, 2007 and June 30, 2007, respectively. As a result, we
will be unable to sell these products into the EU market until such compliance
is achieved. These delays may have an adverse effect on our sales and results
of operations.
Any
acquisitions of companies or technologies by us 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
February 2004 when we acquired the stock of COMO Computer and Motion GmbH
and in May 2004 when we acquired substantially all the assets of Visual
Circuits Corporation. From time-to-time, we may engage in discussions and
negotiations with companies regarding the possibility of 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, if 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 and intangible assets, which, if impaired, will
negatively affect our consolidated results of operations. The accounting
treatment for any potential acquisition may also result in a charge for
in-process research and development expense, as was the case with the
acquisition of Visual Circuits Corporation, which will negatively affect our
consolidated results of operations.
We are
exposed to potential risks from legislation requiring companies to evaluate
financial controls under Section 404 of the Sarbanes-Oxley Act of 2002.
Section 404
of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our
system of internal controls. We will be required to meet the requirements of
Section 404 of the Sarbanes-Oxley Act by December 31, 2007. Compliance with the
requirements of Section 404 is expected to be expensive and
time-consuming. We estimate that we will spend approximately $650,000 to
comply. If we fail to complete this evaluation in a timely manner, or if our
9
independent registered
public accounting firm cannot timely attest to our evaluation, we could be
subject to regulatory scrutiny and a loss of public confidence in our internal
controls. In addition, any failure to implement required new or improved
controls, or difficulties encountered in their implementation, could harm our
operating results or cause us to fail to meet our reporting obligations.
Risks
Related to Our Industry
International
sales are subject to significant risk.
Our revenues from
outside the United States are subject to inherent risks related thereto,
including currency rate fluctuations, the general economic and political
conditions in each country. There can be no assurance that an economic or
currency crisis experienced in certain parts of the world will not reduce
demand for our products and therefore have a material adverse effect on our
revenue or operating results.
Our
businesses are very competitive.
The computer
peripheral and semiconductor markets are extremely competitive and are
characterized by significant price erosion over the life of a product. We
currently compete with other developers of video conversion products and with
video-graphic integrated circuit developers. Many of our competitors have
greater market recognition and greater financial, technical, marketing and
human resources. There can be no assurance that we will be able to compete
successfully against existing companies or new entrants to the marketplace.
The video
production equipment and semiconductor markets are highly competitive and
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over
the life of a product. Competition is fragmented with several hundred
manufacturers supplying a variety of products to this market. We anticipate
increased competition from both existing manufacturers and new market entrants.
Increased competition could result in price reductions, reduced margins and
loss of market share, any of which could materially and adversely affect our
business, financial condition and results of operations. There can be no
assurance that we will be able to compete successfully against current and
future competitors in these markets.
Often our competitors
have greater financial, technical, marketing, sales and customer support
resources, greater name recognition and larger installed customer bases than we
possess. In addition, some of our competitors also offer a wide variety of
product offerings which may confer a competitive advantage based upon their
ability either to bundle their equipment in certain large system sales or
combine products more cost effectively than we can offer.
WHERE YOU CAN FIND MORE INFORMATION
We file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy materials
that we have filed with the SEC at the SEC’s public reference room located at
100 F. Street N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings
also are available to the public on the SEC’s website at http://www.sec.gov. In
addition, our SEC filings are available to the public on our website
http://www.Focusinfo.com.
The SEC allows us
to “incorporate by reference” in this prospectus information we file with it,
which means that we can disclose important information to you by referring you
those documents. The information
incorporated by reference is an important part of this prospectus, and
information that we file later with the SEC and which is incorporated by
reference will automatically update and supersede information contained in this
prospectus or in documents filed earlier with the SEC. We incorporate by reference the documents
listed below and any future filings we make with the SEC under Sections 13(a),
13(c), 14, or 15(d) of the Securities Exchange Act of 1934, as amended, after
the date of the filing of our registration statement on Form S-3, including
this prospectus, until our offering is complete. However, we are not incorporating, in each
case, any documents or information deemed to have been furnished and not filed
in accordance with SEC rules.
These documents are
incorporated herein by reference as of their respective dates of filing:
10
·
Our
Annual Report of Form 10-K for the year ended December 31, 2005, as filed with
the Commission on March 31, 2006;
·
Our
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006, as
filed with the Commission on May 15, 2006;
·
Our
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, as
filed with the Commission on August 14, 2006;
·
Our
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2006, as filed with the Commission on November 14, 2006;
·
Our
Current Reports on Form 8-K, as filed with the Commission on January 30, 2006,
February 21, 2006, February 24, 2006, March 9, 2006, March 15, 2006, April 25,
2006, May 11, 2006, May 15, 2006, June 30, 2006, July 13, 2006, August 2, 2006,
August 10, 2006, August 15, 2006, September 28, 2006, October 5, 2006, November
9, 2006, and November 21, 2006; and
·
The
description of our common stock contained in our registration statement on Form
8-A, as filed with the Commission on April 5, 1993, including any amendments or
reports filed for the purpose of updating that description.
Our filings are
available on our website at http://www.Focusinfo.com. Information contained in
or linked to our website is not a part of this prospectus. You may also request a copy of these filings,
at no cost, by writing or telephoning us at:
Focus Enhancements, Inc.
1370 Dell Avenue
Campbell, California 95008
(408) 866-8300
FORWARD-LOOKING STATEMENTS
This document
contains “forward looking” information within the meaning of the Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), 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 “should,” “would,” and
“could.”
These
forward-looking statements relate to, among other things, expectations of the
business environment in which we operate, opportunities and expectations
regarding technologies, anticipated performance or contributions from new and
existing employees, proposed acquisitions, projections of future performance,
possible changes in laws and regulations, potential risks and benefits arising
from the implementation of our strategic and tactical plans, perceived
opportunities in the market, potential actions of significant stockholders and
statements regarding our mission and vision. Our actual results, performance,
and achievements may differ materially from the results, performance, and
achievements expressed or implied in such forward-looking statements due to a
wide range of factors. 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, failure to integrate new
acquisitions, the actual amount of charges and transaction expenses associated
with the acquisitions, the ability to recognize expected synergies upon
acquisition and the related benefits envisioned by us, 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.
Each forward
looking statement should be read in conjunction with the “Risk Factors”
included in this prospectus and incorporated by reference herein, together with
the “Management’s Discussion and Analysis of
11
Financial Condition and
Results of Operations” and the consolidated financial statements and notes
thereto, contained in our periodic reports filed with the SEC and incorporated
by reference herein. 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, except
as required by law.
USE OF PROCEEDS
Unless we
otherwise indicate in the applicable prospectus supplement, we currently expect
to use the net proceeds we receive from the sale of our common stock, warrants
and units comprised of any or all of these securities, for general corporate
purposes, that may include:
·
working
capital;
·
capital
expenditures;
·
research
and development expenditures;
·
sales
and marketing expenditures; and
·
acquisitions
of new businesses, technologies or products that we believe complement or
expand our business.
Additional
information on the use of net proceeds from the sale of the common stock,
warrants and units comprised of any or all of these securities we offer under
this prospectus may be set forth in the prospectus supplement relating to the
specific offering. Pending the use of the net proceeds, we intend to invest the
net proceeds in interest-bearing, investment-grade and U.S government
securities.
PLAN OF DISTRIBUTION
We may sell the
securities offered through this prospectus (i) to or through underwriters or
dealers, (ii) directly to purchasers, including our affiliates, (iii) through
agents, or (iv) through a combination of any these methods. The securities may
be distributed at a fixed price or prices, which may be changed, market prices
prevailing at the time of sale, prices related to the prevailing market prices,
or negotiated prices. The prospectus supplement will include the following
information:
·
the
terms of the offering;
·
the
names of any underwriters or agents;
·
the
name or names of any managing underwriter or underwriters;
·
the
purchase price of the securities;
·
the
net proceeds from the sale of the securities;
·
any
delayed delivery arrangements;
·
any
underwriting discounts, commissions and other items constituting underwriters’
compensation;
·
any
initial public offering price;
·
any
discounts or concessions allowed or reallowed or paid to dealers; and
·
any
commissions paid to agents.
12
Sale Through Underwriters or
Dealers
If underwriters
are used in the sale, the underwriters will acquire the securities for their
own account, including through underwriting, purchase, security lending or
repurchase agreements with us. The underwriters may resell the securities from
time to time in one or more transactions, including negotiated transactions.
Underwriters may sell the securities in order to facilitate transactions in any
of our other securities (described in this prospectus or otherwise), including
other public or private transactions and short sales. Underwriters may offer
securities to the public either through underwriting syndicates represented by
one or more managing underwriters or directly by one or more firms acting as
underwriters. Unless otherwise indicated in the prospectus supplement, the
obligations of the underwriters to purchase the securities will be subject to
certain conditions, and the underwriters will be obligated to purchase all the
offered securities if they purchase any of them. The underwriters may change
from time to time any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers.
If dealers are
used in the sale of securities offered through this prospectus, we will sell
the securities to them as principals. They may then resell those securities to
the public at varying prices determined by the dealers at the time of resale.
The prospectus supplement will include the names of the dealers and the terms
of the transaction.
Direct Sales and Sales Through
Agents
We may sell the
securities offered through this prospectus directly. In this case, no
underwriters or agents would be involved. Such securities may also be sold
through agents designated from time to time. The prospectus supplement will
name any agent involved in the offer or sale of the offered securities and will
describe any commissions payable to the agent. Unless otherwise indicated in
the prospectus supplement, any agent will agree to use its reasonable best
efforts to solicit purchases for the period of its appointment.
We may sell the
securities directly to institutional investors or others who may be deemed to
be underwriters within the meaning of the Securities Act with respect to any
sale of those securities. The terms of any such sales will be described in the
prospectus supplement.
Delayed Delivery Contracts
If the prospectus
supplement indicates, we may authorize agents, underwriters or dealers to
solicit offers from certain types of institutions to purchase securities at the
public offering price under delayed delivery contracts. These contracts would
provide for payment and delivery on a specified date in the future. The contracts
would be subject only to those conditions described in the prospectus
supplement. The applicable prospectus supplement will describe the commission
payable for solicitation of those contracts.
Market Making, Stabilization and
Other Transactions
Unless the
applicable prospectus supplement states otherwise, each series of offered
securities will be a new issue and will have no established trading market. We
may elect to list any series of offered securities on an exchange. Any
underwriters that we use in the sale of offered securities may make a market in
such securities, but may discontinue such market making at any time without
notice. Therefore, we cannot assure you that the securities will have a liquid
trading market.
Any underwriter
may also engage in stabilizing transactions, syndicate covering transactions
and penalty bids in accordance with Rule 104 under the Exchange Act.
Stabilizing transactions involve bids to purchase the underlying security in
the open market for the purpose of pegging, fixing or maintaining the price of
the securities. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in
order to cover syndicate short positions.
Penalty bids
permit the underwriters to reclaim a selling concession from a syndicate member
when the securities originally sold by the syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the securities to be higher than it would be in the absence of the
transactions. The underwriters may, if they commence these transactions,
discontinue them at any time.
13
Electronic Auctions
We may also make
sales through the Internet or through other electronic means. Since we may from
time to time elect to offer securities directly to the public, with our without
the involvement of agents, underwriters or dealers, utilizing the Internet
(sometimes referred to as the “world wide web”) or other forms of electronic
bidding or ordering systems for the pricing and allocation of such securities,
you will want to pay particular attention to the description of that system we
will provide in a prospectus supplement.
Such electronic
system may allow bidders to directly participate, through electronic access to
an auction site, by submitting conditional offers to buy that are subject to
acceptance by us, and which may directly affect the price or other terms and
conditions at which such securities are sold. These bidding or ordering systems
may present to each bidder, on a so-called “real-time” basis, relevant
information to assist in making a bid, such as the clearing spread at which the
offering would be sold, based on the bids submitted, and whether a bidder’s
individual bids would be accepted, prorated or rejected. Of course, many
pricing methods can and may also be used.
Upon completion of
such an electronic auction process, securities will be allocated based on
prices bid, terms of bid or other factors. The final offering price at which
securities would be sold and the allocation of securities among bidders would
be based in whole or in part on the results of the Internet or other electronic
bidding process or auction.
General Information
Agents,
underwriters, and dealers may be entitled, under agreements entered into with
us, to indemnification by us against certain liabilities, including liabilities
under the Securities Act. Our agents, underwriters, and dealers, or their
affiliates, may be customers of, engage in transactions with or perform
services for us, in the ordinary course of business.
DESCRIPTION OF SECURITIES
General
The following
description, together with the additional information included in any
applicable prospectus supplement and incorporated herein by reference,
summarizes the material terms of the common stock, warrants and units comprised
of any or all of these securities that we may offer under this prospectus. For
complete terms of our common stock, please refer to our second restated
certificate of incorporation, as amended, and our amended and restated bylaws,
which are incorporated by reference into the registration statement which
includes this prospectus. The terms of our common stock, warrants and units may
also be affected by the General Corporation Law of Delaware. We will also
include in the prospectus supplement information, where applicable, about
material United States federal income tax considerations relating to our common
stock, and the securities exchange, if any, on which our common stock is
listed.
Description
of Our Common Stock
We are authorized
to issue up to 150,000,000 shares of common stock, $0.01 par value per share.
As of November 30, 2006, 71,577,891 shares of common stock were issued and
outstanding and 10,425,000 shares of common stock are issuable upon conversion
of our outstanding convertible securities. All of the outstanding capital stock
is fully paid and non-assessable.
Holders of common
stock are entitled to one vote per share. All actions submitted to a vote of
stockholders are voted on by holders of common stock and holders of our
outstanding preferred stock voting together as a single class. Our charter
requires the affirmative vote of the holders of shares of voting stock
representing at least 75% of the voting power of all of the then outstanding
shares of capital stock entitled to vote generally in the election of
directors, voting together as a single class, to (1) reduce or eliminate the
number of authorized shares of our preferred stock or (2) amend, repeal or
adopt certain provisions of our charter regarding our common stock and
preferred stock, the perpetual existence of our company, the management of our
company, the board of directors, the liability of directors to our company and
the indemnification of our directors and officers. In addition, our charter requires the
affirmative vote of the holders of shares of voting stock representing at least
80% of the voting power of all of the then outstanding shares of capital stock
entitled to vote generally in the election of directors, voting together as a
single class, to adopt, amend or repeal any provision of the bylaws of our
company. Holders of
14
common
stock are not entitled to cumulative voting in the election of directors. Our
Board of Directors is divided into three classes, each serving staggered
three-year terms. As a result, one class of directors will be elected at each
annual meeting of our stockholders, with the other classes continuing for the
remainder of their respective terms. This provision in our charter may have the
effect of delaying or preventing changes in control or management.
Additionally, we
are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a “business combination” with an “interested
stockholder” for a period of three years following the date the person became
an interested stockholder, unless, with exceptions, the business combination or
the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a business combination includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an interested stockholder is
a person who, together with affiliates and associates, owns, or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation’s voting stock. The existence of this provision can be
expected to have an anti-takeover effect with respect to transactions not
approved in advance by the board of directors, including discouraging attempts
that might result in a premium over the market price for the shares of common
stock held by stockholders.
Holders of common
stock are entitled to receive dividends in cash or in property on an equal
basis, if and when dividends are declared on the common stock by our board of
directors, subject to any preference in favor of outstanding shares of
preferred stock.
In the event of
liquidation of our company, all holders of common stock will participate on an
equal basis with each other in our net assets available for distribution after
payment of our liabilities and payment of any liquidation preferences in favor
of outstanding shares of preferred stock.
Holders of common
stock are not entitled to preemptive rights and the common stock is not subject
to redemption.
Preferred
Stock
The rights of
holders of common stock are subject to the rights of holders of any preferred
stock that we designate or have designated.
The rights of preferred stockholders may adversely affect the rights of
the common stockholders.
Our board of
directors has the ability to issue up to 3,000,000 shares of preferred stock in
one or more series, without stockholder approval. The board of directors may designate for the
series:
·
the
number of shares and name of the series,
·
the
voting powers of the series, including the right to elect directors, if any,
·
the
dividend rights and preferences, if any,
·
redemption
terms, if any,
·
liquidation
preferences and the amounts payable on liquidation or dissolution, and
·
the
terms upon which such series may be converted into any other series or class of
our stock, including the common stock and any other terms that are not
prohibited by law.
It is impossible
for us to state the actual effect it will have on common stock holders if the
board of directors designates a new series of preferred stock. The effects of
such a designation will not be determinable until the rights accompanying the
series have been designated. The issuance of preferred stock could adversely
affect the voting power, liquidation rights or other rights held by owners of
common stock or other series of preferred stock. The board of directors’
authority to issue preferred stock without stockholder approval could make it
more difficult for a third party to acquire control of our company, and could
discourage any such attempt. We have no present plans to issue any additional
shares of preferred stock.
15
Series B
Preferred Stock
The board of
directors of Focus adopted a Certificate of Designation whereby a total of
3,000 shares of Series B Preferred Stock, $0.01 par value per share are
authorized for issuance. Each share has a liquidation preference in the amount
of $1,190.48 plus all accrued or declared but unpaid dividends, and the holders
of each share of Series B Preferred Stock shall be entitled to receive such liquidation
preference prior to the holders of common stock and Series C Preferred Stock.
Cash dividends on the stock are non-cumulative and are paid at the option of
the board of directors. If paid, the rate shall be seven percent per annum. The
board does not presently intend to pay dividends on the stock. At the option of
the holder, each share is convertible into 1,000 shares of our common stock. At
November 30, 2006, there were 2,744 shares of Series B Preferred Stock
outstanding.
Series C
Preferred Stock
The board of
directors of Focus adopted a Certificate of Designation whereby a total of 500
shares of Series C Preferred Stock, $0.01 par value per share are authorized
for issuance. Each share has a liquidation preference in the amount of
$1,560.00 plus all accrued or declared but unpaid dividends, and the holders of
each share of Series C Preferred Stock shall be entitled to receive such
liquidation preference prior to the holders of common stock but not before the
holders of Series B Preferred Stock. Cash dividends on the stock are
non-cumulative and are paid at the option of the board of directors. If paid,
the rate shall be seven percent per annum. The board does not presently intend
to pay dividends on the stock. At the option of the holder, each share is
convertible into 1,000 shares of our common stock. At November 30, 2006, there
were 417 shares of Series C Preferred Stock outstanding.
Options,
Warrants and Notes
As of November 30,
2006, 5,535,577 options to purchase shares of common stock were outstanding
under our approved stock option plans and 2,956,326 shares of common stock were
available for future grants under our stock option plans. We have also issued
warrants totaling 4,645,395 common stock shares. Holders of options and
warrants do not have any of the rights or privileges of our stockholders,
including voting rights, prior to exercise of the options and warrants. The
number of shares of common stock for which these options and warrants are
exercisable and the exercise price of these options and warrants are subject to
proportional adjustment for stock splits and similar changes affecting our
common stock. Pursuant to the terms of our senior secured convertible notes, we
have reserved an additional 11,443,718 shares of common stock which are
issuable upon their conversion. We have reserved sufficient shares of
authorized common stock to cover the issuance of common stock subject to the
options and warrants.
Limitation
of Liability and Indemnification
Our second
restated certificate of incorporation, as amended, contains provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions provide that our directors will not have
personal liability for monetary damages for any breach of fiduciary duty as a
director, except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty. We also maintain directors’ and officers’ liability
insurance. We believe that these provisions will assist us in attracting and
retaining qualified individuals to serve as directors.
Transfer
Agent and Registrar
The transfer agent
and registrar for our common stock is American Stock Transfer and Trust
Company.
NASDAQ
Capital Market
Our common stock
is traded on the NASDAQ Capital Market under the symbol “FCSE.”
Description of Our Warrants
We may issue
warrants for the purchase of our common stock.
Warrants may be issued independently or together with our common stock
and may be attached to or separate from any offered securities. Each series of warrants may be issued under a
separate warrant agreement to be entered into between us and a bank or trust
company, as warrant agent. The warrant
agent would act solely as our agent in connection with the warrants. The warrant agent will not have any
obligation or relationship of agency or trust for or with any holder or
beneficial
16
owners of warrants. This summary of certain provisions of the
warrants is not complete. For the terms
of a particular series of warrants, you should refer to the prospectus
supplement for that series of warrants and the warrant agreement for that
particular series.
The prospectus
supplement relating to a particular series of warrants to purchase our common
stock or preferred stock will describe the terms of the warrants, including the
following:
·
the
title of the warrants;
·
the
offering price for the warrants, if any;
·
the
aggregate number of the warrants;
·
the
designation and terms of the common stock that may be purchased upon exercise
of the warrants;
·
if
applicable, the designation and terms of the securities with which the warrants
are issued and the number of warrants issued with each security;
·
if
applicable, the date from and after which the warrants and any securities
issued with the warrants will be separately transferable;
·
the
number of shares of common stock that may be purchased upon exercise of a
warrant and the exercise price for the warrants;
·
the
dates on which the right to exercise the warrants shall commence and expire;
·
if
applicable, the minimum or maximum amount of the warrants that may be exercised
at any one time;
·
the
currency or currency units in which the offering price, if any, and the
exercise price are payable;
·
if
applicable, a discussion of material U.S. federal income tax considerations;
·
the
antidilution provisions of the warrants, if any;
·
the
redemption or call provisions, if any, applicable to the warrants;
·
any
provisions with respect to holder’s right to require us to repurchase the
warrants upon a change in control; and
·
any
additional terms of the warrants, including terms, procedures, and limitations
relating to the exchange, exercise and settlement of the warrants.
Holders of equity warrants will not be entitled:
·
to
vote, consent or receive dividends;
·
receive
notice as stockholders with respect to any meeting of stockholders for the
election or our directors or any other matters; or
·
exercise
any rights as stockholders of Focus Enhancements, Inc.
Description of Our Units
We may, from time
to time, issue units comprised of one or more of shares of common stock and
warrants that may be offered under this prospectus. Each unit will be issued so that the holder
of the unit is also the holder of each security included in the unit. Thus, the holder of a unit will have the
rights and obligations of a holder of each included security. The unit agreement under which a unit is
issued may provide that the securities included in the
17
unit may not be held or
transferred separately at any time, or at any time before a specified date.
This summary of certain provisions of the units is not complete. For the terms of the units, you should refer
to the prospectus supplement for the units and the unit agreement for that
particular unit.
The prospectus supplement
relating to the units will describe the terms of the units, including the
following:
·
the
material terms of the securities comprising the units, including whether and
under what circumstances those securities may be held or transferred
separately;
·
the
offering price for the units, if any;
·
the
aggregate number of the units;
·
the
designation and terms of the common stock that may be purchased upon exercise
of the warrants comprising the units;
·
if
applicable, the dates on which the right to exercise the warrants comprising
the units shall commence and expire;
·
if
applicable, the minimum or maximum amount of the warrants comprising the units
that may be exercised at any one time;
·
the
currency or currency units in which the offering price, if any, and the
exercise price are payable;
·
any
material provisions relating to the issuance, payment, settlement, transfer or
exchange of the units or of the securities comprising the units;
·
if
applicable, a discussion of material U.S. federal income tax considerations;
·
the
antidilution provisions of the units or the securities comprising the units, if
any;
·
any
provisions with respect to holder’s right to require us to repurchase the units
or the securities comprising the units upon a change in control; and
·
any
additional material provisions of the governing unit agreement.
VALIDITY OF SHARES
Manatt, Phelps
& Phillips LLP, Palo Alto, California, will pass upon the validity of our
securities offered by this prospectus.
EXPERTS
The consolidated
financial statements as of December 31, 2005 and for the year then ended,
incorporated in this prospectus by reference to the Annual Report on Form 10-K
for the year ended December 31, 2005 have been so incorporated in reliance upon
the report (which contains an explanatory paragraph relating to the Company’s
ability to continue as a going concern as described in Note 2 to the
consolidated financial statements) of Burr, Pilger & Mayer LLP, an
independent registered public accounting firm, given on the authority of said
firm as experts in auditing and accounting.
The consolidated
financial statements of Focus as of December 31, 2004 and for each of the two
years in the period ended December 31, 2004, incorporated in this prospectus by
reference from Focus’ Annual Report on Form 10-K for the year ended December
31, 2005 have been audited by Deloitte & Touche LLP, a registered
independent public accounting firm, as stated in their report (which report
expresses an unqualified opinion and includes an explanatory paragraph
regarding the substantial doubt about Focus’ ability to continue as a going
concern), which is incorporated by reference herein, and have been so
incorporated in reliance upon the report of
18
such firm given upon
their authority as experts in accounting and auditing.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Delaware
General Corporation Law and our second restated certificate of incorporation
provide for indemnification of our directors and officers for liabilities and
expenses that they may incur in such capacities. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of Focus pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
19
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