-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A/byc4aGmYLnk+mReji1QX1y0UNf70oqIcPN16SD55i0Q2QEv/vPdYt939hXdY+z OMeSI8ZzoYgV6oayt9CDnw== 0000950005-02-001073.txt : 20021114 0000950005-02-001073.hdr.sgml : 20021114 20021114164247 ACCESSION NUMBER: 0000950005-02-001073 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOCUS ENHANCEMENTS INC CENTRAL INDEX KEY: 0000884719 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 043144936 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11860 FILM NUMBER: 02825524 BUSINESS ADDRESS: STREET 1: 1370 DELL AVE CITY: CAMPBELL STATE: CA ZIP: 95008 BUSINESS PHONE: 4088668300 10QSB 1 p16282_10qsb.txt U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002, or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File Number 1-11860 Focus Enhancements, Inc. (Name of Small Business Issuer in its Charter) Delaware 04-3144936 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1370 Dell Ave Campbell, CA 95008 (Address of Principal Executive Offices) (408) 866-8300 (Issuer's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of Act: Title of Each Class ------------------- Common Stock, $.01 par value Name of Exchange on which Registered ------------------------------------ NASDAQ Securities registered pursuant to Section 12(g) of the Act: None Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such other shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No As of September 30, 2002, there were 36,158,269 shares of the Registrant's Common Stock Outstanding. Focus Enhancements, Inc. Condensed Consolidated Balance Sheets (in thousands, except share data) (unaudited)
September 30, December 31, 2002 2001 (1) -------- -------- ASSETS Current assets: Cash and cash equivalents $ 720 $ 449 Restricted collateral deposit -- 2,363 Accounts receivable, net of allowances of $474 and $666 at September 30, 2002 and December 31, 2001, respectively 2,300 3,314 Inventories, net of reserves of $944 and $819 at September 30, 2002 and December 31, 2001, respectively 2,556 4,009 Prepaid expenses and other current assets 217 230 -------- -------- Total current assets 5,793 10,365 Property and equipment, net 249 411 Capitalized software development costs 125 379 Other assets 88 107 Intangibles, net 1,183 2,181 Goodwill 5,191 4,654 -------- -------- Total assets $ 12,629 $ 18,097 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Obligations under capital leases, current portion $ 42 $ 42 Accounts payable 2,190 4,295 Accrued liabilities 1,854 1,917 Accrued legal judgment -- 2,073 -------- -------- Total current liabilities 4,086 8,327 Convertible notes payable to stockholder 3,867 4,012 Obligations under capital leases, non-current 14 45 -------- -------- Total liabilities 7,967 12,384 -------- -------- Commitments and contingencies (Note 6) Stockholders' equity Preferred stock, $.01 par value; authorized 3,000,000 shares; 1,904 shares issued at September 30, 2002 and December 31, 2001 (aggregate liquidation preference $2,267) -- -- Common stock, $.01 par value; 50,000,000 shares authorized, 36,608,269 and 33,423,403 shares issued at September 30, 2002 and December 31, 2001, respectively 366 334 Additional paid-in capital 65,152 61,616 Accumulated deficit (60,076) (55,366) Deferred compensation and price protection (80) (171) Treasury stock at cost, 450,000 shares (700) (700) -------- -------- Total stockholders' equity 4,662 5,713 -------- -------- Total liabilities and stockholders' equity $ 12,629 $ 18,097 ======== ========
(1) Derived from the December 31, 2001 audited consolidated financial statements The accompanying notes are an integral part of the condensed consolidated financial statements. 2 Focus Enhancements, Inc. Condensed Consolidated Statements Of Operations (in thousands, except per share amounts) (unaudited) Three Months ended September 30, 2002 2001 -------- -------- Net product revenues $ 4,091 $ 6,024 Contract revenues -- 693 -------- -------- Total net revenues 4,091 6,717 Cost of revenues: Products 2,659 3,833 Contract -- 554 -------- -------- Total cost of revenues 2,659 4,387 -------- -------- Gross profit 1,432 2,330 -------- -------- Operating expenses: Sales, marketing and support 1,141 1,425 General and administrative 423 467 Research and development 1,042 617 Amortization expense 217 700 Restructuring expense 96 -- -------- -------- Total operating expenses 2,919 3,209 -------- -------- Loss from operations (1,487) (879) Interest expense, net (57) (44) Other income (expense), net -- 33 -------- -------- Net loss $ (1,544) $ (890) ======== ======== Loss per common share: Basic and diluted $ (0.04) $ (0.03) ======== ======== Weighted average common shares outstanding: Basic and diluted 35,777 32,520 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements. 3 Focus Enhancements, Inc. Condensed Consolidated Statements Of Operations (in thousands, except per share amounts) (unaudited) Nine Months ended September 30, 2002 2001 -------- -------- Net product revenues $ 12,602 $ 17,194 Contract revenues 759 1,021 -------- -------- Total net revenues 13,361 18,215 Cost of revenues: Products 8,099 10,483 Contract 499 817 -------- -------- Total cost of revenues 8,598 11,300 -------- -------- Gross profit 4,763 6,915 -------- -------- Operating expenses: Sales, marketing and support 3,857 4,531 General and administrative 1,638 1,683 Research and development 3,007 2,515 Amortization expense 725 1,976 Restructuring expense 96 33 Write-off of in-process technology -- 505 -------- -------- Total operating expenses 9,323 11,243 -------- -------- Loss from operations (4,560) (4,328) Interest expense, net (174) (267) Other income (expense), net 24 (62) -------- -------- Net loss $ (4,710) $ (4,657) ======== ======== Loss per common share: Basic and diluted $ (0.13) $ (0.15) ======== ======== Weighted average common shares outstanding: Basic and diluted 35,428 31,329 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements. 4 Focus Enhancements, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
Nine Months Ended September 30, 2002 2001 ------- ------- Cash flows from operating activities: Net loss $(4,710) $(4,657) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 950 2,328 Deferred compensation expense 91 209 Gain on debt settlement (311) -- Warrant issue expense 573 -- In process research and development -- 505 Changes in operating assets and liabilities, net of the effects of acquisitions: Decrease (increase) in accounts receivable 1,014 (1,245) Decrease in inventories 1,453 56 Decrease (increase) in prepaid expenses and other assets 23 (66) Increase (decrease) in accounts payable (1,470) 78 Decrease in accrued liabilities (364) (160) Payment of legal judgement (2,073) -- ------- ------- Net cash used in operating activities (4,824) (2,952) ------- ------- Cash flows from investing activities: Decrease in restricted certificates of deposit -- 965 Decrease in restricted collateral deposit 2,363 -- Additions to property and equipment (64) (169) Net cash from acquisition of Videonics -- 360 ------- ------- Net cash provided by investing activities 2,299 1,156 ------- ------- Cash flows from financing activities: Payments on notes payable and long-term debt -- (400) Proceeds from convertible notes payable to shareholder -- 2,650 Repayment of convertible notes payable to shareholder (145) -- Payments under capital lease obligations (31) (106) Net proceeds from private offerings of common stock 2,435 -- Net proceeds from exercise of common stock options 537 123 Payments for registration of common stock -- (117) ------- ------- Net cash provided by financing activities 2,796 2,150 ------- ------- Net increase in cash and cash equivalents 271 354 Cash and cash equivalents at beginning of period 449 352 ------- ------- Cash and cash equivalents at end of period $ 720 $ 706 ======= ======= Supplemental Cash Flow Information: Interest paid $ 280 $ 13 Income taxes paid -- -- Acquisition of Videonics, Inc., for common stock and options -- 8,813 Conversion of note payable to shareholder to preferred stock -- 2,266 Conversion of accounts payable to common stock 23 -- Conversion of accrued liabilities and notes payable to common stock -- 578 Stock issued for expenses associated with delayed registration -- 150 Issuance of common stock to investment banker in connection with the Videonics acquisition -- 251
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 Focus Enhancements, Inc. Notes To Unaudited Consolidated Financial Statements 1. Basis of Presentation - Interim Financial Information The condensed consolidated financial statements of Focus Enhancements, Inc. ("the Company") as of September 30, 2002 and for the three and nine month periods ended September 30, 2002 and 2001 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. In the opinion of management, the condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of its financial position, operating results and cashflows for interim periods presented. The results of operations and cashflows for the nine month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for any future period. The consolidated financial statements include the accounts of the Company and, as of the January 16, 2001 acquisition date (see "Note 3"), Videonics Inc. ("Videonics"). All intercompany accounts and transactions have been eliminated upon consolidation. 2. Management's Plans The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the nine months ended September 30, 2002 and year ended December 31, 2001, the Company incurred a net loss of $4,710,000 and $6,658,000, and net cash used in operating activities totaled $4,824,000 and $3,452,000, respectively. These factors indicate that the Company may potentially be unable to continue as a going concern. Additionally, our auditors included an explanatory paragraph in their report on our financial statements for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-KSB with respect to uncertainties about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to return to profitability and significant positive cash flows. The Company has historically met cash needs from the proceeds of debt, the sale of common stock in private placements, and the exercise of stock options and warrants. Management is assessing the Company's products to identify how to enhance existing product lines or create new distribution channels. In addition, the Company released three new products in the first nine months of 2002, and expects to release at least one more new product by year-end. During 2001, management took steps to reduce costs, including a 13% reduction in personnel, the closure of its Wilmington, MA facility on April 1, 2001, the transfer of operations, customer support and finance to the Campbell, CA, headquarters facility, and the relocation of the remaining sales personnel into a 2,800 square foot facility in Chelmsford, MA. In April of 2002, the Company further reduced its personnel by 9%. Additionally, during the three months ended September 30, 2002, the Company closed its Chelmsford, MA office (resulting in a $96,000 restructuring charge) and furloughed 7% of its personnel through December 31, 2002 with the eventual return to work dependent on business conditions at that date. Even with the anticipated reduction in expenses related to the restructuring and an expected increase in sales, the Company anticipates that during 2002 it will need to raise additional funds to support its working capital needs and meet existing debt obligations. In connection with that need, on January 11, 2002, the Company raised net proceeds of approximately $2.4 million in a private placement transaction with independent third parties through the issuance of 2,434,490 shares of the Company's common stock. Additional financings may be required in 2002 as the Company implements its business plans. There can be no assurance that management's plans will be successful or if successful, that they will result in the Company continuing as a going concern. 6 Focus Enhancements, Inc. Notes To Unaudited Consolidated Financial Statements 3. Acquisition of Videonics Inc. On January 16, 2001, Focus acquired all of the outstanding shares of Videonics in a transaction accounted for using the purchase method of accounting. Focus issued 0.87 shares of its common stock for each issued and outstanding share of Videonics common stock on the closing date. Based on the exchange ratio, a total of approximately 5,135,000 shares were issued. Focus incurred approximately $637,000 in acquisition expenses, including financial advisory and legal fees and other direct transaction costs, which were included as a component of the purchase price. 4. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The Company adopted SFAS No. 142 for its fiscal year beginning January 1, 2002 and, as such, ceased the amortization of goodwill resulting from business combinations completed prior to the adoption of SFAS 141, with a net carrying value of $4,654,000 at the date of adoption. In accordance with SFAS 142 the Company was required to complete a transitional goodwill impairment test six months from the date of adoption. Accordingly, as of the date of the test, goodwill did not appear to be impaired and as such there was no impact on the Company's financial position and results of operations. In connection with the adoption of SFAS No. 142, the Company ceased amortization of the assembled workforce intangible asset associated with the acquisition of Videonics, and reclassified to goodwill the net carrying amount of the intangible asset, in the amount of $537,000. The following table represents the impact on net loss and basic and diluted loss per share from the reduction of amortization of goodwill as if SFAS No. 142 was adopted on January 1, 2001:
Three months ended Nine months ended September 30, September 30, (Dollars in thousands, except for per share amounts) 2002 2001 2002 2001 ---- ---- ---- ---- Reported net loss $ (1,544) $ (890) $ (4,710) $ (4,657) Workforce amortization -- 75 -- 212 Goodwill amortization -- 392 -- 1,117 Adjusted net loss $ (1,544) $ (423) $ (4,710) $ (3,328) Basic and diluted loss per share: Reported basic and diluted loss per share $ (0.04) $ (0.03) $ (0.13) $ (0.15) Workforce amortization per share -- -- -- -- Goodwill amortization per share -- 0.02 -- 0.04 Adjusted basic and diluted loss per share $ (0.04) $ (0.01) $ (0.13) $ (0.11) Common and common equivalent shares used in calculation: Basic and diluted 35,777 32,520 35,428 31,329
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends APB Opinion No. 30, Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. 7 Focus Enhancements, Inc. Notes To Unaudited Consolidated Financial Statements Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for the Company as of January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements. In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002. 5. Inventories Inventories are stated at lower of cost (first-in, first-out) or market and at September 30, 2002 and December 31, 2001, consist of the following: 2002 2001 ----------- ---------- Raw materials $1,076,000 $1,678,000 Work in process 213,000 825,000 Finished goods 1,267,000 1,506,000 ----------- ---------- Totals $2,556,000 $4,009,000 =========== ========== 6. Commitments Convertible Promissory Notes On October 26, 2000, Carl Berg, a Company director and shareholder, loaned the Company $2,362,494 to collateralize a $2,362,494 bond posted in connection with the CRA litigation (see "CRA Systems, Inc."). The promissory note has a term of three years and bears interest at a rate of prime plus 1% (4.75% at September 30, 2002). Interest earned on the restricted collateral deposit is payable to Mr. Berg. The interest payable by the Company to Mr. Berg is reduced by the amount of interest earned on the restricted collateral deposit. The principal amount of the note was originally due on October 26, 2003, but was amended on November 4, 2002, to provide for an extension of the maturity date to April 25, 2004, with interest to be paid quarterly. Under certain circumstances, including at the election of Mr. Berg and the Company, the promissory note and any accrued and unpaid interest is convertible into shares of the Company's common stock at a conversion price of $1.25 which represented the average closing bid and ask price of the Company's common stock on the day preceding the agreement. The promissory note is secured by a security agreement in favor of Mr. Berg granting him a first priority security interest, over substantially all of the assets of the Company. On May 7, 2001, $46,000 of outstanding interest due under the note was converted into 38 shares of Series B Preferred Stock. In February 2002, in connection with the settlement of the CRA Systems Inc. case, the bond was liquidated and excess proceeds of $145,000 were used to pay down a portion of this note. As of September 30, 2002 the Company had unpaid principal and accrued interest due under the note totaling approximately $2,357,000. On February 28, 2001, Carl Berg agreed to loan the Company $2.0 million to support the Company's working capital needs, bearing interest at a rate of prime plus 1%. The principal amount of the note will be due at the end of its term, with interest to be paid quarterly. On April 24, 2001, the note was amended to provide that under certain circumstances, including at the election of Mr. Berg and the Company, the promissory note and any accrued and unpaid interest is convertible into shares of the Company's preferred stock at a conversion price of $1,190 per share which represented 1,000 (each share of preferred is convertible into 1,000 shares of common) multiplied by 125% of the trailing 30-day average of the Company's common stock ending April 23, 2001. The promissory note is secured by a security agreement in favor of Mr. Berg granting him a security interest in first priority over substantially all of the assets of the Company. On May 7, 2001, the Company and Mr. Berg agreed to the conversion of $1,000,000 of the outstanding principal balance and $16,000 of accrued interest into 854 shares of Series 8 Focus Enhancements, Inc. Notes To Unaudited Consolidated Financial Statements B Preferred Stock. On November 4, 2002, the note was amended to provide for an extension of the maturity date for the remaining principal balance of $1,000,000, from the original maturity date of October 26, 2003 to April 25, 2004. As of September 30, 2002 the Company had principal and accrued interest due under the note totaling approximately $1,095,000. On June 29, 2001, the Company issued a convertible promissory note to Mr. Berg in the amount up to $650,000 to support the Company's working capital needs. The promissory note had an original due date of January 3, 2003 which was extended to January 3, 2004 and bears interest at a rate of prime plus 1%. The principal amount of the note will be due at the end of its term, with interest to be paid quarterly. The note provides that at the election of Mr. Berg and the Company, the promissory note and any accrued and unpaid interest is convertible into shares of the Company's series C Preferred Stock at a conversion price of $1,560 per share which represented 1,000 (each share of preferred is convertible into 1,000 shares of common) multiplied by 125% of the trailing 30-day average of the Company's common stock ending June 28, 2001. The promissory note is secured by a security agreement in favor of Mr. Berg granting him a security interest in first priority over substantially all of the assets of the Company. As of September 30, 2002 the Company had principal and accrued interest due under the note totaling approximately $702,000. Restricted Collateral Deposit In connection with the CRA Systems, Inc. ("CRA") judgment discussed below, the Company posted a bond in the amount of $2,362,494 to suspend any enforcement of the judgment pending appeal. Carl Berg obtained the bond on the Company's behalf in exchange for a secured convertible note in the same amount as described in "Convertible Notes Payable to Stockholder" above. The bond was irrevocable and was collateralized by a certificate of deposit in the amount of $2,363,000. In February, 2002, the Company utilized the bond to pay CRA Systems Inc., $2,216,000 in accordance with the judgment, consisting of the accrued legal judgment of $2,073,000 and accrued interest related thereto of $143,000. See "CRA Systems Inc." for further discussion. CRA Systems, Inc. In 1996 Focus entered into a distribution agreement with CRA , a Texas corporation, the terms and nature of which were subsequently disputed by the parties. CRA brought suit against Focus in 1998, for breach of contract and other claims, contending that Focus grossly exaggerated the demand for the product and the margin of profit that was available to CRA. On October 10, 2000, the court rendered a judgment in favor of CRA for actual damages, punitive damages, attorney's fees, costs, and interest. In connection with this judgment, Focus recorded an expense of $2,147,722 in the period ended September 30, 2000. The court overruled a motion for new trial, and Focus appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit in New Orleans, Louisiana. On October 27, 2000, Focus submitted a bond in the approximate amount of $2.3 million (being the approximate amount of the judgment plus 10% to cover interest and costs of CRA) and the U.S. District Court granted a stay of any enforcement of the judgment pending appeal. The Court of Appeals held oral arguments on December 3, 2001. On January 3, 2002, the Court of Appeals affirmed the judgment awarded to CRA virtually in its entirety. As described above, Focus had already recorded a charge to operations to establish a legal reserve for such amount during the third quarter of 2000. Such accrued legal judgement was reduced to $2,073,000 at December 31, 2001 based on the final amount affirmed by the Court of Appeals. In February, 2002, the Company utilized the bond to pay $2,216,000 in accordance with the judgment, consisting of the accrued legal judgment of $2,073,000 and accrued interest related thereto of $143,000. Excess bond proceeds of $145,000 were used to pay down a Convertible Note Payable to Mr. Berg. See "Convertible Promissory Notes" for further discussion. This case is now closed. General From time to time, the Company is party to certain other claims and legal proceedings that arise in the ordinary course of business which, in the opinion of management, will not have a material adverse effect on the Company's financial position or results of operations. 9 Focus Enhancements, Inc. Notes To Unaudited Consolidated Financial Statements 7. Stockholders' Equity Preferred Stock On April 24, 2001, the Company's board of directors adopted a Certificate of Designation whereby a total of 2,000 shares of Series B Preferred Stock, $0.01 par value per share, are reserved for issuance. Each share has a liquidation preference in the amount of $1,190.48 plus all accrued or declared but unpaid dividends. 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 the Company's common stock. The Company is obligated, under certain circumstances, including at the election of Mr. Berg and Focus, to convert the outstanding balances of convertible notes payable to Mr. Berg, and any unpaid interest, into shares of Focus preferred stock. As of September 31, 2002, approximately 1,370 shares of preferred stock were subject to issuance to Mr. Berg pursuant to the convertible notes payable agreements. See "Note 6. Commitments - Convertible Promissory Notes." Common Stock On July 28, 2000, the Company entered into an equity line of credit agreement with Euston Investments Holdings Limited ("Euston"), for the future issuance and purchase of up to 4,000,000 shares of the Company's common stock at a 10% discount. In lieu of providing Euston with a minimum aggregate drawdown commitment, the Company issued to Euston a stock purchase warrant to purchase 250,000 shares of common stock with an exercise price of $1.625. The warrant expires June 12, 2005. The Company had sought to register such shares under a Registration Statement on Form SB-2. However, before the registration statement was declared effective, on January 11, 2002, Focus and Euston mutually agreed to terminate the agreement. As consideration for terminating the agreement, the exercise price of Euston's warrants to purchase 250,000 shares of Focus common stock was reduced from $1.625 to $0.75 per share. The Company recorded a charge to Other Expenses of approximately $334,000 in the quarter ended March 31, 2002 based on the fair value of the repriced warrants. The fair value of the warrants was calculated using the Black-Scholes option pricing model with the following assumptions: contractual term of 17 months, volatility of 140%, risk free interest rate of 2.9% and no dividends during the term of the warrant. On January 11, 2002, the Company completed the sale of 2,434,490 shares of its common stock in a private placement to four independent third parties, receiving proceeds of approximately $2,435,000, which is net of offering costs of $315,000. Additionally, the Company incurred $182,000 of costs during 2001 in connection with this offering (including costs associated with the subsequent registration of the shares), resulting in total offering costs of $497,000. The shares were sold at a 20% discount to the 20-day average closing bid prices of the Company's common stock as of December 27, 2001, the date an agreement in principle was reached by the parties. In connection with the private placement, the Company issued warrants to the four investors to purchase a total of 367,140 shares of common stock at an exercise price of $1.36 per share. See also, "Note 8. Related Party Transactions." On March 1, 2002, the Company issued warrants to purchase 270,000 shares of common stock as compensation to three unrelated parties for consulting services in the areas of investment advisory, investor relations and public relation services. The warrants are exercisable for a period of two to three years at an exercise prices ranging from $1.35 to $1.50 per share. The Company recorded charges of approximately $238,000 for the quarter ended March 31, 2002 based on the fair value of the warrants. Such amounts were recorded as General and administrative expenses and the fair value of the warrants was calculated using the Black-Scholes option pricing model with the following assumptions: contractual term of 2 to 3 years, volatility of 136% to 140%, risk free interest rate of 2.9% to 3.6% and no dividends during the term of the warrant. 10 Focus Enhancements, Inc. Notes To Unaudited Consolidated Financial Statements As of September 30, 2002, the Company was obligated under certain circumstances, to issue the following additional shares of common stock pursuant to derivative securities, instruments or agreements: Warrants to purchase common stock 1,134,569 Options to purchase common stock 6,681,527 Notes payable convertible into common stock 1,885,978 Preferred Stock convertible into common stock 1,904,000 ---------- Total shares of common stock obligated, under certain circumstances, to issue 11,606,074 ========== 8. Related Party Transactions During the quarter ended March 31, 2002, in connection with its efforts to find investors in the private placement completed on January 11, 2002, vFinance Investments Inc. received from the Company $275,000 in cash and a warrant to purchase 123,690 shares of common stock of Focus at $1.36 per share. Timothy Mahoney, who is a Focus director, is a principal of vFinance. 9. Significant Customers No customer accounted for greater than 10% of total revenue for the three-months ended September 30, 2002. Three customers, each with accounts receivable balances in excess of 10% of our accounts receivable accounted for 48% of total accounts receivable at September 30, 2002. One customer accounted for 11% of total revenue for the three-months ended September 30, 2001. One customer accounted for 22% of total accounts receivable at September 30, 2001. 11 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Introduction The following information should be read in conjunction with the consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. Certain Factors That May Affect Future Results From time to time, information provided by the Company or statements made by its employees may contain "forward looking" information within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve risks and uncertainties. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words or phrases such as "believe", "plan", "expect", "intend", "anticipate", "estimate", "project", "forecast", "may increase", "may fluctuate", "may improve" and similar expressions or future or conditional verbs such as "will", "should", "would", and "could". These forward-looking statements relate to, among other things, expectations of the business environment in which Focus operates, opportunities and expectations regarding technologies, anticipated performance or contributions from new and existing employees, projections of future performance, possible changes in laws and regulations, potential risks and benefits arising from the implementation of the Company's strategic and tactical plans, perceived opportunities in the market, potential actions of significant stockholders and investment banking firms, and statements regarding the Company's mission and vision. The Company's 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 the Company's future cash needs, reliance on major customers, history of operating losses, limited availability of capital under credit arrangements with lenders, market acceptance of the Company's products, technological obsolescence, competition, component supply problems and protection of proprietary information, as well as the accuracy of the Company's internal estimates of revenue and operating expense levels. Each forward looking statement should be read in conjunction with the consolidated financial statements and notes thereto, of this Quarterly Report and with the information contained in Item 2, including, but not limited to, "Risk Factors" contained herein, together with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001, including, but not limited to, the section therein entitled "Certain Factors That May Affect Future Results" and "Risk Factors." Focus does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. Acquisition of Videonics On January 16, 2001, Focus Enhancements, Inc., acquired all of the outstanding shares of Videonics, Inc., ("Videonics") in a transaction accounted for using the purchase method of accounting. Focus issued 0.87 shares of Focus common stock for each issued and outstanding share of Videonics common stock on the closing date. Based on the exchange ratio, a total of approximately 5,135,000 shares were issued. Focus incurred approximately $637,000 in acquisition expenses, including financial advisory and legal fees and other direct transaction costs, which were included as a component of the purchase price. In accordance with the Company's restructuring plan, it has significantly reduced its post merger staffing in the areas of operations, customer support and finance as these areas have been consolidated into the company's Campbell, California facility. In March 2001, the Company negotiated an early release from its lease of a 22,000 square foot facility located in Wilmington, Massachusetts and has since moved its remaining Massachusetts' sales personnel into a 2,800 square foot facility located in Chelmsford, Massachusetts. On September 29, 2002 the Company vacated its Chelmsford, Massachusetts facility and authorized its sales personnel to work from home offices. Focus has notified the landlord and attempted to enter into a settlement agreement. To date, no agreement has been reached. Accordingly, on September 29, 2002, Focus accrued the entire amount of the remaining lease obligation, totaling $96,000. See "Restructuring Expenses." 12 Results of Operations Net Revenues Net revenues for the three-months ended September 30, 2002 were $4,091,000 as compared with $6,717,000 for the three-months ended September 30, 2001 a decrease of $2,626,000, or 39%. Net revenues for the nine-months ended September 30, 2002 were $13,361,000 as compared with $18,215,000 for the nine-months ended September 30, 2001, a decrease of $4,854,000 or 27%. For the three months ended September 30, 2002, net sales to Professional AV customers were approximately $3,061,000 compared to $3,873,000 for the same period in 2001, a decrease of $812,000 or 21%. For the nine months ended September 30, 2002, net sales to Professional AV customers were approximately $8,290,000 compared to $10,940,000 for the same period in 2001, a decrease of $2,650,000 or 24%. The decrease between comparison periods is the result of a decrease in business to business sales as a result of the slowdown in the economy. For the three months ended September 30, 2002, net sales to OEM customers, which includes contract revenues, were approximately $452,000 as compared to $1,539,000 for the same period in 2001, a decrease of $1,087,000 or 70% (net sales to OEM customers for the three months ended September 30, 2001 have been reduced by $158,000, from previously reported amounts, as certain products are now being reported within consumer sales.) For the nine months ended September 30, 2002, net sales to OEM customers were approximately $2,244,000 as compared to $2,908,000 for the same period in 2001, a decrease of $664,000 or 23%. (net sales reported for the nine months ended September 30, 2001 have been reduced by $301,000, from previously reported amounts, as certain products are now being reported within consumer sales.) The decrease for the three and nine months ended September 30, 2002 is primarily attributable to a decrease in contract revenues of $693,000 and $263,000, respectively, and a decline in scan converter sales as a result of the slowdown in the economy. For the three months ended September 30, 2002, net consumer sales to Resellers consisting of Distributors, Retailers, VAR's and Education segments were approximately $578,000 as compared to $1,305,000 for the same period in 2001, a decrease of $727,000 or 56%. For the nine months ended September 30, 2002, net sales to Resellers were approximately $2,826,000 as compared to $4,367,000 for the same period in 2001, a decrease of $1,541,000 or 35%. Overall sales to resellers has been trending lower as a result of a reduction of nationwide computer sales, decreased educational spending and the Company's discontinuance of sales of its products to certain retail accounts. As of September 30, 2002, the Company had a sales order backlog of approximately $212,000. Cost of Goods Sold Cost of goods sold were $2,659,000, or 65% of net sales, for the three-months ended September 30, 2002, as compared with $4,387,000, or 65% of net sales, for the three-months ended September 30, 2001, a decrease of $1,728,000 or 39%. The Company's gross profit margin for the third quarters of 2002 and 2001 was 35%. Cost of goods sold were $8,598,000, or 64% of net sales, for the nine-months ended September 30, 2002, as compared with $11,300,000, or 62% of net sales, for the nine-months ended September 30, 2001, a decrease of $2,702,000 or 24%. The Company's gross profit margin for the nine-month periods of 2002 and 2001 were 36% and 38%, respectively. The majority of the decrease in gross profit as a percentage of revenue for the nine-month comparison periods is primarily due to a higher percentage of fixed costs in relation to revenues as a result of decreased revenue. The three-months ended September 30, 2002 also was impacted by an inventory obsolescence charge of $250,000 to reserve for excess and obsolete inventory, offset somewhat by a $163,000 reversal of an accrual the Company had established in the fourth quarter of 2000. The accrual related to a disputed claim between the Company and the seller as to the product's quality and the Company's ability to return. The accrual was reduced as the Company settled for less than the amount originally reserved. 13 Sales, Marketing and Support Expenses Sales, marketing and support expenses were $1,141,000, or 28% of net revenues, for the three-months ended September 30, 2002, as compared with $1,425,000, or 21% of net revenues, for the three-months ended September 30, 2001, a decrease of $284,000 or 20%. Sales, marketing and support expenses were $3,857,000, or 29% of net revenues, for the nine-months ended September 30, 2002, as compared with $4,531,000, or 25% of net revenues, for the nine-months ended September 30, 2001, a decrease of $674,000 or 15%. The decrease in sales, marketing and support expenses in absolute dollars is primarily the result of lower staffing, decreased commission and reduced marketing expenses. General and Administrative Expenses General and administrative expenses for the three-months ended September 30, 2002 were $423,000 or 10% of net revenues, as compared with $467,000 or 7% of net revenues for the three-months ended September 30, 2001, a decrease of $44,000 or 9%. General and administrative expenses for the nine-months ended September 30, 2002 were $1,638,000 or 12% of net revenues, as compared with $1,683,000 or 9% of net revenues for the nine-months ended September 30, 2001, a decrease of $45,000. The decrease in general and administrative expense for the three-months ended September 30, 2002 is primarily attributable to reduced payroll expenses, consulting and legal fees, which includes an insurance deductible refund of $100,000, partially offset by increased investor relations expenses. The decrease in general and administrative expense for the nine-months ended September 30, 2002 is primarily attributable to reduced payroll expenses, consulting and legal fees, which includes an insurance deductible refund of $100,000, partially offset by charges of approximately $238,000 associated with the issuance of warrants in connection with consulting services, increased investor relations expenses and an increase in bad debt expenses. Research and Development Expenses Research and development expenses for the three-months ended September 30, 2002 were approximately $1,042,000 or 25% of net revenues, as compared with $617,000 or 9% of net revenues for the three-months ended September 30, 2001, an increase of $425,000 or 69%. Research and development expenses for the nine-months ended September 30, 2002 were approximately $3,007,000 or 23% of net revenues, as compared with $2,515,000 or 14% of net revenues for the nine-months ended September 30, 2001, an increase of $492,000 or 20%. The increase in research and development expenses was due primarily to a reduction in engineering work performed under contract and, as such, less research and development personnel expenses were allocated to costs of sales than in the prior year. Amortization Amortization expenses for the three-months ended September 30, 2002 was $217,000 or 5% of net revenues, as compared with $700,000 or 10% of net revenues, for the three-months ended September 30, 2001, a decrease of $483,000 or 69%. Amortization expense for the nine-months ended September 30, 2002 were $725,000 or 4% of net revenues, as compared with $1,976,000 or 11% of net revenues, for the nine-months ended September 30, 2001, a decrease of $1,251,000 or 63%. The decrease in terms of absolute dollars and as a percentage of net revenues is primarily due to the Company's adoption of FAS 142 on January 1, 2002, under which goodwill is no longer amortized. On a pro forma basis had the amortization of goodwill and the assembled workforce intangible asset ceased on January 1, 2001, the Company's amortization expense for the three and nine months ended September 30, 2001 would have decreased by $467,000, and $1,130,000, respectively, and the Company would have reported a net loss of $423,000 or $0.01 per share and net loss of $3,327,000 or $0.11 per share, respectively. As of September 30, 2002, no impairment of goodwill had been recognized. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. See also "Note 4. Recent Accounting Pronouncements." Restructuring Expenses For the three-months ended September 30, 2002, the Company recorded restructuring expenses totaling $96,000 related to the closure of its Chelmsford, MA, facility. For the nine-months ended September 30, 2001, the Company recorded restructuring expenses totaling $33,000 related to the closure of its Wilmington, MA, facility. Write-off of In-Process Technology In connection with the acquisition of Videonics, the Company recorded a charge for purchased in-process technology of $505,000 during the first quarter of 2001. 14 Interest Expense, Net Net interest expense for the three-months ended September 30, 2002 was $57,000, or 1% of net revenues, as compared to $44,000, or 1% of net revenues, for the three-months ended September 30, 2001, a increase of $13,000. Net interest expense for the nine-months ended September 30, 2002 was $174,000, or 1% of net revenues, as compared to $267,000, or 1% of net revenues, for the nine-months ended September 30, 2001, a decrease of $93,000. The decrease in interest expense for the nine-month period is primarily attributable to a decrease in debt obligations and lower interest rates. Other Income (Expense), Net Net other income for the three-months ended September 30, 2002 was zero, as compared to net other expense of $33,000, or less than 1% of net revenues, for the three-months ended September 30, 2001, a change of $33,000. Net other income for the nine-month period ended September 30, 2002 was $24,000, or less than 1% of net revenues, as compared to net other expense of $62,000, or less than 1% of net revenues, for the nine-months ended September 30, 2001, a change of $86,000. Other expense for the nine-months ended September 30, 2002 is primarily comprised of a charge of $334,000 related to the repricing of warrants associated with the termination of an equity line of credit offset by gains on the settlement of debts for less than original amounts of $360,000. The increase in other income for the three-months ended September 30, 2001 is primarily attributable to gains of approximately $128,000 related to the settlement of debts for less than the amounts initially accrued, offset by charges of $69,000 associated with the untimely registering of AMRO Investment International's 1,400,000 shares which were issued in connection with a private placement in which the Company received gross proceeds of $1,500,000 in June 2000. The Company registered these shares in February of 2002. The increase in other expense for the nine-months ended September 30, 2001 is primarily attributable to charges of $374,000 associated with the untimely registering of AMRO Investment International's shares. Offsetting these charges were gains of approximately $328,000 related to the settlement of debts for less than original amounts accrued. Liquidity and Capital Resources The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the nine-months ended September 30, 2002 and the year ended December 31, 2001, the Company incurred net losses of $4,710,000 and $6,658,000, respectively, and net cash used in operating activities of $4,824,000, and $3,452,000, respectively. These factors indicate that the Company may potentially be unable to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to return to profitability and significant positive cash flows. Since inception, the Company has financed its operations primarily through the public and private sale of common stock, proceeds from the exercise of options and warrants, short-term borrowing from private lenders, and favorable credit arrangements with vendors and suppliers. Net cash used in operating activities for the nine-months ended September 30, 2002 and 2001 was $4,824,000 and $2,952,000, respectively. In the first nine months of 2002, net cash used in operating activities consisted primarily of a net loss of $4,170,000 adjusted for depreciation and amortization of $950,000, warrant issue expense of $573,000 and gain on debt settlement totaling $311,000, a decrease in accounts payable of $1,470,000 and payment of legal judgment of $2,073,000, partially offset by an decrease in accounts receivable of $1,014,000 and a decrease in inventories totaling $1,453,000. In first nine months of 2001, net cash used in operating activities consisted primarily of a net loss of $4,657,000 adjusted for depreciation and amortization of $2,328,000, the write-off of in-process technology related to 15 the acquisition of Videonics totaling $505,000, deferred compensation expense of $209,000, a decrease in accrued expenses totaling $160,000 and an increase in accounts receivable of $1,260,000, partially offset by an increase in accounts payable of $78,000. Three customers, each with accounts receivable balances in excess of 10% of our accounts receivable, accounted for 48% of our total accounts receivable at September 30, 2002. We expect that our operating cash flows may fluctuate in future periods as a result of fluctuations in our operating results, shipment linearity and accounts receivable collections, inventory management, and the timing of payments among others. Net cash provided by investing activities for the nine-months ended September 30, 2002 and 2001 was $2,300,000 and $1,156,000, respectively. For the first nine months of 2002, cash provided in investing activities was principally from the decrease in restricted collateral deposit of $2,363,000, offset by the purchase of property and equipment of $64,000. For the first nine months of 2001, cash was provided by a reduction in restricted certificates of deposit of approximately $965,000 and net cash provided through the acquisition of Videonics on January 16, 2001, of $360,000, offset by additions to property and equipment of $169,000. The acquisition of Videonics was accounted for as a purchase and made through the issuance of approximately 5,135,000 shares of the Company's common stock. Net cash provided by financing activities for the three-months ended September 30, 2002 and 2001 was $2,796,000 and $2,150,000, respectively. In the first nine months of 2002, the Company received $2,435,000 in net proceeds from private offerings of common stock and $537,000 from the exercise of common stock options which were partially offset by $145,000 in repayments on convertible notes to a shareholder. In the first nine months of 2001, cash provided by financing activities occurred primarily from the issuance of notes payable to a stockholder and director of the Company of $2,650,000 offset by repayments of $400,000 to a bank. As of September 30, 2002, the Company had working capital of $1,707,000, as compared to $2,038,000 at December 31, 2001, an decrease of $331,000. The Company has incurred losses and negative cash flows from operations for the nine-months ended September 30, 2002 and each of the two years in the period ended December 31, 2001 and as such has been dependent upon raising money for short and long-term cash needs through debt, proceeds from the exercise of options, and the sale of common stock in private placements. For the nine-months ended September 30, 2002, the Company received approximately $537,000 from the exercise of common stock options and $2,435,000 in proceeds from private offerings of common stock, which is net of financing costs of $315,000. Additionally, the Company incurred $182,000 of costs during 2001 in connection with this offering (including costs associated with the subsequent registration of the shares), resulting in total offering costs of $497,000. On February 28, 2001, and June 29, 2001, the Company and Carl Berg, a director and stockholder of the Company, entered into Secured Convertible Promissory Note agreements under which Mr. Berg loaned the Company a total of $2.7 million to support the Company's working capital needs. On May 7, 2001, the Company converted $2.3 million of outstanding debt under two separate promissory notes and accrued interest owed by Focus to Mr. Berg to Convertible Preferred Stock. See "Note 7 - Convertible Notes" for more information. At September 30, 2002, the Company owed Mr. Berg approximately $4.2 million in principal and accrued interest on various notes. Management has taken steps to reduce costs, including the closure of its Wilmington, MA facility on April 1, 2001. All operations, customer support and finance were moved into the Campbell, CA, facility. In connection with this restructuring, the Company reduced overall personnel by 13%. In April of 2002, the Company further reduced its personnel by 9%. Additionally, during the three-months ended September 30, 2002, the Company closed its Chelmsford, Massachusetts office and furloughed 7% of its personnel through December 31, 2002 with the eventual return to work dependent on business conditions at that date. Management is assessing its product lines to identify how to enhance existing or create new distribution channels. In addition, the Company released three new products in the first nine months of 2002, and expects to release at least one 16 more new product by year-end. There can be no assurances as to the amount of revenue these new products will produce. Ultimate future capital requirements will depend on many factors, including cash flow from operations, continued progress in research and development programs, competing technological and market developments, and our ability to market our products successfully. Additional financings may be required in 2002 as the Company implements its business plan. As of September 30, 2002, the Company had no commitments from any other sources to provide additional equity or debt financing. As such, there can be no assurance that sufficient funds will be raised. Moreover, any equity financing would result in dilution to our then-existing stockholders and any additional debt financing may result in higher interest expense. There is no assurance that management's plans will be successful or if successful, that they will result in the Company continuing as a going concern. Effects of Inflation and Seasonality The Company believes that inflation has not had a significant impact on the Company's sales or operating results. The Company's business does not experience substantial variations in revenues or operating income during the year due to seasonality. Risk Factors You should carefully consider the following risks relating to our business and our common stock, together with the other information described elsewhere in this prospectus. If any of the following risks actually occur, our business, results of operations and financial condition could be materially affected, the trading price of our common stock could decline, and you might lose all or part of your investment. Risks Related to Our Business We have a long history of operating losses. As of September 30, 2002, we had an accumulated deficit of $60,076,000. We incurred net losses of $4,710, 000, $6,658,000 and $12,029,000 for the nine-months ended September 30, 2002 and the years ended December 31, 2001 and 2000, respectively. There can be no assurance that we will become profitable. Additionally, our auditors have included an explanatory paragraph in their report on our financial statements for the year ended December 31, 2001 with respect to uncertainties about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. We may need to raise additional capital, which will result in further dilution of existing and future stockholders. Historically, we have met our short-and long-term extra cash needs through debt and the sale of common stock in private placements because cash flow from operations has been insufficient to fund our operations. Set forth below is information regarding net proceeds received recently: Private Offerings Of Issuance of Exercise of Stock Common Stock Debt Options and Warrants ------------ ---- -------------------- First nine months 2002 $2,435,000 -- $537,000 Fiscal 2001 -- $2,650,000 $199,000 Fiscal 2000 $1,284,000 $2,363,000 $1,121,000 Future capital requirements will depend on many factors, including cash flow from operations, continued progress in research and development programs, competing technological and market developments, and our ability to market our products successfully. If we require additional equity or debt financing in the future, there can be no assurance that sufficient funds will be raised. Moreover, any equity financing or convertible debt would result in dilution to our then-existing stockholders and could have a negative effect on the market price of our common stock. Furthermore, any additional debt financing may result in higher interest expense. 17 In the event we are unable to raise additional capital, we may not be able to fund our operations which could result in the inability to execute our current business plan. We have a significant amount of convertible securities that will dilute existing shareholders upon conversion. At September 30, 2002, we had 36,158,269 and 1,904 shares of common and preferred shares issued and outstanding, respectively, and 1,134,569 warrants and 6,681,527 options that are exercisable into shares of common stock. The 1,904 shares of preferred stock are convertible into 1,904,000 shares of our common stock. We also may issue additional shares in acquisitions and may grant 187,702 additional stock options to our employees, officers, directors and consultants under our current stock option plans. Any additional plans will further dilute existing shareholders. In addition, at September 30, 2002, the Company was obligated under certain circumstances, to issue up to 1,370 shares of preferred stock upon the conversion of $1,797,000 debt and accrued interest. We are dependent upon a significant stockholder to meet our interim financing needs. We have relied upon the ability of Carl Berg, a director and significant owner of our common stock for interim financing needs. As of September 30, 2002, we had an aggregate of approximately $4.2 million in debt and accrued interest outstanding to Mr. Berg. There can be no assurances that Mr. Berg will continue to provide such interim financing should we need additional funds. We rely on certain vendors for a significant portion of our manufacturing. Over 50% of the components for our products are manufactured on a turnkey basis by four vendors, Furthertech Company, Ltd., Sicon International, Samsung Semiconductor Inc., and Asemtec Corporation. In addition, certain of products are assembled by a single vendor in Mexico. If these vendors experience production or shipping problems for any reason, we in turn could experience delays in the production and shipping of our products, which would have an adverse effect on our results of operations. We are dependent on our suppliers. 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. We rely on sales to a few major customers for a large part of our revenues. No customer accounted for greater than 10% of total revenue for the quarter ended September 30, 2002, however, three customers accounted for 48% of our total accounts receivable at September 30, 2002. 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 we will be able to market our current or proposed products to new customers. Loss of any major customer would have a material adverse effect on our business as a whole. Furthermore, many of our products are dependent upon the overall success of our customer's product, over which we often have no control. Our products may become obsolete very quickly. The computer peripheral markets are characterized by extensive research and development and rapid technological change resulting in short product life cycles. Development by others of new or improved products, processes or technologies may make our products or proposed products obsolete or less competitive. We must devote substantial efforts and financial resources to enhance our existing products and to develop new products. There can be no assurance that we will succeed with these efforts. We may not be able to protect our proprietary information. We have a total of eight patents issued, of which five relate to our PC-to-TV video-graphics products. We treat our technical data as confidential and rely on internal non-disclosure safeguards, including confidentiality agreements with 18 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. Delays in product development could adversely affect our market position or customer relationships. We have experienced delays in product development in the past and may experience similar delays in the future. Given the short product life cycles in the markets for our products, any delay or unanticipated difficulty associated with new product introductions or product enhancements could cause us to lose customers and damage our competitive position. Prior delays have resulted from numerous factors, such as: o changing product specifications; difficulties in hiring and retaining necessary personnel; o difficulties in reallocating engineering resources and other resource limitations; o difficulties with independent contractors; o changing market or competitive product requirements; unanticipated engineering complexity; o undetected errors or failures in software and hardware; and o delays in the acceptance or shipment of products by customers. If we are unable to respond to rapid technological change in a timely manner, then we may lose customers to our competitors. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our products. Our industry is characterized by rapid technological change, changes in user and customer requirements and preferences and frequent new product and service introductions. If competitors introduce products and services embodying new technologies, or if new industry standards and practices emerge, then our existing proprietary technology and systems may become obsolete. Our future success will depend on our ability to do the following: o both license and internally develop leading technologies useful in our business; o enhance our existing technologies; o develop new services and technology that address the increasingly sophisticated and varied needs of our prospective customers; and o 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. 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 quarterly financial results are subject to significant fluctuations. We have been unable in the past to accurately forecast our operating expenses or revenues. Our 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. 19 In the past, our common stock has not met the minimum levels to remain listed on the Nasdaq SmallCap Market. If we were to be delisted, it could make trading in our stock more difficult. Our common stock is traded on the Nasdaq SmallCap Market. There are various quantitative listing requirements for a company to remain listed on the Nasdaq SmallCap Market. o We must maintain stockholders' equity of $2,500,000. At September 30, 2002, we had total stockholders' equity of $4.6 million. To the extent we continue losing money and do not raise additional capital, our stockholders' equity will be reduced. o We are required to maintain a minimum bid price of $1.00 per share for our common stock. The closing price of our common stock on November 12, 2002 was $1.20. If we fail these Nasdaq SmallCap requirements in the future, our common stock could be delisted, eliminating the only established trading market for shares of our common stock. Any sales of our common stock at a discount to market may reduce the trading price of our common stock to a level below the Nasdaq minimum bid price requirement. In the event we are delisted from Nasdaq, we would be forced to list our shares on the OTC Electronic Bulletin Board or some other quotation medium, such as pink sheets, depending on our ability to meet the specific listing requirements of those quotation systems. As a result an investor might find it more difficult to dispose of, or to obtain accurate price quotations for, our shares. Delisting might also reduce the visibility, liquidity, and price of our common stock. Our common stock price is volatile. The market price for our common stock is volatile and has fluctuated significantly to date. For example, between October 1, 2001 and November 12, 2002, the price of our stock has fluctuated between $0.73 and $2.24 per share, closing at $1.20 at November 12, 2002. The trading price of our common stock is likely to continue to be highly volatile and subject to wide fluctuations in response to factors including, but not limited to, the following: o actual or anticipated variations in our quarterly operating results; o announcements of technological innovations, new sales formats or new products or services by us or our competitors; o changes in financial estimates by securities analysts; o changes in the economic performance and/or market valuations of other multi-media, video scan companies; o announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; o additions or departures of key personnel; and o sales of common stock or issuance of other dilutive securities. In addition, the securities markets have experienced extreme price and volume fluctuations, 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 our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of stock, many companies have been the object of securities class action litigation, including us. If we are sued again in a securities class action, then it could result in additional substantial costs and a diversion of management's attention and resources. 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 the economic crisis and currency issues currently being 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. 20 Our businesses are very competitive. The computer peripheral 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. Although we are not currently aware of any announcements by our competitors that would have a material impact on its operations, 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 market is highly competitive and is 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 in the video post-production equipment market 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 this market. 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 video equipment, including professional video tape recorders, video cameras and other related equipment. In some cases, these competitors may have a competitive advantage based upon their ability to bundle their equipment in certain large system sales. The energy crisis in the State of California could adversely effect our operations. The western United States (and California in particular) has experienced repeated episodes of diminished electrical power supply and fluctuating energy costs. This has resulted in uncertainty regarding the settlement of the various financial components of the crisis. These financial components include a potential adverse impact on the State of California's general fund, the determination of which energy customers will bear what cost burdens, and the resolution of the financial status of the two largest utilities in the State. We remain concerned about the potential impact of California's energy crisis upon our operations and the financial condition of our customers and suppliers in California. Furthermore, our California offices at this time do not have backup generators, and hence we would need to curtail our operations in the event of an electricity brown-out or black-out. We are exposed to general economic conditions that have resulted in significantly reduced sales levels. If such adverse economic conditions were to continue or worsen, our business, financial condition and operating results could be adversely impacted. If the adverse economic conditions in the United States and throughout the world economy continue or worsen, we may experience a material adverse impact on our business, operating results, and financial condition. We continue to take actions and charges to reduce our cost of sales and operating expenses in order to address these adverse conditions. A prolonged continuation or worsening of sales trends may require additional actions and charges to reduce cost of sales and operating expenses in subsequent quarters. We may be unable to reduce cost of sales and operating expenses at a rate and to a level consistent with such a future adverse sales environment. If we must undertake further expense reductions, we may incur significant incremental special charges associated with such expense reductions that are disproportionate to sales, thereby adversely affecting our business, financial condition and operating results. Continuing weakness in the economy could decrease demand for our products, increase delinquencies in payments and otherwise have an adverse impact on our business. Recent corporate bankruptcies, accounting irregularities, and alleged insider wrong doings have negatively affected general confidence in the stock markets and the economy, further depressing the stock market and causing the U.S. Congress to enact sweeping legislation. In an effort to address these growing investor concerns, the U.S. Congress passed, and on July 30, 2002, President Bush signed into law, the Sarbanes-Oxley Act of 2002. This sweeping legislation primarily impacts investors, the public accounting profession, public companies, including corporate duties and responsibilities, and securities analysts. 21 Some highlights include establishment of a new independent oversight board for public accounting firms, enhanced disclosure requirements for public companies and their insiders, required certification by CEO's and CFO's of SEC financial filings, prohibitions on certain loans to offices and directors, efforts to curb potential securities analysts' conflicts of interest, forfeiture of profits by certain insiders in the event financial statements are restated, enhanced board audit committee requirements, whistleblower protections, and enhanced civil and criminal penalties for violations of securities laws. It is difficult to predict the impact of such legislation, however it will increase the costs of securities law compliance for publicly traded companies such as Focus. Continued terrorism threats and potential war in the Middle East have had a negative impact on the U.S. economy. The adverse consequences of potential war and the effects of terrorism have had a negative affect on the U.S. economy. For example, the potential for war in Iraq has further depressed the stock markets. Any prolonged conflict(s) could negatively impact our ability to raise additional funds if needed and our revenues will be adversely affected if consumers and businesses continue to cut back spending. 22 Item 3. Controls and Procedures In accordance with Section 302 of the Sarbanes-Oxley Act of 2002 and the Securities Exchange Act of 1934 Section 13(a) or Section 15(d), we implemented disclosure controls and procedures pursuant to which management under the supervision and with the participation of the chief executive officer ("CEO") and chief financial officer ("CFO") carried out, within 90 days prior to the filing of this quarterly report, a review and evaluation of the effectiveness of these controls and procedures. Based on this review, our CEO and CFO have concluded that our disclosure controls and procedures are effective in timely alerting them to material changes in information required to be included in our periodic Securities and Exchange Commission filings. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above. 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings Class Action Suits Focus and one of our directors were named as defendants in a securities class action pending in United States District Court for the District of Massachusetts. The complaint includes a class of stockholders who purchased Focus shares during the July 17, 1997 to February 19, 1999 period (C.A. No. 99-12344-DPW). The complaint was initially filed in November of 1999 and has been amended several times. The complaint purports to allege violations of the federal securities laws and seeks unspecified monetary damages. Defendants moved to dismiss the action. The Federal District Court granted certain portions of our motion to dismiss and denied other portions, allowing the case to go forward into pretrial discovery as to certain matters. On or about December 7, 2001 the parties reached an agreement in principle to settle this case and on or about May 23, 2002 the case was settled and a final judgement was entered by the United States District Court. The settlement was funded entirely by proceeds from defendants' insurance carrier. The case is now closed. CRA Systems, Inc. In 1996 we entered into an agreement with CRA Systems, Inc., a Texas corporation, the terms and nature of which were subsequently disputed by the parties. We contended that the transaction was simply a sale of inventory for which we were never paid. CRA contended otherwise. CRA brought suit against Focus and on September 21, 1998, filed in the 170th Judicial District Court of McLennon County, Texas (Case No. 98-3151-4) for breach of contract and other claims, contending that we grossly exaggerated the demand for the product and the margin of profit that was available to CRA regarding this project. CRA sought to recover out-of-pocket losses exceeding $100,000 and lost profits of $400,000 to $1,000,000. The case was removed to the US District Court for the Western District of Texas, Waco, Texas (Civil No. W-99-CA-031). A jury trial in May 2000 in that court resulted in a verdict in favor of CRA for $848,000 actual damages and $1,000,000 punitive damages. On October 10, 2000, the court rendered a judgment in favor of CRA for actual damages, punitive damages, attorney's fees, costs, and interest. In connection with this judgment, we recorded an expense of $2,147,722 in the period ended September 30, 2000. The court overruled the motion for new trial that we filed, and we appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit in New Orleans, Louisiana. On October 27, 2000, we submitted a bond in the approximate amount of $2.3 million (being the approximate amount of the judgment plus 10% to cover interest and costs of CRA) and the U.S. District Court granted a stay of any enforcement of the judgment pending appeal. The Court of Appeals held oral argument on December 3, 2001. On January 3, 2002, the Court of Appeals affirmed the judgment awarded to CRA virtually in its entirety. We had already recorded a charge to operations to establish a legal reserve for such amount during the third quarter of 2000. Therefore, in February 2002, the Company utilized the bond to pay CRA $2,215,600 in accordance with the judgement. Excess bond proceeds of $145,000 were used to pay down a Convertible Note Payable to Mr. Berg. See "See Note 6. Commitments - Convertible Promissory Notes" for further discussion. This case is now closed. General From time to time, the Company is party to certain other claims and legal proceedings that arise in the ordinary course of business of which, in the opinion of management, do not have a material adverse effect on the Company's financial position or results of operation. 24 Item 2. Changes in Securities (a) (None) (b) (None) (c) During the nine months ended September 30, 2002, the Focus has sold the following securities that were not registered under the Securities Act. The purchases and sales were exempt pursuant to Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering, where the purchasers represented their intention 1. On January 11, 2002, we sold in a private placement, 2,434,490 shares of our common stock to four investors for gross proceeds of $2,750,000. The proceeds were used for general corporate purposes. In connection with the private placement, we also issued warrants to purchase 367,140 shares of common stock at $1.36 per share. The securities were later registered on a Registration Statement on Form S-3 deemed effective on February 12, 2002. 2. On January 18, 2002 and March 26, 2002, we issued 5,607 and 10,190 shares of our common stock, respectively, to two unrelated third parties in settlement of an aggregate of $23,000 in accounts payable. 3. In September 2002, we received gross proceeds of $187,500 from the issuance of 250,000 shares of common stock resulting from the exercise of common stock warrants initially issued pursuant to a private placement with an unaffiliated investor. The proceeds from the warrants were used for general corporate purposes. The warrants and underlying common stock were registered on a Registration Statement on Form S-3 deemed effective on February 12, 2002. The issuance of the securities described above were exempt either pursuant to Rule 701 under the Securities Act, as a transaction pursuant to a compensatory benefit plan, or pursuant to Section 4(2) as a transaction by an issuer not involving a public offering. The recipients in such transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. No underwriters were employed in any of the above transactions. Appropriate legends were affixed to the share certificates and warrants issued in the transactions. (d) See (c) above. Item 3. Defaults Upon Senior Securities (None) Item 4. Submission of Matters to a Vote of Security Holders (None) Item 5. Other Information (None) 25 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.40 - Employment agreement between Focus Enhancements and Brett Moyer Exhibit 99.1 - CEO 906 Certification Exhibit 99.2 - CFO 906 Certification (b) Reports on Form 8-K On August 23, 2002, the Company filed a Form 8-K announcing that its FS454 Semiconductor had been accepted for the X Box Video Game System. On August 27, 2002, the Company filed a Form 8-K announcing the retirement of its president and the appointment of a new president. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. November 14, 2002 Focus Enhancements, Inc. - ------------------------ --------------------------------- Date Registrant By:/s/ Gary L. Williams ------------------------ Gary L. Williams Vice President of Finance, Chief Financial Officer (Principal Financial and Accounting Officer and Authorized Signer) Certification of the Principal Executive Officer (Section 302 of the Sarbanes-Oxley Act of 2002) I, Brett Moyer, President and Chief Executive Officer of Focus Enhancements, Inc. certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Focus Enhancements Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Brett Moyer --------------- Brett Moyer President and Chief Executive Officer Certification of the Principal Financial Officer (Section 302 of the Sarbanes-Oxley Act of 2002) I, Gary L. Williams, Chief Financial Officer of Focus Enhancements, Inc. certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Focus Enhancements Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Gary L. Williams ----------------------- Gary L. Williams Chief Financial Officer EX-10.40 3 ex10.txt EMPLOYMENT AGREEMENT Exhibit 10.40 EMPLOYMENT AGREEMENT ("Agreement") FOCUS Enhancements, Inc., a Delaware Corporation (hereinafter referred to as "Employer") and Brett Moyer (hereinafter referred to as "Employee"), in consideration of the mutual promises made herein, agree as follows: ARTICLE 1 TERM OF EMPLOYMENT Specified Period Section 1.1 Employer hereby employs Employee, and Employee hereby accepts employment with Employer for the period beginning on the effective date of this Agreement as set forth below (the "effective date") and terminating two years after the effective date ("Initial Term"). Succeeding Term Section 1.2 This Agreement shall extend on the end of the Initial Term and annually thereafter at the annual anniversary date for an additional one-year period (the "Succeeding Term"), unless terminated by either party for any reason or not renewed upon written notice given by one party to the other party at least thirty (30) days before such applicable anniversary date. "Employment Term" Defined Section 1.3 As used herein, the phrase "employment term" refers to the entire period of employment of Employee by Employer hereunder, whether for the periods provided above, or whether terminated earlier as hereinafter provided or extended automatically or by mutual agreement between Employer and Employee. ARTICLE 2 DUTIES AND OBLIGATIONS OF EMPLOYEE General Duties Section 2.1 As of the date set forth in Section 8.8, Employee shall serve as Employer's President & Chief Executive Officer, and he shall also serve as a member of Employer's Board of Directors. Prior to such date, Employee shall continue to serve in his current capacity as Executive Vice-President working under the direction of and reporting to Michael D'Addio, the Company's current President and Chief Executive Officer. In his capacity as President and Chief Executive Officer, Employee shall do and perform all services, acts or things in accordance with the policies set by Employer's Board of Directors. Employee shall perform such services primarily in Campbell, California, which shall serve as the Employer's principal facility, except that the parties understand that temporary travel on Employer's business to other sites shall be required. The parties may designate another location for Employee to primarily perform his services; provided, however, that Employee's permanent place of employment shall not be more than fifty miles from Campbell, California absent Employee's written consent. Devotion to Employer's Business Section 2.2 (a) Employee shall devote substantially all his productive time, ability and attention to the business of Employer during the employment term. (b) Employee shall not engage in any other business duties or pursuits whatsoever, or directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of the Board of Directors except for (1) boards of directors of private companies on which Employee currently serves and (2) other boards of directors to which Employee shall not devote more than 16 hours of service per month (measured on an annual basis). However, the expenditure of reasonable amounts of time for education, charitable or professional activities shall not be deemed a breach of this Agreement if those activities do not materially interfere with the services required under this Agreement. (c) In addition to Employee's providing occasional service as a member of the Board(s) of Directors as provided above, this Agreement shall not be interpreted to prohibit Employee from making passive personal investments or conducting private business affairs if those activities do not materially interfere with the services required under this Agreement. Confidential Information; Tangible Property; Competitive Activities Section 2.3 (a) Employee shall hold in confidence and not use or disclose to any person or entity without the express written authorization of Employer, either during the employment term or any time thereafter, secret or confidential information of Employer. Information and materials received in confidence from third parties by Employee with respect to the performance of his duties for Employer is included within the meaning of this section. If any confidential information described below is sought by legal process, Employee will promptly notify Employer and will cooperate with Employer in preserving its confidentiality in connection with any legal proceeding. The parties hereto hereby stipulate that, to the extent it is not known publicly, the following information is important, material and has independent economic value (actual or potential) from not being generally known to others who could obtain economic value from its disclosure or use ("Confidential Information"), and that any breach of any terms of this Section 2.3 is a material breach of this Agreement: (i) The names, buying habits and practices of Employer's customers or prospective customers; (ii) Employer's marketing methods and related data; (iii) The names of Employer's vendors and suppliers; (iv) Cost of materials / services; (v) The prices Employer obtains or has obtained or for which it sells or has sold its products or services; (vi) Production costs; (vii) Compensation paid to employees or other terms of employment; (viii) Employer's past and projected sales volumes; (ix) Proposed new products / services; (x) Enhancements of existing products / services; and (xi) Any additional information deemed by Employer to be confidential by marking or stamping "Confidential" or similar words on the cover of such information, by advising Employee orally or in writing that certain information is confidential. All software code, methodologies, models, samples, tools, machinery, equipment, notes, books, correspondence, drawings and other written, graphical or electromagnetic records relating to any of the products of Employer or relating to any of the Confidential Information of Employer which Employee shall prepare, use, construct, observe, possess, or control shall be and shall remain the sole property of Employer and shall be returned by Employee upon termination of employment. (b) During the employment term, Employee shall not, directly or indirectly, either as an employee, consultant, agent, principal, partner, stockholder (except in a publicly held company), corporate officer, director, or in any other individual or representative capacity, engage or participate in any business that is in competition in any manner whatsoever with the then business of Employer. (c) During the employment term, Employee agrees that Employee will not undertake planning for or organization of any business activity competitive with Employer's business, or combine or conspire with other employees or representatives of Employer's business for the purpose of organizing any competitive business activity. (d) During the employment term and for two (2) years thereafter, Employee agrees that he will not directly or indirectly, or by action in concert with others, induce or influence (or seek to induce or influence) any person who is then engaged (as an employee, agent, independent contractor, or otherwise) by Employer to terminate his employment or engagement for the purpose of employing such person in any enterprise in which Employee is a member of Management or has a material interest. (e) Covenants of this Section 2.3 shall be construed as separate covenants covering their subject matter in each of the separate counties and states in the United States in which Employer transacts its business. To the extent that any covenant shall be judicially unenforceable in any one or more of said counties or states, said covenants shall not be affected with respect to each other county and state; each covenant with respect to each other county and state being construed as severable and independent. (f) Employee represents and warrants that Employee is free to enter into this Agreement and to perform each of its terms and covenants, and that doing so will not violate the terms or conditions of any other agreement between Employee and any third party. Inventions and Original Works Section 2.4 (a) Employee agrees that he will promptly make full written disclosure to Employer, will hold in trust for the sole right and benefit of Employer, and hereby assigns to Employer all of his right, title and interest in and to any and all inventions (and patent rights with respect thereto), original works of authorship relating to the business of FOCUS Enhancements (including all copyrights with respect thereto), developments, improvements or trade secrets which Employee may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the course of performing his duties under this Agreement. (b) Employee acknowledges that all original works of authorship relating to the business of FOCUS Enhancements which are made by him (solely or jointly with others) within the scope of his duties under this Agreement and which are protectable by copyrights are "works made for hire" as that term is defined in the United States Copyright Act (17 U.S.C.A., Section 101), and that Employee is an employee as defined under that Act. Employee further agrees from time to time to execute written transfers to Employer of ownership or specific original works or authorship (and all copyrights therein) made by Employee (solely or jointly with others) which may, despite the preceding sentence, be deemed by a court of law not to be "works made for hire" in such form as is acceptable to Employer in its reasonable discretion. Maintenance of Records Section 2.5 Employee agrees to keep and maintain adequate and current written records of all inventions, original works of authorship, trade secrets developed or made by him (solely or jointly with others) during the employment term. The records will be in the form of notes, sketches, drawings and other formats that may be specified by Employer. The records will be available to and remain the sole property of Employer at all times. Obtaining Letters Patent and Copyright Registration Section 2.6 Employee agrees to assist Employer to obtain United States or foreign letters patent, and copyright registrations (as well as any transfers of ownership thereof) covering inventions and original works of authorship assigned hereunder to Employer. Such obligation shall continue beyond the termination of this Agreement, but after such termination Employer shall compensate Employee at a reasonable rate for time actually spent by Employee at Employer's request on such assistance. If Employer is unable for any reason whatsoever, including Employee's mental or physical incapacity to secure Employee's signature to apply for or to pursue any application for any United States or foreign letters, patent or copyright registrations (or any document transferring ownership thereof) covering inventions or original works or authorship assigned to Employer under this Agreement, Employee hereby irrevocably designates and appoints Employer and its duly authorized officers and agents as Employee's agent and attorney-in-fact to act for and in his behalf and stead to execute and file any such applications and documents and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent or copyright registrations or transfers thereof with the same legal force and effect as if executed by Employee. This appointment is coupled with an interest in and to the inventions and works of authorship and shall survive Employee's death or disability. Employee hereby waives and quitclaims to Employer any and all claims of any nature whatsoever which Employee now or may hereafter have for infringement of any patents or copyrights resulting from or relating to any such application for letters, patent or copyright registrations assigned hereunder to Employer. Article 3 OBLIGATIONS OF EMPLOYER General Description Section 3.1 Employer shall provide Employee with the compensation, incentives and benefits specified in Section 4 of this Agreement. Office and Staff Section 3.2 Employer shall provide Employee with a private office, office and technical equipment, supplies and other facilities, equipment and services suitable to Employee's position and adequate for the performance of his duties. Article 4 COMPENSATION OF EMPLOYEE Annual Salary Section 4.1 As compensation for his services hereunder, Employee shall be paid at a base salary rate of $190,000 (one hundred ninety thousand dollars) in the first year of the Initial Term. For the second year of the Initial Term, Employer shall pay Employee at a base salary rate of $200,000 (two hundred thousand dollars). Salary shall be paid in equal installments not less frequently than once per month. Bonus Compensation and Relocation Expenses Reimbursement Section 4.2 (a) In addition to his regular base salary, Employee shall be entitled to participate in an incentive bonus plan to earn up to an additional $110,000 per year. $55,000 (fifty five thousand dollars) of this bonus amount shall be based upon the Employer's quarterly revenue growth year over year; provided that no revenue attributable to any existing written agreement as of the effective date between Employer and its major undisclosed OEM (contracted with in June 2001) shall be included in any revenue calculations. From the effective date of this Agreement until December 31, 2003, the bonus rate will be 1.34% of the quarterly revenue growth year over year. From the effective date of this Agreement until December 31, 2003, up to an additional $55,000 (fifty five thousand dollars) in bonus amount shall be paid based upon the Employer's quarterly cash flow provided by operations (as calculated using the Company's 10-Q and 10-K filings) as follows, starting in the first full quarter beginning after the effective date: if more than $25,000 and less than $100,000 in cash flow is provided by operations, this will result in a bonus payment of $6,000; if more than $100,000 and less than $200,000 in cash flow is provided by operations, this will result in a bonus payment of $8,500; if more than $200,000 and less than $500,000 in cash flow is provided by operations, this will result in a bonus payment of $13,500; if more than $500,000 and less than $750,000 in cash flow is provided by operations, this will result in a bonus payment of $20,000; if more than $750,000 in cash flow is provided by operations, this will result in a bonus payment of $25,000. (For illustrative purposes see table below.) ---------------------------------------------------- ---------------------- If quarterly cash flows from operations are: Bonus Payment ---------------------------------------------------- ---------------------- Greater than $25,000 but less than $100,000 $6,000 ---------------------------------------------------- ---------------------- Greater than $100,000 but less than $200,000 $8,500 ---------------------------------------------------- ---------------------- Greater than $200,000 but less than $500,000 $13,500 ---------------------------------------------------- ---------------------- Greater than $500,000 but less than $750,000 $20,000 ---------------------------------------------------- ---------------------- Greater than $750,000 $25,000 ---------------------------------------------------- ---------------------- From January 1, 2004 through the termination of this Agreement or until otherwise agreed to by the Employee and the Board of Directors (excluding Employee), whichever is first, the bonus plan described above (Section 4.2 (a)) shall remain in effect except that, if any change is made in calculating the bonus, Employee shall receive a minimum guaranteed bonus of $6,875 (six thousand eight hundred seventy five dollars) per quarter under each bonus criteria that is changed. (Bonus criteria are defined as (i) quarterly revenue growth and (ii) quarterly increases in cash flow provided by operations.) No change to any bonus criteria shall be effective unless agreed by Employee and the Board of Directors (excluding Employee) at least 60 (sixty) days prior to the start of a quarter. (b) Employer shall reimburse Employee for all relocation expenses reasonably incurred in moving Employee's household and family from the greater Boston, Massachusetts area up to a maximum of $85,000 (eighty-five thousand dollars). Relocation costs include reasonable temporary family and personal living expenses in California, transportation, lodging and living expenses while moving and commission costs associated with the sale of Employee's current home in the greater Boston, Massachusetts area. ("Temporary family and personal living expenses" as used in the above sentence shall not be for more than 6 weeks and shall be paid only during the period Employee and his family have moved to California from the greater Boston Massachusetts area but Employee has not yet sold his home in the greater Boston, Massachusetts area.) (c) If Employer terminates Employee's employment in the Initial Term other than for Cause as set forth below in Section 6.3, Employer shall pay Employee the reasonable costs to move his family and household to the greater Boston, Massachusetts area. If the Employee does not elect to return to the Boston area within a six-month window from such termination without Cause, then the Employer is not obligated to pay any additional remuneration to the Employee for relocation. (d) If the Employee elects to terminate his employment during the Initial Term, the he is obligated to reimburse the Employer for a prorated portion of the initial relocation costs. Tax Withholding Section 4.3 Employer shall have the right to deduct or withhold from the compensation due to Employee hereunder any and all sums required for federal income and social security taxes and all state or local taxes now applicable or that may be enacted and become applicable in the future, for which withholding is required by law. Non Qualified Stock Options Section 4.4 Employee shall be granted Non Qualified Stock Options to purchase 350,000 shares of Employer's Common Stock under Employer's Available Stock Option Plans, said grant to be made on the effective date by the Employer's Board of Directors. Said Options shall be exercisable at the fair market value on the day immediately prior to the effective date, shall vest in equal installments at the rate of one-thirty-sixth (1/36) per month thereafter over three (3) years, and shall expire at the longer of (1) five (5) years from the date of grant or (2) if permitted thereunder, ten years from the date of grant. The Company shall request the approval of an adequate number of stock options at the next Shareholder Meeting to grant to Employee the 150,000 stock options immediately following that meeting. Article 5 EMPLOYEE BENEFITS Annual Vacation Section 5.1 Employee shall be entitled to 20 business days of paid vacation during each year of this Agreement. Employee may be absent from his employment for vacation only at such times the Employee notifies at a minimum of 10 (ten) days in advance the Employer's Board of Directors Compensation Committee of the planned vacation. Unused vacation will carry over from one year to the next but the maximum amount of vacation, which can be accrued (unused) at any one time, shall not exceed 20 business days. Unused vacation will not be paid in the form of cash, except upon termination of employment. Benefits Section 5.2 Employee shall be eligible to participate in any and all benefit plans provided by Employer, on the same basis as same are made available to other employees, including health, disability and life insurance coverage should Employee elect to participate in any such plans. Business Expenses Section 5.3 Employer shall reimburse Employee for all appropriate expenses for travel and entertainment by Employee for legitimate business purposes, provided that they are approved in writing by the Chief Financial Officer of the Employer and provided that Employee furnishes to Employer adequate records and documentary evidence for the substantiation of each such expenditure, as required by the Internal Revenue Code of 1986, as amended. Article 6 TERMINATION OF EMPLOYMENT Termination Section 6.1 Employer shall not terminate the Employee's employment except as provided in Section 6.3 and/or 6.4. Employee's employment hereunder may be terminated by Employee for any reason, without further obligation or liability, except as expressly provided herein. Resignation, Retirement, Death or Disability Section 6.2 Employee's employment hereunder shall be terminated at any time by Employee's resignation, or by Employee's retirement at or after attainment of age sixty (60) at Employee's option ("Retirement"), death, or his inability to perform his duties under this Agreement on a full-time basis for a continuous period of ninety (90) days or more because of a physical or mental illness ("Disability"). Employer shall not be liable for payment of bonus compensation during any period of Disability, though salary and benefits shall continue to be paid during such period. Termination for Cause Section 6.3 Employer may terminate Employee for Cause at any time. "Cause" shall mean personal dishonesty, conflict of interest or breach of fiduciary duty involving material personal or family profit, willfully engaging in conduct with the purpose and effect of materially injuring Employer, the willful and continued failure by the Employee to substantially perform his duties hereunder in a reasonably competent manner expected of similarly situated executives for comparable public companies in the high technology electronics industry. For purposes of this Section 6.3, no act, or failure to act, on the Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Employer. Notwithstanding the foregoing, the Employee shall not be terminated for Cause without (i) reasonable notice to the Employee setting forth the reasons for the Employer's intention to terminate for Cause and a reasonable period of time to cure such "Cause" if same is capable of being cured within such period; (ii) if not capable of being so cured within a reasonable period, an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors; and (iii) if clause (i) shall be inapplicable, then, after the opportunity to be heard as set forth in clause (ii), delivery to the Employee of a Notice of Termination as defined in Section 6.6 hereof from the Board finding that in the good faith opinion of the majority of the Board of Directors, the Employee has engaged in conduct set forth above, and specifying the particulars thereof in detail. Termination Without Cause Section 6.4 (a) Employer may terminate Employee without Cause at any time. For the first year of the Initial Term, if Employer terminates Employee without Cause, Employee shall receive, as severance pay for the remainder of the Initial Term, all regular salary and benefits otherwise which would be due to him on the same schedule as same were paid at the time of termination, as if he were still employed through such Initial Term. If Employee is terminated without Cause or this Agreement is allowed to expire without renewal during the second year of the Initial Term or in the first Succeeding Year of the Initial Term, Employee shall receive, as severance pay for the twelve months immediately after such termination date, regular salary and benefits payable at the same rate he was earning on the same schedule as such were paid at the time of termination. If Employee is terminated without Cause or this Agreement is allowed to expire without renewal during the Initial Term or in the first Succeeding Year after the Initial Term, as described in this paragraph, any unvested stock options issued to Employee which have not lapsed and which are not otherwise exercisable shall vest, accelerate, and become immediately exercisable by Employee. If Employee is terminated without Cause or this Agreement is allowed to expire without renewal during any Succeeding Year which commences one or more year(s) after the end of the Initial Term, then Employee shall receive as severance pay for the twelve months immediately after such termination date regular salary and benefits payable at the same rate he was earning and on the same schedule at the time of termination. In the event of Employee's subsequent death after his termination by Employer without Cause, Employer shall continue to pay the same payments and benefits to Employee's surviving spouse, or if none, to Employee's estate as Employee was entitled to at the date of his death. Employee's employment hereunder may be terminated without Cause upon ten (10) business days' notice for any reason. (b) Employee may terminate this Agreement with or without Cause for any reason at any time upon thirty (30) days prior notice. Upon such termination by Employee, Employee shall receive all salary, benefits and options vested through such termination date. Expiration Section 6.5 Unless otherwise renewed in accordance herewith, Employee's employment shall end upon expiration of the employment term as provided in Section(s) 1.1 and 1.2. Notice for Termination Section 6.6 Any termination of the Employee's employment (other than termination by reason of death) shall be communicated by written Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall include the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination. Date of Termination Section 6.7 The "Date of Termination" shall be: (a) if the Employee's employment is terminated by his death, the date of his death; (b) if the Employee's employment is terminated by reason of Employee's Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period); (c) if the Employee's employment is terminated for Cause, subject to Section 6.3 above, the date of the Notice of Termination is given or after if so specified in such Notice of Termination; (d) if the Employee's employment is terminated by either party for any other reason than those set forth in clauses 6.7(a)-(c) above, the date on which the Notice of Termination specifies. Article 7 PAYMENTS TO EMPLOYEE UPON TERMINATION Death, Disability or Retirement Section 7.1 Upon Employee's Retirement, Death or Disability, all benefits generally available to Employer's employees as of the date of such an event shall be payable to Employee or Employee's estate without reduction, in accordance with the terms of any plan, contract, understanding or arrangement forming the basis for such payment. Employee shall be entitled to such other payments as might arise from any other plan, contract, understanding or arrangement between Employee and Employer at the time of any such event. Termination for Cause or Resignation Section 7.2 If Employer terminates Employee for Cause or Employee voluntarily resigns for reasons other than constructive discharge, neither Employer nor any affiliate shall have any further obligation to Employee under this Agreement or otherwise, except to the extent provided in any other plan, contract, understanding or arrangement, or as may be expressly required by law. Article 8 GENERAL PROVISIONS Notices Section 8.1 Any notices to be given hereunder by either party to the other shall be in writing and may be transmitted by personal delivery or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at: "Employee" Brett Moyer 38 Heritage Lane Stow, MA 01775 "Employer" FOCUS Enhancements, Inc. 1370 Dell Avenue Campbell, California 95008 Each party may change that address or addressee by written notice in accordance with this section. All notices delivered shall be deemed communicated as of the date of actual receipt. Arbitration Section 8.2 (a) Any controversy between Employer and Employee involving the construction or application of any of the terms, provisions or conditions of this Agreement or the breach thereof shall be settled by binding arbitration before a single arbitrator selected by the American Arbitration Association, in accordance with its then current commercial rules. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. Arbitration shall comply with and be governed by the provisions of the American Arbitration Association, Commercial Division. No discovery shall be permitted in such arbitration other than an exchange of documents, and the parties hereby agree to limit the number of hearing days in arbitration to two (2) days. The arbitrator shall issue a written decision listing findings of fact, reasons for the decision, and conclusions of law in any arbitration. The arbitration award shall be specifically enforceable. (b) The cost of arbitration (including the prevailing party's reasonable attorneys' fees) shall be borne by the non-prevailing party as determined by the arbitrator or in such proportions as the arbitrator decides. (c) Such arbitration and any litigation shall take place solely in Santa Clara County, California. Attorneys' Fees and Costs Section 8.3 If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to obtain from the non-prevailing party, reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which that party may be entitled. This provision shall be construed as applicable to this entire Agreement. Entire Agreement Section 8.4 This Agreement supersedes, merges and voids any and all other agreements, either oral or in writing, between the parties hereto with respect to its subject matter and no other covenants and agreements between the parties exist with respect thereto. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding on either party. Modifications Section 8.5 Any modification of this Agreement will be effective only if it is in writing and signed by the Employee and properly authorized by Employer's Board of Directors and signed by a representative thereof (who may, but need not be, Chairman). Effect of Waiver Section 8.6 The failure of either party to insist on strict compliance with any of the terms, covenants or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant or condition, nor shall any waiver or relinquishment of any right or power at any one time or times be deemed a waiver or relinquishment of that right or power for all or any other times. No waiver shall be effective unless in a writing and signed by the person charged with making such waiver Partial Invalidity Section 8.7 If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. Effective Date Section 8.8 The effective date of this Agreement shall be the date it is signed by both parties. However, Employee shall become President and Chief Executive Officer and a member of the Company's Board of Directors on the earlier to occur of (i) three (3) days after the Company's public announcement that purchase orders for commercial quantities of units have been placed under the above-described undisclosed June 2001 OEM agreement or (ii) September 30, 2002. IN WITNESS WHEREOF, the parties have executed this Agreement on August 6, 2002, at Campbell, California. "Employer" "Employee" FOCUS Enhancements, Inc. By: /s/ Michael D'Addio By: /s/ Brett Moyer ------------------------ ---------------------- Michael D'Addio Brett Moyer CEO Gary Williams Witness EX-99.1 4 ex991.txt CEO CERTIFICATION BRETT MOYER Exhibit 99.1 CEO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Focus Enhancements, Inc. (the "Company") on Form 10-QSB for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brett Moyer, President, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/Brett Moyer Brett Moyer Chief Executive Officer November 13, 2002 EX-99.2 5 ex992.txt CEO CERTIFICATION GARY WILLIAMS Exhibit 99.2 CFO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Focus Enhancements, Inc. (the "Company") on Form 10-QSB for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary L. Williams, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/Gary L. Williams Gary L. Williams Chief Financial Officer November 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----