FCSE Focus Enhancements (MM)

TABLE OF CONTENTS

 

You should rely only on the information contained in or incorporated by reference in this prospectus supplement and the accompanying prospectus.  We have not authorized anyone to provide you with additional or different information.  We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted.  You should not assume that the information contained in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date of this prospectus supplement or the accompanying prospectus, respectively, or that information contained in any document incorporated or deemed to be incorporated by reference is accurate as of any date other than the date of that document.

 

This document is in two parts.  The first part is this prospectus supplement, which describes the terms of this offering of our common stock and warrants (and common stock underlying the warrants) and also adds to and updates information contained in or incorporated by reference into the accompanying prospectus.  The second part is the accompanying prospectus, which gives more information about us and the type of securities we may offer from time to time under our shelf registration statement.  The information in this prospectus supplement updates information in the accompanying prospectus and, to the extent it is inconsistent with the information in the accompanying prospectus, replaces such information.

 

FORWARD-LOOKING STATEMENTS

 

This prospectus supplement and the accompanying prospectus contain or incorporate by reference certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties.  Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words or phrases such as “believe,” “plan,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “forecast,” “may increase,” “may fluctuate,” “may improve” and similar expressions or future or conditional verbs such as “should,” “would,” and “could.”

 

These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, opportunities and expectations regarding technologies, anticipated performance or contributions from new and existing employees, proposed acquisitions, projections of future performance, possible changes in laws and regulations, potential risks and benefits arising from the implementation of our strategic and tactical plans, perceived opportunities in the market, potential actions of significant stockholders and statements regarding our mission and vision. Our actual results, performance, and achievements may differ materially from the results, performance, and achievements expressed or implied in such forward-looking statements due to a wide range of factors. Factors that may cause such differences include, without limitation, the availability of capital to fund our future cash needs, reliance on major customers, history of operating losses, failure to integrate new acquisitions, the actual amount of charges and transaction expenses associated with the acquisitions, the ability to recognize expected synergies upon acquisition and the related benefits envisioned by us, market acceptance of our products, technological obsolescence, competition, component supply problems and protection of proprietary information, as well as the accuracy of our internal estimates of revenue and operating expense levels.

 

Each forward looking statement should be read in conjunction with the “Risk Factors” included in this supplement and the accompanying prospectus and incorporated by reference herein, together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto, contained in our periodic reports filed with the Securities Exchange Commission (“SEC”) and incorporated by reference herein. We do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as required by law.

 

PROSPECTUS SUPPLEMENT SUMMARY

 

The following summary highlights information contained elsewhere or incorporated by reference in this prospectus supplement and the accompanying prospectus.  It may not contain all of the information that is important to you.  Before making a decision to invest in our common stock, you should read carefully this entire prospectus supplement.  This summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere or incorporated by reference in this prospectus supplement and the accompanying prospectus.  Unless the context otherwise requires, the terms ”Focus,” “Company,” “we,” “us” and “our” refer to Focus Enhancements, Inc., a Delaware corporation, and our subsidiaries.

 

Focus Enhancements, Inc.

 

Incorporated in 1992, Focus Enhancements, Inc. and its subsidiaries develop and market proprietary video technology in two areas: semiconductor and systems. Focus markets its products globally to original equipment manufacturers (“OEMs”), and dealers and distributors in the consumer and professional channels. Semiconductor products include several series of Application Specific Standard Products (“ASSPs”), which address the wireless video and data market using Ultra Wideband (“UWB”) technology and the video convergence market. The UWB chipsets are targeted for the wireless USB market while the video convergence chips are deployed into portable media players, video conferencing systems, Internet TV, media center and interactive TV applications. Focus’ systems products are designed to provide solutions for the professional video production market particularly for the video acquisition, media asset management and digital signage markets. Focus markets its systems products primarily through the professional channel. Focus production products include video scan converters, video mixers, standard and high definition digital video disk recorders, MPEG (Moving Picture Experts Group) recorders and file format conversion tools. Focus media asset management systems products include network-based video servers, long-duration program monitors and capture/playout components. Focus digital signage and retail media solutions products include standard and high definition MPEG players, servers.

 

General Information

 

We were incorporated in 1992.  Our main address is 1370 Dell Avenue, Campbell, California 95008 and our telephone number is (408) 866-8300.  Our Web site is located at http://www.Focusinfo.com.  Information contained in our Web site is not part of this prospectus.

 

THE OFFERING

 

Issuer		Focus Enhancements, Inc.
Securities Offered		14,423,077 shares of common stock and warrants to purchase 5,010,058 shares of common stock. (This prospectus supplement also relates to the offering of shares of common stock issuable upon the exercise of the warrants.)
Shares of common stock to be outstanding immediately after this offering		101,377,665 (includes the 14,423,077 shares offered hereby)
Offering Price		$0.26
Nasdaq Capital Markets Symbol		FCSE
Use of Proceeds		We will use the net proceeds from this offering for general corporate purposes and working capital requirements.
Warrant terms		The warrants will be exercisable at a price of $0.25 per share of common stock.

 

Except as otherwise indicated herein, the information above and elsewhere in this prospectus supplement regarding outstanding shares of our common stock is based on 86,954,588 shares of common stock outstanding as of July 31, 2008 and excludes the following shares of common stock:

 

·	5,512,529 shares of common stock issuable upon the exercise of stock options outstanding as of July 31, 2008, with a weighted-average exercise price of $1.05 per share;

 

·	32,703,748 shares of common stock issuable upon the exercise of warrants outstanding as of July 31, 2008 with a weighted-average exercise price of $0.85 per share;

 

·	2,235,034 shares of common stock reserved for future awards under our stock option plans as of July 31, 2008;

 

·	3,161,000 shares of common stock issuable upon the conversion of 3,161 shares of preferred stock as of July 31, 2008;

 

·	4,000,000 shares of common stock issuable upon the exercise of the warrants issued hereunder.

 

 

RISK FACTORS

 

An investment in our common stock and warrants involves various risks, including those in the accompanying prospectus beginning on page 3.  You should carefully consider such risk factors, together with all of the information contained in or incorporated by reference in this prospectus supplement, the accompanying prospectus, our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as amended, and our Quarterly Report on Form 10-Q for the period ended March 31, 2008, which are incorporated by reference herein, in determining whether to purchase our common stock and warrants.  The risks and uncertainties described in the accompanying prospectus are not the only risks and uncertainties we face.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.  If any of the risks described herein or in the accompanying prospectus actually occur, our business, operating results, prospects and financial condition could be harmed.  This could cause the market price of our common stock to decline and could cause you to lose all or part of your investment.

 

We have a long history of operating losses.

 

As of March 31, 2008, we had an accumulated deficit of $128.7 million. We incurred net losses of $17.4 million, $15.9 million and $15.4 million for the years ended December 31, 2007, 2006 and 2005, respectively, and we expect to continue to incur net losses for the remainder of 2008. There can be no assurance that we will ever become profitable. Additionally, our independent registered public accounting firm has included an explanatory paragraph in its report on our consolidated financial statements for the year ended December 31, 2007 with respect to substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

 

We will need to raise additional capital, which may not be available when we need it.

 

Historically, we have met our short- and long-term cash needs through debt issuances, the sale of common stock or other convertible securities in private placements, because cash flow from operations has been insufficient to fund our operations.

 

We received net proceeds of $9.3 million from the issuance of secured notes and warrants to a group of private investors in February 2008. We received net proceeds of $6.2 million and $4.9 million from the issuances of common stock to groups of private investors in February 2007 and September 2007, respectively. We believe that we will need to raise additional amounts before December 31, 2008 in addition to securities being sold hereby to continue development and launch commercialization of our next generation UWB products. The amount necessary will depend upon the results of ongoing UWB development efforts and our Semiconductor and Systems businesses. Our future capital requirements will remain dependent upon these and other factors, including cash flow from operations, maintaining our gross margins at current or increased  levels, continued progress in research and development programs, competing technological and market developments, and our ability to market our new products successfully. There can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms or at all. If we are unable to access equity or debt financings when we need it, our business will be substantially harmed.

 

Our future capital raising activities may dilute the ownership of our existing stockholders.

 

We may sell securities in the public and private equity markets if and when conditions are favorable.  Raising funds through the issuance of common stock will dilute the ownership of our existing stockholders.  Furthermore, we may issue common stock, or securities convertible into or exercisable for our common stock, at prices that represent a substantial discount to the market price of our common stock, which could result in a decline in the trading price of our common stock.

Currently we do not meet the requirements to remain listed on the Nasdaq Capital Market.  If we are delisted, it could, among other things, decrease the liquidity of our common stock, limit our ability to raise additional capital and potentially accelerate the amounts due under our $20.8 million outstanding principal amount of senior secured notes at the option of the holders of such notes.

Our common stock is traded on the Nasdaq Capital Market. There are various quantitative listing requirements for a company to remain listed on the Nasdaq Capital Market, including maintaining a minimum bid price of $1.00 per share of common stock and stockholders’ equity of $2.5 million or market capitalization of at least $35 million.

On June 16, 2008, the Company received a letter from The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it fails to comply with the market value of public listed securities requirement for continued listing set forth in Marketplace Rule 4310(c)(3)(B). Such rule requires that the Company’s market value not be below $35,000,000 for ten consecutive trading days. According to Nasdaq, as of June 13, 2008, the Company's listed securities market value was $30,214,960. The Company had until July 16, 2008, to regain compliance with the rule.

S-5

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USE OF PROCEEDS

 

We expect that the net proceeds to us from the sale of our common stock (not including proceeds that may be received upon exercise of the warrants) in this offering after deducting estimated offering expenses, will be approximately $3,410,000.

 

We currently intend to use the net proceeds we receive from the sale of our common stock in this offering for general corporate purposes, that may include:

 

·                   working capital;

 

·                   capital expenditures;

 

·                   research and development expenditures;

 

·                   sales and marketing expenditures; and

 

·                   acquisitions of new businesses, technologies or products that we believe complement or expand our business.

 

Our management will retain broad discretion as to the allocation of the net proceeds from this offering.  Pending the use of the net proceeds, we intend to invest the net proceeds in interest-bearing, investment-grade and U.S. government securities.

 

 

DESCRIPTION OF WARRANTS

Purchasers will receive warrants for the purchase of our common stock at an initial exercise price equal to $0.25 per share for each share of common stock they purchase in this offering.  Each warrant may be exercised at any time and from time to time after six months and one day following the issuance date and for five years after the date of grant.

 

Exercise .  Holders of the warrants may exercise their warrants to purchase shares of our common stock on or before the expiration date by delivering (i) an exercise notice, appropriately completed and duly signed, and (ii) payment of the exercise price for the number of shares with respect to which the warrant is being exercised.  Warrants may be exercised in whole or in part, but only for full shares of common stock, and any portion of a warrant not exercised prior to the expiration date shall be and become void and of no value.  We provide certain buy-in rights to a holder if we fail to deliver the shares of common stock underlying the warrants by the fifth trading day after the date on which delivery of such stock certificate is required by the warrant. The buy-in rights apply if after such fifth trading day, but prior to cure by us, the holder purchases (in an open market transaction or otherwise) shares of our common stock to deliver in satisfaction of a sale by the holder of the warrant shares that the holder anticipated receiving from us upon exercise of the warrant.  In this event, at the request of and in the holder’s discretion, we will pay cash to the holder in an amount equal to the amount by which the holder’s total purchase price (including brokerage commissions, if any) for the shares of common stock so purchased exceeds the product of (A) such number of shares of common stock as we were required to delivered to the holder, times (B) the price at which the sell order giving rise to such purchase obligation was executed, and at the option of the holder, either reinstate the portion of the warrant and equivalent number of common stock to be issued pursuant to the warrant for which such exercise was not honored or deliver to the holder a certificate or certificates representing the shares of common stock underlying the exercised warrant that would have been issued had we timely complied with our exercise and delivery obligations.

 

In addition, the warrant holders are entitled to a “cashless exercise” option if, at any time of exercise, there is no effective registration statement registering the warrant shares.  This option entitles the warrant holder to elect to receive fewer shares of common stock without paying the cash exercise price.  The number of shares to be issued would be determined by a formula based on the total number of shares to which the warrant holder is entitled, the market price of the common stock on the date of exercise and the applicable exercise price of the warrants.

 

The shares of common stock issuable on exercise of the warrants will be, when issued in accordance with the warrants, duly and validly authorized, issued and fully paid and non-assessable. We will authorize and reserve at least that number of shares of common stock equal to the number of shares of common stock issuable upon exercise of all outstanding warrants.

 

Fundamental Transaction . If, at any time while the warrant is outstanding, (1) we effect any merger or consolidation with or into another person or entity after which our shareholders as of immediately prior to the transaction own less than a majority of the outstanding stock of the surviving entity, (2) we effect any sale of all or substantially all of our property, assets or business in one or a series of related transactions, or (3) we effect any reorganization or reclassification of the common stock  (in any such case, a “Fundamental Transaction”), then the holder shall have the right thereafter to receive, upon exercise of the warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of warrant shares then issuable upon exercise of the warrant (the “Alternate Consideration”). In the case of any such Fundamental Transaction, the surviving entity or the corporation purchasing or otherwise acquiring such assets shall expressly assume the due and punctual performance of each and every covenant and condition of the warrant, and the other obligations and liabilities under the warrant.

 

Delivery of Certificates . Upon the holder’s exercise of a warrant, we will promptly, but in no event later than five trading days after the exercise date, issue and deliver, or cause to be issued and delivered, a certificate for the shares of common stock issuable upon exercise of the warrant, free of restrictive legends unless there is no effective registration statement covering the issuance of the shares of common stock or the shares of common stock issuable upon exercise of the warrant are not freely transferable without volume restrictions under the Securities Act.  Share certificates issued at times when there is not a then effective registration statement covering the issuance of the underlying common stock will include customary legends restricting transfer to the extent we determine necessary to ensure our compliance with the applicable laws.

 

Certain Adjustments . The exercise price and the number of shares of common stock purchasable upon the exercise of the warrants are subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, and combinations or reclassifications of our common stock. Upon any such event, each holder will be provided the right to receive, upon exercise of such warrant, in addition to the number of shares of common stock issuable under the warrant, the same kind and amount of securities, cash or other property as it would have been entitled to receive upon the occurrence of such transaction, if the warrant had been exercised immediately prior to such transaction.

 

Additional Provisions . The above summary of certain terms and provisions of the warrants is qualified in its entirety by reference to the detailed provisions of the warrants, the form of which will be filed as an exhibit to a current report on Form 8-K that will be incorporated herein by reference. We are not required to issue fractional shares upon the exercise of the warrants. No holders of the warrants will possess any rights as a shareholder under those warrants until the holder exercises those warrants. The warrants may be transferred independent of the common stock they were issued with, on a form of assignment, subject to all applicable laws.

PLAN OF DISTRIBUTION

 

We will enter into securities purchase agreements directly with the investors in connection with this offering, and we will only sell to investors who have entered into securities purchase agreements.  Assuming all of the purchase agreements are executed by the investors as currently contemplated and subject to the terms and conditions of the purchase agreements, the investors will agree to purchase, and we will agree to sell, an aggregate of up to 15,500,000 shares of our common stock and warrants to purchase up to 4,000,000 shares of common stock, as provided on the cover of this prospectus supplement.

 

In connection with this offering, we will use First Montauk Securities Corp. (the “Placement Agent”) as our placement agent to introduce investors to us.  The Placement Agent is not purchasing or selling any shares by this prospectus supplement or accompanying prospectus, nor is it required to arrange for the purchase or sale of any specific number or dollar amount of shares, but it has agreed to use best efforts to arrange for the sale of all 15,500,000 shares of our common stock and warrants to purchase up to 4,000,000 shares of our common stock.

Such Placement Agent may be deemed to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act, and any fees or commissions received by the Placement Agent and any profit realized on the resale of the securities sold by the Placement Agent while acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act.  As underwriters, the Placement Agent would be required to comply with the requirements of the Securities Act and the Exchange Act, including, without limitation, Rule 415(a)(4) under the Securities Act and Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing of purchases and sales of shares of common stock and warrants by the Placement Agent.  Under these rules and regulations, the Placement Agent:

 

-         may not engage in any stabilization activity in connection with our securities; and

 

-          not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than as permitted under the Exchange Act, until it has completed its participation in the distribution.

 

On July 9, 2008, we entered into an agreement with the Placement Agent pursuant to which the Placement Agent agreed to introduce us to one or more investors in connection with this offering.  Pursuant to the agreement, we will pay the Placement Agent a cash fee equal to 8% of the cash proceeds we receive from investors introduced to us by the Placement Agent.  Pursuant to this agreement, we have agreed to indemnify the Placement Agent against certain liabilities under the Securities Act.

 

The Placement Agent (or its associated) persons held, prior to the date of this Prospectus Supplement, an aggregate of 140,683 common stock warrants which were received in connection with a private placement completed in October 2005, pursuant to which the Placement Agent served as placement agent for the Company.  The 140,683 warrants held by the Placement Agent (and its associated persons) expire in October 2010.

The agreement entered with the Placement Agent will be included as an exhibit to a Current Report on Form 8-K that we will file with the SEC and that will be incorporated by reference into the registration statement of which this prospectus supplement forms a part.

The shares of common stock sold in this offering will be listed on the Nasdaq Capital Market.  We expect that the shares of common stock will be delivered directly through the transfer agent or in book-entry form through the Depository Trust Company, New York, New York.  The warrants will be issued in certificated form.  We expect to deliver the shares of our common stock and warrants being offered pursuant to this prospectus supplement on or about August [  ], 2008.

The expenses directly related to this offering (exclusive of fees payable to the Placement Agent) are estimated to be approximately $40,000 and will be paid by us.  Expenses of the offering include our legal and accounting fees, printing expenses, transfer agent fees, Nasdaq Capital Market listing fees and miscellaneous fees.

LEGAL MATTERS

 

The validity of our securities offered in this prospectus supplement and accompanying prospectus will be passed upon for us by Manatt, Phelps & Phillips, LLP, Palo Alto, California.

 

EXPERTS

 

The consolidated financial statements incorporated in this prospectus by reference to the Annual Report on Form 10-K for the year ended December 31, 2007, have been so incorporated in reliance on the report (which contains an explanatory paragraph relating to the Company’s ability to continue as a going concern as described in Note 2 to the consolidated financial statements) of Burr, Pilger & Mayer LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

 

WHERE YOU CAN FIND MORE INFORMATION

           We file annual and quarterly reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s public reference rooms in Washington, D.C., 100 F Street N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Copies of these materials can be obtained at prescribed rates from the Public Reference Section of the SEC at its principal office at 100 F Street, N.E., Washington, D.C. 20549. Our SEC filings are also available to the public from the SEC’s Website at “http://www.sec.gov.”  The information on the SEC’s web site is not part of this prospectus supplement and the accompanying prospectus, and any references to this web site or any other web site are inactive textual references only.

This prospectus supplement and accompanying prospectus provides you with a general description of the securities being registered.  This prospectus supplement and accompanying prospectus are part of a registration statement that we have filed with the SEC. To see more detail, you should read the exhibits and schedules filed with our registration statement. You may obtain copies of the registration statement and the exhibits and schedules to the registration statement as described above.

  

  INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The SEC permits us to “incorporate by reference” the information contained in documents we file with the SEC, which means that we can disclose important information to you by referring you to those documents rather than by including them in this prospectus supplement and the accompanying prospectus. Information that is incorporated by reference is considered to be part of this prospectus supplement and the accompanying prospectus and you should read it with the same care that you read this prospectus supplement and the accompanying prospectus. Later information that we file with the SEC will automatically update and supersede the information that is either contained, or incorporated by reference, in this prospectus supplement and the accompanying prospectus, and will be considered to be a part of this prospectus supplement and the accompanying prospectus from the date those documents are filed. We incorporate by reference the following documents we filed with the SEC with the exception of those items deemed to be only furnished with the SEC:

Our SEC Filings (File No. 1-11860)		Date of Filing
Annual Report on Form 10-K for the year ended December 31, 2007		March 28, 2008
Annual Report on Form 10-K/A for the year ended December 31, 2007		April 29, 2008
Current Report on Form 8-K		February 15, 2008
Current Report on Form 8-K		February 25, 2008
Current Report on Form 8-K		March 6, 2008
Current Report on Form 8-K		June 20, 2008
Current Report on Form 8-K		July 1, 2008
Current Report on Form 8-K		July 7, 2008
Current Report on Form 8-K		July 21, 2008
Current Report on Form 8-K		July 31, 2008
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008		May 15, 2008

We also incorporate by reference all additional documents that we file with the SEC under the terms of Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act that are made between the date of this prospectus supplement and the termination of any offering of securities offered by this prospectus supplement or the accompanying prospectus. In no event, however, will any information that we furnish under Item 2.02 or Item 7.01 of any Current Report on Form 8-K or other information that we may from time to time furnish to the SEC (rather than file) be incorporated by reference into, or otherwise become a part of, this prospectus.

You may request a copy of any or all of the documents incorporated by reference but not delivered with this prospectus supplement and the accompanying prospectus, at no cost, by writing or telephoning us at the following address:

Focus Enhancements, Inc.

1370 Dell Avenue

Campbell, California 95008

Attention:  Investor Relations

Phone:  (408) 866-8300

 

 

 

 

 

 

 

 

 

 

 

The following summary is qualified by more detailed information, including our consolidated financial statements and related notes, included in this prospectus and incorporated in this prospectus by reference.  You should carefully consider the information set forth in this entire prospectus, including the “Risk Factors” section, the applicable prospectus supplement for our securities offered hereby and the other documents we refer to and incorporate by reference, including but not limited to, the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and in our other filings with the Securities and Exchange Commission.  Unless the context otherwise requires, the terms “Focus,” “Company,” “we,” “us” and “our” refer to Focus Enhancements, Inc., a Delaware corporation, and our subsidiaries.

 

This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission, or SEC, using a “shelf” registration process. Under this shelf registration process, from time to time, we may offer up to $45,000,000 of common stock, warrants and units comprised of any or all of these securities in one or more offerings and in any combination. This prospectus provides you with a general description of the common stock, warrants and units we may offer. Each time we offer shares of common stock, warrants and units, you will be provided with a prospectus supplement that will describe specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. This prospectus, together with the prospectus supplements, will include all material information relating to that offering.  You should read both this prospectus and any prospectus supplement, including the Risk Factors, together with the additional information described under the heading “Where You Can Find More Information.”

 

Focus Enhancements, Inc.

 

We are a technology company that develops and markets proprietary video technology in two areas: semiconductors and systems. We market our products globally to original equipment manufacturers (“OEMs”), and dealers and distributors in the consumer and professional channels. Semiconductor products include several series of Application Specific Integrated Circuits (“ASICs”), which process digital and analog video to be used with televisions, computer motherboards, graphics cards, video conferencing systems, Internet TV, media center and interactive TV applications. In addition, o ur semiconductor group is currently developing a wireless integrated circuit (“IC”) chip set based on the WiMedia Ultra Wideband (“UWB”) standard, designed to be compatible with Wireless USB, and used in personal computer, consumer electronics (“CE”), and mobile electronics applications. Our systems products are designed to provide solutions in PC-to-TV scan conversion, video presentation, digital-video (“DV”) conversion, video production and home theater markets. We market these systems products through both consumer and professional channels. Our consumer and production systems products include video scan converters, video mixers, DV and high definition digital video disk recorders, Moving Picture Experts Group (“MPEG”) recorders, and file format conversion tools. Our digital asset management system products include network-based video servers with video capture and play-out components. Our digital signage and retail media solutions products include both standard and high definition MPEG players, servers and associated control software.

 

We were incorporated in 1992.  Our main address is 1370 Dell Avenue, Campbell, California 95008 and our telephone number is (408) 866-8300.  Our Web site is located at http://www.Focusinfo.com.  Information contained in our Web site is not part of this prospectus.

 

The Securities We May Offer

 

We may offer up to $45,000,000 of common stock, warrants and units in one or more offerings and in any combination.  A prospectus supplement, which we will provide each time we offer securities hereunder, will describe the specific amounts, prices and terms of such securities.

 

 

You should carefully consider the following risks relating to our business, our common stock, warrants and units, together with the other information described elsewhere in this prospectus before making an investment decision.  If any of the following risks actually occur, our business could be harmed, the trading price of our common stock could decline, and you might lose all or part of your investment.  Additional risks not presently known to us or that we currently believe are immaterial also may harm our business.

 

We have a long history of operating losses.

 

As of September 30, 2006, we had an accumulated deficit of $102.3 million. We incurred net losses of $15.4 million, $11.0 million and $1.7 million for the years ended December 31, 2005, 2004 and 2003, respectively and $12.9 million for the first nine months of 2006. There can be no assurance that we will ever become profitable. Additionally, our independent registered public accounting firm has included an explanatory paragraph in its report on our consolidated financial statements for the year ended December 31, 2005 with respect to substantial doubt about our ability to continue as a going concern. The consolidated financial statements incorporated by reference herein do not include any adjustments that might result from the outcome of that uncertainty.

 

We will likely need to raise additional capital.

 

Historically, we have met our short- and long-term cash needs through debt issuances and the sale of common stock in private placements, because cash flow from operations has been insufficient to fund our operations. Set forth below is information regarding net proceeds received through private placements of our common stock and exercise of stock options and warrants in 2005, 2004 and 2003:

 

 

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC.  You may read and copy materials that we have filed with the SEC at the SEC’s public reference room located at 100 F. Street N.E., Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.  Our SEC filings also are available to the public on the SEC’s website at http://www.sec.gov. In addition, our SEC filings are available to the public on our website http://www.Focusinfo.com.

 

The SEC allows us to “incorporate by reference” in this prospectus information we file with it, which means that we can disclose important information to you by referring you those documents.  The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC and which is incorporated by reference will automatically update and supersede information contained in this prospectus or in documents filed earlier with the SEC.  We incorporate by reference the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934, as amended, after the date of the filing of our registration statement on Form S-3, including this prospectus, until our offering is complete.  However, we are not incorporating, in each case, any documents or information deemed to have been furnished and not filed in accordance with SEC rules.

 

These documents are incorporated herein by reference as of their respective dates of filing:

 

·

Our Annual Report of Form 10-K for the year ended December 31, 2005, as filed with the Commission on March 31, 2006;

 

·

Our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006, as filed with the Commission on May 15, 2006;

 

·

Our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, as filed with the Commission on August 14, 2006;

 

·

Our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006, as filed with the Commission on November 14, 2006;

 

·

Our Current Reports on Form 8-K, as filed with the Commission on January 30, 2006, February 21, 2006, February 24, 2006, March 9, 2006, March 15, 2006, April 25, 2006, May 11, 2006, May 15, 2006, June 30, 2006, July 13, 2006, August 2, 2006, August 10, 2006, August 15, 2006, September 28, 2006, October 5, 2006, November 9, 2006, and November 21, 2006; and

 

·

The description of our common stock contained in our registration statement on Form 8-A, as filed with the Commission on April 5, 1993, including any amendments or reports filed for the purpose of updating that description.

 

Our filings are available on our website at http://www.Focusinfo.com. Information contained in or linked to our website is not a part of this prospectus.  You may also request a copy of these filings, at no cost, by writing or telephoning us at:

 

Focus Enhancements, Inc.

1370 Dell Avenue

Campbell, California 95008

(408) 866-8300

 

 

This document contains “forward looking” information within the meaning of the Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words or phrases such as “believe,” “plan,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “forecast,” “may increase,” “may fluctuate,” “may improve” and similar expressions or future or conditional verbs such as “should,” “would,” and “could.”

 

These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, opportunities and expectations regarding technologies, anticipated performance or contributions from new and existing employees, proposed acquisitions, projections of future performance, possible changes in laws and regulations, potential risks and benefits arising from the implementation of our strategic and tactical plans, perceived opportunities in the market, potential actions of significant stockholders and statements regarding our mission and vision. Our actual results, performance, and achievements may differ materially from the results, performance, and achievements expressed or implied in such forward-looking statements due to a wide range of factors. Factors that may cause such differences include, without limitation, the availability of capital to fund our future cash needs, reliance on major customers, history of operating losses, failure to integrate new acquisitions, the actual amount of charges and transaction expenses associated with the acquisitions, the ability to recognize expected synergies upon acquisition and the related benefits envisioned by us, market acceptance of our products, technological obsolescence, competition, component supply problems and protection of proprietary information, as well as the accuracy of our internal estimates of revenue and operating expense levels.

 

 

Unless we otherwise indicate in the applicable prospectus supplement, we currently expect to use the net proceeds we receive from the sale of our common stock, warrants and units comprised of any or all of these securities, for general corporate purposes, that may include:

 

·                   working capital;

 

·                   capital expenditures;

 

·                   research and development expenditures;

 

·                   sales and marketing expenditures; and

 

·                   acquisitions of new businesses, technologies or products that we believe complement or expand our business.

 

Additional information on the use of net proceeds from the sale of the common stock, warrants and units comprised of any or all of these securities we offer under this prospectus may be set forth in the prospectus supplement relating to the specific offering. Pending the use of the net proceeds, we intend to invest the net proceeds in interest-bearing, investment-grade and U.S government securities.

 

 

We may sell the securities offered through this prospectus (i) to or through underwriters or dealers, (ii) directly to purchasers, including our affiliates, (iii) through agents, or (iv) through a combination of any these methods. The securities may be distributed at a fixed price or prices, which may be changed, market prices prevailing at the time of sale, prices related to the prevailing market prices, or negotiated prices. The prospectus supplement will include the following information:

 

·                   the terms of the offering;

 

·                   the names of any underwriters or agents;

 

·                   the name or names of any managing underwriter or underwriters;

 

·                   the purchase price of the securities;

 

·                   the net proceeds from the sale of the securities;

 

·                   any delayed delivery arrangements;

 

·                   any underwriting discounts, commissions and other items constituting underwriters’ compensation;

 

·                   any initial public offering price;

 

·                   any discounts or concessions allowed or reallowed or paid to dealers; and

 

·                   any commissions paid to agents.

 

 

General

 

The following description, together with the additional information included in any applicable prospectus supplement and incorporated herein by reference, summarizes the material terms of the common stock, warrants and units comprised of any or all of these securities that we may offer under this prospectus. For complete terms of our common stock, please refer to our second restated certificate of incorporation, as amended, and our amended and restated bylaws, which are incorporated by reference into the registration statement which includes this prospectus. The terms of our common stock, warrants and units may also be affected by the General Corporation Law of Delaware. We will also include in the prospectus supplement information, where applicable, about material United States federal income tax considerations relating to our common stock, and the securities exchange, if any, on which our common stock is listed.

 

 

Manatt, Phelps & Phillips LLP, Palo Alto, California, will pass upon the validity of our securities offered by this prospectus.

 

 

The consolidated financial statements as of December 31, 2005 and for the year then ended, incorporated in this prospectus by reference to the Annual Report on Form 10-K for the year ended December 31, 2005 have been so incorporated in reliance upon the report (which contains an explanatory paragraph relating to the Company’s ability to continue as a going concern as described in Note 2 to the consolidated financial statements) of Burr, Pilger & Mayer LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

 

 

     The Delaware General Corporation Law and our second restated certificate of incorporation provide for indemnification of our directors and officers for liabilities and expenses that they may incur in such capacities.  Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Focus pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.