FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-11860
------------------------------
FOCUS ENHANCEMENTS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 04-3186320
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
800 WEST CUMMINGS PARK, SUITE 4500
WOBURN, MA 01801
(Address of principal executive offices)
(617) 938 - 8088
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of July 25, 1996, there were outstanding 9,274,708 shares of Common Stock,
$.01 par value per share.
-1-
FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
June 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FACING PAGE 1
TABLE OF CONTENTS 2
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations
for the Three Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Operations
for the Six Months Ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities 17
ITEM 3. Defaults Upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT 11- Computation of Primary and Fully Diluted Earnings Per Share 20
</TABLE>
-2-
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 610,080 $2,140,043
Accounts receivable, net of allowance of $159,418 and $296,887
at June 30, 1996 and December 31, 1995, respectively 4,634,737 1,860,592
Inventories 1,894,324 1,862,335
Prepaid expenses and other current assets 168,930 346,458
------------- -------------
Total current assets 7,308,071 6,209,428
Property and equipment, net 281,334 417,849
Other assets, net 73,524 105,379
Goodwill, net 2,083,585 2,227,723
------------- -------------
Total assets $9,746,514 $8,960,379
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $2,597,458 $3,637,458
Obligations under capital leases 68,751 133,497
Accounts payable 2,079,363 1,228,860
Accrued liabilities 956,015 346,927
------------- -------------
Total current liabilities 5,701,587 5,346,742
Obligations under capital leases 10,404 26,310
------------- -------------
Total liabilities 5,711,991 5,373,052
------------- -------------
Stockholders' equity
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued - -
Common stock, $.01 par value: 16,000,000 shares authorized,
9,274,708 and 7,171,862 shares issued and outstanding at
June 30, 1996 and December 31, 1995, respectively. 92,747 71,719
Additional paid-in capital 17,157,996 13,168,730
Accumulated deficit (13,216,220) (9,653,122)
------------- -------------
Total stockholders' equity 4,034,523 3,587,327
------------- -------------
Total liabilities and stockholders' equity $9,746,514 $8,960,379
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1996 1995
-------------- -------------
<S> <C> <C>
Net sales $ 4,369,255 $3,434,154
Cost of goods sold 2,588,476 2,047,471
-------------- -------------
Gross profit 1,780,779 1,386,683
Operating expenses:
Sales, marketing and support 829,656 677,180
General and administrative 463,972 424,419
Research and development 334,689 186,301
-------------- -------------
Total operating expenses 1,628,316 1,287,900
-------------- -------------
Income (loss) from operations 152,463 98,783
Interest expense, net (65,729) (134,157)
Other income (expense) (2,481) 90,147
-------------- -------------
Net income (loss) before income taxes 84,253 54,773
Federal income tax expense 2,500 -
-------------- -------------
Net income (loss) $ 81,753 $ 54,773
============== =============
Net income (loss) per common share $ 0.01 $ 0.01
============== =============
Weighted average common and common
equivalent shares outstanding 8,894,842 6,305,471
============== =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1996 1995
-------------- --------------
<S> <C> <C>
Net sales $ 8,171,134 $ 8,708,875
Cost of goods sold 7,714,286 5,754,713
-------------- --------------
Gross profit 456,848 2,954,162
Operating expenses:
Sales, marketing and support 1,976,785 1,456,210
General and administrative 1,232,325 908,499
Research and development 617,941 482,437
-------------- --------------
Total operating expenses 3,827,051 2,847,146
-------------- --------------
Income (loss) from operations (3,370,203) 107,016
Interest expense, net (170,103) (272,044)
Other income (12,792) 272,301
-------------- --------------
Net income before income taxes (3,553,098) 107,273
Federal income tax expense 10,000 -
Net income (loss) $(3,563,098) $ 107,273
============== ==============
Net income (loss) per common share $ (0.45) $ 0.02
============== ==============
Weighted average common and common
equivalent shares outstanding 7,974,362 5,681,076
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1996 1995
--------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,563,098) $ 107,273
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 390,715 470,389
Amortization of deferred compensation - 39,383
Gain on forgiveness of accounts payable - (272,647)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,736,188) 211,031
Increase in notes receivable (37,957) -
Decrease (increase) in inventories (31,989) 75,223
Decrease(increase) in prepaid expenses and
other assets 177,528 (15,960)
Increase (decrease) in accounts payable 850,503 (1,124,821)
Increase in accrued liabilities 609,088 2,073
---------------- --------------
Net cash used in operating activities (4,341,398) (508,056)
---------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (78,207) (24,553)
Purchase of intangible assets (65,749)
---------------- --------------
Net cash used in investing activities (78,207) (90,302)
---------------- --------------
Cash flows from financing activities:
Payments on notes payable (1,040,000) (473,627)
Payments under capital lease obligations (80,652) (102,539)
Net proceeds from private offering of common stock 3,015,528 1,146,050
Net proceeds from exercise of warrants 894,015 -
Proceeds from exercise of common stock options and warrants 100,751 19,619
---------------- --------------
Net cash provided by financing activities 2,889,642 589,503
---------------- --------------
Net increase (decrease) in cash and cash equivalents (1,529,963) (8,855)
Cash and cash equivalents at beginning of period 2,140,043 81,181
---------------- --------------
Cash and cash equivalents at end of period $ 610,080 $ 72,326
================ ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of FOCUS Enhancements, Inc. ("the
Company") as of June 30, 1996 and for the three and six month periods ended June
30, 1996 and 1995 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1995 included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995. In the opinion of management, the consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results of the
interim periods. The results of operations for the three and six months ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for any future period.
2. NET INCOME (LOSS) PER SHARE
Per share amounts are calculated using the weighted average number of
common shares and common share equivalents outstanding during periods of net
income. Common share equivalents are attributable to unexercised stock options
and warrants and are computed using the treasury stock method. Per share amounts
are calculated using only the weighted average number of common shares
outstanding during periods of net loss.
3. NOTE RECEIVABLE
On January 5, 1996, an officer of the Company borrowed $40,000 under a
promissory note, bearing interest at 8.5% per annum and due not later than
January 5, 1997. At June 30, 1996, the balance is included in accounts
receivable.
4. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1996 1995
---- ----
Finished goods $ 1,440,016 $ 1,669,003
Raw materials 454,308 193,332
------------------- -------------------
$ 1,894,324 $ 1,862,335
=================== ===================
5. NOTES PAYABLE
The Company maintains a line of credit with a bank which permits
borrowings up to $1,000,000. Borrowings under the line of credit are payable on
demand and are collateralized by all of the assets of the Company except as
noted below. Borrowings aggregating $900,000 at June 30, 1996 bear interest at
the bank's prime rate plus 1% and are personally guaranteed by an investor. On
June 25, 1996, the line of credit was extended by the lender until March 7,
1997.
In October 1994, the Company borrowed $2,500,000 from an unrelated
individual under a term line of credit note (the "term note") due February 1,
1996. The term note accrues interest at the prime rate plus 2%, payable
quarterly in arrears, and was originally collateralized by the inventory,
accounts receivable and contract rights related to the Company's business with
Apple
-7-
Computer, Inc. In January 1996, the Company repaid $1,000,000 of the amount owed
under the term note. On June 28, 1996, the Company negotiated an amendment to
the term note with the lender to extend the due date of the term note to March
31, 1997. In consideration of the extension, the Company granted a second
security interest on all of the assets of the Company and issued 50,000 warrants
to the lender exercisable for a period of three years at a price of $2.07 per
share. At June 30, 1996, the Company owed $1,500,000 to the lender under the
term note.
Additionally, in June 1996, the Company entered into a security
agreement with its largest inventory supplier regarding certain amounts owed by
the Company to the supplier. At June 30, 1996, the outstanding amount owed the
supplier was approximately $640,000. The amounts owed the supplier are secured
by a third security interest in the Company's assets.
6. SUPPLEMENTARY CASH FLOW INFORMATION
In the second quarter ended June 30, 1996, the Company sold
approximately 890,000 shares of common stock for gross proceeds of approximately
$2,374,000 in connection with a private offering to foreign investors. The
common stock is unregistered and subject to restrictions on trading in the
United States for a period of forty-one days. In connection with the offering,
the Company incurred fees and expenses of approximately $131,000. Net proceeds
of the offering were approximately $2,240,000.
For the six month period ended June 30, 1996, the Company sold
approximately 1,229,000 shares of common stock for gross proceeds of
approximately $3,325,000 in connection with two private offerings to foreign
investors. The common stock is unregistered and subject to restrictions on
trading in the United States for a period of forty-one days. In connection with
the offerings, the Company incurred fees and expenses of approximately $192,000.
Net proceeds of the offerings were approximately $3,130,000.
From April 1 through June 30, 1996, the Company issued approximately
12,000 shares of common stock upon the exercise of approximately 12,000 private
warrants, receiving gross proceeds of approximately $10,680. For the six month
period ended June 30, 1996, the Company issued approximately 793,000 shares of
common stock upon the exercise of approximately 786,000 public and private
warrants, receiving gross proceeds of approximately $1,021,000.
-8-
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, 1995.
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain "forward looking"
information that involves risks and uncertainties. In particular, statements
contained in this Form 10-QSB which are not historical facts constitute forward
looking statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Each forward looking statement should
be read in conjunction with the consolidated financial statements and notes
thereto in Part I, Item 1, of this Quarterly Report and with the information
contained in Item 2, including, but not limited to, "Certain Factors That May
Affect Future Results" contained herein, together with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995, including, but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Three-Month Period Ended June, 1996 As Compared
With The Three-Month Period Ended June 30, 1995
NET SALES
Net sales for the three-month period ended June 30, 1996 were
$4,369,255 as compared with $3,434,154 for the three-month period ended June 30,
1995, an increase of $935,101 or 27%. The growth in revenues resulted primarily
from increased OEM revenues related to sales of the Company's PC to TV products
under the agreement with Zenith Electronics, as well as, increased revenues
resulting from the continued expansion of the Company's domestic and
international distribution customers.
Also, in the three-month period ended June 30, 1996, the Company
continued to experience a significant reduction in orders from Apple for the
Company's L-TV product and orders for the Company's graphics/connectivity
products for Apple's PowerBook 190 and 5300 laptop computers. During the quarter
ended June 30, 1996, sales to Apple represented 1% of the Company's revenues as
compared to 43% of revenues during the comprable quarter in 1995. The Company
was able to liquidate through its distribution channel inventory related to
Apple's PowerBook 190 and 5300 laptop computers which had been written off in
the first quarter of 1996. The associated revenue for this transaction was
approximately $1,568,000 or 36% of net sales for the three-month period ended
June 30, 1996.
As of June 30, 1996, the Company had a sales order backlog of
approximately $750,000.
-9-
COST OF GOODS SOLD
Cost of goods sold were $2,588,476 or 59% of net sales, for the
three-month period ended June 30, 1996, as compared with $2,047,471 or 60% of
net sales, for the three months ended June 30, 1995, an increase of $541,005 or
26%. The increase in cost of goods sold in absolute dollars is due principally
to the increased sales volume of the Company's Micro Presenter and PC to TV
products. Cost of goods sold for the three-month period ended June 30, 1996 was
favorably impacted by the sale of previously written off inventory related to
Apple's PowerBook 190 and 5300 laptop computers.
SALES, MARKETING AND SUPPORT EXPENSES
Sales, marketing and support expenses were $829,656 or 19% of net
sales, for the three-month period ended June 30, 1996, as compared with
$677,180, or 20% of net sales, for the three-month period ended June 30, 1995,
an increase of $152,476 or 22%. The increase in sales, marketing and support
expenses in absolute dollars is primarily the result of increased expenditures
related to domestic and international channel expansion efforts, as well as the
establishment of the Company's European headquarters in the Netherlands.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month period ended
June 30, 1996 were $463,972 or 11% of net sales, as compared with $424,419, or
12% of net sales for the three-month period ended June 30, 1995, an increase of
$39,553 or 9%. The increase is due primarily to higher than expected audit,
legal and outside consulting fees.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three-month period ended June
30, 1996 were $334,689, or 8% of net sales, as compared to $186,301, or 5% of
net sales, for three-month period ended June 30, 1995 an increase of $148,388 or
80%. The increase in research and development expenses in both absolute dollars
and as a percentage of revenue is due primarily to higher staffing levels and
related expenses associated with new product development and enhancement of the
Company's current and future product offerings.
INTEREST EXPENSE, NET
Net interest expense for the three-month period ended June 30, 1996 was
$65,729, or 2% of net sales, as compared to $134,157, or 4% of net sales, for
the three-month period ended June 30, 1995 a decrease of $68,428, or 51%.
Interest expense for the three-month period ended June 30, 1996 arose primarily
from the $2,500,000 term note, which the Company issued in October 1994 to an
unrelated party, and a $1,000,000 line of credit with its commercial bank.
-10-
RESULTS OF OPERATIONS
Six-Month Period Ended June 30, 1996 As Compared
With The Six-Month Period Ended June 30, 1995
NET SALES
Net sales for the six-month period ended June 30, 1996 were $8,171,134
as compared with $8,708,875 for the six-month period ended June 30, 1995, a
decrease of $537,741 or 6%. In May 1995, the Company restructured its agreement
with Apple Computer, Inc. ("Apple") regarding the Company's L-TV product so that
it could recognize royalty revenue rather than product sales with related cost
of goods sold, as it had in its transactions with Apple during the first quarter
of 1995. The restructuring of the agreement resulted from the severe liquidity
and cash flow problems experienced by the Company at the end of 1994 and during
the first six months of 1995. In the six months ended June 30, 1996, the Company
recognized royalty revenues from Apple of approximately $340,000 or 4% of net
sales, with 100% gross margin as compared to approximately $860,000 for the
comparable period in 1995. The Company expects that royalty revenues from the
Apple agreement will not be material for the remainder of 1996.
In addition, net sales in the six-month period ended June 30, 1996,
were lower due to a significant reduction in orders from Apple for the Company's
L-TV product and orders for the Company's graphics/connectivity products for
Apple's PowerBook 190 and 5300 laptop computers. During the period, sales to
Apple represented 12% of the Company's revenues as compared to 46% of revenues
in the first six months of 1995. It is anticipated that revenues from Apple will
continue to decline, on a percentage basis, as the Company continues to
diversify its distribution channels.
Additionally, the Company began shipments under its agreement with
Zenith Electronics for its PC to TV products during the six-month period ended
June 30, 1996. Revenues for the period were approximately $1,400,000 or 17% of
total revenues. There were no sales to Zenith Electronics in the first six
months of 1995. The Company also experienced growth in its domestic and
international reseller channels.
COST OF GOODS SOLD
Cost of goods sold were $7,714,286 or 94% of net sales, for the
six-month period ended June 30, 1996, as compared with $5,754,713 or 66% of net
sales, for the six months ended June 30, 1995, an increase of $1,959,573 or 34%.
The increase in cost of goods sold in absolute dollars and as a percentage of
sales is due principally to the write down of inventory related to the Company's
graphics/connectivity products for the Powerbook 190 and 5300 laptop computer.
As previously disclosed in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995, the Company experienced a significant
reduction in orders for the Company's L-TV product and graphics/connectivity
products for the Powerbook 190 and 5300 laptop computers during the period ended
June 30, 1996. During the first five months of 1996, management became aware of
various product quality and sell-through issues relating to Apple's Powerbook
190 and 5300 products, including a recall by Apple of the products in May 1996.
Because of the uncertainty with respect to these Apple products and the
likelihood that demand for the Company's graphic/connectivity products would be
significantly below the Company's then existing inventory levels, management
decided to minimize the Company's inventory exposure and recorded a charge of
$2.2 million in the first quarter of 1996. In the second quarter
-11-
of 1996, this inventory was liquidated through the Company's distribution
channels which had the result of reducing cost of goods sold as a percentage of
total revenues.
SALES, MARKETING AND SUPPORT EXPENSES
Sales, marketing and support expenses were $1,976,785 or 24% of net
sales, for the six-month period ended June 30, 1996, as compared with
$1,456,210, or 17% of net sales, for the six-month period ended June 30, 1995,
an increase of $520,575 or 35%. The increase in sales, marketing and support
expenses in both absolute dollars and as a percentage of net sales is primarily
the result of increased staffing, marketing and advertising expenditures related
to the Company's distribution channel expansion efforts both domestically and
internationally. The Company also established its European headquarters in the
Netherlands during this period.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the six-month period ended June
30, 1996 were $1,232,325 or 15% of net sales, as compared with $908,499, or 10%
of net sales for the six-month period ended June 30, 1995, an increase of
$323,826 or 36%. The increase is due primarily to higher than expected audit,
legal and outside consulting fees associated with the Company's 1995 audit and
related filings.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the six-month period ended June
30, 1996 were $617,941, or 8% of net sales, as compared to $482,437, or 6% of
net sales, for six-month period ended June 30, 1995, an increase of $135,504 or
28%. The increase in research and development expenses in both absolute dollars
and as a percentage of revenue is due primarily to increased staffing levels and
related expenses associated with new product development and enhancement of the
Company's current and future product offerings. During the period ended June 30,
1996, the Company launched the PC-Z-TV for Zenith and the Micro Presenter
product.
INTEREST EXPENSE, NET
Net interest expense for the six-month period ended June 30, 1996 was
$170,103, or 2% of net sales, as compared to $272,044, or 3% of net sales, for
the six-month period ended June 30, 1995, a decrease of $101,941, or 38%.
Interest expense for the six-month period ended June 30, 1996 arose primarily
from the $2,500,000 term note, which the Company issued in October 1994 to an
unrelated party, and a $1,000,000 line of credit with its commercial bank. In
addition, expenses related to the issuance of warrants to lenders in 1995 are
included in interest expense for the period ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1996, net cash used in operating
activities was $4,341,398 consisting primarily of a net loss of $3,563,098 and
an increase in accounts receivable of $2,736,188. These were partially offset by
increased accounts payable and accrued liabilities totaling $1,459,591 as well
as depreciation of property, plant and equipment and amortization of goodwill
relating to the Lapis acquisition of $390,715. Net cash provided by financing
activities was $2,889,642 due primarily to proceeds of approximately $4,000,000
from the exercise of warrants, stock options and issuance of shares of common
stock in private placements described below. The proceeds were partially offset
by the payment of notes payable totaling $1,040,000 which included the repayment
of $1,000,000 of the amount owed under the Company's $2,500,000 term note.
-12-
As of June 30, 1996, the Company had a working capital of $1,606,484,
as compared to working capital of $862,686 at December 31, 1995, an increase of
$743,798. The increase is primarily attributable to the increase in accounts
receivable of approximately $2,736,000 offset by increases in accounts payable
of approximately $850,000 and accrued liabilities of approximately $600,000 from
December 31, 1995.
For the six month period ended June 30, 1996, the Company sold
approximately 1,229,000 shares of common stock for gross proceeds of
approximately $3,264,000 in connection with a private offering to private
investors. This stock is unregistered and subject to restrictions on private
trading in the United States for a period of forty-one days. In connection with
the offering, the Company incurred fees of approximately $192,000. Net proceeds
of the offering were approximately $3,072,000.
From January 1 through June 30, 1996, the Company issued approximately
793,000 shares of common stock upon the exercise of approximately 786,000
private and public warrants, receiving gross proceeds of approximately
$1,021,000.
From its inception through June 30, 1996, the Company has incurred
approximately $13 million of accumulated losses. The report of independent
accountants on the Company's financial statements as of and for the years ended
December 31, 1995 and 1994 includes an explanatory paragraph to the effect that
the Company's ability to continue as a going concern is dependent upon the
Company's ability to achieve its fiscal 1996 operating plan, including the
achievement of sustained profitability, and obtaining additional sources of
financing. In 1995, the Company redefined its operating model to achieve
profitability by discontinuing sales of lower-margin, non-proprietary products,
by focusing its marketing efforts on its higher-margin proprietary products,
emphasizing sales to OEMs and the reseller channel, limiting inventory levels
and reducing operating costs. In 1996, the Company expects to continue to use
this business model. The Company's ability to achieve profitability in 1996 is
dependent upon its securing additional contracts from OEM partners such as Apple
and Zenith Electronics, Inc., as well as, increasing revenues through its
domestic and international distributors. The Company does not have any material
commitments for capital expenditures. Management anticipates that current
working capital, funds generated through the revised business model, and
additional funds that may be received from debt or equity financing will be
sufficient to fund operations for at least 12 months. The Company has extended
the term of its $1,000,000 line of credit and its $2,500,000 term note with its
commercial bank and its unaffiliated lenders to extend until March 1997. There
can be no assurance that the Company will achieve sustained profitability or
obtain sufficient financing to provide the liquidity necessary for the Company
to continue operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discussion of the Company's risk factors should be read
in conjunction with the financial statements and related notes thereto. The
following factors among others, could cause actual results to differ materially
from those contained in forward looking statements contained or incorporated by
reference in this report and presented by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
Reliance on Major Customers. Approximately 50% of the Company's net
sales during the year ended December 31, 1995 and approximately 12% of the
Company's net sales during the six months ended June 30, 1996 were derived from
sales of the Company's L-TV product to Apple Computer, Inc. ("Apple"). In August
1994, the Company entered into a two year Master Purchase Agreement with Apple
under which Apple agreed to bundle and distribute
-13-
the Company's L-TV product with Apple's "Presentation System" product offering.
Although orders under this agreement represented over 50% of the Company's
revenues in 1995, management believes that orders under this agreement in 1996
will not be material to the Company's revenues for the year as a whole. The
Company believes it may secure additional contracts from Apple in the future,
however, no assurances can be given that the Company will be successful in
securing one or more additional contracts.
In the first quarter of 1996, the Company began shipments under its
agreement with Zenith Electronics for its PC to TV convergence products.
Revenues through the six month period ended June 30, 1996 were approximately
$1,400,000 or 12% of revenues. Management believes that orders under this
agreement will continue throughout 1996, however, no assurances can be given as
to the estimated annual revenue to be generated from this agreement in 1996.
Future Capital Needs. At June 30, 1996, the Company had a working
capital of $1,606,484, cash and cash equivalents of $610,080 and was fully drawn
on its $900,000 line of credit with its bank and its $2.5 million term note with
an unaffiliated lender. Historically, the Company has been required to meet its
short- and long-term cash needs through debt and the sale of Common Stock in
private placements in that cash flow from operations has been insufficient. In
December 1995, the Company received gross proceeds of $1 million from the sale
of Common Stock to four investors in a private placement. In the first six
months of 1996, the Company received approximately $4,000,000 in proceeds from
the exercise of warrants, stock options and sale of common stock.
The Company's future capital requirements will depend on many factors,
including cash flow from operations, continued progress in its research and
development programs, competing technological and market developments, and the
Company's ability to market its products successfully. During 1996, the Company
may be required to raise additional funds through equity or debt financing, of
which there can be no assurance. Any equity financing could result in dilution
to the Company's then-existing stockholders that the Company will be able to
obtain. Sources of debt financing may result in higher interest expense. Any
financing, if available, may be on terms unfavorable to the Company. If adequate
funds are not available, the Company may be required to curtail its activities
significantly.
Limited Availability of Capital under Credit Arrangements with Lenders.
The Company maintains a $900,000 line of credit with Silicon Valley Bank. As of
June 30, 1996, approximately $900,000 is owed to the Bank under the line of
credit. Pursuant to its agreement with the Bank, the line of credit terminated
in April 1996, and has been extended until March 7, 1997.
In October 1994, the Company borrowed $2,500,000 from an unaffiliated
lender to help finance its inventory and accounts receivable under its Master
Purchase Agreement with Apple. The Company issued to this unaffiliated lender
its term note in the aggregate principal amount of $2,500,000. The term note
accrues interest at the revolving rate of prime plus 2%, is payable quarterly in
arrears at the end of December, March, June, and September, and was due February
1, 1996. The term note was originally secured by those specific assets financed
under the agreement with Apple, including accounts receivable, finished goods,
inventory, raw materials, work-in-process and contract rights arising under the
Apple agreement. The Company has fully utilized the proceeds of this term note
to finance purchase orders received from Apple. In January 1996, the Company
repaid approximately $1 million of the amount owed under the term note. On June
28, 1996, the Company negotiated an amendment to the term note with the lender
to extend the due of the term note to March 31, 1997. Pursuant to the amendment,
the Company granted the lender a second security interest in all the assets of
the Company.
-14-
Component Supply Problems. The Company purchases all of its parts from
outside suppliers and from time to time experiences difficulty in obtaining some
components or peripheral devices. The Company attempts to reduce the risk of
supply interruption by evaluating and obtaining alternative sources for various
components or peripheral devices. However, there can be no assurance that supply
shortages will not occur in the future which could significantly increase the
cost, or delay of shipment of, the Company's products, which in turn could
adversely affect its results of operations.
Dependence on Apple Macintosh Platform; Adverse Effects of Reduced
Apple Macintosh Sales. Historically, a substantial portion of the Company's
sales have been derived from products designed for use on the Apple Macintosh
family of personal computers. The Company expects that sales of products for use
with Macintosh computers will represent a smaller portion of its net sales for
the foreseeable future. Although sales of Macintosh computers have increased
from year to year, there can be no assurance that such sales will continue to be
widely accepted as a platform for high performance applications. Also, there can
be no assurance that other computer platforms will not gain increased acceptance
in the Company's markets as these platforms evolve to support applications
similar to those offered for the Macintosh. In addition, there can be no
assurance that the Company will be able to make timely and successful
introductions of products for other platforms.
Reliance on Single Vendor. Approximately 60% of the components for the
Company's products are manufactured on a turnkey basis by a single vendor, Pagg
Corporation. In the event that the vendor were to cease supplying the Company,
management believes there are alternative vendors for the components for the
Company's products. However, the Company would experience short-term delays in
the shipment of its products.
Market Acceptance. The Company's sales and marketing strategy
contemplates sales of its products to the personal computer and Macintosh
enhancements markets. There can be no assurance that the Company's marketing
strategy will be effective and that consumers of personal computer or Macintosh
enhancements will buy the Company's products. The failure of the Company to
penetrate these enhancements markets would have a material adverse effect upon
its operations and prospects. Market acceptance of the Company's current and
proposed products will depend upon the ability of the Company to demonstrate the
advantages of its products over other computer enhancement products.
Competition. The personal computer and Macintosh enhancements market is
extremely competitive. The Company competes with computer retail stores,
including superstores, certain hardware and software vendors which sell directly
to end-users, and other direct marketers of personal computer and/or Macintosh
enhancements and peripheral products. Many of the Company's competitors,
including Apple, Radius and Asante, have greater market recognition and greater
financial, technical, marketing and human resources than the Company. Although
the Company is not currently aware of any announcements by its competitors that
would have a material impact on the Company or its operations, there can be no
assurance that the Company will be able to compete successfully against existing
companies or new entrants to the marketplace.
Technological Obsolescence. The personal computer and Macintosh and
enhancements market is characterized by extensive research and development and
rapid technological change resulting in product life cycles of nine to eighteen
months. Development by others of new or improved products, processes or
technologies may take the Company's products or proposed products obsolete or
less competitive. The Company will be required to devote substantial efforts and
financial resources to enhance its existing products and to develop new
products. There can be no assurance that the Company will succeed with these
efforts.
-15-
Protection of Proprietary Information. The Company does not have any
patents. The Company treats its technical data as confidential and relies on
internal nondisclosure safeguards, including confidentiality agreements with
employees, and on laws protecting trade secrets to protect its proprietary
information. There can be no assurance that these measures will adequately
protect the confidentiality of the Company's proprietary information or that
others will not independently develop products or technology that are equivalent
or superior to those of the Company. While it may be necessary or desirable in
the future to obtain licenses relating to one or more of its products or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms.
Dependence on Key Personnel. The Company's success depends to a
significant extent, upon a number of key employees. The loss of services of one
or more of these employees, especially the Company's Chief Executive Officer and
President, Thomas L. Massie, could have a material adverse effect on the
business of the Company. The Company believes that its future success will also
depend in part upon its ability to attract, retain and motivate qualified
personnel. Competition for such personnel in the computer industry is intense.
Although the Company has not in the past experienced difficulty in attracting
and retaining qualified personnel, there can be no assurance that the Company
will be successful in attracting and retaining such personnel in the future.
Volatility of Stock Price. The price of the Company's Common Stock and
Redeemable Common Stock Purchase Warrants has fluctuated widely in the past.
Management believes that such fluctuations may have been caused by quarterly
fluctuations in the Company's results of operations and other factors, including
changes in the personal computer market generally and in the market for products
related to the Apple operating system in particular. Due to the rapid
technological changes and highly competitive nature of the computer industry as
a whole, prices for the securities of technology companies have experienced
extreme volatility over the past several months and can be expected to
experience extreme volatility in the future. Such price volatility could have a
material adverse effect on the Company's ability to raise capital at favorable
valuations, as well as reduce the ability of a holder of the Company's
securities to sell them at favorable prices.
-16-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings, other than
routine litigation that is incidental to the business, which would have a
material adverse effect on the Company's financial position or results of
operation for the three and six month periods ended June 30, 1996.
ITEM 2. CHANGES IN SECURITIES
No instruments defining the rights of the holders of any class of
registered securities have been materially modified nor have the rights
evidenced by any class of registered securities been materially limited or
qualified by the issuance or modification of any other class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
On June 11, 1996, the Board of Directors caused to be distributed to
stockholders of record as of June 10, 1996, a Notice of Annual Meeting of
Stockholders, Proxy and Proxy Statement for the Annual Meeting held on July 15,
1996. As of the record date, 8,640,885 shares of Common Stock (excluding
treasury shares) were entitled to vote.
At the meeting, the stockholders acted upon the following proposals: (i)
election of two Class I directors; (ii) approval of the 1995 Non-Employee
Director Stock Option Plan; and (iii) ratification of the firm of Wolf &
Company, P.C. as independant auditors for the fiscal year ending December 31,
1996. All of the above matters were approved by the stockholders.
Votes "For" represent affirmative votes and do not represent abstentions or
broker non-votes. In cases where a signed proxy was submitted without direction,
the shares represented by the proxy were voted "For" each proposal in the manner
disclosed in the Proxy Statement and Proxy.
The voting results were as follows:
<TABLE>
<CAPTION>
Broker
Matter For Against Withheld Abstain Non-Votes
------ --- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
I. Election of Class I Directors:
Thomas L. Massie 7,331,586 0 21,532 0 0
John C. Cavalier 7,332,586 0 20,532 0 0
II. Approval of 1995 Non-Employee Director Stock Option Plan
6,837,989 261,956 0 38,932 214,241
III. Ratification of Independant Auditor
7,317,774 28,600 0 6,744 0
</TABLE>
-17-
ITEM 5. OTHER INFORMATION
On August 5, 1996, the Company announced that it had reached an
agreement in princple to acquire all the issued and outstanding stock of TView,
Inc., a developer of PC to TV multimedia products for up to 1,000,000 shares of
the Company's common stock. The acquisition is expected to be completed on or
before September 30, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
10.1 Loan Document Modification Agreement dated as of April 5,
1996 by and between the Company, Lapis Technologies, Inc.
and Silicon Valley Bank
10.2 Amended and Restated Promissory Note dated as of April 5,
1996 in favor of Silicon Valley Bank
10.3 Amendment No.2 to the Note and Warrant Subscription
Agreement dated as of June 28, 1996 between the Company and
Fred Kassner
10.4 Amended and Restated Term Line of Credit Note dated as of
June 28, 1996 in favor of Fred Kassner
10.5 Security Agreement dated as of June 28, 1996 between the
Company and Fred Kassner
10.6 Warrant W96/6, dated June 28, 1996, issued to Fred Kassner
10.7 Agreement dated as of June 28, 1996 between the Company and
PAGG Corporation
10.8 Security Agreement dated as of June 28, 1996 between the
Company and PAGG Corporation
11 - Statement Re: Computation of Per Share Earnings
27 - Financial Data Schedule
b. Reports on Form 8-K.
During the quarter covered by this report, the following reports
on Form 8-K were filed:
Date of Form 8-K Summary of Item
---------------- ---------------
May 14, 1996 Registrant reported resignation of
Coopers & Lybrand L.L.P. as its
independent auditors
June 18, 1996 Registrant reported engagement of
Wolf & Company, P.C. as its
independent auditors
-18-
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOCUS Enhancements, Inc.
August 14, 1996 By: /s/ Thomas L. Massie
------------------------------------------
Thomas L. Massie
President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
August 14, 1996 By: /s/ Jeremiah J. Cole, Jr.
-----------------------------------------
Jeremiah J. Cole, Jr.
Vice President of Finance
(Principal Accounting Officer)
-19-
Focus Enhancements, Inc. and Lapis Technologies, Inc.
Loan Document Modification Agreement No. 5
Table of Contents
-----------------
1. Loan Document Modification Agreement No. 5
2. Amended and Restated Promissory Note
LOAN DOCUMENT MODIFICATION AGREEMENT
------------------------------------
(No. 5; dated as of April 5, 1996)
----------------------------------
LOAN DOCUMENT MODIFICATION AGREEMENT dated as of April 5, 1996 by and
between FOCUS ENHANCEMENTS, INC., a Delaware corporation and LAPIS TECHNOLOGIES,
INC., a California corporation, (each a "Borrower" and together the "Borrowers")
and SILICON VALLEY BANK (the "Bank"), a California chartered bank with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054,
and with a loan production office located at Wellesley Office Park, 40 William
Street, Wellesley, MA 02181, doing business under the name "Silicon Valley
East".
1. Reference to Existing Loan Documents.
Reference is hereby made to that Credit Agreement dated January 20,
1994 between the Bank and the Borrower as previously amended as of January 24,
1994, March 30,1994, October 6, 1994 and June 15, 1995 (with the attached
schedules and exhibits, the "Credit Agreement") and the Loan Documents referred
to therein, including without limitation that certain Amended and Restated
Promissory Note of the Borrower dated June 15, 1995 in the principal amount of
$1,000,000 (the "Note"), and the Security Documents referred to therein. Unless
otherwise defined herein, capitalized terms used in this Agreement shall have
the same respective meanings as set forth in the Credit Agreement.
2. Effective Date.
This Agreement shall become effective as of April 5, 1996 (the
"Effective Date"), provided that the Bank shall have received the following on
or before June 25, 1996 and provided further, however, in no event shall this
Agreement become effective until signed by an officer of the Bank in California:
a. two copies of this Agreement, duly executed by the
Borrower, with the attached consent duly executed by C. Bruce Johnstone, duly
executed thereby; and
b. an amended and restated promissory note in the form
enclosed herewith (the "Amended Note"), duly executed by the Borrower.
By the signature of its authorized officer below, each Borrower is
hereby representing that, except as modified in Schedule A attached hereto, the
representations of the Borrowers set forth in the Loan Documents (including
those contained in the Credit Agreement, as amended by this Agreement) are true
and correct as of the Effective Date as if made on and as of such date. In
addition, the Borrowers confirm their authorization as to the debiting of their
account with the Bank in the amount of $7,500 in order to pay the Bank's
facility fee for the period up to and including the extended Expiry Date and in
the amount of $1,800 to pay the fees of Sullivan & Worcester LLP, special
counsel to the Bank for services rendered to the Bank in connection with this
Agreement. Finally, each Borrower (and each guarantor, if any, signing below)
agrees that, as of the Effective Date, it has no defenses against its
obligations to pay any amounts under the
-2-
Credit Agreement and the other Loan Documents; and in consideration for the
Bank's entering into this Amendment, the Borrowers hereby also agree to release
and forever discharge the Bank and its affiliates, officers, directors, agents,
attorneys, employees, successors and assigns of and from all manner of actions,
causes of action, suits, judgments, claims and demands whatsoever in law or in
equity, which have arisen from the beginning of time up to the date of the
Borrower's acceptance of this Amendment, whether arising in connection with the
transaction contemplated hereby or by the Credit Agreement or otherwise.
3. Description of Change in Terms.
As of the Effective Date, the Credit Agreement is modified in the
following respects:
a. The figure "$1,000,000" appearing on the cover page and in
the fifth line of Section 1.1 of the Credit Agreement is hereby deleted and
there is hereby substituted the figure "$900,000."
b. Section 1.5 of the Credit Agreement is hereby amended by
deleting "April 5, 1996" appearing in the second line thereof as the Maturity
Date and substituting in place thereof "March 7, 1997." Section 1.5 is further
amended by inserting the following new sentence at the end thereof: "The Bank
shall meet with an officer of the Borrowers on or about January 7, 1997 in order
to discuss (a) an extension to the Guarantee of C. Bruce Johnstone and (b) a
plan acceptable to the Bank for repayment of the entire outstanding balance of
the Note by the Maturity Date."
c. Section 1.4 of the Credit Agreement is hereby restated in
its entirety as follows:
"1.4 Borrowing Base. The Borrowers shall not permit, or
request any advance or the issuance of any Letter of Credit hereunder
that would cause, the sum of the aggregate unpaid principal amount of
all Line of Credit Loans under this Commitment (the "Extensions of
Credit"), to exceed at any time an amount equal to the lesser of (i)
the Commitment or (ii) the sum of (a) 70% of all Eligible Domestic
Accounts Receivable (the "Borrowing Base"). If at any time the
aggregate principal amount of all Extensions of Credit exceeds the
Borrowing Base, the Borrowers shall, on the next Business Day, prepay
such excess principal amount together with accrued interest thereon at
the applicable rate, and if such excess is not eliminated thereby, the
Borrowers shall also pledge to the Bank an amount by which the
aggregate Extension of Credit exceeds the Borrowing Base, in a manner
acceptable to the Bank."
d. Numbered paragraphs 7.10 through 7.13 are hereby restated
in their entirety as follows:
"7.10 Quick Ratio. The Borrowers will not permit the Quick
Ratio at the end of any month (a) to be less than 0.6 to 1 for the
months ending March 31, 1996 through November 30,1996; and (b) 0.8 to 1
for the month ending December 31, 1996 and each month thereafter.
-3-
7.11 Minimum Profitability. The Borrowers will not permit Net
Losses to be greater than, or Net Income to be less than, the amounts
set forth opposite the respective fiscal quarter ends listed below.
Quarter Ending Minimum Profitability
-------------- ---------------------
March 31, 1996 ($3,700,000)
June 30, 1996 ( 500,000)
September 30, 1996 $ 75,000
December 31, 1996 $ 200,000
7.12 [Not Utilized]
7.13 Tangible Net Worth. The Borrowers will not permit
Tangible Net Worth at the end of any fiscal month (a) to be less than
$600,000 for the months ending March 31, 1996 through November 30,
1996; and (b) $1,000,000 for the month ending December 31, 1996 and
thereafter."
e. The definition of "Eligible Domestic Accounts Receivable"
set forth in Section 9.1 of the Credit Agreement is hereby amended as follows:
(i) There is hereby added to subparagraph (a) the
following: "Notwithstanding the foregoing, the Bank in its
sole discretion may approve accounts receivable which remain
unpaid more than 90 but less than 120 days from the invoice
date."
(ii) The percentage set forth in the second and third
lines of clause (i) with respect to permitted concentration
from a single account debtor and its Subsidiaries and
Affiliates is hereby increased from 25% to 40%.
f. The form of Compliance Certificate attached to the Credit
Agreement as Exhibit C is hereby restated in its entirety in the form of Exhibit
C hereto.
g. The Credit Agreement and the other Loan Documents are
hereby amended wherever necessary or appropriate to reflect the foregoing
changes.
4. Continuing Validity.
Upon the effectiveness hereof, each reference in each Security
Instrument or other Loan Document to "the Credit Agreement", "thereunder",
"thereof", "therein", or words of like import referring to the Credit Agreement,
shall mean and be a reference to the Credit Agreement, as amended hereby. Except
as specifically set forth above, the Credit Agreement shall remain in full force
and effect and is hereby ratified and confirmed. Each of the other Loan
Documents is in full force and effect and is hereby ratified and confirmed. The
amendments set forth above (i) do not constitute a waiver or modification of any
term, condition or covenant of the Credit Agreement or any other Loan Document,
other than as expressly set forth herein, and (ii) shall not prejudice any
rights which the Bank may now or hereafter have under or in connection with the
Credit Agreement, as
-4-
modified hereby, or the other Loan Documents and shall not obligate the Bank to
assent to any further modifications.
5. Miscellaneous.
a. This Agreement may be signed in one or more counterparts
each of which taken together shall constitute one and the same document.
b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
c. EACH BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN
ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF THIS LOAN MODIFICATION AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY
REASON LENDER CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS, THEN VENUE SHALL LIE IN SANTA CLARA COUNTY, CALIFORNIA.
d. The Borrowers agree, jointly and severally to promptly pay
on demand all costs and expenses of the Bank in connection with the preparation,
reproduction, execution and delivery of this letter amendment and the other
instruments and documents to be delivered hereunder, including the reasonable
fees and out-of-pocket expenses of Sullivan & Worcester LLP, special counsel for
the Bank with respect thereto.
[Intentionally Left Blank]
-5-
IN WITNESS WHEREOF, the Bank and the Borrower have caused this
Agreement to be signed under seal by their respective duly authorized officers
as of the date set forth above.
SILICON VALLEY EAST, a Division
of Silicon Valley Bank
By: /s/ Mark Pasculano
-----------------------------
Name: Mark Pasculano
Title: Vice President
SILICON VALLEY BANK
By: /s/ Pamela Doyle
-----------------------------
Name: Pamela Doyle
Title:Senior Vice Pres.
(signed in Santa Clara, CA)
FOCUS ENHANCEMENTS, INC.
By: /s/ T. L. Massie
-----------------------------
Name:
Title:
LAPIS TECHNOLOGIES, INC.
By: /s/ T. L. Massie
-----------------------------
Name:
Title:
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: FOCUS ENHANCEMENTS, INC. AND LAPIS TECHNOLOGIES, INC.
The undersigned authorized officer of Focus Enhancements, Inc. and
Lapis Technologies, Inc. hereby certifies that in accordance with the terms and
conditions of the Loan and Security Agreement between Borrower and Bank (the
"Agreement"), (i) Borrower is in complete compliance for the period ending ____
with all required covenants except as noted below and (ii) all representations
and warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) and are consistently applied from one period to the next except as
explained in an accompanying letter or footnotes. The Officer expressly
acknowledges that no borrowings may be requested by the Borrower at any time or
date of determination that Borrower is not in compliance with any of the terms
of the Agreement, and that such compliance is determined not just at the date
this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTINQ COVENANT REQUIRED COMPLIES
- ------------------- -------- --------
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 30 days Yes No
A/R Audit Semi-Annual Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ratio
3/31/96 thru 10/31/96 0.6:1.0 ___:1.0 Yes No
12/31/96 and thereafter 0.3:1.0 ___:1.0 Yes No
Minimum Tangible Net Worth
3/31/96 thru 10/30/96 $ 600,000 $_______ Yes No
12/31/96 and theafter $1,000,000 $_______ Yes No
Profitability: Quarterly
3/31/96 ($3,700,000) $_______ Yes No
6/30/96 ( $ 500,000) $_______ Yes No
9/30/96 $ 75,000 $_______ Yes No
1 2/31/96 $ 200,000 $_______ Yes No
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
/s/ T. L. Massie
- -------------------
SIGNATURE
TITLE
DATE
June 20, 1996
Silicon Valley Bank
Wellesley Office Park
40 William Street
Wellesley, MA 02181
Gentlemen:
Reference is hereby made to (a) that certain Guarantee dated as of
June 15, 1995 (the "Guarantee") of the undersigned (the "Guarantor") in favor of
Silicon Valley Bank; and (b) that certain Loan Document Modification Agreement
(No. 5) dated as of April 5, 1996 (the "Modification Agreement") by and among
the Bank and Focus Enhancements, Inc. and Lapis Technologies, Inc. (together,
the "Borrowers"). Unless otherwise defined herein, all capitalized terms used
herein shall have the same respective meanings as set forth in the Credit
Agreement referred to in, and as amended by, the Modification Agreement. This
letter agreement may be signed in one or more counterparts, each of which shall
be an original and all of which taken together shall constitute one and the same
agreement.
1. The Guarantor hereby consents to the Modification Agreement and the
Amended Note.
2. The Guarantor hereby confirms and agrees with the Bank that the
Guarantee is, and shall continue to be in full force and effect in accordance
with its terms (and in any event until all obligations owing to the Bank by the
Borrowers under or in connection with the Credit Agreement are satisfied in
full) and the Guarantee is hereby ratified and confirmed in all respects, except
that upon the effectiveness of the Modification Agreement, all reference in the
Guarantee to the "Credit Agreement," "thereunder," "thereof," "therein," or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement as amended by the Modification Agreement, and
each reference in the Guaranty to the "Note,"
Silicon Valley Bank
June 20, 1996
Page 2
"thereunder," "thereof," "therein" and words of like import referring to the
Note, shall mean and be a reference to the Note as amended and restated by the
Amended Note.
Very truly yours,
/s/ C. Bruce Johnstone
-------------------------
C. Bruce Johnstone
Accepted and Agreed to:
Silicon Valley Bank
By: Mark Pasculano
----------------------------------
Name: Mark Pasculano
Title: Vice President
AMENDED AND RESTATED PROMISSORY NOTE
$900,000 Woburn, Massachusetts
As of April 5, 1996 (Originally
dated January 20, 1994 as
previously amended as of
March 30, 1994 and June 15, 1995)
For value received, the undersigned, FOCUS ENHANCEMENTS, INC., a
Delaware corporation and LAPIS TECHNOLOGIES, INC., a California corporation
(each a "Borrower" and collectively the "Borrowers"), jointly and severally
promise to pay to SILICON VALLEY BANK (the "Bank") at the office of the Bank
located at 3003 Tasman Drive Santa Clara, California 95054, or to its order, the
lesser of Nine Hundred Thousand Dollars ($900,000) or the outstanding principal
amount hereunder, on March 7, 1997 (the "Maturity Date"), together with interest
on the principal amount hereof from time to time outstanding at a fluctuating
rate per annum equal to the Prime Rate (as defined below) plus the Applicable
Margin (as defined in the Credit Agreement) until the Maturity Date, payable
monthly in arrears on the first day of each calendar month occurring after the
date hereof and on the Maturity Date, provided, further, however, the Borrowers
agree to make eleven (11) consecutive monthly prepayments of principal in the
amount of Ten Thousand Dollars ($10,000) each, commencing May 1, 1996 and ending
March 1, 1997, provided, further however, the final payment on the Maturity Date
shall be sufficient in amount to satisfy all outstanding obligations of the
Borrowers hereunder. The Borrowers jointly and severally promise to pay on
demand interest at a per annum rate of interest equal to the Prime Rate plus the
Applicable Margin plus 5% on any overdue principal (and to the extent permitted
by law, overdue interest). The Bank's "Prime Rate" is the per annum rate of
interest from time to time announced and made effective by the Bank as its Prime
Rate (which rate may or may not be the lowest rate available from the Bank at
any given time).
Computations of interest shall be made by the Bank on the basis of a
year of 360 days for the actual number of days occurring in the period for which
such interest is payable.
This promissory note amends and restates the terms and conditions of
the obligations of the Borrower under the promissory note dated as of January
20, 1994 as previously amended as of March 30, 1994 and June 15, 1995 (the
"Original Note") by the Borrower to the Bank. Nothing contained in this
promissory note shall be deemed to create or represent the issuance of new
indebtedness or the exchange by the Borrower of the Original Note for a new
promissory note. This note is the promissory note referred to in the Credit
Agreement herewith by and among the Bank and the Borrowers (together with all
related exhibits and schedules), as amended as of January 24, 1994, March 30,
1994, October 6, 1994, June 15, 1995 and April 5, 1996 and as the same may be
amended, modified or supplemented from time to time (the "Credit Agreement"),
and is entitled to the benefits thereof and of the other Loan Documents referred
to therein, and is subject to optional and mandatory prepayment as provided
therein. This note is secured by Security Agreements dated of even date herewith
each Borrower in favor of the Bank, as the same may be amended, modified or
supplemented from time to time.
- 2 -
Each reference in each Loan Document (as defined in the Credit
Agreement) to "the Note", "thereof", "therein", "thereunder", or words of like
import referring to the Original Note, shall mean and be a reference to the
Original Note, as amended and restated hereby.
Upon the occurrence of any Event of Default under, and as defined in,
the Credit Agreement, at the option of the Bank, the principal amount then
outstanding of and the accrued interest on the advances under this note and all
other amounts payable under this note shall become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate),
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrowers.
The Bank shall keep a record of the amount and the date of the making
of each advance pursuant to the Credit Agreement and each payment of principal
with respect thereto either by endorsing such information on the schedule
annexed hereto and made a part hereof, or continuations thereof which shall be
attached hereto and made a part hereof, or by maintaining a computerized record
of such information and printouts of such computerized record, which endorsement
or computerized record, and the printouts thereof, shall constitute prima facie
evidence of the accuracy of the information so endorsed.
The undersigned jointly and severally agree to pay all reasonable
out-of-pocket costs and expenses of the Bank (including, without limitation, the
reasonable fees and expenses of attorneys) in connection with the enforcement of
this note and the other Loan Documents and the preservation of their respective
rights hereunder and thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. Each
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THE BORROWERS ACKNOWLEDGE THAT THIS NOTE SHALL BE DEEMED DELIVERED TO
THE BANK AND ACCEPTED BY THE BANK IN THE STATE OF CALIFORNIA.
EACH BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER
HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT) OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, EACH BORROWER ACCEPTS FOR
ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
NON-EXCLUSIVE JURISDICTION OF ANY STATE
- 3 -
OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA OR THE
COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND
AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS
DEFINED IN THE CREDIT AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN
ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE
BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY
SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN
SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND
EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO,
WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN
SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO
THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM
ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT
PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE
MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF
THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF
CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF
THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER
SEAL.
Attest: FOCUS ENHANCEMENTS, INC.
__________________________ By: /s/ T. L. Massie
----------------------------
Name: Name:
Title: Title:
[Seal]
Attest: LAPIS TECHNOLOGIES, INC.
__________________________ By: /s/ T. L. Massie
---------------------------
Name: Name:
Title: Title:
[Seal]
PROMISSORY NOTE (CONT'D)
LOANS AND PAYMENTS OF PRINCIPAL
-------------------------
AMOUNT AMOUNT OF PRINCIPAL NOTATION
DATE OF LOAN REPAID MADE BY
DEBT EXTENSION AGREEMENT
AMENDMENT NO. 2 TO THE
NOTE AND WARRANT SUBSCRIPTION AGREEMENT
WHEREAS, FOCUS Enhancements, Inc., a Delaware corporation (the
"Company"), and Fred Kassner (the "Lender") entered into a certain Term Line of
Credit Note in the principal amount of up to $2,500,000 (the "Note"), a Common
Stock Purchase Warrant to purchase 200,000 shares of the Company's Common Stock,
a Note and Warrant Subscription Agreement, a Security Agreement, and an
Intercreditor and Subordination Agreement (collectively, the "Loan Agreements"),
each dated as of October 18, 1994.
WHEREAS, on February 22, 1995, the parties entered into Amendment No. 1
to the Note and Warrant Subscription Agreement extending the maturity date of
the Note to February 1, 1996 and in December 1995, the Company prepaid
$1,000,000 of the principal amount of the Note; and
WHEREAS, the parties now wish to extend the maturity date of the Term
Line of Credit Note issued under the Loan Agreements for the remaining balance
outstanding under the Note until March 31, 1997;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and obligations contained in the Loan Agreements, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. DEBT EXTENSION: The parties agree to extend the indebtedness for
money borrowed and owed by the Company to the Lender and represented by the Note
to March 31, 1997 and to extend, substitute, exchange and replace the
Replacement Term Line of Credit Note with the Amended and Restated Term Line of
Credit Note in the form attached hereto as Exhibit A. The undersigned Lender
agrees to cancel and return to the Company the original Replacement Term Line of
Credit Note dated as of October 18, 1994. Upon issuance by the Company to the
Lender of the Amended and Restated Term Line of Credit Note, the prior Note
shall be deemed cancelled on the books of the Company.
Except as expressly changed above, all other provisions of the Loan
Agreements remain in full force and effect. The Company hereby reconfirms and
affirms all of its obligations under each of the Loan Agreements.
IN WITNESS WHEREOF, the undersigned parties execute this Debt Extension
Agreement, Amendment No. 2 to the Note and Warrant Subscription Agreement as of
June 28, 1996.
FOCUS ENHANCEMENTS, INC. /s/ Fred Kassner
(the "Company") -------------------------------
Fred Kassner
(the "Lender")
By: /s/ T. L. Massie
---------------------------
Title: President
------------------------
THIS AMENDED AND RESTATED TERM LINE OF CREDIT NOTE REPLACES THE
REPLACEMENT TERM LINE OF CREDIT NOTE IN THE PRINCIPAL AMOUNT OF $2,500,000
ISSUED BY THE UNDERSIGNED DEBTOR IN FAVOR OF FRED KASSNER AND ORIGINALLY DUE
FEBRUARY 1, 1996.
The security represented hereby has not been registered under the
Securities Act of 1933 or applicable state securities laws and may not be sold,
assigned or transferred without an effective registration statement for such
security under the Securities Act of 1933 or applicable state securities laws,
unless the Company has received the written opinion of counsel satisfactory to
the Company that such counsel is of the opinion that such sale, assignment or
transfer does not involve a transaction requiring registration of such security
under the Securities Act of 1933 or applicable state securities laws.
FOCUS ENHANCEMENTS, INC.
AMENDED AND RESTATED TERM LINE OF CREDIT NOTE
$1,500,000 October 18, 1994;
amended and restated
as of June 28, 1996.
FOR VALUE RECEIVED, FOCUS ENHANCEMENTS, INC., a Delaware corporation
(the "DEBTOR"), hereby promises to pay to the order of FRED KASSNER (the
"LENDER") the principal amount of up to ONE MILLION FIVE HUNDRED THOUSAND
DOLLARS ($1,500,000) or, if less, the aggregate unpaid principal amount of all
loans made by the Lender to the Debtor and outstanding hereunder, together with
all accrued and unpaid interest thereon at a fluctuating interest rate per annum
equal to two percent (2%) above the interest rate announced by Silicon Valley
Bank in Santa Clara, California, from time to time as its "Prime Rate" (the
"PRIME RATE"). Principal and interest shall be payable in lawful money of the
United States of America, in immediately available funds, at the principal
office of the Lender or at such other place as the Lender may designate from
time to time in writing to the Debtor. Interest shall be computed on the basis
of actual days elapsed, a 360-day year and a 30-day month. If this Note is not
paid in full upon maturity, interest in unpaid balances shall thereafter be
payable on demand at a fluctuating interest rate per annum equal to four percent
(4%) above the Prime Rate in effect from time to time.
The principal on this Note shall be due and payable on or before March
31,1997, and interest shall be payable quarterly in arrears at the end of March,
June, September and December, commencing on June 30, 1996.
All loans hereunder and all payments on account of principal and
interest hereof shall be recorded by the Lender and, prior to any transfer
hereof, endorsed on the attached grid which is part of this Note. The entries on
the records of the Lender (including any appearing on this Note) shall be prima
facie evidence of amounts outstanding hereunder.
This Note is issued pursuant to and is subject to the terms and
conditions of that certain Note and Warrant Subscription Agreement between the
Debtor and the Lender dated as of October 18, 1994, as amended from time to time
(the "AGREEMENT"), which is hereby incorporated herein by reference, and is
entitled to the benefits thereof.
The principal amount of this Note may be repaid by the Debtor in whole
or in part without penalty or premium at any time and reborrowed from time to
time.
If any of the following circumstances or events shall occur and be
continuing, uncured, unremedied or unwaived (individually, an "EVENT OF
DEFAULT"):
(a) failure by the Debtor to pay the principal on this Note
thirty (30) days after maturity; or
(b) the cessation of the business of the Debtor as a going
concern or the failure by the Debtor to pay its outstanding obligations
as they become due in the ordinary course (consistent with commercially
reasonable practices); or
(c) the failure of the Debtor to pay any indebtedness for
borrowed money (other than as evidenced by this Note) owing by the
Debtor to Silicon Valley Bank (the "BANK") pursuant to the terms of a
certain Credit Agreement dated as of January 20, 1994 between the
Debtor and the Bank, or any interest or premium thereon, when due (or,
if permitted by the terms of the relevant document, within any
applicable grace period), whether such indebtedness shall become due by
scheduled maturity, by required prepayment or by acceleration, if the
effect of such failure to pay or perform is the actual acceleration by
the Bank of the maturity of such indebtedness, unless such failure to
pay or perform is waived in writing by the Bank; or
(d) the Debtor shall be involved in financial difficulties as
evidenced (i) by its admitting in writing its inability to pay its
debts generally as they become due; (ii) by its commencement of a
voluntary case under Title 11 of the United States Code, the Federal
Bankruptcy Code, as from time to time in effect, or by its authorizing,
by appropriate proceedings of its Board of Directors or other
government body, the commencement of such voluntary case; (iii) by its
filing an answer or other pleading admitting or failing to deny the
material allegations of a petition filed against it commencing an
involuntary case under said Title 11, or seeking, consenting to or
acquiescing in the relief therein provided, or by its failing to
controvert timely the material allegations of any such petition; (iv)
by the entry of an order of relief in any involuntary case commenced
under Title 11, except that the Company shall have a reasonable period,
not to exceed ninety (90) days, to have such order revoked; (v) by its
seeking relief as a debtor under any applicable law, other than said
Title 11, of any jurisdiction relating to the liquidation or
reorganization of debtor or to the modification or alteration of the
rights of creditors, or by its consenting to or
- 2 -
acquiescing in such relief; (vi) by the entry of an order by a court of
competent jurisdiction (a) finding it to be bankrupt or insolvent; (b)
ordering or approving its liquidation, reorganization or any
modification or alteration of the rights of its creditors, or (c)
assuming custody of, or appointing a receiver or other custodian for,
all or a substantial part of its property or assets; or (vii) by its
making an assignment for the benefit of, or entering into a composition
with, its creditors, or appointing or consenting to the appointment of
a receiver or other custodian for all or a substantial part of its
property; or
(e) any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied against a substantial part of
the property of the Debtor in an amount exceeding $75,000 and such
judgment, writ, or similar process shall not be released, vacated or
fully bonded within ninety (90) days after its issue or levy;
then, and in any such event, the Lender may, by notice to the Debtor, declare
the entire unpaid principal amount of this Note, all interest accrued and unpaid
thereon and all other amounts payable under this Note to be forthwith due and
payable, whereupon this Note, all such accrued interest and all such amounts
shall become and be forthwith due and payable without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by the Debtor.
The Debtor agrees to pay all costs, charges and expenses directly
incurred by the Lender (including, without limitation, costs of collection,
court costs, and reasonable attorneys' fees and disbursements) in connection
with the successful enforcement of the Lender's rights and collection of
principal and accrued interest under this Note (all such costs, charges and
expenses being referred to as "COSTS"). Presentment for payment, demand,
protest, notice of protest and notice of prepayment shall be made on five (5)
business days prior written notice. The Debtor agrees that any delay on the part
of the Lender in exercising any rights hereunder will not operate as a waiver of
such rights; Debtor agrees that any payments received hereunder will be applied
first to Costs, next to interest, and the balance to principal on the Note. The
Lender shall not by any act, delay, omission, or otherwise be deemed to waive
any of his rights or remedies, and no waiver of any kind shall be valid unless
in writing and signed by the Lender.
This Note applies to, inures to the benefit of, and binds the
successors and assigns of the parties hereto. This Note is made under and shall
be governed by and construed in accordance with the internal laws of, and
enforced by the courts located within, the Commonwealth of Massachusetts.
- 3 -
IN WITNESS WHEREOF, the Debtor has executed this Note as an instrument
under seal as of the date first written above.
ATTEST: FOCUS ENHANCEMENTS, INC.
By: /s/ John A. Piccione By: /s/ T. L. Massie
---------------------------- ------------------------------
Title: Secretary Title: President
------------------------- ---------------------------
- 4 -
ADVANCES AND PAYMENTS OF PRINCIPAL
Amount Amount
Amount of of Outstanding Notation
of Principal Interest Principal Made
Date Loan Paid Paid Balance By
- 5 -
SECURITY AGREEMENT
------------------
AGREEMENT, dated as of June 28, 1996 between FOCUS ENHANCEMENTS, INC.,
a corporation duly organized and validly existing under the laws of the State of
Delaware (the "Debtor"), and FRED KASSNER (the "Secured Party").
W I T N E S S E T H:
--------------------
In consideration of the mutual covenants and agreements contained
herein, the parties hereto hereby agree as follows:
1. Definitions. All terms used herein, unless otherwise defined, shall
have the meanings ascribed to them in the Note and Warrant Subscription
Agreement as amended and the Amended and Restated Term Line of Credit Note
(collectively, the "Loan Agreement"), between the Debtor, on the one hand, and
the Secured Party, on the other, providing for loans by the Secured Party to the
Debtor in the principal amount of $1,500,000.00.
"Liabilities" shall mean all indebtedness and other
liabilities and obligations, whether now existing or hereafter arising, of the
Debtor to the Secured Party pursuant to the Loan Agreement including, without
limitation, increases in the amounts of or refinancing of or other changes to
the principal amount thereof and any other loans or other indebtedness that may
be created by any amendment, supplement or other modification to, or restatement
of, the Loan Agreement.
2. Grant of Security Interest.
--------------------------
(a) As security for the prompt payment and performance when
due (whether at stated maturity, by acceleration or otherwise) of the
Liabilities, Debtor hereby grants to the Secured Party a security interest in
the Collateral, whether now owned or hereafter acquired by such Debtor.
(b) As used herein, the term "Collateral" shall mean with
respect to each Debtor;
(1) All of the real and personal property of such Debtor;
(2) All leases, licenses, permits (to the extent
permissible under applicable law) or similar agreements or
interests (whether existing or holdover; whether arising out
of written, oral or implied agreements and whether held in the
name of such Debtor, any predecessor in interest to such
Debtor or any subsidiary or other affiliate or other division
of such Debtor or any such predecessor in interest) and all
licenses, permits, or other authorizations of any federal,
state, local or other governmental authority, and all
extensions, renewals, amendments and modifications thereof;
(3) All equipment in all of its forms, wherever
located, now or hereafter existing, including, without
limitation, all fixtures, leasehold improvements, tools,
machinery, furniture, files, books, records and computer
systems and programs and all parts thereof and all accessions
thereto;
(4) All inventory in all of its forms, wherever
located, now or hereafter existing, including, without
limitation, (a) goods in which such Debtor has an interest in
mass or a joint or other interest or right of any kind and (b)
goods which are returned to or repossessed by such Debtor, and
all accessions thereto and products thereof and documents
therefor;
(5) All accounts, contract rights, chattel paper,
instruments, general intangibles, documents and other
obligations of any kind now or hereafter existing, arising out
of or in connection with the sale or lease of goods, the
rendering of services or otherwise, and all rights nor or
hereafter existing in and to all security agreements, leases,
and other contracts securing or otherwise relating to any such
accounts, contract rights, chattel paper, instruments, general
intangibles, documents or obligations;
(6) All trade or service names, trademarks, service
marks, logos, and all patents, patent applications,
copyrights, licensing agreements and royalty payments;
- 2 -
(7) All documents, instruments, contract rights,
chattel paper, general intangibles, bank accounts, monies,
revenues, credits, claims, demands, goodwill and any claims or
causes of action arising from or related to any transaction
contemplated by any of the foregoing; and
(8) All proceeds (including, without limitation, the
proceeds of all insurance contracts in respect thereof),
additions and accessions of or to any and all of the
Collateral described in this Section 2(b) and all
substitutions and replacements therefor and, to the extent not
otherwise included, (a) all payments under insurance (whether
or not the Secured Party is the loss payee thereof) or as a
result of any seizure or condemnation, or under any indemnity,
warrant or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing Collateral, (b)
all rights of such Debtor to receive monies due and to become
due under, pursuant to or in connection with any of the
foregoing Collateral, (c) all claims of such Debtor for losses
or damages arising out of or related to, or for any breach of
any agreements, covenants, representations or warranties or
any default by any other Person under, any of the foregoing
Collateral, and (d) the right of such Debtor to terminate any
of the foregoing Collateral, to perform thereunder and to
enforce and compel performance and otherwise exercise all
rights and remedies thereunder, pursuant thereto or in
connection therewith, including, without limitation, all
rights to give and receive notices, reports, requests and
consents, to make demands, to exercise discretion and to
exercise all options and elections thereunder, pursuant
thereto or in connection therewith.
3. Covenants of the Debtor.
------------------------
(a) Upon request of the Secured Party, the Debtor will, upon
reasonable notice, permit representatives of the Secured Party, during normal
business hours, to inspect its properties included in the Collateral and to
inspect and make abstracts from its books and records pertaining to the
Collateral.
- 3 -
(b) All policies of insurance maintained by Debtor on or with
respect to the Collateral shall, unless otherwise specified by the Secured
Party, be written for the benefit of the Debtor and the Secured Party (as an
additional named insured) as their interests may appear, and all such policies,
or certificates evidencing the same, shall be furnished to the Secured Party.
The Debtor will cause the carriers of its insurance to issue loss payee clauses
in favor of the Secured Party with respect to such insurance and to cause such
carriers to give not less than 30 days' prior notice to the Secured Party of the
cancellation or non-renewal of any of such policies.
(c) Debtor will not, without the prior written consent of the
Secured Party, which consent shall not be unreasonably withheld:
(1) Permit any of the Collateral to be levied upon
under legal process or to fall under any other lien, unless
promptly discharged; or
(2) Cause, directly or indirectly, anything to be
done outside of the ordinary course of business of such Debtor
which, or fail to take any action outside of the ordinary
course of business of such Debtor which failure, may impair
the value of the Collateral in any material respect (other
than normal wear and tear) or the liens and security interests
herein granted and/or intended to be granted hereby; or
(3) Sell, lease, transfer, assign (including by
virtue of assignments by operation of law), mortgage, pledge
or otherwise dispose of or encumber any of the Collateral
except for dispositions or encumbrances in the ordinary course
of business, or permit any party other than the Secured Party
and parties holding liens permitted under (1) above to perfect
any security interest in such Collateral.
- 4 -
(d) The Debtor will maintain its books and records only at the
location specified in Section 6 hereof or at such other place within the United
States of America as the Secured Party may agree in writing (which agreement
shall not be unreasonably withheld), and will not change its name, or the name
under which it conducts its business, or its addresses without giving the
Secured Party 30 days' prior written notice thereof.
(e) If any Event of Default shall have occurred and shall be
continuing, the Debtor will keep and stamp or otherwise mark any and all books
and records relating to the Collateral in such manner as the Secured Party may
reasonably require.
4. Further Assurances; etc.
-----------------------
(a) If any Event of Default shall have occurred and shall be
continuing, Debtor will, from time to time and at its own expense, promptly
execute, acknowledge, witness and deliver and file and/or record, or cause the
execution, acknowledgement, witnessing and delivery and the filing and/or
recordation of, such specific and further assignments of Collateral and such
other documents or instruments, and shall take or cause to be taken such other
actions, as the Secured Party may reasonably request for the perfection against
such Debtor and all third parties whomsoever of the security interests created
hereby in the Collateral or for the continuation and protection thereof, and
promptly give to the Secured Party evidence satisfactory to the Secured Party of
such action. Without limiting the generality of the foregoing, Debtor promptly
upon the execution and delivery of this Agreement, and at any time or from time
to time thereafter upon the request of the Secured Party, shall, at Debtor's
expense, execute, acknowledge, witness and deliver such financing and
continuation statements as the Secured Party may reasonably request for the
purposes of perfecting, maintaining and protecting such security interests of
the Secured Party, and shall cause this Agreement, any amendment or supplement
hereto or thereto and each such financing and continuation statement, notice and
additional security agreements to be filed or recorded in such manner and in
such places as may be required by applicable law or as the Secured Party may
reasonably request for such purpose.
- 5 -
Debtor hereby authorizes the Secured Party to effect any
filing or recording which the Secured Party has requested pursuant to this
Section 4(a) without the signature of such Debtor, to the extent permitted by
applicable law. Notwithstanding the foregoing provisions of this Section 4(a) or
any of the other provisions of this Agreement, the Secured Party agrees that it
shall not communicate with any account debtors or customers of Debtor in the
exercise of the Secured Party's rights hereunder until the occurrence and during
the continuance of an Event of Default.
(b) At any time and from time to time, upon the written
request of the Secured Party, Debtor will, at Debtor's expense, promptly and
duly execute, acknowledge, witness and deliver, or cause to be duly executed,
acknowledged, witnessed and delivered, any and all such further instruments and
documents, and take such further actions, as the Secured Party may reasonably
request, to obtain for the Secured Party the full benefits of this Agreement and
of the rights and powers herein and therein granted.
5. Actions by the Secured Party.
----------------------------
(a) If any Event of Default shall have occurred and shall be
continuing, the Secured Party shall have the power to exchange any of the
Collateral for other property upon any reorganization, recapitalization or other
readjustment and in connection therewith to deposit any of the Collateral with
any committee or depository upon such terms as it may determine, all without
notice and without liability (other than for gross negligence or willful
misconduct), except to account for property actually received by the Secured
Party.
- 6 -
(b) The Secured Party may, at any time and from time to time,
at its option or at the request of the Secured Party, after having given notice
of its intention to do so to the Debtor perform any act which is undertaken by
Debtor to be performed by it hereunder but which it shall have failed to
perform, and upon the giving of such notice the Secured Party may take any other
action which the Secured Party may in its reasonable judgment deem necessary for
the maintenance, preservation or protection of any of the Collateral or the
security interests therein, and the Secured Party is hereby irrevocably
appointed attorney-in-fact of the Debtor for this purpose. All moneys advanced
by the Secured Party for account of Debtor in connection with any of the
foregoing, together with interest thereon at the rate of interest set forth in
the Loan Agreement from the date of such advance to the date of the repayment
thereof, shall be repaid by the Debtor to the Secured Party, upon demand, and
shall constitute additional Liabilities secured hereby. The making of any such
advance by the Secured Party for account of Debtor shall not, however, relieve
the Debtors of liability for any default hereunder until the full amount of all
such moneys so advanced and such interest thereon shall have been repaid to the
Secured Party and such default shall have otherwise been cured.
6. Debtor Representations.
----------------------
Debtor represents and warrants to the Secured Party that its
chief place of business is at the address set forth below its name on the
signature pages hereof and that it conducts its business only under the name
specified on the signature pages hereof.
7. Power Upon Default.
------------------
(a) Upon the occurrence and during the continuance of any
Event of Default, the Secured Party shall have all the rights and remedies of a
secured party under the UCC, or other applicable law, including the power of
sale upon notice, and all rights provided herein, all of which rights and
remedies shall, to the fullest extent permitted by law, be cumulative.
- 7 -
(b) Without limiting the generality of the foregoing:
(1) Upon the occurrence and during the continuance of
any Event of Default, but subject always to any mandatory
requirements of applicable law then in effect, the Secured
Party may, at its option, do any one or more or all of the
following acts, as the Secured Party in its sole and complete
discretion may then elect and at such time or times as the
Secured Party in its complete and sole discretion may
determine:
(a) exercise all the rights and remedies in
foreclosure and otherwise granted to mortgagees and
secured parties under the provisions of applicable
law, including, without limitation, the UCC;
(b) institute legal proceedings for the
specific performance of any covenant or agreement
herein undertaken by Debtor or for aid in the
execution of any power or remedy herein granted;
(c) institute legal proceedings to foreclose
upon and against any of the liens and security
interests created hereby;
(d) institute legal proceedings for the
sale, under the judgment or decree of any court of
competent jurisdiction, of any of the Collateral;
(e) institute legal proceedings for the
appointment of a receiver or receivers pending
foreclosure hereunder or the sale of any of the
Collateral under the order of a court of competent
jurisdiction or under other legal process;
- 8 -
(f) personally, or by agents or attorneys,
enter into and upon any premises wherein the
Collateral or any part thereof may then be situated
and take possession of all or any part thereof or
render it unusable; and, without being responsible
(except for gross negligence or willful misconduct)
for loss or damage, hold, store and keep idle, or
operate, lease or otherwise use or permit the use of
the same or any part thereof for such time and upon
such terms as the Secured Party in its complete and
sole discretion may determine, and demand, collect
and retain all hire, earnings and all other sums due
and to become due in respect of the earnings arising
from such use, if any, after charging against all
receipts from the use of the same and from any
subsequent sale thereof, by court proceedings or
pursuant to subclause (g) of this Section 7(b)(1) all
reasonable costs and expenses of, and damages or
losses by reason of, such use and/or sale; or
(g) personally, or by agents or attorneys,
enter upon and into any place wherein the same may
then be located, and take possession of any part or
all of the Collateral owned by Debtor, with or
without process of law and without being responsible
for loss or damage (except such as results from the
Secured Party's gross negligence or willful
misconduct), and sell or dispose of all or any part
of the same, free from any and all claims of Debtor
or any other party claiming by, through or under
Debtor at law, in equity or otherwise, at one or more
public or private sales, in such place or places, at
such time or times, for cash or credit and upon such
terms as the Secured Party may determine, with or
without any previous demand or notice to either
Debtor or advertisement and demand and any right or
equity of redemption otherwise required by law are
hereby waived by Debtor to the fullest extent
permitted by applicable law. The power of sale
hereunder shall not be exhausted by one or more
sales, and the Secured Party may from time to time
adjourn any sale to be made pursuant to this Section
7.
- 9 -
(2) If the Secured Party shall demand possession of
the Collateral or any part thereof pursuant hereto, Debtor
will, at its own expense, forthwith cause the Collateral owned
by Debtor or any part thereof designated by the Secured Party
to be assembled and made available and/or delivered to the
Secured Party at any place reasonably designated by the
Secured Party.
(3) In the event that any mandatory requirement of
applicable law shall obligate the Secured Party to give prior
notice to Debtor of any of the foregoing acts, Debtor agrees
that a notice sent to it in writing by certified U.S. mail,
return receipt requested, at least five (or such longer period
as may be required by applicable law) Business Days before the
date of any such act, at its address specified beneath its
signature hereto (or such other address as shall have been
notified to the Secured Party in writing), shall be deemed to
be reasonable notice of such act, and, specifically,
reasonable notification of the time and place of any public
sale hereunder and reasonable notification of the time after
which any private sale or other intended disposition to be
made hereunder is to be made.
(4) The Secured Party shall apply the proceeds from
the sale or other disposition of the Collateral pursuant to
the provisions of this Section 7(b) and any other amounts held
by it as Collateral hereunder in the following order:
FIRST, to the payment of the costs and
expenses, if any (including, without limitation,
reasonable attorneys' fees and expenses), incurred by
the Secured Party in preserving its interests in the
Collateral or in enforcing any remedies granted in or
realizing against the security of, this Agreement or
any disbursements by the Secured Party under Section
5 hereof;
SECOND, to the payment to the Secured Party
of accrued and unpaid interest due and payable under
the Loan Agreement (whether at stated maturity, by
acceleration or otherwise);
THIRD, to the payment to the Secured Party
of the outstanding principal amount due and payable
under the Loan Agreement (whether at stated maturity,
by acceleration or otherwise);
- 10 -
FOURTH, to the payment to the Secured Party
of any and all other Liabilities due on the date of
such application;
FIFTH, to the payment of any other amounts
required by applicable law (including, without
limitation, Section 9-504(1)(c) of the UCC); and
SIXTH, after the payment in full of all of
the Liabilities (including those not due and payable
at the time of the applications above), to the
payment to the Debtors of any surplus then remaining
from such proceeds or otherwise as a court of
competent jurisdiction may direct.
(5) No sale or other disposition of all or any part
of the Collateral owned by Debtor by the Secured Party
pursuant to this Section 7(b) shall be deemed to relieve
Debtor of its obligations in respect of any Liabilities except
to the extent the proceeds thereof are applied to the payment
of such Liabilities.
8. Subordination. The rights of the Secured Party pursuant to this
Agreement shall be subject to the rights of Silicon Valley Bank ("SVB") under a
certain Loan and Security Agreement, as amended, between SVB and the Debtor and
shall be exercisable only to the extent that rights of SVB are not compromised
thereby.
9. Possession until Default. Until an Event of Default shall occur and
be continuing, except as otherwise provided in this Agreement, Debtor will have
the right to the possession and enjoyment of the Collateral owned by it for the
purpose of conducting the ordinary course of its business.
10. Waiver by Debtor. To the fullest extent it may lawfully so agree,
Debtor agrees that it will not at any time insist upon, claim, plead or take any
benefit or advantage of any appraisement, valuation, stay, extension,
moratorium, redemption or similar law now or hereafter in force in order to
prevent, delay or hinder the enforcement hereof or the absolute sale of any part
of the Collateral or the possession thereof by any purchaser at any sale
pursuant to Section 7(b) hereof; and Debtor, for itself and all who claim
through it, so far as it or they now or hereafter lawfully may do so, hereby
waives the benefit of all such laws, and all right to have the Collateral owned
by it marshalled upon any foreclosure hereof, and agrees that any court having
jurisdiction to foreclose this Agreement may order the sale of the Collateral as
an entirety.
- 11 -
Without limiting the generality of the foregoing, Debtor hereby: (i)
authorizes the Secured Party, in its sole discretion and without notice to or
demand upon it and without otherwise affecting its obligations hereunder or in
respect of the Liabilities, from time to time to take and hold other collateral
(in addition to the Collateral) for payment of any Liabilities or any part
thereof and to accept and hold any endorsement or guarantee of payment of the
Liabilities or any part thereof and to release or substitute any endorser or
guarantor or any other party granting security for or in any way obligated upon
the Liabilities or any part thereof and/or to modify or terminate the terms of
subordination of any indebtedness subordinated to any of the Liabilities; and
(ii) waives and releases any and all right to require the Secured Party to
collect any Liabilities from any specific item or items of Collateral, from any
other party liable as guarantor or in any other manner in respect of any
Liabilities or from any other collateral.
11. Purchases by the Secured Party. At any sale pursuant to Section
7(b) hereof, the Secured Party may to the extent permitted by applicable law bid
for and purchase the Collateral offered for sale, and, upon compliance in full
with the terms of such sale, may hold, retain and dispose of such property
without further accountability therefor to Debtor or any other party.
12. No Representation, etc. Anything herein contained to the contrary
notwithstanding, neither the Secured Party nor any of its nominees or assignees
shall have any obligation or liability by reason of or arising out of this
Agreement to make any inquiry as to the nature or sufficiency of, to present or
file any claim with respect to, or to take any action to collect or enforce the
payment of, any amounts to which it may be entitled at any time or times by
virtue of this Agreement. The Secured Party makes no representations or
warranties hereunder with respect to the Collateral or any part thereof, and the
Secured Party shall not by virtue of this Agreement be chargeable with any
obligations or liabilities of Debtor or any other party with respect thereto.
The Secured Party (if it shall have acted in good faith and in a commercially
reasonable manner) shall have no liability or obligation arising out of any
claims with respect to the Collateral settled by the Secured Party.
- 12 -
13. Remedies. Each right, power and remedy herein specifically granted
to the Secured Party or otherwise available to it shall be cumulative, and shall
be in addition to every other right, power and remedy herein specifically given
or now or hereafter existing at law, in equity or otherwise; and each right,
power and remedy, whether specifically granted herein or otherwise existing, may
be exercised, at any time and from time to time as often and in such order as
may be deemed expedient by the Secured Party in its sole and complete
discretion; and the exercise or commencement of exercise of any right, power or
remedy shall not be construed as a waiver of the right to exercise, at the same
time or thereafter, the same or any other right, power or remedy. No delay or
omission by the Secured Party in exercising any such right or power, or in
pursuing any such remedy, shall impair any such right, power or remedy or be
construed to be a waiver of any default on the part of either Debtor or an
acquiescence therein. No waiver by the Secured Party of any breach or default of
or by either Debtor hereunder shall be deemed to be a waiver of any other or
similar, previous or subsequent, breach or default.
14. Notices. All notices and other communications provided for herein
shall be by telex, fax, telegraph, cable or in writing and telexed, faxed,
telegraphed, cabled, mailed by registered or certified mail, postage prepaid,
return receipt requested or delivered to the intended recipient at the telephone
number or "Address for Notices" specified below its name on the signature pages
hereof; or, as to any party, at such other telephone number or address as shall
be designated by such party in a notice to the other parties. All notices and
other communications hereunder shall be effective or deemed delivered or
furnished (i) if given by mail on the third Business Day after such
communication is deposited in the mail addressed as above provided, (ii) if
given by telex or fax, when such communication is transmitted to the appropriate
number determined as above provided in this Section 14 and the appropriate
answerback is received or receipt is otherwise acknowledged, and (iii) if given
by telegraph or cable delivered to the telegraph or cable office, in each case
addressed as aforesaid.
- 13 -
15. Amendments, etc. This Agreement may not be amended or modified
except by written agreement of the Debtor and the Secured Party, and no consent
or waiver hereunder shall be valid unless in writing and signed by the person or
persons giving such consent or waiver.
16. Term. This Security Agreement shall continue in full force and
effect until all of the Liabilities have been fully and indefeasibly paid in
full, whereupon this Security Agreement and the lien granted herein shall
terminate.
17. Entire Agreement. This Security Agreement replaces the Security
Agreement (the "Old Security Agreement") dated October 18, 1994 by and among the
Debtor, Secured Party and SVB. The Old Security Agreement shall be of no further
force and effect.
18. Miscellaneous.
(a) This Agreement shall be binding upon and shall inure to
the benefit of the Debtor and the Secured Party and their respective successors
and assigns; provided that Debtor may not assign its rights or obligations
hereunder without the prior written consent of the Secured Party.
(b) This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and either of the parties hereto may execute this Agreement by
signing any such counterpart.
(c) This agreement will be construed in accordance with and
governed by the law of the Commonwealth of Massachusetts, provided that as to
collateral located in any jurisdiction other than Massachusetts, the Secured
Party shall have all the rights to which a secured party under the laws of such
jurisdiction is entitled.
(d) The section titles contained in this Agreement shall be
without substantive meaning or content of any kind whatsoever and shall not
govern the interpretation of any of the provisions of this Agreement.
- 14 -
The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
FOCUS ENHANCEMENTS, INC.
By: /s/ T. L. Massie
------------------------------
Thomas L. Massie, President
- Address for Notices -
800 West Cummings Park
Suite 4500
Woburn, Massachusetts 01801
with copies to:
John A. Piccione, Esq.
Epstein Becker & Green, P.C.
75 State Street
Boston, Massachusetts 02109
Telephone No.: 617-342-4000
Telecopier No.: 617-342-4001
/s/ Fred Kassner
------------------------------
Fred Kassner
- Address for Notices -
69 Spring Street
Ramsey, New Jersey 07446
Telephone No.: 201-934-3500
Telecopier No.: 201-934-3617
with copies to:
Susan G. Kaufman, Esq.
69 Spring Street
Ramsey, New Jersey 07446
Telephone No.: 201-934-3626
Telecopies No.: 201-934-3617
- 15 -
THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD,
ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH
SECURITY UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS,
UNLESS THE COMPANY HAS RECEIVED THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH COUNSEL IS OF THE OPINION THAT SUCH SALE, ASSIGNMENT OR
TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF SUCH SECURITY
UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS.
WARRANT NO.: W96/6 RIGHT TO PURCHASE 50,000
SHARES OF COMMON STOCK OF
JUNE 28, 1996 FOCUS ENHANCEMENTS, INC.
VOID UNLESS EXERCISED BEFORE 5:00 P.M., EASTERN STANDARD TIME ON JUNE 28, 1999.
FOCUS ENHANCEMENTS, INC.
COMMON STOCK PURCHASE WARRANT
FOCUS ENHANCEMENTS, INC., a Delaware corporation (the "Company"),
hereby certifies that, for value received, Fred Kassner, or assigns, is
entitled, subject to the terms set forth below, to purchase from the Company,
commencing June 28, 1996, at any time or from time to time before 5:00 p.m.,
Eastern Daylight Savings Time, on or before June 28, 1999, 50,000 fully paid and
nonassessable shares of Common Stock, $.01 par value, of the Company, at an
exercise price per share equal to $2.07. Such exercise price per share as
adjusted from time to time as herein provided is referred to herein as the
"Exercise Price." The number and character of such shares of Common Stock and
the Exercise Price are subject to adjustment as provided herein.
As used herein, the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Company" shall include FOCUS Enhancements, Inc., a
Delaware corporation, and any corporation which shall succeed or assume
the obligations of the Company hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock,
$.01 par value per share, as authorized, (b) any other capital stock of
any class or classes (however designated) of the Company, authorized on
or after such date, the holders of which shall have the right, without
limitation as to amount, either to all or to a
share of the balance of current dividends and liquidating dividends
after the payment of dividends and distributions on any shares entitled
to preference, and the holders of which shall ordinarily, in the
absence of contingencies, be entitled to vote for the election of a
majority of directors of the Company (even though the right so to vote
has been suspended by the happening of such a contingency), (c) any
other securities into which or for which any of the securities
described in (a) or (b) may be converted or exchanged pursuant to a
plan of recapitalization, reorganization, merger, sale of assets or
otherwise, or the conversion of promissory notes or other obligations
of the Company.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person
(corporate or otherwise) which the holder of this Warrant at any time
shall be entitled to receive, or shall have received, on the exercise
of the Warrant, in lieu of or in addition to Common Stock, or which at
any time shall be issuable or shall have been issued in exchange for or
in replacement of Other Securities pursuant to Sections 3 or 4 or
otherwise.
1. EXERCISE OF WARRANT.
1.1. FULL EXERCISE. This Warrant may be exercised in full by
the holder hereof by surrender of this Warrant, with the form of subscription at
the end hereof duly executed by such holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or official bank check
payable to the order of the Company, in the amount obtained by multiplying the
number of shares of Common Stock for which this Warrant is then exercisable by
the Exercise Price then in effect.
1.2 PARTIAL EXERCISE. This Warrant may be exercised in part by
surrender of this Warrant in the manner and at the place provided in Section 1.1
except that the amount payable by the holder on such partial exercise shall be
the amount obtained by multiplying (a) the number of shares of Common Stock
designated by the holder in the subscription at the end hereof by (b) the
Exercise Price then in effect. On any such partial exercise, the Company at its
expense will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof
or as such holder (upon payment by such holder of any applicable transfer taxes)
may request, calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock for which such Warrant or Warrants may still be
exercised.
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable
after the exercise of this Warrant in full or in part, and in any event within
sixty (60) days thereafter, the Company at its expense (including the payment by
it of any applicable issue taxes) will cause to be issued in the name of and
delivered to the holder hereof, or as such holder (upon payment by such holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which such holder shall be entitled on such exercise, plus, in
lieu of any
2
fractional share to which such holder would otherwise be entitled, cash equal to
such fraction multiplied by the then current market value of one full share,
together with any other stock or other securities and property (including cash,
where applicable) to which such holder is entitled upon such exercise pursuant
to Section 1 or otherwise.
3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION OR MERGER.
3.1 REORGANIZATION, CONSOLIDATION OR MERGER. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or entity, or (c) transfer all
or substantially all of its properties or assets to any other person under any
plan or arrangement contemplating the dissolution of the Company, then, in each
such case, the holder of the Warrant, on the exercise hereof as provided in
Section 1 at any time after the consummation of such reorganization,
consolidation or merger or the effective date of such dissolution, as the case
may be, shall receive, in lieu of the Common Stock (or Other Securities)
issuable on such exercise prior to such consummation or such effective date, the
stock and other securities and property (including cash) to which such holder
would have been entitled upon such consummation or in connection with such
dissolution, as the case may be, if such holder had so exercised this Warrant,
immediately prior thereto, all subject to further adjustment thereafter as
provided in Sections 4 and 5.
3.2 CONTINUATION OF TERMS. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3, this Warrant shall continue in full force and
effect and the terms hereof shall be applicable to the shares of stock and Other
Securities and property receivable on the exercise of the Warrant after the
consummation of such reorganization, consolidation or merger or the effective
date of dissolution following any such transfer, as the case may be, and shall
be binding upon the issuer of any such stock or other securities, including, in
the case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant.
4. ADJUSTMENTS FOR STOCK DIVIDENDS AND STOCK SPLITS. In the event that
the Company shall (i) issue additional shares of Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide its outstanding
shares of Common Stock, or (iii) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Exercise Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then prevailing Exercise Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event (calculated assuming the conversion
or exchange of all outstanding shares of convertible or exchangeable securities
of the Company which are convertible or exchangeable into, or exercisable for,
shares of Common Stock) and the denominator of which shall be the number of
shares of Common Stock outstanding immediately after such event (calculated
assuming the conversion or
3
exchange of all outstanding shares of convertible or exchangeable securities of
the Company which are convertible or exchangeable into, or exercisable for,
shares of Common Stock), and the product so obtained shall thereafter be the
Exercise Price then in effect. The Exercise Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive event or
events described herein in this Section 4. The holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive that number of shares of Common Stock determined by multiplying the
number of shares of Common Stock which would otherwise (but for the provisions
of this Section 4) be issuable on such exercise, by a fraction of which (i) the
numerator is the Exercise Price which would otherwise (but for the provisions of
this Section 4) be in effect, and (ii) the denominator is the Exercise Price in
effect on the date of such exercise.
5. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY AND
RECLASSIFICATIONS. In case at any time or from time to time, the holders of
Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate
rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which, in the case
of Common Stock, are provided for in Section 4), then and in each such case the
holder of this Warrant, on the exercise hereof as provided in Section 1, shall
be entitled to receive the amount of other or additional stock and other
securities and property (including cash in the cases referred to in subdivision
(b) of this Section 5) which such holder would hold on the date of such exercise
if on the date of distribution of such other or additional stock or other
securities and property, or on the record date fixed for determining the
shareholders entitled to receive such other or additional stock or other
securities and property, such holder had been the holder of record of the number
of shares of Common Stock called for on the face of this Warrant and had
thereafter, during the period from the date thereof to and including the date of
such exercise, retained such shares and all such other or additional stock and
other securities and property (including cash in the cases referred to in
subdivision (b) of this Section 5) receivable by such holder as aforesaid during
such period, giving effect to all adjustments called for during such period by
Sections 3 and 4.
4
6. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Company of a record of the holders of any class
or securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of
all or substantially all the assets of the Company to or consolidation
or merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company,
then and in each such event the Company will mail or cause to be mailed to the
holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, and
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or Other Securities) shall be entitled to
exchange their shares of Common Stock (or Other Securities) for securities or
other property deliverable on such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be mailed at least twenty (20) days prior to the
date specified in such notice on which any such action is to be taken.
7. RESERVATION OF STOCK ISSUABLE ON EXERCISE ON WARRANT. The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of the Warrant, all shares of Common Stock (or Other Securities)
from time to time issuable on the exercise of the Warrant; the shares of Common
Stock which the holder of this Warrant shall receive upon exercise of the
Warrant will be duly authorized, validly issued, fully paid and non-assessable.
8. EXCHANGE OF WARRANT. On surrender for exchange of this Warrant,
properly endorsed, to the Company, the Company at its expense will issue and
deliver to or on the order of the holder thereof a new Warrant or Warrants of
like tenor, in the name of such holder or as such holder (on payment by such
holder of any applicable transfer taxes) may direct, calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant or Warrants so surrendered.
9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of
5
any such loss, theft or destruction of this Warrant, on delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
10. WARRANTHOLDER NOT DEEMED STOCKHOLDER; RESTRICTIONS ON TRANSFER.
This Warrant is issued upon the following terms, to all of which each holder or
owner hereof by the taking hereof consents and agrees:
(a) No holder of this Warrant shall, as such, be deemed the holder of
Common Stock that may at any time be issuable upon exercise of this
Warrant for any purpose whatsoever, nor shall anything contained herein
be construed to confer upon such holder, as such, any of the rights of
a stockholder of the Company until such holder shall have exercised the
Warrant and been issued shares of Common Stock in accordance with the
provisions hereof.
(b) Neither this Warrant nor any shares of Common Stock purchased
pursuant to this Warrant shall be registered under the Securities Act
of 1933 (the "Securities Act") and applicable state securities laws.
Therefore, the Company may require, as a condition of allowing the
transfer or exchange of this Warrant or such shares, that the holder or
transferee of this Warrant or such shares, as the case may be, furnish
to the Company an opinion of counsel acceptable to the Company to the
effect that such transfer or exchange may be made without registration
under the Securities Act and applicable state securities laws. The
certificates evidencing the shares of Common Stock issued on the
exercise of the Warrant shall bear a legend to the effect that the
shares evidenced by such certificates have not been registered under
the Securities Act and applicable state securities laws.
(c) This Warrant is not transferable or assignable to any party without
the prior written consent of the Company and an opinion of counsel
satisfactory to the Company that such transfer is permissible under
applicable law.
11. NOTICES. All notices and other communications from the Company to
the holder of this Warrant shall be mailed by (i) first class mail, postage
prepaid, (ii) electronic facsimile transmission, or (iii) express overnight
courier service, at such address as may have been furnished to the Company in
writing by such holder or, until any such holder furnishes to the Company an
address, then to, and at the address of, the last holder of this Warrant who has
so furnished an address to the Company.
12. REGISTRATION RIGHTS. The Company hereby grants the following
registration rights with respect to the shares of Common Stock issued or
issuable upon exercise of this Warrant (the "Warrant Shares").
6
12.1 "PIGGY-BACK REGISTRATIONS": If at any time the Company
shall determine to register in a public offering for its own account (and not
the account of selling stockholders) under the Securities Act any of its Common
Stock, it shall send to the Warrantholder written notice of such determination
and, if within 15 days after receipt of such notice, the Warrantholder shall so
request in writing, the Company shall use its best efforts to include in such
registration statement all or any part of the Warrant Shares such holder
requests to be registered. This right shall not apply to a registration of
shares of Common Stock on Form S-4 or Form S-8 (or their then equivalents)
relating to shares of Common Stock to be issued by the Company in connection
with any acquisition of any entity or business, or shares of Common Stock
issuable in connection with any stock option or other employee benefits plan,
respectively.
If, in connection with any offering involving an underwriting of Common
Stock to be issued by the Company for the account of the Company, the managing
underwriter shall impose a limitation on the number of shares of such Common
Stock which may be included in any such registration statement because, in its
judgment, such limitation is necessary to effect an orderly public distribution
of the Common Stock and to maintain a stable market for the securities of the
Company, then the Company shall be obligated to include in such registration
statement only such limited portion (which may be none) of the Warrant Shares
with respect to which the Warrantholder and all other selling stockholders have
requested inclusion thereunder.
12.2 SHORT-FORM REGISTRATION RIGHT. At any time after November
1, 1999, if the registration of the Warrant Shares can be effected on Form S-3,
or any successor form promulgated by the SEC, then upon the written request of
the Warrantholder, the Company will, as expeditiously as possible, use its best
efforts to effect qualification and registration of the Warrant Shares under the
Securities Act on Form S-3 of all or such portion of said Warrant Shares as the
holder shall specify; provided, however, that the Company may in its discretion
delay such registration for up to 90 days. The Company shall not be required to
effect more than one registration pursuant to this Section 12.2. The rights set
forth in this Section 12.2 shall expire on June 28, 1999.
12.3 EXPENSES. In the case of a registration under Section
12.1 or 12.2, the Company shall bear all costs and expenses of such
registration, including, but not limited to, printing, legal and accounting
expenses, Securities and Exchange Commission (the "SEC") and NASD filing fees
and all related "Blue Sky" fees and expenses; provided, however, that the
Company shall have no obligation to pay or otherwise bear any portion of the
underwriters' commissions or discounts attributable to the Warrant Shares being
offered and sold by the Warrantholder or the fees and expenses of any counsel
for the Warrantholder in connection with any registration of the Warrant Shares.
7
12.4 LOCK-UP AGREEMENT FOR PUBLIC OFFERING. In connection with
any public offering of equity securities of the Company, the Warrantholder
agrees not to sell, pledge, transfer or otherwise dispose of, or grant any
option or purchase right with respect to, any shares of capital stock then owned
by him and not otherwise offered in the public offering, or engage in any short
sale, hedging transaction or other derivative security transaction involving the
Warrant Shares, or other shares of Common Stock of the Company held by him, for
such period of time commencing 30 days prior to the proposed effective date of
such public offering until such period of time following the offering as the
Company and the managing underwriter of such public offering deem necessary in
order to ensure a stable and orderly trading market.
12.5 EXPIRATION OF REGISTRATION RIGHTS. The obligations of the
Company under this Section 12 to register the Warrant Shares shall expire and
terminate on the earlier of (i) June 28, 1999 or (ii) at such time as the
Warrantholder shall be entitled to sell such securities without restriction and
without a need for the filing of a registration statement under the Securities
Act, including, without limitation, for any resales of "Restricted Securities"
made pursuant to Rule 144 as promulgated by the SEC, or a sale made pursuant to
Sections 4(1) and/or 4(2) under the Securities Act. If the Warrantholder desires
to exercise the registration rights provided in Section 12.2 hereof, the
Warrantholder must exercise this Warrant for cash consideration prior to the
effectiveness of any registration.
13. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant and the shares of Common Stock underlying this Warrant
shall be construed and enforced in accordance with and governed by the laws of
the State of Delaware. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the terms hereof.
The invalidity or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any other provision.
14. EXPIRATION. The right to exercise this Warrant shall expire at 5:00
p.m., Eastern Daylight Saving Time, on June 28, 1999.
Dated: June 28, 1996
ATTEST: FOCUS ENHANCEMENTS, INC.
By: /s/ John A. Piccione By: /s/ T.L. Massie
--------------------- --------------------
Title: Secretary Title: President
------------------ ----------------
8
FORM OF SUBSCRIPTION
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO FOCUS Enhancements, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, ____________
shares of Common Stock of FOCUS Enhancements, Inc., a Delaware corporation, and
herewith makes payment of $____________ therefor, and requests that the
certificates for such shares be issued in the name of, and delivered to
_________________________, whose address is_____________________________.
Dated: _____________________________________________________
(Signature must conform to name of holder as specified
on the face of the Warrant)
_____________________________________________________
_____________________________________________________
(Address)
----------------------
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY ON TRANSFER OF WARRANT)
For value received, the undersigned hereby sells, assigns, and
transfers unto _________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of FOCUS Enhancements,
Inc., a Delaware corporation, to which the within Warrant relates, and appoints
_________________________ Attorney to transfer such right on the books of FOCUS
Enhancements, Inc., a Delaware corporation, with full power of substitution in
the premises.
Dated: _____________________________________________________
(Signature must conform to name of holder as specified
on the face of the Warrant)
_____________________________________________________
_____________________________________________________
(Address)
Signed in the presence of:
____________________________________
9
EXHIBIT 10.7
AGREEMENT, made as of this 28th day of June 1996, by and between Focus
Enhancements, Inc. a Deleware corporation, ("Focus"), and PAGG Corporation, a
Massachusetts corporation ("PAGG").
WHEREAS, Focus has purchased, and may wish to continue to purchase, various
products from PAGG; and
WHEREAS, PAGG requires as a condition to any such sale assurances that it
will receive full and prompt payment of the purchase price therefor; and
WHEREAS, Focus is willing to grant to PAGG a security interest in all of
Focus's inventory and accounts receivables in order to secure the payment of
such all amounts for the purchase of products purchased by Focus fron PAGG;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto do hereby agree with each other as follows:
1. Focus shall, on the date hereof, execute and deliver to PAGG a security
agreement (the "Security Agreement") in all its inventory and accounts
receivables, together with all related financing statements, such Security
Agreement and each other document executed therewith to be in form and substance
satisfactory to PAGG.
2. Focus represents and warrents to PAGG as follows:
(a) Focus is a duty organized and validly existing corporation in good
standing under the laws of the state of its incorporation and has all requisite
corporate power and authority for the ownership and operation of its property
and carrying on its business as now being conducted and proposed to be
conducted.
(b) Focus has all necessary corporate power and has taken all
corpoarate action required to make all the provisions of this Agreement and the
Security Agreement the valid and enforceable obligations they purport to be.
(c) No authorization, consent, approval, license, exemption of or
filing or registration with any court or governmenal department, commission,
board, bureau, agency or instrumentality, domestic or foreign, is or will be
necessary for, or in connection with, the execution or delivery by Focus of, or
for the performance by it of its obligations under, this Agreement or the
Security Agreement.
(d) Neither the execution and delivery of this Agreement, the Security
Agreement nor the consummation of any transactions contemplated hereby or
thereby has constituted or resulted in or will constitute or result in a default
or violation of any term or provision of Focus's charter or by-laws or, with
notice or the passage of time, any mortgages, indentures, leases, agreements or
other instruments or any judgments, decrees, governmental orders, statutes,
rules and regulations by which Focus is bound or to which its properties or
assets are subject.
3. The "Effective Date" shall be that date, on or before June 28, 1996, on
which Focus shall have delivered to PAGG, or its counsel, each of the following:
(a) A duly executed copy of this Agreement, the Security Agreement and
all related financing statements.
(b) A certified copy of the resolutions of the Board of Directions and,
to the extent required, the stockholders of Focus evidencing approval of this
Agreement and the Security Agreement and other matters contemplated hereby and
thereby; and certified copies of all documents evidencing other necessary
corporate or other action and government approval, is any, with respect to this
Agreement and the Security Agreement.
(c) A certificate of the Security or an Assistant Secretary of Focus
which shall certify the names of the officers of Focus authorized to sign this
agreement, the Security Agreement and the other documents or certificates to be
delivered pursuant to this Agreement and the Security Agreement by Focus, or any
of its officers, together with the true signature of such officers.
(d) An opinion of Epstein, Becker & Green, P.C., counsel for Focus, as
to such matters as PAGG, or its counsel, may reasonably request.
4. This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument and either of
the parties hereby may execute this Agreement by signing any such counterpart.
5. This Agreement shall be effective as of the Effective Date, provided
that such Effective Date occurs on or before June 28, 1996.
6. This Agreement shall be governed by and conastrued in accordance with
the laws of the Commonwealth of Massachusetts and shall have the effect of a
sealed instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FOCUS ENHANCEMENTS, INC.
By:/s/ Thomas L. Massie
-----------------------------
Thomas L. Massie, President
PAGG CORPORATION
By:/s/ Edward R. Price
------------------------------
Edward R. Price, President
SECURITY AGREEMENT
------------------
(INVENTORY AND ACCOUNTS RECEIVABLES)
------------------------------------
The undersigned, FOCUS ENHANCEMENTS, INC., a Delaware corporation with
a place of business and executive office located at 800 West Cummings Park,
Woburn, Massachusetts 01801 (hereinafter referred to as a "Debtor") hereby
grants to PAGG CORPORATION, a Massachusetts corporation, with its principal
place of business and executive office located at 425 Fortune Boulevard,
Milford, Massachusetts 01757(hereinafter called the "Secured Party"), a security
interest in and agrees and acknowledges that Secured Party has and will continue
to have a security interest in the following:
(A) All of Debtor's inventory of whatever name, nature, kind or
description, all Debtor's goods held for sale or lease or to be furnished under
contracts of service, finished goods, work in process, raw materials, materials
used or consumed by the Debtor, parts, supplies, all wrapping, packaging,
advertising, labeling, and shipping materials, all contract rights and documents
relating to any of the foregoing, whether any of the foregoing be now existing
or hereafter arising, wherever located, now owned or hereafter acquired by the
Debtor (all of which is sometimes hereinafter referred to as "Inventory"); and
(B) All of the Debtor's accounts, accounts receivable, notes, bills,
drafts, acceptances, instruments, documents, chattel paper and all other debts,
obligations and liabilities in whatever form owing to the Debtor for goods sold
by it or for services rendered by it, or however otherwise established or
created, all guaranties and security therefor, all right, title and interest of
the Debtor in the goods or services which gave rise thereto, including rights of
an unpaid seller of goods or services; whether any of the foregoing be now
existing or hereafter arising, now or hereafter received by or owing or
belonging to the Debtor (all of which are sometimes hereinafter referred to as
"Accounts");
(all hereinafter sometimes collectively referred to as "Collateral"); to secure
the payment of all sums due or which may become due as a result of the sale of
products, whether heretofore or hereinafter made, by the Secured Party to the
Debtor (hereinafter sometimes collectively referred to as "Obligation" or
"Obligations").
I. WARRANTIES AND COVENANTS.
------------------------
The Debtor hereby warrants and covenants that:
(A) The Inventory is used primarily for business purposes.
(B) The Inventory of the Debtor will be kept at the Debtor's places of
business, set forth in Exhibit A attached hereto. The Debtor will promptly
notify the Secured Party of any change in the location of the Inventory, and the
Debtor will not remove the Inventory from the locations set forth in Exhibit A
without the prior written consent of the Secured Party. The Debtor will notify
the Secured Party, at least twenty (20) days prior to any such event, of any
change in the Debtor's exact legal name, any change in its places of business as
set forth in Exhibit A or its
establishment of any new place of business or location of Inventory or office
where its records concerning Accounts are kept.
(C) Except for (i) the security interest granted hereby and (ii) the
permitted encumbrances set forth on Exhibit B attached hereto (the "Permitted
Encumbrances"), the Debtor is the owner of its presently owned Collateral and
will be the owner of its Collateral hereafter acquired free from any adverse
lien, security interest or encumbrance, and the Debtor will defend the
Collateral against the claims and demands of all persons at any time claiming
the same or any interest therein.
(D) No financing statements (other than financing statements filed in
connection with the Permitted Encumbrances) covering any Collateral or any
proceeds thereof are on file in any public office, and at the request of Secured
Party, the Debtor will join with Secured Party in executing one or more (i)
financing statements pursuant to the Uniform Commercial Code and (ii) other
documents necessary or advisable to perfect the security interests evidenced
hereby, all in form satisfactory to Secured Party and the Debtor will pay the
cost of filing the same or filing or recording this Agreement in all public
offices wherever filing or recording is deemed by Secured Party to be necessary
or desirable.
(E) The Debtor will have and maintain insurance at all times with
respect to all its Collateral against risks of fire (including so-called
extended coverage), theft, embezzlement and such other risks as Secured Party
may reasonably require containing such terms, in such form, for such periods and
written by such companies as may be reasonably satisfactory to Secured Party;
and, if requested by the Secured Party, all policies of insurance shall provide
for at least twenty (20) days' written cancellation notice to Secured Party. If
and when requested by the Secured Party, the Debtor shall furnish Secured Party
with certificates or other evidence satisfactory to Secured Party of compliance
with the foregoing insurance provision and the Secured Party may act either in
its name or as attorney for the Debtor (for that purpose by these presents duly
authorized and appointed with full power of substitution and revocation) in
obtaining, adjusting, settling and canceling such insurance and endorsing any
drafts in payment of any loss.
(F) The Debtor will upon request made by the Secured Party render to
the Secured Party a list of all Accounts assigned hereunder and a statement
indicating the total dollar amount of the Accounts then outstanding.
(G) The only offices where the Debtor keeps records concerning any
Accounts are listed on Exhibit A and the Debtor will not remove any of such
records from said offices without written consent of the Secured Party.
(H) The Debtor will keep its Collateral free from any adverse lien,
security interest or encumbrances except the Permitted Encumbrances and liens
created by this Agreement. The Debtor will at all times keep accurate and
complete records of its Accounts, and the Secured Party or any of its agents
shall have the right at reasonable times and upon prior notice, to inspect the
Debtor's books and records relating to said Accounts or to any other
transactions to which the Debtor is a party and from which an Account might
arise and to make extracts from said books
-2-
and records. The Debtor shall immediately notify the Secured Party of any event
causing material loss or depreciation in value of any of its Accounts and the
amount of such loss or depreciation.
(I) If any of a Debtor's Accounts arise out of contracts with the
United States or any department, agency or instrumentality thereof, the Debtor
will immediately notify the Secured Party thereof in writing and will execute
any instruments and take any steps reasonably required by the Secured Party in
order that all monies due and to become due under such contracts shall be
assigned to the Secured Party and notice thereof given to the government under
the Federal Assignment of Claims Act. Notwithstanding the foregoing, the Secured
Party shall not request the Debtor to provide notice to the United States or any
department, agency or instrumentality thereof until an Event of Default has
occurred.
(J) Subsequent to the occurrence of any Event of Default, if any of a
Debtor's Accounts should be evidenced by promissory notes, trade acceptances or
other instruments for the payment of money, the Debtor will immediately deliver
same to the Secured Party, appropriately endorsed to the Secured Party's order
and, regardless of the form of such endorsement, such Debtor hereby waives
presentment, demand or notice of any kind with respect thereto. This Agreement
may, but need not be supplemented by separate assignments of Accounts to the
Secured Party and if such assignments are given the rights and security
interests given thereby shall be in addition to and not in limitation of the
rights and security interests given by this Agreement.
(K) The Debtor will pay promptly when due all taxes and assessments
upon its Collateral or upon this Agreement or upon any note or notes secured
hereby. In its sole discretion, the Secured Party may: (i) discharge taxes and
liens levied or placed on Collateral or (ii) pay for insurance thereon or the
maintenance and preservation thereof. Any amount so paid shall constitute a loan
for all purposes hereunder, and the Debtor promises to repay the Secured Party
such amounts upon the Secured Party's demand. Nothing herein shall be deemed to
obligate the Secured Party to do any of the foregoing and the making of any one
or more such payments shall not constitute an agreement by the Secured Party to
take any further or similar action or a waiver of any right of the Secured Party
hereunder.
(L) THE RIGHTS OF THE SECURED PARTY PURSUANT TO PARAGRAPHS (E), (I),
(J) AND (K) OF THIS ARTICLE I SHALL BE SUBJECT TO THE RIGHTS OF SILICON VALLEY
BANK ("SVB") UNDER THE LOAN AND SECURITY AGREEMENT, DATED AS OF APRIL 6, 1996,
BETWEEN THE DEBTOR AND SVB AND FRED KASSNER UNDER THE LOAN AGREEMENT, DATED AS
OF JUNE 28, 1996, BETWEEN THE DEBTOR AND FRED KASSNER (SVB AND FRED KASSNER ARE
HEREINAFTER REFERRED TO COLLECTIVELY AS THE "SENIOR LENDERS") AND SHALL BE
EXERCISABLE ONLY TO THE EXTENT THAT THE RIGHTS OF THE SENIOR LENDERS ARE NOT
COMPROMISED THEREBY.
II. ADDITIONAL RIGHTS AND ASSURANCES.
--------------------------------
(A) At the Secured Party's request, the Debtor at its expense will
promptly and duly execute and deliver such documents and assurances and take
such actions as may be necessary or desirable or as the Secured Party may
request in order to correct any defect, error or omission which may at any time
be discovered or to more effectively carry out the intent and purpose of
-3-
this Agreement and to establish, perfect and protect the Secured Party's
security interest, rights and remedies created or intended to be created
hereunder.
(B) The Secured Party will at any time following an occurrence of an
Event of Default hereunder have the right to take physical possession of the
Collateral and to maintain such possession on the Debtor's premises or to remove
the Collateral or any part thereof to such other places as the Secured Party may
desire. If the Secured Party exercises such right, the Debtor shall at its sole
expense upon the Secured Party's request assemble the same and make it available
to the Secured Party at a place reasonably convenient to the Secured Party. If
any Inventory is in the possession or control of any of the Debtor's agents or
processors, the Debtor shall, at the Secured Party's request, notify them of the
Secured Party's security interest therein and, at the Secured Party's request,
instruct them to hold the same for the Secured Party's account and subject to
the Secured Party's instructions.
(C) The Secured Party may at any time after an occurrence of an Event
of Default (i) in its own name or in the name of others communicate with account
debtors in order to verify with them to the Secured Party's satisfaction the
existence, amount and terms of any Accounts and the absence of any reductions,
discounts, defenses or offsets with respect thereto, or (ii) notify account
debtors that Collateral has been assigned to the Security Party and that
payments by such debtors shall be made directly to the Secured Party. At the
Secured Party's request, the Debtor will notify any or all such debtors of such
assignment, give instruction and/or indicate on billings to such debtors that
their Accounts shall be paid to the Secured Party and/or supply such debtors
with a copy of this Agreement.
(D) Subsequent to the occurrence of any Event of Default, the Secured
Party shall have full power, in its own name or that of the Debtor, to collect,
endorse, compromise, settle, sell or otherwise deal with any or all of the
Collateral or proceeds thereof. Subsequent to the occurrence of any Event of
Default, the Debtor agrees upon request of the Secured Party to appoint any
officer or agent of the Secured Party as true and lawful attorney-in-fact, with
power of substitution, to endorse the name of the Debtor or any of its officers,
trustees or agents upon any Accounts, notes, checks, drafts, money orders, or
other instruments of payment (including under any policy of insurance on
Collateral) or Collateral that may come into possession of the Secured Party in
full or part payment of any amounts owing to Secured Party; to sign and endorse
the name of the Debtor or any of its officers, trustees or agents upon any
invoice, freight or express bill, bill of lading, storage or warehouse receipts,
drafts against debtors, assignments, verifications and notices in connection
with Accounts, and any instruments or documents relating thereto or to the
Debtor's rights therein; to give written notice to such offices and officials of
the United States Postal Service to effect such change or changes of address so
that all mail addressed to the Debtor may be delivered directly to the Secured
Party; to take any and all other actions necessary or appropriate to collect,
compromise, settle, sell or otherwise deal with any or all of the Collateral or
proceeds thereof; and to obtain, adjust, settle and cancel any insurance; hereby
granting to each said attorney-in-fact or his substitute full power to do any
and all things necessary or appropriate to be done in and about the premises as
fully and effectually as the Debtor might or could do, and hereby ratifying all
that any said attorney-in-fact or his substitute shall lawfully do or cause to
be done by virtue hereof.
-4-
(E) The Debtor hereby assigns to the Secured Party all sums which may
become payable under any and all of such Debtor's policies of insurance and
directs each insurance company issuing any such policy to make payment which
would otherwise be due thereunder to the Debtor directly to the Secured Party.
(F) In the event of the sale, exchange or disposition of any of the
Collateral (other than finished goods in the ordinary course of business) or any
interest therein (and no such sale, exchange or other disposition is hereby
authorized or consented to), the Secured Party's security interest shall
nevertheless continue in such Collateral (including without limitation all
proceeds, cash and non-cash) notwithstanding such sale, exchange or other
disposition; and the Secured Party's receipt of any such proceeds shall not be
deemed or construed to be an authorization of or consent to any such sale,
exchange or other disposition.
(G) A carbon, photographic, or other reproduction of a security
agreement or a financing statement is sufficient as a financing statement to the
extent permitted under applicable law.
(H) THE RIGHTS OF THE SECURED PARTY PURSUANT TO PARAGRAPHS (B), (D) AND
(E) OF THIS ARTICLE II SHALL BE SUBJECT TO THE RIGHTS OF THE SENIOR LENDERS AND
SHALL BE EXERCISABLE ONLY TO THE EXTENT THAT THE RIGHTS OF THE SENIOR LENDERS
ARE NOT COMPROMISED THEREBY.
III. EVENTS OF DEFAULT.
-----------------
The Debtor shall be in default under this Agreement upon the happening
of any of the following events or conditions (individually and collectively an
"Event of Default"):
(A) Failure by the Debtor to observe or perform any covenant or
agreement referred to herein and, if no other grace or cure period is applicable
thereto, the continuance of such failure for fifteen (15) business days;
(B) Sale, transfer or assignment of any of the Collateral (including
via an assignment of transfer of any interest of the Debtor) (except the sale of
finished goods in the ordinary course of business), loss, theft, or substantial
damage or destruction of any of the Collateral which is not fully and adequately
insured against as hereinbefore provided; or
(C) The failure by the Debtor to timely pay any Obligations..
IV. REMEDIES.
--------
(A) If an Event of Default occurs:
(1) The Secured Party may declare all Obligations immediately
due and payable without presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived.
(2) The Secured Party may exercise and shall have any and all
rights and remedies accorded it by the Massachusetts Uniform Commercial Code or
the Uniform Commercial Code as adopted in such state whose laws govern the
disposition of certain
-5-
Collateral. The requirement of reasonable notice shall be met, if notice
containing such information as may be required under applicable law is mailed,
postage prepaid, to the Debtor or other person entitled thereto at least ten
(10) days (including non-business days) before the time of sale or disposition
of the Collateral. The Debtor shall pay to the Secured Party on demand any and
all expenses, including reasonable legal expenses and reasonable attorney's
fees, incurred or paid the Secured Party in protecting or enforcing any rights
of the Secured Party hereunder, including its right to take possession of the
Collateral, storing and disposing of the same or in collecting the proceeds
thereof.
(3) The Debtor designates and appoints the Secured Party its
true and lawful attorney with full power of substitution in its own name or in
the name of such Debtor to demand, collect, receive, receipt for, sue for,
compound and give acquittance for, any and all amounts due and to become due on
the Accounts and to endorse the name of such Debtor on all commercial paper
given in payment or part-payment thereof and in its reasonable discretion to
file any claim or take any other action which the Secured Party may reasonably
deem necessary or appropriate to protect and preserve and realize upon the
security interest of the Secured Party in the Accounts or the proceeds thereof.
(B) The Debtor understands and agrees the Secured Party may exercise
its rights hereunder without affording the Debtor an opportunity for a
preseizure hearing before the Secured Party, through judicial process or
otherwise, takes possession of the Collateral upon the occurrence of an Event of
Default, and the Debtor expressly waives its constitutional right, if any, to
such prior hearing.
(C) No delay in accelerating the maturity of any obligation as
aforesaid or in taking any other action with respect to any Event of Default or
in exercising any rights with respect to the Collateral such affect the rights
of the Secured Party later to take such action with respect thereto, and no
waiver as to one Event of Default shall affect rights as to any other default.
V. MISCELLANEOUS.
-------------
(A) The Debtor irrevocably
(1) agrees that any suit, action, or other legal proceeding
arising out of this Agreement may be brought in the courts of record of the
Commonwealth of Massachusetts or the courts of the United States located in such
state;
(2) consents to the jurisdiction of each such court in any
such suit; action or proceeding; and
(3) to the extent permitted under applicable law, waives any
objection which it may have to the laying of venue of such suit, action or
proceeding in any of such courts and waives any right to a trial by jury in any
of such courts.
For such time as the Obligations shall be unpaid in whole or in part,
the Debtor irrevocably designates Thomas L. Massie as its agent to accept and
acknowledge on its behalf
-6-
service of any and all process in any such suit, action or proceeding brought in
any such court and agree and consent that any such service of process upon such
agent and written notice of such service to the Debtor by registered or
certified mail shall be taken and held to be valid personal service upon the
Debtor whether the Debtor shall then be doing business within the Commonwealth
of Massachusetts and that any such service of process shall be of the same force
and validity as if service were made upon it according to the laws governing the
validity and requirements of such service in such states and waives all claim of
error by reason of any such service. Any notice, process, pleadings or other
papers served upon the aforesaid designated agent shall, at the same time, be
sent by certified or registered mail to the Debtor.
(B) In case any one or more of the provisions contained herein should
be invalid, illegal or unenforceable in any respect, the validity, legality or
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
(C) All rights of the Secured Party hereunder shall inure to the
benefit of its successors and assigns; and all obligations of the Debtor shall
bind the successors or assigns of the Debtor. All the provisions of this
Agreement shall be construed by and administered in accordance with the local
laws of the Commonwealth of Massachusetts. This Agreement shall become effective
when it is signed by the Debtor. The Debtor acknowledges receipt of a copy of
this Agreement.
(D) In the absence of gross negligence or willful misconduct, neither
the Secured Party nor any attorney-in-fact appointed hereunder shall be liable
to the Debtor or any other person for any act or omission, any mistake of fact
or any error of judgment in exercising any right or remedy granted herein.
(E) All notices and other communications relating to this Agreement
shall be in writing and shall be delivered, or sent by certified or registered
mail, return receipt requested, postage prepaid and address as follows:
If to the Secured Party: PAGG Corporation
425 Fortune Boulevard
Milford, Massachusetts 01757
Attention: President
with a copy to: George W. Thibeault, Esq.
Testa, Hurwitz & Thibeault, LLP
125 High Street - High Street Tower
Boston, Massachusetts 02110
If to the Debtor: Focus Enhancements, Inc.
800 West Cummings Park
Woburn, Massachusetts 01801
Attention: President
-7-
with a copy to: Glenn D. Burlingame, Esq.
Epstein, Becker & Green, P.C.
75 State Street
Boston, Massachusetts 02109
Signed, sealed and delivered this 28th day of June 1996.
FOCUS ENHANCEMENTS, INC.
By /s/ T. L. Massie
--------------------------------
Thomas L. Massie, President
Acknowledged and Accepted:
PAGG CORPORATION
By /s/ Edward R. Price
--------------------------------
Edward R. Price, President
-8-
EXHIBIT A
LOCATIONS OF EQUIPMENT, INVENTORY, RECORDS CONCERNING
-----------------------------------------------------
ACCOUNTS RECEIVABLES AND OTHER ASSETS
-------------------------------------
Debtor's Place of Business
The Debtor's sole place of business is located at: 800 West Cummings Park,
Woburn, Massachusetts 01801.
EXHIBIT B
PERMITTED ENCUMBRANCES
1). The security interest granted to the Silicon Valley Bank referenced in the
agreement referred to in Article I(L) of this Security Agreement.
2). The security interest granted to Fred Kassner referenced in the agreement
referred to in Article I(L) of this Security Agreement.
EXHIBIT 11
FOCUS ENHANCEMENTS, INC.
STATEMENT COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30, June 30,
1996 1995
-------------- --------------
<S> <C> <C>
Net income (loss) $ 81,753 $ 54,773
============== ==============
Primary:
Weighted average number of common shares outstanding 8,353,809 5,087,931
Weighted average common equivalent shares 289,175
-------------- --------------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 8,353,809 5,377,106
============== ==============
Fully diluted:
Weighted average number of common shares outstanding 8,353,809 4,334,055
Weighted average common equivalent shares 541,033 -
-------------- --------------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 8,894,842 4,334,055
============== ==============
Net income (loss) per share $ 0.01 $ 0.01
============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 610,080
<SECURITIES> 0
<RECEIVABLES> 4,794,155
<ALLOWANCES> 159,418
<INVENTORY> 1,894,324
<CURRENT-ASSETS> 7,308,071
<PP&E> 1,574,415
<DEPRECIATION> 1,293,081
<TOTAL-ASSETS> 9,746,514
<CURRENT-LIABILITIES> 5,701,587
<BONDS> 0
0
0
<COMMON> 92,747
<OTHER-SE> 3,941,776
<TOTAL-LIABILITY-AND-EQUITY> 9,746,514
<SALES> 8,171,134
<TOTAL-REVENUES> 8,171,134
<CGS> 7,714,286
<TOTAL-COSTS> 3,827,051
<OTHER-EXPENSES> 12,792
<LOSS-PROVISION> 159,418
<INTEREST-EXPENSE> 170,103
<INCOME-PRETAX> (3,553,098)
<INCOME-TAX> 10,000
<INCOME-CONTINUING> (3,563,098)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,563,098)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0
</TABLE>
