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, 1998
[ ] 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.)
142 North Road
Sudbury, MA 01776
(Address of principal executive offices)
(978) 371 - 2000
(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 June 30, 1998, there were outstanding 17,458,357 shares of Common Stock,
$.01 par value per share.
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FOCUS ENHANCEMENTS, INC.
FORM 10-QSB
QUARTERLY REPORT
June 30, 1998
TABLE OF CONTENTS
Page
Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 3
Consolidated Statements of Income
for the Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Income
for the Six Months Ended June 30, 1998 and 1997 5
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1998 6
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1997 7
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997 8
Notes to Consolidated Financial Statements 9-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,028,980 $ 719,851
Securities available for sale 794,373 $ 595,000
Accounts receivable, net of allowances of $432,150 and $820,998
at June 30, 1998 and December 31, 1997, respectively 9,569,257 5,538,132
Inventories 3,007,492 3,989,604
Prepaid expenses and other current assets 394,457 470,907
------------ ------------
Total current assets 19,794,559 11,313,494
Property and equipment, net 1,165,886 1,068,918
Other assets, net 280,770 288,482
Goodwill, net 2,501,280 1,249,750
------------ ------------
Total assets $ 23,742,495 $ 13,920,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,429,476 $ 2,220,000
Obligations under capital leases 46,836 102,320
Accounts payable 3,947,993 5,515,913
Accrued liabilities 175,226 855,961
------------ ------------
Total current liabilities 6,599,531 8,694,194
Deferred Income 84,212 84,212
Obligations under capital leases 65,205 73,855
------------ ------------
Total liabilities 6,748,948 8,852,261
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 25,000,000 shares authorized,
17,458,357 and 14,010,186 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 174,584 140,102
Additional paid-in capital 38,050,804 27,339,892
Accumulated deficit (21,431,214) (22,411,611)
Accumulated other comprehensive income 199,373 --
------------ ------------
Total stockholders' equity 16,993,547 5,068,383
------------ ------------
Total liabilities and stockholders' equity $ 23,742,495 $ 13,920,644
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
June 30, June 30,
1998 1997
------------ ------------
Net sales $ 6,872,086 $ 6,124,867
Cost of goods sold 4,065,355 4,057,809
------------ ------------
Gross profit 2,806,731 2,067,058
------------ ------------
Operating expenses:
Sales, marketing and support 1,281,010 1,012,253
General and administrative 590,751 474,476
Research and development 244,923 252,436
------------ ------------
Total operating expenses 2,116,684 1,739,165
------------ ------------
Income from operations 690,047 327,893
Interest expense, net (60,371) (67,703)
Other income (expense), net 5,134 (26,883)
------------ ------------
Income before income taxes 634,810 233,307
Income tax expense 19,161 1,600
------------ ------------
Net income $ 615,649 $ 231,707
============ ============
Net income per common share
Basic $ 0.04 $ 0.02
============ ============
Diluted $ 0.04 $ 0.02
============ ============
Weighted average common
shares outstanding
Basic 16,203,388 12,716,005
============ ============
Diluted 17,407,893 13,337,853
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
4
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FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended
June 30, June 30,
1998 1997
------------ ------------
Net sales $ 12,124,034 $ 10,926,417
Cost of goods sold 6,847,291 7,325,650
------------ ------------
Gross profit 5,276,743 3,600,767
------------ ------------
Operating expenses:
Sales, marketing and support 2,447,337 1,965,217
General and administrative 1,131,982 859,568
Research and development 555,724 431,838
------------ ------------
Total operating expenses 4,135,043 3,256,623
------------ ------------
Income from operations 1,141,700 344,144
Interest expense, net (137,410) (134,943)
Other income, net 5,768 42,132
------------ ------------
Income before income taxes 1,010,058 251,333
Income tax expense 29,661 3,150
------------ ------------
Net income $ 980,397 $ 248,183
============ ============
Net income per common share
Basic $ 0.06 $ 0.02
============ ============
Diluted $ 0.06 $ 0.02
============ ============
Weighted average common
shares outstanding
Basic 15,367,771 12,123,306
============ ============
Diluted 16,604,378 12,538,386
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
5
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
Accumulated
Other
Comprehensive Common Paid-in Accumulated Comprehensive
Income Stock Capital Deficit Income Total
------------- --------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 140,102 $27,339,892 $(22,411,611) $ 5,068,383
Comprehensive Income:
Net income $ 980,397 980,397 980,397
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment 199,373 $199,373 199,373
-----------
Comprehensive income $ 1,179,770
===========
Common stock issued 34,482 10,710,912 10,745,394
--------- ----------- ------------ -------- -----------
Ending balance $ 174,584 $38,050,804 $(21,431,214) $199,373 $16,993,547
========= =========== ============ ======== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Accumulated
Other
Comprehensive Common Paid-in Accumulated Comprehensive
Income Stock Capital Deficit Income Total
------------- --------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 113,018 $21,285,037 $(20,425,532) $ 972,523
Comprehensive Income:
Net income $ 248,183 248,183 248,183
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment -- $ -- --
-----------
Comprehensive income $ 248,183
===========
Common stock issued 14,172 2,023,466 2,037,638
--------- ----------- ------------ -------- -----------
Ending balance $ 127,190 $23,308,503 $(20,177,349) $ -- $ 3,258,344
========= =========== ============ ======== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
7
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<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 980,397 $ 248,183
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 356,499 191,681
Gain on the forgiveness of accounts payable -- (70,202)
Changes in operating assets and liabilities, net of the
effects of acquisition;
(Increase) decrease in accounts receivable (3,866,784) (2,643,714)
Decrease (increase) in inventories 1,042,728 (328,363)
Decrease (increase) in prepaid expenses and other assets 76,450 (11,092)
Decrease (increase) in other assets 7,712 (25,490)
(Decrease) increase in accounts payable (1,622,462) 1,983,615
(Decrease) increase in accrued liabilities (680,735) (71,364)
----------- -----------
Net cash used in operating activities (3,706,195) (726,746)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (382,854) (396,772)
Cash paid in acquisition of Digital Vision, Inc. (46,980) --
----------- -----------
Net cash used in investing activities (429,834) (396,772)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (120,477) (20,000)
Payments under capital lease obligations (64,134) (45,468)
Net proceeds from private offerings of common stock 2,827,355 1,996,813
Net proceeds from exercise of common stock options and warrants 6,802,414 40,825
----------- -----------
Net cash provided by financing activities 9,445,158 1,972,170
----------- -----------
Net increase in cash and cash equivalents 5,309,129 848,652
Cash and cash equivalents at beginning of period 719,851 413,894
----------- -----------
Cash and cash equivalents at end of period $ 6,028,980 $ 1,262,546
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 137,410 $ 134,943
Income taxes paid $ 29,661 $ 3,150
Issuance of Common Stock Warrants $ -- $ 42,000
Supplemental schedule of noncash investing and financing activities:
On March 31, 1998, the Company purchased certain assets and
assumed certain liabilities of Digital Vision, Inc. as follows:
Fair value of tangible assets acquired 224,957
Fair value of liabilities assumed (384,495)
-----------
Fair value of net assets acquired (159,538)
Common stock issued (1,115,625)
Cash paid (46,980)
===========
Excess of cost over fair value of net assets acquired $(1,322,143)
===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
8
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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, 1998 and for the three- and six-month periods ended
June 30, 1998 and 1997 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1997 included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries Lapis Technologies,
Inc., TView, Inc., FOCUS Enhancements b. v. and Focus Networking, Inc. On March
31, 1998, the Company acquired certain assets and assumed certain liabilities of
Digital Vision, Inc. in a transaction accounted for under the purchase method of
accounting.
The results of operations of Digital Vision, Inc. have been included in the
accompanying consolidated financial statements since April 1, 1998. The
following unaudited pro forma information presents a summary of the consolidated
results of operations of the Company and Digital Vision, Inc. as if the
acquisition had occurred at the beginning of the six-month period, presented.
Pro forma Results
Six Months Ended
June 30,
1998 1997
-----------------------
Net Sales $12,375,000 $11,425,000
Income From Operations 1,175,000 395,000
Net Income 1,000,000 265,000
Net Income
Per Common Share (Basic And Diluted) $ 0.06 $ 0.02
---------- ----------
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-month periods ended June 30, 1998
are not necessarily indicative of the results that may be expected for any
future period.
9
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2. NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings
Per Share" which requires earnings per share to be calculated on a basic and
dilutive basis. Basic earnings per share represents income available to common
stock divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the assumed
conversion. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and warrants, and are determined using the
treasury stock method. The assumed conversion of outstanding dilutive stock
options and warrants would increase the shares outstanding but would not require
an adjustment to income as a result of the conversion. For the six- months ended
June 30, 1998 and 1997, options and warrants applicable to 6,881,303 shares and
3,468,158 shares, respectively, were anti-dilutive and excluded from the diluted
earnings per share computation. The statement is effective for interim and
annual periods ending after December 15, 1997, and requires the restatement of
all prior period earnings per share data presented. Accordingly, the Company has
restated all earnings per share data for prior periods presented herein.
3. COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997.
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Certain FASB statements, however, require
entities to report specific changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, as a separate
component of the equity section of the balance sheet. Such items, along with net
income, are components of comprehensive income. SFAS No. 130 requires that all
items of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Additionally,
SFAS No. 130 requires that the accumulated balance of other comprehensive income
be displayed separately from retained earnings and additional paid-in-capital in
the equity section of the balance sheet. The Company adopted these disclosure
requirements in the first quarter of 1998 and has presented comparative
disclosure for the six months ended June 30, 1998 and June 30, 1997,
respectively. In 1997, the Company had no other components of comprehensive
income other than net income.
4. INCOME TAXES
The Company has utilized its net operating loss carryforwards in
estimating its provision for income taxes in the three- and six-month periods
ended June 30,1998.
5. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1998 1997
---------- -----------
Finished goods $2,596,981 $3,304,444
Raw materials 410,511 685,160
---------- ----------
$3,007,492 $3,989,604
========== ==========
10
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6. NOTES PAYABLE
Lines of Credit, Banks. The Company maintains a revolving line of
credit with a bank, which is fully drawn as of June 30, 1998. Borrowings under
the line are payable upon demand and are collateralized by all of the assets of
the Company, except as noted below. Borrowings, aggregating $680,000 at June 30,
1998, bear interest at the bank's prime rate plus 1% (9.5% at June 30, 1998) and
are personally guaranteed by a stockholder. In August 1998, the line of credit
was extended to October 8, 1998.
Term Line of Credit. At June 30, 1998, the Company owed $1,500,000 to
an unrelated individual under a term line of credit originated in October 1994
in the principal amount of $2,500,000. Borrowings under the line of credit were
made pursuant to a promissory note that was due on June 30, 1997 and was not
paid. The Company repaid this obligation, in full, on July 10, 1998.
Term Loan, Bank. On March 31, 1998, the Company assumed a $329,953 bank
loan resulting from the purchase of certain assets and the assumption of certain
liabilities of Digital Vision, Inc. The borrowings bear interest at the Wall
Street Journal prime rate plus 2% (10.5% at June 30, 1998). The terms of the
note require payment through September 30, 1998, of interest only. The
outstanding balance at September 30, 1998 is payable thereafter in monthly
installments, with interest, until the loan expiration date of June 30, 1999. At
June 30, 1998, the outstanding amount owed on this loan was $249,476.
7. COMMON STOCK TRANSACTIONS
On March 3, 1998, the Company completed a financing of approximately
$3,000,000 in gross proceeds from the sale of 1,092,150 shares of common stock
and warrants to purchase 327,645 shares of common stock in a private placement
to an unaffiliated accredited investor. The warrants are exercisable until March
3, 2005 if during the period ending August 25, 1999, the average of the closing
bid prices of the Company's common stock during any consecutive 20 trading days
is equal to or less than $2.7469. The shares issued in connection with this
transaction and issuable upon exercise of the warrants were registered under the
Securities Act of 1933 on April 22, 1998. Fees and expenses associated with this
offering amounted to approximately $172,600 yielding net proceeds of $2,827,400.
In connection with this transaction, the Board of Directors authorized the grant
of warrants to the placement agent to purchase 21,429 shares of the Company's
common stock at a price of $4.2118 per share exercisable for a period of five
years.
On March 31, 1998, the Company issued approximately 350,000 shares of
common stock valued at approximately $1,115,600 in conjunction with the
acquisition of certain assets of Digital Vision, Inc. Under the terms of the
asset purchase agreement, shares issued as part of this transaction have been
registered under the Securities Act of 1933. In addition, the Company agreed to
pay approximately $47,000 in cash for net assets with a fair value of
approximately ($160,000), consisting of accounts receivable ($164,400),
inventory ($60,600) offset by the assumption of notes payable ($330,000) and
accounts payable ($55,000). The resulting goodwill of approximately $1,322,000
will be amortized over its estimated benefit period of ten years. The operations
of Digital Vision, Inc. have been included in the financial statements of the
Company since April 1, 1998.
In the six-month period ended June 30, 1998, the Company received gross
proceeds of $6,146,887.50 as a result of the exercise of 910,650 of the
Company's Redeemable Common Stock Purchase Warrants (the "Warrants") issued in
connection with the Company's initial public offering in May 1993. The Company
issued 1,649,202 shares of common stock as a result of the exercise of the
Warrants. In accordance with the anti-dilution provisions of the Warrants, the
holder was entitled to receive 1.811 shares of common stock for each Warrant
exercised. The Warrants were exercisable at a price of $6.75 per Warrant until
May 26, 1998.
11
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8. SUBSEQUENT EVENTS
Purchase of PC Video Conversion, Inc.
On July 29, 1998, the Company acquired certain assets and assumed
certain liabilities of PC Video Conversion, Inc. ("PC Video"). At the closing,
the Company paid PC Video $700,000 in cash and delivered a promissory note in
the principal amount of $1,000,000 providing payment of principal and interest
over a period of 36 months. In addition, the Company issued 122,796 shares of
common stock and agreed to register the common stock with the United States
Securities and Exchange Commission within one hundred twenty days of the
closing. The Company purchased all of PC Video's accounts receivable, inventory,
all tangible assets including equipment and computer hardware and all
intellectual property rights including trademarks, customer lists and contract
rights. The Company also assumed approximately $79,650 of liabilities in
connection with this acquisition. The acquisition is being accounted for as a
purchase and resulted in goodwill of approximately $1,566,500. The operations of
PC Video Conversion, Inc. will be included in the financial statements of the
Company beginning August 1, 1998.
12
<PAGE>
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, 1997.
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, 1997, including, but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Three-Month Period Ended June 30, 1998 As Compared
With The Three-Month Period Ended June 30, 1997
Net Sales
Net sales for the three-month period ended June 30, 1998 ("Q2 98") were
$6,872,086 as compared with $6,124,867 for the three-month period ended June 30,
1997 ("Q2 97"), an increase of $747,219 or 12%. The growth in net sales is
attributed to increased sales to US resellers offset by decreased sales to
international resellers and OEM/Licensing customers. Specifically, net sales in
Q2 98 to the Company's US resellers increased 51% to $5,330,000 from $3,540,000
in Q2 97. Net sales to international resellers declined 88% to $81,000 from
$648,000 for the same quarter in 1997 due to the transition from the sale of
networking products (which constituted a significant portion of net sales in
1997) to the sale of PC to TV products. Net sales to OEM/Licensing customers
decreased 25% to $1,461,000 in Q2 98 from $1,937,000 for the same quarter in
1997. This decrease reflects primarily a reduction in OEM sales to a major
manufacturer of personal computers and to a manufacturer of televisions. During
Q2 98, there were no sales to these two customers whereas sales to these
customers were approximately 29% of revenues during the comparable quarter in
1997.
As of June 30, 1998, the Company had a sales order backlog of
approximately $550,000.
13
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Cost of Goods Sold
Cost of goods sold were $4,065,355 or 59% of net sales, for the
three-month period ended June 30, 1998, as compared with $4,057,809 or 66% of
net sales, for the three-month period ended June 30, 1997, an increase in
absolute dollars of $7,546 or 0.2%. The Company's gross profit margins for Q2 98
and Q2 97 were 41% and 34%, respectively. As a percentage of sales, cost of
goods sold was lower in Q2 98 principally due to reduced manufacturing costs
achieved as a result of the use of the Company's FS300 integrated circuit in
manufacturing of the Company's PC to TV products, combined with a decrease in
OEM sales on which margins are typically lower.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $1,281,010 or 19% of net
sales, for the three-month period ended June 30, 1998, as compared with
$1,012,253, or 17% of net sales, for the three-month period ended June 30, 1997,
an increase of $268,757 or 27%. The increase in absolute dollars is due
primarily to increased spending for advertising and trade show events as well as
increased domestic channel expansion efforts.
General and Administrative Expenses
General and administrative expenses for the three-month period ended
June 30, 1998 were $590,751 or 9% of net sales, as compared with $474,476, or 8%
of net sales for the three-month period ended June 30, 1997, an increase of
$116,275 or 25%. The increase in absolute dollars is due primarily to increases
in depreciation of $78,000 and payroll of $38,000.
Research and Development Expenses
Research and development expenses for the three-month period ended June
30, 1998 were $244,923, or 4% of net sales, as compared to $252,436, or 4% of
net sales, for three-month period ended June 30, 1997, a decrease of $7,513 or
3%. The decrease is due principally to a decrease in consulting fees of $68,000
offset by an increase in payroll of $59,000.
Interest Expense, Net
Net interest expense for the three-month period ended June 30, 1998 was
$60,371, or .8% of net sales, as compared to $67,703, or 1.1% of net sales, for
the three-month period ended June 30, 1997, a decrease of $7,332, or 10.8%. The
decrease is primarily attributable to a reduction in outstanding debt balances
and the reduction of certain fees incurred with the extension of the Company's
revolving line of credit.
Other Income (Expense)
Other Income (Expense) for the three-month period ended June 30, 1998
was $5,134 as compared to ($26,883), for the three-month period ended June 30,
1997. Other (Expense) in the three-month period ended June 30, 1997 was due to
the write-off of approximately $28,000 of unamortized license fees.
Net Income
For the quarter ended June 30, 1998, the Company reported net
income of $615,649, or $0.04 per share, as compared to $231,707, or $0.02 per
share, for the quarter ended June 30, 1997.
14
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Six-Month Period Ended June 30, 1998 As Compared
With The Six-Month Period Ended June 30, 1997
Net Sales
Net sales for the six-month period ended June 30, 1998 (the "98
Period") were $12,124,034 as compared with $10,926,417 for the six-month period
ended June 30, 1997 (the "97 Period"), an increase of $1,197,617 or 11%. The
growth in net sales is attributed to increased sales to US resellers offset by
decreased sales to international resellers and OEM/Licensing customers.
Specifically, net sales in the 98 Period to the Company's US resellers increased
50% to $9,672,000 from $6,439,000 in the 97 Period. Net sales to international
resellers declined 67% to $469,000 in the 98 period from $1,418,000 for the 97
Period due to the transition from the sale of networking products (which
constituted a significant portion of net sales in 1997) to the sale of PC to TV
products. Net sales to OEM/Licensing customers decreased 35% to $1,983,000 in
the 98 Period from $3,069,000 for the 97 Period. This decrease reflects
primarily a reduction in OEM sales to a major manufacturer of personal computers
and to a manfuacturer of televisions. During the 98 Period, net sales to these
two customers represented 2% of the Company's revenues whereas sales to these
customers were approximately 12% of revenues during the 97 Period.
Cost of Goods Sold
Cost of goods sold were $6,847,291 or 56% of net sales, for the
six-month period ended June 30, 1998, as compared with $7,325,650 or 67% of net
sales, for the six-month period ended June 30, 1997, a decrease in absolute
dollars of $478,359 or 7%. The Company's gross profit margins for the 98 Period
and the 97 Period were 44% and 33%, respectively. As a percentage of sales, cost
of goods sold was lower in the 98 Period principally due to reduced
manufacturing costs achieved as a result of the use of the Company's FS300
integrated circuit in manufacturing of the Company's products, combined with a
decrease in OEM sales on which margins are typically lower.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $2,447,337 or 20% of net
sales, for the six-month period ended June 30, 1998, as compared with
$1,965,217, or 18% of net sales, for the six-month period ended June 30, 1997,
an increase of $482,120 or 25%. The increase in absolute dollars is due
primarily to increased sales commissions as a result of increased sales from
period to period and, an increase in advertising and trade show events as well
as increased domestic channel expansion efforts.
General and Administrative Expenses
General and administrative expenses for the six-month period ended June
30, 1998 were $1,131,982 or 9% of net sales, as compared with $859,568, or 8% of
net sales for the six-month period ended June 30, 1997, an increase of $272,414
or 32%. The increase in absolute dollars is due primarily to increases in
depreciation of $176,000, payroll of $50,000 and professional services of
$40,000.
Research and Development Expenses
Research and development expenses for the six-month period ended June
30, 1998 were $555,724, or 5% of net sales, as compared to $431,838, or 4% of
net sales, for six-month period ended June 30, 1997, an increase of $123,886 or
29%. The increase is due principally to increases in payroll of $107,000 and
recruiting expenses of $15,000.
15
<PAGE>
Interest Expense, Net
Net interest expense for the six-month period ended June 30, 1998 was
$137,410, or 1.1% of net sales, as compared to $134,943, or 1.2% of net sales,
for the six-month period ended June 30, 1997, an increase of $2,467, or 1.8%.
The increase is primarily attributable to additional interest paid to the
unrelated individual lender during the extended term of the promissory note.
Other Income
Other Income for the six-month period ended June 30, 1998 was $5,768 as
compared to $42,132, for the six-month period ended June 30, 1997. In the
six-month period ended June 30, 1997, the Company realized higher other income
as a result of favorable settlements of certain accounts payable obligations.
Net Income
For the six months ended June 30, 1998, the Company reported net income
of $980,397, or $0.06 per share, as compared to $248,183, or $0.02 per share,
for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six-month periods ended
June 30, 1998 and 1997 was ($3,706,195) and ($726,746), respectively. In the 98
Period, net cash used in operating activities consisted primarily of an increase
in accounts receivable of $3,866,784 and decreases in accounts payable of
$1,622,462 and accrued liabilities of $680,735. This was offset by a decrease in
inventory of $1,042,728, non-cash charges for depreciation and amortization of
$356,499, and net income of $980,397. As of June 30, 1998, accounts receivable
from a major distributor and from a major national retailer represented
approximately 29% and 32%, respectively, of total accounts receivable. In the 98
Period, the Company wrote-off approximately $400,000 of uncollectable accounts
receivable against a reserve established at December 31, 1997. In the 98 Period,
the Company continued to record provisions for potential future uncollectable
accounts. The Company continually monitors inventory levels at its resellers,
and during the 98 Period experienced improved sell-through and lower inventory
levels of its products in its distribution channels.
For the six months ended June 30, 1997, net cash used in operations
consisted primarily of increases in accounts receivable and inventories of
$2,643,714 and $328,363, respectively. This was offset by an increase in
accounts payable of $1,983,615.
Net cash used in investing activities for the six-month periods ended
June 30, 1998 and 1997 was ($429,834) and ($396,772), respectively. In the 98
Period and the 97 Period, cash used in investing activities was principally for
the purchase of property and equipment.
Net cash from financing activities for the six-month periods ended June
30, 1998 and 1997 was $9,445,158 and $1,972,170, respectively. In the 98 Period,
the Company received $2,827,355 in net proceeds from private offerings of common
stock and $6,802,414 from the exercise of common stock options and warrants. The
Company's financing proceeds were offset by payments on notes payable and
capital lease obligations. In the same six-month period in 1997, the Company
received $1,996,813 in net proceeds from private offerings of Common Stock and
$40,825 from the exercise of common stock options and warrants. The 97 Period
financing proceeds were offset by payments on notes payable and capital lease
obligations.
16
<PAGE>
As of June 30, 1998, the Company had working capital of $13,195,028, as
compared to $2,619,300 at December 31, 1997, an increase of $10,575,728. The
Company's cash position increased to $6,028,980 at June 30, 1998, an increase of
$5,309,129, over amounts at December 31, 1997.
On March 3, 1998, the Company sold 1,092,150 shares of common stock and
warrants to purchase 327,645 shares of common stock for gross proceeds of
approximately $3,000,000 in a private placement to an unaffiliated accredited
investor. The warrants are exercisable until March 3, 2005 if during the period
ending August 25, 1999, the average of the closing bid prices of the Company's
common stock during any consecutive 20 trading days is equal to or less than
$2.7469. The shares issued in connection with this transaction and issuable upon
exercise of the warrants were registered under the Securities Act of 1933 on
April 22, 1998. Fees and expenses associated with this offering amounted to
approximately $172,600 yielding net proceeds of $2,827,400. In connection with
this transaction, the Board of Directors authorized the grant of warrants to the
placement agent to purchase 21,429 shares of the Company's common stock at a
price of $4.2118 per share exercisable for a period of five years.
In the 98 Period, the Company received gross proceeds of $6,146,887.50
as a result of the exercise of 910,650 of the Company's Redeemable Common Stock
Purchase Warrants (the "Warrants") issued in connection with the Company's
initial public offering in May 1993. The Company issued 1,649,202 shares of
common stock as a result of the exercise of the Warrants. In accordance with the
anti-dilution provisions of the Warrants, the holder was entitled to receive
1.811 shares of common stock for each Warrant exercised. The Warrants were
exercisable at a price of $6.75 per Warrant until May 26, 1998.
Although the Company has been successful in the past in raising
sufficient capital to fund its operations, there can be no assurance that the
Company will achieve sustained profitability or obtain sufficient financing in
the future to provide the liquidity necessary for the Company to continue
operations.
At June 30, 1998, the Company was in violation of certain debt
covenants relating to the line of credit with its commercial bank. In August
1998, the Company received a waiver of the covenants from the commercial bank, a
revision of the loan covenants and an agreement to extend the line until October
8, 1998.
Effects of Inflation and Seasonality
The Company believes that inflation has not had a significant impact on
the Company's sales or operating results. The Company's business does not
experience substantial variations in revenues or operating income during the
year due to seasonality.
Environmental Liability
The Company has no known environmental violations or assessments.
Year 2000
The Company has conducted a review of its computer systems to identify
the programs that could be affected by the "Year 2000" issue and has developed
an implementation plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software or converting to new software, the Year 2000 problem will not
pose significant
17
<PAGE>
operational problems for the Company's computer systems as so modified and
converted. The expenditures for the modifications and conversions are not
expected to have a material impact on the operations of the Company. However, if
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
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 involve risks and uncertainties. In particular, statements
contained in this Form 10-QSB which are not historical facts (including, but not
limited to, statements concerning international revenues, anticipated operating
expense levels and such expense levels relative to the Company's total revenues)
constitute forward looking statements and are made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the availability of capital to fund the Company's future cash needs, reliance on
major customers, history of operating losses, limited availability of capital
under credit arrangements with lenders, market acceptance of the Company's
products, technological obsolescence, competition, component supply problems and
protection of proprietary information, as well as the accuracy of the Company's
internal estimates of revenue and operating expense levels.
18
<PAGE>
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
operations for the six month period ended June 30, 1998.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
On June 30, 1998, the Board of Directors caused to be distributed to
stockholders of record as of June 23, 1998, a Notice of Annual Meeting of
Stockholders, Proxy and Proxy Statement for the Annual Meeting held on July 31,
1998. As of the record date, 17,410,498 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 II directors; and (ii) ratification of the firm of
Wolf & Company, P.C. as independent auditors. 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 proxy were voted "For" each
proposal in the manner disclosed in the Proxy Statement and Proxy. The voting
results were as follows:
I. Election of Director
FOR AGAINST WITHHOLD
--- ------- --------
William B. Coldrick 14,941,383 250 46,879
Timothy E. Mahoney 14,941,633 0 46,629
II. Ratification of Independent Auditors
FOR AGAINST WITHHOLD
--- ------- --------
14,933,023 27,700 27,539
19
<PAGE>
ITEM 5. OTHER INFORMATION
Exercise of Common Stock Warrants
In the six-months ended June 30, 1998, the Company issued 1,649,202
shares of common stock as a result of the exercise of 910,650 of the Company's
Redeemable Common Stock Purchase Warrants (the "Warrants") issued in connection
with the Company's initial public offering in May 1993. The Company received
gross proceeds of $6,146,887.50 as a result of the exercise of the Warrants. In
accordance with the anti-dilution provisions of the Warrants, the holder was
entitled to receive 1.811 shares of common stock for each Warrant exercised. The
Warrants were exercisable at a price of $6.75 per Warrant until May 26, 1998.
Purchase of PC Video Conversion, Inc.
On July 29, 1998, the Company acquired certain assets and assumed
certain liabilities of PC Video Conversion, Inc. ("PC Video"). At the closing,
the Company paid PC Video $700,000 in cash and delivered a promissory note in
the principal amount of $1,000,000 providing payment of principal and interest
over a period of 36 months. In addition, the Company issued 122,796 shares of
common stock and agreed to register the common stock with the United States
Securities and Exchange Commission within one hundred twenty days of the
closing. The Company purchased all of PC Video's accounts receivable, inventory,
all tangible assets including equipment and computer hardware and all
intellectual property rights including trademarks, customer lists and contract
rights. The Company also assumed approximately $79,650 of liabilities in
connection with this acquisition. The acquisition is being accounted for as a
purchase and resulted in goodwill of approximately 1,566,500. The operations of
PC Video Conversion, Inc. will be included in the financial statements of the
Company beginning August 1, 1998.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
2.1 Purchase & Sale Agreement between FOCUS Enhancements, Inc.,
FOCUS Acquisition Corp., and PC Video Conversion, Inc. dated
July 29, 1998.
4.1 Registration Rights Agreement between FOCUS Enhancements, Inc.
and PC Video Conversion, Inc.
4.2 Certificate of Warrant Adjustment dated May 6, 1998.
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K reports during the
quarter ended June 30, 1998.
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<PAGE>
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, 1998 By: \s\ Thomas L. Massie
Thomas L. Massie
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
August 14, 1998 By: \s\ Gary M. Cebula
Gary M. Cebula
Vice President of Finance
and Administration
(Principal Accounting Officer)
22
EXHIBIT 2.1
PURCHASE AND SALE AGREEMENT
between
FOCUS ENHANCEMENTS, INC.,
FOCUS ACQUISITION CORP.
and
PC VIDEO CONVERSION, INC.
July 29, 1998
<PAGE>
AGREEMENT FOR PURCHASE AND SALE OF ASSETS
THIS AGREEMENT, made and entered into as of this twenty-nineth day of
July, 1998, by and among FOCUS Enhancements, Inc., a Delaware corporation with
its principal place of business at 142 North Road, Sudbury, Massachusetts 01776
("FOCUS"), and Focus Acquisition Corp. ("FAC") (FOCUS and FAC hereinafter
referred to collectively as the "Buyer"), and PC Video Conversion, Inc., a
California corporation with its principal place of business at 16120 Caputo
Drive, Suite A, Morgan Hill, CA 95037 (the "Seller").
Preliminary Statement
This Agreement contemplates a transaction in which the Buyer will
purchase certain of the assets (and assume certain of the liabilities) of the
Seller for the consideration set forth below, subject to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the respective representations,
warranties, covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Basic Transaction
1.01. Purchase of Assets. On the Closing Date, as hereinafter defined, Buyer
will purchase and acquire from Seller, and Seller will sell, transfer,
convey and deliver to Buyer, all of the assets of Seller integral to
the operations of Seller (the "Assets"), including, without limitation,
the following:
a) Real Estate. Buyer agrees to assume the lease of the property
located at 16120 Caputo Drive, Suite A Morgan Hill, CA 95037
(hereinafter referred to as "Lease"), together with all tenant
improvements thereto and all fixtures and other installations
within such property and any rights of tenant arising from the
use, occupancy or leasing of such property and necessary to
continue the operation of the Seller.
b) Tangible Personal Property. All tangible personal property
used in the operation of the Seller, including, but not
limited to, all of the following:
i) All equipment, vehicles, machinery, tools, storage
racks and bins, furniture and fixtures, computer
hardware and disks, telephone systems, portable
phones, communication devices, Seller forms, display
materials, maintenance machinery and equipment, test
equipment, and other tangible personal property, all
of which shall be fully inventoried (collectively the
"Fixed Assets"); and
ii) All current inventory of the Seller held for resale
including all components thereof, such as raw
materials, work-in-process, finished goods, office
supplies, maintenance supplies, packaging materials,
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spare parts and similar items, manuals, computer
disks and software, all of which shall be fully
inventoried (collectively, the "Inventory").
c) Intangible Property. All intangible property ("Intangible
Property") including, but not limited to:
i) All accounts (less Three Hundred Thousand Dollars
($300,000)), accounts receivable, notes and notes
receivable existing on the Closing Date (as
hereinafter defined), including any security held for
the payment thereof (the "Accounts Receivable");
ii) Such contract rights of the Seller as Buyer may elect
to acquire after examination of same, including,
without limitation, all rights arising under purchase
orders placed by Seller with vendors and purchase
orders from customers accepted by Seller, rights
under any warranty agreements and rights under any
insurance contract;
iii) All goodwill and going concern value of the Seller,
including, without limitation, all customer lists,
vendor lists, pricing data, warranty records,
advertising and marketing materials and other trade
information of whatever type;
iv) All intellectual property including, without
limitation, (i) all inventions (whether patentable or
unpatentable and whether or not reduced to practice),
all improvements thereto, and all patents, patent
applications, and patent disclosures, together with
all reissuances, continuations,
continuations-in-part, revisions, extensions, and
reexaminations thereof along with any foreign
couterparts; (ii) all copyrightable works, all
copyrights, and all applications, registrations, and
renewals in connection therewith, (iii) all mask
works and all applications, registrations, and
renewals in connection therewith, (iv) all trade
secrets and confidential business information
(including ideas, research and development, know-how,
formulas, compositions, manufacturing and production
processes and techniques, technical data, designs,
drawings, specifications, customer and supplier
lists, pricing and cost information, and business and
marketing plans and proposals), (v) all computer
software (including data and related documentation),
(vi) customer lists; (vii) all licenses and goodwill
associated therewith, sublicenses and other
agreements (as licensor or licensee) relating to any
of the foregoing kinds of property, and rights
thereunder; and (vii) rights to any "know-how" or
disclosure or use of ideas, remedies against
infringements thereof, and rights to protection of
interest therein under the laws of all jurisdictions;
(viii) all other proprietary rights, and (ix) all
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copies and tangible embodiments thereof (items listed
in clauses (i)-(ix) shall be referred to herein as
"Intellectual Property");
v) All rights of Seller to any software licensed to
Seller; provided that if such licenses are not
transferable without licensor's consent, Seller shall
obtain such consent and/or a new license agreement in
the name of Buyer on substantially the same terms
currently available to Seller;
vi) All licenses and permits of any type whatsoever used
in the Seller or the release of same so as to permit
the issuance to the Buyer of such license or permit
applicable to the Seller;
vii) all trademarks, service marks, trade dress, logos,
and trade names, together with all translations,
adaptations, derivations, and combinations thereof
and including all goodwill associated therewith, and
all applications, registrations, and renewals in
connection therewith related in any manner to the
Seller; and
viii) all rights under the contracts, agreements, leases,
licenses and other instruments that are set forth on
Schedule 1.01( c)(viii) attached hereto together with
any consent necessary to transfer any of the
foregoing (collectively, the "Contract Rights").
ix) Any other assets integral to the operations of
Seller.
1.02. Purchase Price. In full consideration for the conveyance and transfer
to Buyer of the Acquired Assets, at the Closing FOCUS shall:
(i) issue to Seller within five (5) business days following the
Closing Date one hundred twenty-two thousand seven hundred
ninety-six (122,796) shares (the "Shares") of common stock,
$0.01 par value per share of the FOCUS (the "Common Stock"),
which Shares will not have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and
will bear legends restricting transfer in accordance with the
Securities Act.;
(ii) pay to Seller Seven Hundred Thousand Dollars ($700,000);
(iii) tender a promissory note ("Note") to Seller in the amount of
One Million Dollars ($1,000,000) payable over a period of
thirty-six (36) months together with interest on the
outstanding principal balance payable at the rate of three and
one half (3 1/2%) percent interest per annum. Payments on the
note shall be made on a monthly basis for a total of
thirty-six (36) installments, the first installment of which
shall be due on the first day of the first month immediately
following the Closing Date. Payment of principal and interest
under the above-described Note and interest shall be secured
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by assets in accordance with a Security Agreement in
substantially the form attached hereto as Exhibit F;
(iv) assume certain accounts payable of Seller, as specified on
Schedule 1.02(iv) attached hereto (the "Assumed Accounts
Payable"), totaling __________________________________
Thousand Dollars ($_____,000) (The amounts identified in
clauses (i)-(iv) of this Section 1.02 shall be referred to
herein as the "Purchase Price".).
1.03 Employment. Steve Wood shall enter into a three (3) year employment
agreement with FAC in a form substantially equivalent to that of
Exhibit C.
1.04. Allocation. The Purchase Price shall be allocated by the Buyer, with
the concurrence of the Seller, among the Assets within 120 days after
the Closing Date.
1.05. Liabilities of Seller. Except for the Assumed Accounts Payable, Buyer
is not assuming any liabilities or obligations of Seller and Buyer will
have no responsibility with respect to any obligation or liability
(whether known or unknown, asserted or unasserted, absolute or
contingent, accrued or unaccrued, liquidated or unliquidated, or due or
to become due) (collectively, "Liability") not specifically assumed
pursuant to this Agreement.
1.06. The Closing Date. The closing (the "Closing") shall occur on July 29 ,
1998 at 10 a.m. at the offices of Focus Enhancements, Inc., 142 North
Road, Sudbury, Massachusetts, 01776, or such other date, time or place
as shall be mutually agreed upon by Buyer and Seller. The transfer of
the Assets by Seller to Buyer shall be deemed to occur, and the payment
of the Purchase Price shall occur, at 10 a.m., Boston time, on the date
of the Closing (the "Closing Date").
1.07. Sales Taxes. Seller shall pay all sales, transfer and documentary taxes
and expenses, if any, payable in connection with the sale, transfer and
deliveries to be made to Buyer hereunder.
1.08. Further Assurances. At any time and from time to time after the
Closing, at Buyer's request and without further consideration, Seller
promptly shall execute and deliver such instruments of sale, transfer,
conveyance, assignment and confirmation, and take such other action, as
Buyer may reasonably request to more effectively transfer, convey and
assign to Buyer, and to confirm Buyer's title to, all of the Assets, to
put Buyer in actual possession and operating control thereof, to assist
Buyer in exercising all rights with respect thereto and to carry out
the purpose and intent of this Agreement.
2. Representations and Warranties of Seller. Seller makes the following
representations and warranties to Buyer, each of which shall be deemed
to be independently material and to have been relied upon by Buyer.
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2.01. Organization and Authority. Seller is a corporation duly organized,
validly existing and in good standing under the corporate and tax laws
of the State of California and has the corporate power to own its
properties and to carry on its business as and where it is now being
conducted, to execute and deliver this Agreement and the agreements
contemplated herein, and to consummate the transactions contemplated
thereby. Seller is duly licensed or qualified and in good standing as a
foreign corporatio in all jurisdictions where the character of the
properties owned by Seller or the nature of the business transacted by
it make such license or qualification necessary, except where the
failure to so qualify would not have a material adverse effect on the
operations or financial condition of Buyer.
2.02. Authorization. Seller has taken all actions necessary to authorize and
permit the execution, delivery and performance of this Agreement and
the agreements contemplated herein by Seller, and the consummation by
Seller of the transactions contemplated hereby and thereby. This
Agreement constitutes the valid and binding obligation of Seller,
enforceable against it in accordance with its terms, except as
enforcement may be subject to applicable bankruptcy, insolvency,
moratorium and other laws affecting creditors generally and by general
equitable principles.
2.03 Noncontravention. The execution and delivery of this Agreement or the
agreements contemplated herein, and the consummation by Seller of the
transactions contemplated hereby or thereby, will not, with or without
the giving of notice or the passage of time or both, (i) conflict with
the Articles of Organization or Bylaws of Seller, (ii) conflict with
any agreement or instrument to which the Seller is a party or by which
it may be bound, or (iii) violate the provisions of any law, rule or
regulation applicable to Seller. Schedule 2.03 attached hereto sets
forth a true, correct and complete list of all consents, assignments,
waivers and/or approvals of third parties required in connection with
the consummation by Seller of the transactions contemplated by this
Agreement and the sale, transfer, conveyance and/or delivery by Seller
of the Assets to Buyer.
2.04. Title to Assets; Condition and Location; Sufficiency. Seller has good
and marketable title to all of the Assets, free and clear of any and
all liens, security interests, encumbrances and claims. All of the
Assets are located in 16120 Caputo Drive, Suite A, Morgan Hill, CA
95037, except as set forth on Schedule 2.04 attached hereto. The Assets
are adequate to conduct the business operations currently conducted by
Seller.
2.05. Financial Statements. Seller has previously delivered to Buyer (i) its
unaudited balance sheet, statement of income and cash flow as of and
for the fiscal year ended December 31, 1997 (the "Year-End Financial
Statements"), and (ii) its unaudited balance sheet (the "Current
Balance Sheet"), statement of income and cash flow for the seven months
ended July 31, 1998 (together with the Current Balance Sheet, the
"Current Financial Statements"). The Year-End Financial Statements and
the Current Financial Statements have been prepared in accordance with
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generally accepted accounting principles and fairly present the
financial condition of Seller in all material respects.
2.06 Accounts Receivable. Schedule 2.06 attached hereto sets forth a true,
correct and complete list of the Accounts Receivable, including an
aging thereof as of the date of the Current Financial Statements.
Schedule 2. 06, as updated pursuant to Section 6.08 hereof, shall set
forth a true, correct and complete list of Accounts Receivable as of
the Closing Date, including an aging thereof. All accounts receivable
shown on Schedule 2. 06 constitute bona fide accounts receivable
resulting from the sale of the Company's products in the ordinary
course of business. Such Accounts Receivable were and are not subject
to any conditions to payment or to any offsets, counterclaims, defenses
or returns except as shown as an allowance for doubtful accounts on the
Financial Statements. No account debtors or note debtors have been
delinquent in payment by more than ninety (90) days except as otherwise
reflected on the books and records maintained by Seller or have refused
or threatened to refuse to make payment except as disclosed in writing
to Buyer.
2.07 Inventory. The Inventory reflected on the June 30, 1998 Balance Sheet
was purchased or acquired in the ordinary and regular course of the
Company's business and are maintained for resale to customers in a
manner substantially similar to past practices. Such inventory has been
consistently valued at the lower of cost consistently with prior
periods. The Inventory consists, and will at the Closing Date consist,
of those items as described in Schedule 2.07, subject to use and sale
in the ordinary course of business of Seller, from the date of Schedule
2.07 to the Closing. The phrase "the ordinary course of business," as
used in this Agreement, shall mean the conduct of the business of
Seller in the manner in which Seller conducted its business during the
year preceding execution of this Agreement, following usual accounting
practices, making ordinary accruals, incurring ordinary liabilities or
expenditures, and making ordinary contract commitments.
2.08. Fixed Assets. Schedule 2.08 attached hereto sets forth a true, correct
and complete list of all Fixed Assets with an individual fair market
value in excess of One Thousand Dollars ($1,000) as of the date hereof,
including a description thereof. Schedule 2.08, as updated pursuant to
Section 6.08 hereof, shall set forth a true, correct and complete list
of all Fixed Assets as of the Closing Date, including a description
thereof. Except as set forth on Schedule 2.08, all of the Fixed Assets
(i) are in good operating condition and repair, normal wear and tear
excepted, (ii) taken in their entirety, are suitable and adequate for
the conduct of the operations of Seller as conducted on the date
hereof, and (iii) have been maintained normally and on a consistent
basis.
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2.09 Intangible Property.
(a) Schedule 2.09 attached hereto sets forth a true, correct and
complete list and, where appropriate, a description of, all
Intangible Property. Except as set forth on Schedule 2.09,
true, correct and complete copies of all licenses and other
agreements relating to the Intangible Property have been
previously delivered by the Seller to the Buyer.
(b) Except as otherwise disclosed in Schedule 2.09, the Seller is
the sole and exclusive owner of all Intangible Property and
all designs, permits, labels and packages used on or in
connection therewith. The Intangible Property owned by Seller
is sufficient to conduct its business as presently conducted
and as conducted during the past two years and, when
transferred to Buyer pursuant to this Agreement, will be
sufficient to permit Buyer to conduct the business of Seller
as presently conducted. There is no litigation pending or, to
Seller's knowledge, threatened that might result in a denial
of the right of Seller to use any of the Intangible Property.
Seller has not received notice of, nor has knowledge of any
basis for, a claim against Seller that any of its operations,
activities, products or publications infringes on any
Intellectual Property right of a third party, or that it is
illegally or otherwise using the Intellectual Property rights
of others. Seller has no disputes with or claims against any
third party for infringement by such third party of any
Intangible Property. Seller has taken all steps reasonably
necessary to protect its right, title and interest in and to
the Intangible Property. To the best of Seller's knowledge,
there are no Intellectual Property rights owned or held by any
officer, agent, employee or any person associated with Seller,
or in which any such person has an exclusive or protectable
right, that are valuable to or useful in Seller's business.
2.10 Assumed Liabilities; Third-Party Consents. None of the obligations of
Seller to be assumed by Buyer pursuant to Sections 1. 05 hereof is in
default by any party thereto, and none involves an obligation on the
part of Seller to perform more than six months following the Closing
Date. With the exception of those contracts listed on Schedule 2.10,
which require the consent of the party identified on Schedule 2.10,
there are no contracts being assigned pursuant to this Agreement that
require the consent of a third party.
2.11. Condition of Business. Except as set forth on Schedule 2.11 attached
hereto, since December 31, 1997 Seller has not entered into any
transaction that is not in the ordinary course of business, and for the
12 months preceding the date hereof, the business of Seller has not
been subject to any strikes, picketing or other organized labor
activity.
2.12. Bulk Transfer. Buyer waives all of its rights that it would otherwise
have pursuant to the bulk transfer laws of the State of California and
Seller shall indemnify Buyer and hold Buyer harmless against and in
respect of any claim for undisclosed payables or other liabilities, and
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also in respec of all expenses of any character (including attorney's
fees) incurred by Buyer in connection with the defense and/or
settlement of actions or claims related thereto. Seller agrees that any
amounts owing to Buyer due to the indemnity granted hereunder shall be
deductible from the balance of the Note upon written notice to Seller.
Seller will not be responsible for any settlement made by Buyer without
Seller's consent, which consent will not be unreasonably withheld,
conditioned or delayed.
2.13. Undisclosed Liabilities. Except as and to the extent (i) incurred in
the ordinary course of business after the date of the Year-End
Financial Statements and not material, either individually or in the
aggregate, or (ii) representing ordinary course purchases of inventory,
there are no Liabilities of Seller affecting any of the Assets. Seller
further represents that no promises with respect to financial
obligations have been made to Seller's employees.
2.14. Litigation. Except as set forth on Schedule 2.14 attached hereto, there
is no action or suit in law or equity, nor proceeding by any
administrative or governmental agency, now pending nor, to the
knowledge of Seller, threatened, nor any outstanding order, writ,
injunction or decree of any court or administrative or governmental
agency, affecting any of the Assets or the business or condition
(financial or otherwise) of Seller.
2.15. Product Warranty. Each product manufactured, sold, leased or delivered
by Seller has been in conformity with all applicable contractual
commitments and all express and implied warranties, and Seller has no
known Liability (and there is no known basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand against Seller giving rise to any Liability) for
replacement or repair thereof or other damages in connection therewith,
subject only to the reserve for product warranty claims set forth on
the face of the Current Balance Sheet (rather than in any notes
thereto) as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of Seller. No product
manufactured, sold, leased or delivered by Seller is subject to any
guaranty, warranty or other indemnity beyond the applicable standard
terms and conditions of sale or lease. Schedule 2.15 attached hereto
includes copies of the standar terms and conditions of sale or lease
for Seller (containing applicable guaranty, warranty and indemnity
provisions).
2.16. Compliance with Laws. Seller is not to the best of Seller's knowledge
in violation of any federal, state or local law, including, without
limitation, wage and hour, employment and occupational safety
legislation and environmental protection legislation.
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2.17. Indebtedness, Powers of Attorney and Guarantees. Except as set forth in
Schedule 2.17 attached hereto, Seller has no outstanding indebtedness
affecting the Assets, other than trade or business obligations incurred
in the ordinary course of business on usual credit terms. Seller has no
general or special powers of attorney outstanding (whether as grantor
or grantee) nor is a party to any contract of surety, guaranty or
similar engagement by which it may be made to answer for the debt of
another person.
2.18. Taxes and Payroll. Seller has paid all real and personal property,
franchise, income and other taxes due or payable in connection with its
business, has collected or paid all sales taxes, has withheld all
amounts required to be withheld from the payroll of its employees, and
has paid all salaries, bonuses and other payments due to each of its
employees. Seller has timely filed all federal, state and local tax
returns required to be filed by it, and such tax returns are true,
correct and complete. No examination of such tax returns is currently
in progress, no requests for waiver of the time to assess any such
taxes are pending, and no deficiencies have been asserted or assessed
as a result of any audit by the Internal Revenue Service or any
national, state or local taxing authority and no such deficiency or
audit has been proposed or threatened. Seller has not waived any
statute of limitations in respect of any such taxes or agreed to any
extension of time with respect to a tax assessment or deficiency.
2.19. Insurance. The Assets are insured against loss or damage by fire or
other casualty at such levels as is customary for businesses engaged in
the same business as Seller.
2.20. Employee Relations. Seller is not a party to any written or oral
agreement with any labor union in connection with the business of
Seller, and there is not currently, nor has there been within the 12
months prior to this Agreement, any effort to organize any employees of
Seller.
2.21. Accuracy of Schedules. All schedules, certificates, exhibits and other
documents which have been furnished pursuant to this Agreement to Buyer
or its counsel are true, correct and complete in all material respects.
2.22. Diligence Request. All documents, certificates, and statements
requested described on the due diligence list, attached hereto as
Schedule 2.22, has been furnished to Buyer or its counsel and such
documents, certificates, and statements are true, correct and complete
in all material respects.
2.23. Disclosure. No representation or warranty by the Seller contained in
this Agreement or in any certificate, schedule, exhibit or other
document delivered to Buyer pursuant to this Agreement contains any
untrue statement of a material fact or omits to state a material fact
required to make the statements contained in this Agreement or in any
said certificate, schedule, annex, exhibit or document not materially
misleading, and all such representations and warranties considered
together are not materially misleading in any respect.
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3. Representations and Warranties of Buyer. Buyer makes the following
representations and warranties to the Seller, each of which shall be
deemed to be independently material and to have been relied upon by the
Seller:
3.01. Organization and Authority. Buyer is a corporation duly organized,
validly existing and in good standing under the corporate and tax laws
of the State of Delaware and has the corporate power to own its
properties and to carry on its business as and where it is now being
conducted, to execute and deliver this Agreement and the agreements
contemplated herein, and to consummate the transactions contemplated
thereby. Buyer is duly licensed or qualified and in good standing as a
foreign corporation in all jurisdictions where the character of the
properties owned by Buyer or the nature of the business transacted by
it make such license or qualification necessary, except where the
failure to so qualify would not have a material adverse effect on the
operations or financial condition of Buyer.
3.02. Authorization. Buyer has taken all actions necessary to authorize and
permit the execution, delivery and performance of this Agreement and
the agreements contemplated herein by Buyer, and the consummation by
Buyer of the transactions contemplated hereby and thereby. This
Agreement constitutes the valid and binding obligation of Buyer,
enforceable against it in accordance with its terms, except as
enforcement may be subject to applicable bankruptcy, insolvency,
moratorium and other laws affecting creditors generally and by general
equitable principles.
3.03. Noncontravention. The execution and delivery of this Agreement or the
agreements contemplated herein, and the consummation by Buyer of the
transactions contemplated hereby or thereby, will not, with or without
the giving of notice or the passage of time or both, (i) conflict with
the Articles of Organization or Bylaws of the Buyer, (ii) conflict with
any agreement or instrument to which Buyer is a party or by which it
may be bound, or (iii) violate the provisions of any law, rule or
regulation applicable to Buyer.
3.04. Organization. Buyer agrees that all current employees of Seller will be
offered a comparable position with FAC performing similar duties. Each
employee shall be compensated as he/she was compensated one (1) month
prior to the Closing Date and each employee shall be credited with
their current seniority for the calculation of benefits. Seller agrees
to remain liable for all pension benefits due to each employee prior to
the Closing Date.
4. Covenants of Seller. Seller covenants and agrees with Buyer as follows:
4.01. Conduct of Business. From and after the date hereof and until the
Closing Date, Seller shall carry on its business diligently and
substantially in the same manner as heretofore conducted, except as
agreed to in writing by Buyer. All of the property of Seller shall be
used, operated, repaired and maintained in a normal business manner
consistent with past practice.
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4.02. Compliance with Laws. From and after the date hereof and until the
Closing Date, Seller will comply in all material respects with all laws
and regulations that are applicable to it, the ownership of the Assets
or to the conduct of its business, and will perform and comply with all
contracts, commitments and obligations by which it is bound.
4.03. Preservation of Business. For a period of one hundred eighty (180) days
after the Closing Date, Seller shall assist and cooperate, to such
extent as is reasonable under the circumstances, with Buyer to preserve
for Buyer the goodwill of suppliers, customers, employees and others
having business relations with Seller prior to the Closing Date. After
said 180-day period, Seller agrees not to interfere with Buyer and its
relations with suppliers, customers, employees and others.
4.04. Curing Defaults. Promptly upon discovery of any breach or default under
any representation, warranty or agreement made by the Seller and
contained in this Agreement of such a nature that it can be cured prior
to the Closing Date, the Seller will make reasonable efforts to cure
such breach or default.
4.05. Cooperation; Further Assurances. Seller will cooperate in the orderly
consummation of the transactions contemplated by this Agreement,
including, without limitation, permitting Buyer and its representatives
full access, at all reasonable times and in a manner so as not to
interfere with the normal business operations of Seller, to all
premises, properties, personnel, books, records, contracts and
documents of Seller pertaining to the Assets, and will execute all
documents and perform all acts reasonably necessary or appropriate to
carry out the intent of this Agreement.
4.06. Proprietary Information.
(a) Seller shall hold in confidence, and use its best efforts to
have all of the officers, directors and personnel of Seller
hold in confidence, all knowledge and information of a secret
or confidential nature with respect to the business of Seller,
and shall not disclose, publish or make use of the same
without the consent of Buyer, except to the extent that such
information shall have become public knowledge other than by
breach of this Agreement by Seller.
(b) Seller agrees that the remedy at law for any breach of this
Section 4.06 would be inadequate and that such breach would
cause irreparable harm to Buyer, and therefore Buyer shall be
entitled (without the requirement of posting any bond) to
injunctive relief in addition to any other remedy it may have
upon breach of any provision of this Section 4.06.
4.07. No Solicitation or Hiring of Former Employees. Except as provided by
law, for a period of five years after the Closing Date, Seller shall
not solicit any person who was an employee of Buyer on the Closing Date
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to terminate his or her employment with Buyer or to become an employee
of Seller or hire any person who was an employee of Buyer on the date
hereof or on the Closing Date.
4.08. Non-Competition Agreement.
(a) In further consideration of the Purchase Price, for a period
of two ( 2) years following the termination of employment
under Section 1.03 above , Seller agrees that neither Seller
nor any affiliate of Seller shall, without the prior written
consent of the Buyer, (i) manufacture, market or sell any
product that has the same or substantially the same form,
function and primary application as any existing or proposed
product manufactured by Seller on or prior to the Closing Date
or (ii) engage in any business competitive with the business
of Seller as conducted on the date hereof or on the Closing
Date, in the United States of America or any other country in
which Seller conducted its business during the two years prior
to the Closing Date. (The agreement contained in this Section
4.08(a) shall be referred to herein as the "Non-Competition
Agreement".)
(b) The parties hereto agree that the consideration, duration and
scope of the Non-Competition Agreement are reasonable. In the
event that any court determines that the duration or the
geographic scope, or both, are unreasonable, the parties
hereto agree that the provision shall remain in full force and
effect for the greatest time period and in the greatest area
that would not render it unenforceable. The parties intend
that this Non-Competition Agreement shall be deemed to be a
series of separate covenants, one for each and every county of
each and every state of the United States of America and each
and every political subdivision of each and every country
outside the United States of America where this provision is
intended to be effective. Seller agrees that damages are an
inadequate remedy for any breach of this provision and that
Buyer shall, whether or not it is pursuing any potential
remedies at law, be entitled to equitable relief in the form
of preliminary and permanent injunctions without bond or other
security upon actual or threatened breach of this
Non-Competition Agreement.
4.09. Best Efforts to Obtain Satisfaction of Conditions. Seller shall use its
best efforts to obtain the satisfaction of the conditions specified in
this Agreement.
5. Covenants of Buyer.
5.01. Current Public Information. Buyer shall use its best efforts to make
all filings when required under the Securities Act and the Securities
and Exchange Act of 1934, as amended.
5.02. Best Efforts to Obtain Satisfaction of Conditions. Buyer shall use its
best efforts to obtain the satisfaction of the conditions specified in
this Agreement.
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6. Conditions Precedent to Buyer's Obligations. The obligations of Buyer
to be performed under this Agreement are subject to the fulfillment,
prior to or at the Closing, of the following conditions precedent, each
of which may be waived in writing in the sole discretion of Buyer:
6.01. Representations and Warranties. The representations and warranties of
Seller made in this Agreement shall be true and correct as of the
Closing in all material respects.
6.02. Compliance with Agreement. Seller shall have performed and complied
with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Closing, and Buyer
shall have been furnished with a certificate of an authorized
representative of Seller, dated the Closing Date, to that effect.
6.03. Opinion of Counsel for Seller. Buyer shall have received an opinion
from the Law Office of John Teter, dated the Closing Date, in form and
substance satisfactory to counsel for Buyer, and in substantially the
form annexed hereto as Exhibit A.
6.04. Governmental Approvals. Any governmental agency, department, bureau,
commission and similar body, the consent, authorization or approval of
which is necessary under any applicable law, rule, order or regulation
for the consummation by Seller of the transactions contemplated by this
Agreement and the sale, transfer, conveyance and delivery of the Assets
to Buyer shall have consented to, authorized, permitted or approved
such transactions.
6.05. Consents of Lenders and Other Third Parties. The Seller shall have
received all requisite consents and approvals of all lenders and other
third parties whose consent or approval is required in order for Seller
to consummate the transactions contemplated by this Agreement,
including, without limitation, those set forth on Schedule 2.03.
6.06. Adverse Proceedings. No action or proceeding by or before any court or
other governmental body shall have been instituted or threatened by any
governmental body or person whatsoever that shall seek to restrain,
prohibit or invalidate the transactions contemplated by this Agreement
or that might affect the right of the Buyer to own or use the Assets
after the Closing.
6.07. Certificate of Examination. Seller shall have submitted to Buyer
certificates of examination by a reputable company or lawyer
satisfactory to Buyer of the indices in the State of California
applicable to the appropriate recording files of financial statements,
conditional sales agreement, chattel mortgages, lease agreements,
notices of assignment of loans and mortgages receivable, factors'
liens, trust receipts, and federal tax liens showing there are no
liens, mortgages, encumbrances, charges or other rights of third
parties of record with respect to any of the Assets. Seller agrees to
provide a certificate of examination from the Secretary of State of the
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State of California that are consistent with the aforementioned
certificates of examination by a reputable company or lawyer within
fifteen (15) business days of the Closing.
6.08 Update. Seller shall have provided Buyer with a true, correct and
complete list and amount, as of the Closing Date, of:
(a) Accounts Receivable, including an aging thereof;
(b) Inventory;
(c) Fixed Assets;
(d) all unfilled orders with respect to customers of Seller; and
(e) all shipments by Seller made during the period from the date
of this Agreement to the Closing Date,
none of which information shall be materially different from the
information supplied by Seller as of the date hereof on Schedules 2.06,
2.07 and 2.08.
6.09 Closing Deliveries. Buyer shall have received at or prior to the
Closing each of the following:
(a) A bill of sale pertaining to the Assets substantially in the
form annexed hereto as Exhibit B;
(b) Such instruments of conveyance, assignment and transfer, and
such other deeds, conveyances and documents as may be
necessary and appropriate to effect the transfer to, and to
vest in, Buyer, good, clear, record and marketable title to
the Assets and all rights of use and ownership therein and
thereto;
(c) All documents contemplated by Sections 6.02-6.05, 6.07 and
6.08;
(d) All technical data, formulations, product literature,
contracts, files and other data and documents pertaining to
the Assets;
(e) A certificate of the Secretary of the State of California as
to the legal existence and good standing (including with
respect to the payment of tax) of Seller in California;
(f) A certificate of the Secretary of Seller attesting to the
incumbency of Seller's officers, the authenticity of the votes
authorizing the transactions contemplated by this Agreement,
and the authenticity and continuing validity of the charter
documents of Seller; and
(g) Such other documents, instruments or certificates as Buyer may
reasonably request.
7. Conditions Precedent to Seller's Obligations. The obligations of Seller
to be performed under this Agreement on or before the Closing are
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subject to the fulfillment, prior to or at the Closing, of the
following conditions precedent, each of which may be waived in writing
in the sole discretion of Seller:
7.01. Representations and Warranties. The representations and warranties of
Buyer made in this Agreement shall be true and correct as of the
Closing in all material respects.
7.02. Compliance with Agreement. Buyer shall have performed and complied with
all agreements and conditions required by this Agreement to be
performed or complied with by Buyer prior to or at the Closing, and
Seller shall have been furnished with a certificate of an authorized
representative of Buyer, dated the Closing Date, to that effect.
7.03. Governmental Approvals. Any governmental agency, department, bureau,
commission and similar body, the consent, authorization or approval of
which is necessary under any applicable law, rule, order or regulation
for the consummation by Buyer of the transactions contemplated by this
Agreement and the sale, transfer, conveyance and delivery of the Assets
to Buyer shall have consented to, authorized, permitted or approved
such transactions.
7.04. Adverse Proceedings. No action or proceeding by or before any court or
other governmental body shall have been instituted or threatened by any
governmental body or person whatsoever that shall seek to restrain,
prohibit or invalidate the transactions contemplated by this Agreement
or that might affect the right of the Buyer to own or use the Assets
after the Closing.
7.05. Registration Rights. At or prior to Closing, Buyer and Seller shall
have entered into registration rights agreement substantially in the
form annexed hereto as Exhibit D.
7.06. Closing Deliveries. Seller shall have received at or prior to the
Closing each of the following:
(a) Payment of the Purchase Price, including, without limitation,
certificates representing the Shares registered in the name of
Seller and the promissory note;
(b) An assumption agreement pertaining to the Assumed Liabilities
substantially in the form annexed hereto as Exhibit E;
(c) All documents contemplated by Sections 7.02-7.03 and 7.05; and
(d) Such other documents, instruments or certificates as Seller
may reasonably request.
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8. Warranty.
In connection with any products or services of Seller shipped
or performed prior to the Closing, Buyer does not assume any Liability
or obligation for (i) any warranty (express or implied), (ii) any
damage, injury or loss, consequential or otherwise, resulting from
product defects or defects in the services provided, or (iii) any
warranty of merchantability or fitness for a particular purpose.
9. Expenses; Brokers and Finders.
9.01. Expenses. Except as otherwise provided in Sections 1. 07 and 11, Buyer,
on the one hand, and Seller, on the other hand, shall each pay its own
expenses in connection with this Agreement and the transactions
contemplated hereby.
9.02. Brokers and Finders. Seller represents to Buyer and Buyer represents to
Seller, that no fee is due to any broker or finder in connection with
the transactions contemplated by this Agreement and each party shall
indemnify the other and hold it harmless against and in respect of any
claim for brokerage or other commissions relative to this Agreement, or
to the transactions contemplated hereby, and also in respect of all
expenses of any character incurred by Seller in connection with this
Agreement or such transactions.
10. Termination of Agreement.
10.1. Termination by Lapse of Time. This Agreement shall terminate at 5 p.m.,
Boston time, on July 31, 1998 if the transactions contemplated hereby
have not been consummated, unless such date is extended by the written
consent of all of the parties hereto.
10.2. Termination by Agreement of the Parties. This Agreement may be
terminated by the mutual written agreement of the parties hereto. In
the event of such termination by agreement, Buyer shall have no further
obligation or Liability to Seller under this Agreement, and Seller
shall have no further obligation or Liability to Buyer under this
Agreement; provided, however, that this Section 10, the survival and
indemnification provisions set forth in Section 11 hereto and the
expenses provisions set forth in Section 9 hereto shall remain in full
force and effect.
10.3. Termination by Reason of Breach. This Agreement may be terminated by
Seller, if at any time prior to the Closing there shall occur a
material breach of any of the representations, warranties or covenants
of Buyer or the failure by Buyer to perform any condition or obligation
hereunder; and may be terminated by Buyer, if at any time prior to the
Closing there shall occur a material breach of any of the
representations, warranties or covenants of Seller or the failure of
Seller to perform any condition or obligation hereunder.
11. Survival and Indemnification.
11.01. Survival and Materiality of Covenants. All covenants, agreements,
representations and warranties made herein and in certificates
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delivered pursuant hereto shall be deemed to have been material and
relied upon by the party to which made, and shall survive the Closing
Date. All representations, warranties, covenants and agreements made by
Seller in this Agreement shall survive the Closing, and any
investigation at any time made by or on behalf of Buyer; provided,
however, that the representations and warranties of the parties hereto
shall terminate two years from the date of this Agreement. The parties
acknowledge that in entering into this Agreement, they have not relied
on any representations, warranties or covenants other than as expressed
or referred to or incorporated herein.
11.02. Indemnification.
(a) By Buyer. Buyer covenants and agrees with Seller that it will
defend and hold Seller harmless from and against any and all
losses, damages, costs, expenses or other Liabilities,
including reasonable attorneys' fees, arising from the breach
of any one or more of the representations, warranties,
obligations, covenants and agreements made by Buyer in this
Agreement, and Buyer will reimburse Seller in the full amount
of any sum (including reasonable costs, expenses and
attorneys' fees) that Seller pays or becomes obligated to pay
at any time as a result of such breach.
(b) By Seller. Seller covenants and agrees with Buyer that it will
defend and hold Buyer harmless from and against any and all
losses, damages, costs, expenses or other Liabilities,
including reasonable attorneys' fees, arising from any of the
following:
(i) the breach of any one or more of the representations,
warranties, obligations, covenants and agreements
made by Seller;
(ii) any claims against, or Liabilities or obligations of,
Seller, or any claims against the Assets not
specifically assumed by Buyer pursuant to Section
1.04 of this Agreement;
(iii) any warranty claim, product repair or replacement
relating to (y) products manufactured or sold by
Seller prior to the Closing Date or (z) Seller's
business or operation prior to the Closing Date,
other than an Assumed Liability;
(iv) any product liability claim related to (y) products
manufactured or sold by Seller prior to the Closing
Date or (z) the Seller's business or operation prior
to the Closing Date, whether arising from alleged
negligence, breach of warranty or otherwise; and
(v) any tax Liabilities or obligations of any kind or
nature whatsoever of Seller, whether relating to any
period prior to or after the Closing Date.
(c) Amount of Indemnification. In the performance of any of the
foregoing indemnities, the indemnifying party will pay to, or
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reduce any claim against, the other party in the amount which
would then be required to establish the other party in the
position that it would have held had each such representation
or warranty been true, complete and correct, had each such
obligation been fulfilled, and had each such covenant and
agreement been fully performed. The foregoing notwithstanding,
the aggregate amount of indemnification paid by an
indemnifying party shall not exceed the Purchase Price.
(d) Notice of Right to Indemnification. If at any time after the
Closing any party has reason to believe that it is entitled to
indemnification under this Agreement, or any claim or dispute
exists that could, unless successfully defended, entitle such
party to indemnification, the party entitled to
indemnification shall give notice to the other party of the
facts entitling such party to indemnification and the nature
of the claim or dispute. The party receiving notice shall have
the right, a its own expense and through counsel of its
choice, to defend, settle or compromise any claim or dispute
that would entitle the other party to indemnification. If the
party receiving notice refuses or fails to promptly defend or
compromise any such claim or dispute, the party giving notice
shall have the right to defend, settle or compromise such
claim and may seek indemnification from the other party under
this Agreement.
(e) Security for Indemnification; Right of Offset. To secure the
indemnifications and obligations set forth in or contemplated
in this Agreement, a party to this Agreement entitled to
indemnification from the other party to this Agreement, or
entitled to payment of any sum from the other party, shall be
entitled to offset against and deduct from any amount due to
such other party the amount of any damages, costs, expenses or
other liabilities against which the party entitled to
indemnification has been indemnified and/or any payment due
from the other party.
12. Confidentiality. All information not previously disclosed to the public
or generally known to persons engaged in the respective businesses of
Seller or Buyer that shall have been furnished by Buyer or Seller to
the other party in connection with the transactions contemplated hereby
shall not be disclosed to any person other than their respective
employees, directors, attorneys, accountants or other designated
representatives, including certain financial institutions and advisors,
or other than as contemplated herein. In the event that the
transactions contemplated by this Agreement shall not be consummated,
all such information that is in documentary form shall be returned to
the party furnishing the same, including, to the extent reasonably
practicable, all copies or reproductions thereof which may have been
prepared, and neither party shall at any time thereafter disclose to
third parties, or use, directly or indirectly, for its own benefit, any
such information, written or oral, about the business of the other
party hereto.
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13. Miscellaneous.
13.01. Notices. All notices required or permitted to be given in connection
with the transactions contemplated by this Agreement shall be in
writing and shall be deemed to have been sufficiently given if
delivered personally, sent by facsimile or nationally recognized
overnight delivery service, or mailed by certified mail, postage
prepaid, addressed to:
If to Seller:
Steve Wood
455 La Paz Court
Morgan Hill, CA 95122
With a copy to:
John Teter, Esq.
Suite 301
1550 The Alameda
San Jose, CA 95126
If to Buyer:
Attention: Thomas L. Massie
Chairman of the Board & CEO
Focus Enhancements, Inc.
142 North Road
Sudbury, MA 01776
With a copy to:
Attention: General Counsel
Focus Enhancements, Inc.
142 North Road
Sudbury, MA 01776
or to such other address or addresses as either party shall notify the
other of in writing. Notice shall be deemed to have been given upon
delivery if delivered personally or by facsimile, one business day
after being sent by overnight delivery with a nationally recognized
overnight delivery service, or if mailed, three business days following
deposit in the mail.
13.02. Modification of Agreement. This Agreement, including the Schedules and
Exhibits hereto, contains the entire agreement and understanding of the
parties hereto and may not be altered, modified or changed in any
manner whatsoever except by a writing signed by authorized officers of
Seller and Buyer.
13.03. Governing Law. This Agreement is intended to take effect as a sealed
instrument and shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
13.04. Headings. The Section headings in this Agreement are for convenience
only and shall not affect the construction hereof.
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<PAGE>
13.05. Counterparts. This Agreement may be executed and delivered in a number
of counterparts, each of which, when so executed and delivered, shall
be deemed an original and all of which shall together constitute one
and the same agreement.
13.06. Exhibits. All Schedules, Exhibits and documents referred to herein are
hereby incorporated herein by this reference and shall become a part of
this Agreement.
13.07. Assigns. Any purported assignment of this Agreement by any party shall
have no force or effect whatsoever unless the prior written consent of
the other party to this Agreement is first obtained; provided, however,
that Buyer may assign this Agreement, and its rights and obligations
hereunder, to a parent, subsidiary or affiliate.
13.08. Specific Performance. Each of the parties acknowledges and agrees that
the consideration relating hereto is unique and that either party may
have no adequate remedy at law if the other party fails to perform its
obligations hereunder and further acknowledges that the aggrieved party
will be entitled in such event to require specific performance of this
Agreement in addition to any other rights and remedies which it may
have at law or in equity, without limitation.
13.09. Severability. If any provision of this Agreement shall be held invalid,
illegal or unenforceable as applied to any particular case, such
circumstance shall not affect the enforceability of any such provision
in any other case, nor shall it affect the validity or enforceability
of any other provision of this Agreement.
13.10. Jurisdiction. Any action to enforce, arising out of, or relative in any
way to the provisions of this Agreement may be brought and prosecuted
in such court or courts located within the Commonwealth of
Massachusetts as is provided by law, and Seller consents to the
jurisdiction of said court or courts and to service of process by
registered mail, return receipt requested, or by any other manner
provided by law.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
FOCUS ENHANCEMENTS, INC.
By: ________________________
Name: Thomas L. Massie
Title: Chief Executive Officer
PC VIDEO CONVERSION, INC.
By: ________________________
Name: Steve Wood
Title: President
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EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of July 29,
1998, by and among FOCUS ENHANCEMENTS, INC., a corporation organized under the
laws of the State of Delaware (the "Company"), and PC Video Conversion, Inc., a
corporation organized under the laws of the state of California ("PCV").
WHEREAS:
A. In connection with the Purchase and Sale Agreement of even date herewith by
and between the Company and PCV (the "Purchase Agreement"), the Company has
agreed, upon the terms and subject to the conditions contained therein, to
issue and sell to PCV one hundred twenty-two thousand seven hundred
ninety-six (122,796) shares of the Company's common stock, par value $.01
per share, unregistered with restrictive legends (the "Common Stock"); and
B. To induce PCV to execute and deliver the Purchase Agreement, the Company
has agreed to provide certain registration rights under the Securities Act
of 1933, as amended, and the rules and regulations thereunder, or any
similar successor statute (collectively, the "Securities Act"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and PCV
hereby agree as follows:
1. DEFINITIONS.
a) As used in this Agreement, the following terms shall have the following
meanings:
(i) "Seller" means PCV.
(ii) "register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule
415 under the Securities Act or any successor rule providing for
offering securities on a continuous basis ("Rule 415"), and the
declaration or ordering of effectiveness of such Registration
Statement by the United States Securities and Exchange Commission (the
"SEC").
(iii)"Registrable Securities" means the Common Shares issued or issuable
pursuant to the Purchase Agreement.
(iv) "Registration Statement" means any registration statement of the
Company under the Securities Act required to be filed pursuant hereto
<PAGE>
(including all amendments or supplements to any such Registration
Statement).
b) Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set forth in the Purchase Agreement.
2. REGISTRATION.
a) Mandatory Registration. The Company shall use its diligent business efforts
to ensure the registration of the Registrable Securities by the one hundred
twentieth (120th) day following the date hereof. In connection therewith,
the Company shall prepare, and, as soon as practicable, but in no event
later than, on or before the one hundred twentieth (120th) day following
the date hereof (the "Filing Date"), file with the SEC a Registration
Statement on Form S-3 or, if Form S-3 is not then available, on such form
of Registration Statement as is then available to effect a registration of
all of the Registrable Securities, covering the resale of all of the
Registrable Securities.
b) Eligibility for Form S-3. The Company represents and warrants that, as of
the date of this agreement, it meets the requirements for the use of Form
S-3 for registration of the sale by Seller and any transferee or assignee
of the Registrable Securities and the Company shall file all reports
required to be filed by the Company with the SEC in a timely manner so as
to maintain such eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
c) The Company shall prepare and file with the SEC the Registration Statement
required by Section 2(a) as soon as practicable after the date hereof (but
in no event later than the Filing Date), and cause such Registration
Statement relating to Registrable Securities to become effective as soon as
practicable after such filing, and keep the Registration Statement
effective pursuant to Rule 415 at all times until such date as is the
earlier of (i) the date on which all of the Registrable Securities have
been sold and (ii) the date on which all of the Registrable Securities (in
the reasonable opinion of counsel to Seller) may be immediately sold to the
public without registration or restriction pursuant to Rule 144(k) under
the Securities Act or any successor provision (the "Registration Period"),
which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein and all documents incorporated
by reference therein) shall not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein not misleading.
d) The Company shall prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement
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<PAGE>
and the prospectus used in connection with the Registration Statement as
may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of
in accordance with the intended methods of disposition by Seller or sellers
thereof as set forth in the Registration Statement.
e) The Company shall furnish to Seller (i) promptly after the same is prepared
and publicly distributed, filed with the SEC, or received by the Company,
one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus, final prospectus and each amendment or supplement
thereto, and each letter written by or on behalf of the Company to the SEC
or the staff of the SEC regarding the registrable securities (including,
without limitation, any request to accelerate the effectiveness of any
Registration Statement or amendment thereto), and each item of
correspondence from the SEC or the staff of the SEC, in each case relating
to such Registration Statement (other than any portion, if any, thereof
which contains information for which the Company has sought confidential
treatment), (ii) on the date of effectiveness of the Registration Statement
or any amendment thereto, a notice stating that the Registration Statement
or amendment has been declared effective, and (iii) such number of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as Seller may reasonably
request in order to facilitate the disposition of the Registrable
Securities owned by Seller.
f) The Company shall use its best efforts to (i) register and qualify the
Registrable Securities covered by the Registration Statement under such
other securities or "blue sky" laws of the Commonwealth of Massachusetts,
(ii) prepare and file such amendments (including post-effective amendments)
and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration
Period, (iii) take such other actions as may be necessary to maintain such
registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary
or advisable to qualify the Registrable Securities for sale in the state of
California; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 3(d), (b) subject itself to general taxation
in any such jurisdiction, (c) file a general consent to service of process
in any such jurisdiction, (d) provide any undertakings that cause the
Company undue expense or burden, or (e) make any change in its charter or
bylaws, which in each case the Board of Directors of the Company determines
to be contrary to the best interests of the Company and its stockholders.
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<PAGE>
g) As promptly as practicable after becoming aware of such event, the Company
shall notify Seller of the happening of any event, of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material
fact or omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver one
such supplement or amendment to Seller.
h) The Company shall use its best efforts to prevent the issuance of any stop
order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at
the earliest practicable moment (including in each case by amending or
supplementing such Registration Statement) and to notify Seller of the
issuance of such order and the resolution thereof (and if such Registration
Statement is supplemented or amended, deliver such number of copies of such
supplement or amendment to Seller as Seller may reasonably request).
i) The Company shall hold in confidence and not make any disclosure of
information concerning Seller provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or
correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other
order from a court or governmental body of competent jurisdiction, (iv)
such information has been made generally available to the public other than
by disclosure in violation of this or any other agreement, or (v) Seller
consents to the form and content of any such disclosure. The Company agrees
that it shall, upon learning that disclosure of such information concerning
Seller is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to Seller prior to
making such disclosure, and allow Seller, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective
order for, such information.
j) The Company shall comply with all applicable laws related to the
Registration Statement and offering and sale of securities and all
applicable rules and regulations of governmental authorities in connection
therewith (including, without limitation, the Securities Act and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated by the SEC.)
All obligations of the Company under this Section 3 (except for those
obligations set forth in paragraph (l) of this Section 3) shall terminate
as soon as Seller no longer owns any Registrable Securities.
4. OBLIGATIONS OF THE SELLER.
In connection with the registration of the Registrable Securities, the
Seller shall have the following obligations:
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<PAGE>
a) It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of Seller, that Seller shall furnish to the Company
such information regarding itself, the Registrable Securities held by it
and the intended method of disposition of the Registrable Securities held
by it as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with
such registration as the Company may reasonably request.
b) Seller, by Seller's acceptance of the Registrable Securities, agrees to
cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of the Registration Statement
hereunder.
c) Seller agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Sections 3(e) or 3(f),
Seller will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until Seller's receipt of the copies of the supplemented or amended
prospectus contemplated by Sections 3(e) or 3(f) and, if so directed by the
Company, Seller shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Seller's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
5. EXPENSES OF REGISTRATION.
All reasonable expenses incurred in connection with registrations,
filings or qualifications pursuant to Section 2, including, without
limitation, all registration, listing and qualifications fees, printers and
accounting fees, the fees and disbursements of counsel for the Company
shall be borne by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a) To the extent permitted by law, the Company will indemnify, hold harmless
and defend (i) Seller, and (ii) the directors, officers, partners, members,
employees, agents and each person who controls Seller within the meaning of
Section 15 of the Securities Act or Section 20 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), if any, (each, an
"Indemnified Person"), against any joint or several losses, claims,
damages, liabilities or expenses (collectively, together with actions,
proceedings or inquiries by any regulatory or self-regulatory organization,
whether commenced or threatened, in respect thereof, "Claims") to which any
of them may become subject insofar as such Claims arise out of or are based
upon: (i) any untrue statement or alleged untrue statement of a material
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<PAGE>
fact in a Registration Statement or the omission or alleged omission to
state therein a material fact required to be stated or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus
if used prior to the effective date of such Registration Statement, or
contained in the final prospectus (as amended or supplemented, if the
Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact
necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading,
or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any other applicable securities law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to the restrictions set forth in
Section 6(c) with respect to the number of legal counsel, the Company shall
reimburse the Seller and each other Indemnified Person, promptly as such
expenses are incurred and are due and payable, for any reasonable legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by such Indemnified Person expressly
for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not apply to amounts paid in settlement of
any Claim if such settlement is effected without the prior written consent
of the Company, which consent shall not be unreasonably withheld; and (iii)
with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely
basis in the prospectus, as then amended or supplemented, if such corrected
prospectus was timely made available by the Company pursuant to Section
3(c) hereof, and the Indemnified Person was promptly advised in writing not
to use the incorrect prospectus prior to the use giving rise to a Violation
and such Indemnified Person, notwithstanding such advice, used it. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by Seller pursuant to
Section 9 hereof.
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<PAGE>
b) In connection with any Registration Statement in which Seller is
participating, Seller agrees to indemnify, hold harmless and defend, to the
same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, its employees, agents and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, and any other stockholder selling securities
pursuant to the Registration Statement or any of its directors or officers
or any person who controls such stockholder within the meaning of the
Securities Act or the Exchange Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against any Claim to which any
of them may become subject, under the Securities Act, the Exchange Act or
otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written
information furnished to the Company by Seller expressly for use in
connection with such Registration Statement; and subject to Section 6(c)
Seller will reimburse any legal or other expenses (promptly as such
expenses are incurred and are due and payable) reasonably incurred by them
in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) shall
not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of Seller, which consent shall
not be unreasonably withheld; provided, further, however, that Seller shall
be liable under this Agreement (including this Section 6(b) and Section 7)
for only that amount as does not exceed the net proceeds actually received
by Seller as a result of the sale of Registrable Securities pursuant to
such Registration Statement. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such
Indemnified Party. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented, and the Indemnified Party
failed to utilize such corrected prospectus.
c) Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall,
if a Claim in respect thereof is to made against any indemnifying party
under this Section 6, deliver to the indemnifying party a written notice of
the commencement thereof, and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as
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<PAGE>
the case may be; provided, however, that such indemnifying party shall not
be entitled to assume such defense and an Indemnified Person or Indemnified
Party shall have the right to retain its own counsel with the fees and
expenses to be paid by the indemnifying party, if, in the reasonable
opinion of counsel retained by the indemnifying party, the representation
by such counsel of the Indemnified Person or Indemnified Party and the
indemnifying party would be inappropriate due to actual or potential
conflicts of interest between such Indemnified Person or Indemnified Party
and any other party represented by such counsel in such proceeding or the
actual or potential defendants in, or targets of, any such action include
both the Indemnified Person or the Indemnified Party and the indemnifying
party and any such Indemnified Person or Indemnified Party reasonably
determines that there may be legal defenses available to such Indemnified
Person or Indemnified Party which are different from or in addition to
those available to such indemnifying party. The indemnifying party shall
pay for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be
selected by Seller, if the Seller is entitled to indemnification hereunder,
or by the Company, if the Company is entitled to indemnification hereunder,
as applicable. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall
not relieve such indemnifying party of any liability to the Indemnified
Person or Indemnified Party under this Section 6, except to the extent that
the indemnifying party is actually prejudiced in its ability to defend such
action. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would
otherwise be liable under Section 6 to the fullest extent permitted by law;
provided, however, that (i) no contribution shall be made under
circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in Section 6, (ii) no
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (iii) contribution (together with any
indemnification or other obligations under this Agreement) by any seller of
Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable
Securities.
8. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company
and Seller. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon Seller and the Company.
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<PAGE>
9. MISCELLANEOUS.
a) A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities.
If the Company receives conflicting instructions, notices or elections from
two or more persons or entities with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or
election received from the registered owner of such Registrable Securities.
b) Any notices required or permitted to be given under the terms of this
Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier or by confirmed telecopy,
and shall be effective five (5) days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or
by courier or confirmed telecopy, in each case addressed to a party. The
addresses for such communications shall be:
If to the Seller:
Attn: Steve Wood
PC Video Conversion, Inc.
16120 Caputo Drive, Suite A
Morgan Hill, CA 95037
Tel: (408) 779-1280
Fax: (408) 779-7868
With a copy to:
John Teter, Esq.
Suite 301
1550 The Alameda
San Jose, CA 95126
Tel: (408) 289-8044
Fax: (408) 289-8046
and to Company if delivered personally, sent by facsimile or nationally
recognized overnight delivery service, or mailed by certified mail, postage
prepaid, addressed to:
Attn: Thomas L. Massie
FOCUS Enhancements, Inc.
142 North Road
Sudbury, Massachusetts 01776
Tel: (978) 371-2000
Fax: (978) 371-8471
with a copy to:
Attn: General Counsel
FOCUS Enhancements, Inc.
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<PAGE>
142 North Road
Sudbury, Massachusetts 01776
Tel: (978) 371-8420
Fax: (978) 371-8471
c) Failure of any party to exercise any right or remedy under this Agreement
or otherwise, or delay by a party in exercising such right or remedy, shall
not operate as a waiver thereof.
d) This Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts applicable to contracts made and
to be performed in The Commonwealth of Massachusetts. Seller irrevocably
consents to the jurisdiction of the United States federal courts and the
state courts located in The Commonwealth of Massachusetts in any suit or
proceeding based on or arising under this Agreement and irrevocably agrees
that all claims in respect of such suit or proceeding may be determined in
such courts. Seller irrevocably waives the defense of an inconvenient forum
to the maintenance of such suit or proceeding. Seller further agrees that
service of process upon Seller, mailed by first class mail shall be deemed
in every respect effective service of process upon Seller in any such suit
or proceeding. Nothing herein shall affect the Company's right to serve
process in any other manner permitted by law. Seller agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on such judgment or in
any other lawful manner.
e) This Agreement and the Purchase Agreement (including all schedules and
exhibits thereto) constitute the entire agreement among the parties hereto
with respect to the subject matter hereof and thereof. This Agreement and
the Purchase Agreement supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and
thereof.
f) Subject to the requirements of Section 9 hereof, this Agreement shall inure
to the benefit of and be binding upon the successors and assigns of each of
the parties hereto.
g) The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
h) This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i) Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
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<PAGE>
reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions
contemplated hereby.
j) For purposes of this Agreement, the term "business day" means any day other
than a Saturday or Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law, regulation or
executive order to close.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
COMPANY:
FOCUS ENHANCEMENTS, INC.
By:
Name: Thomas L. Massie
Its: Chief Executive Officer
SELLER:
PC VIDEO CONVERSION, INC.
By:
Name: Steve Wood
Its: President
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Exhibit 4.2
CERTIFICATE OF WARRANT ADJUSTMENT
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
The undersigned, being the Vice President of Finance and Administration of FOCUS
Enhancements, Inc. (the "Company") hereby certifies that, pursuant to Section
4.3 of that certain Warrant Agreement by and among the Company and Mellon
Securities Trust Company, dated May 24, 1993, the terms of the Company's
Redeemable Common Stock Purchase Warrants issued in connection with the
Company's public offering on May 24, 1993, (the "Public Warrants") are hereby
adjusted as follows:
o Each Public Warrant, with an exercise price of $6.75, entitles
the holder to purchase 1.811 shares of Common Stock, which is
equal to $3.73 per Common Share on a pro-rated basis, until
May 23, 1998.
The foregoing purchase price and numbers of shares of Common Stock issuable upon
exercise are primarily the result of adjustments during the period June 30, 1997
through May 5, 1998 due to: (a) the sale of an aggregate of 1,092,150 shares of
Common Stock for less than the purchase price of Common Stock under the Public
Warrants at the date of sale relating to a Private Placement in March 1998; and
(b) the sale of an aggregate of 350,000 additional shares of Common Stock for
less than the purchase price of Common Stock under the Public Warrants at the
date of sale relating to the acquisition of Digital Vision, Inc.
IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 6th
day of May, 1998.
\s\ Gary M. Cebula
Gary M. Cebula
Vice President of Finance
and Administration
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF INCOME PER SHARE
EXHIBIT 11
Three months ended
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net income $ 615,649 $ 231,707
=========== ===========
Basic:
Weighted average number of common shares outstanding 16,203,388 12,716,005
=========== ===========
Diluted:
Weighted average number of common shares outstanding 16,203,388 12,716,005
Weighted average common equivalent shares 1,204,505 621,848
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 17,407,893 13,337,853
=========== ===========
Net income per share
Basic $ 0.04 $ 0.02
=========== ===========
Diluted $ 0.04 $ 0.02
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF INCOME PER SHARE
Six months ended
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net income $ 980,397 $ 248,183
=========== ===========
Basic:
Weighted average number of common shares outstanding 15,367,771 12,123,306
=========== ===========
Diluted:
Weighted average number of common shares outstanding 15,367,771 12,123,306
Weighted average common equivalent shares 1,236,608 415,080
----------- -----------
Weighted average number of common and common equivalent
shares outstanding used to calculate per share data 16,604,378 12,538,386
=========== ===========
Net income per share
Basic $ 0.06 $ 0.02
=========== ===========
Diluted $ 0.06 $ 0.02
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,028,980
<SECURITIES> 794,373
<RECEIVABLES> 10,001,407
<ALLOWANCES> 432,150
<INVENTORY> 3,007,492
<CURRENT-ASSETS> 19,794,559
<PP&E> 3,103,143
<DEPRECIATION> 1,937,257
<TOTAL-ASSETS> 23,742,495
<CURRENT-LIABILITIES> 6,599,531
<BONDS> 0
0
0
<COMMON> 174,584
<OTHER-SE> 38,050,804
<TOTAL-LIABILITY-AND-EQUITY> 23,742,495
<SALES> 12,124,034
<TOTAL-REVENUES> 12,124,034
<CGS> 6,847,291
<TOTAL-COSTS> 4,135,043
<OTHER-EXPENSES> (5,768)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,410
<INCOME-PRETAX> 1,010,058
<INCOME-TAX> 29,661
<INCOME-CONTINUING> 980,397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 980,397
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
