U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10KSB/A
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998, or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 111860
FOCUS Enhancements, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 043186320
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Research Drive
Wilmington, Massachusetts 01887
(Address of Principal Executive Offices)
(978) 9885888
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.01 par value NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
---------------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such other shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. X Yes No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB contained in this form and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10KSB or any amendment to
this Form 10KSB X
Issuer's revenues for the fiscal year ended December 31, 1998 were $18,440,226.
The aggregate market value of voting Common Stock held by non-affiliates of the
Registrant was approximately $21,429,809 based on the closing bid price of the
Registrant's Common Stock on November 24, 1998 as reported by NASDAQ ($1.281 per
share).
As of March 31, 1999, there were 18,005,090 shares of Common Stock outstanding.
Document Incorporated by Reference:
None
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TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 16
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 7. Financial Statements 25
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 26
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act 27
Item 10. Executive Compensation 31
Item 11. Security Ownership of Certain Beneficial Owners
and Management 36
Item 12. Certain Relationships and Related Transactions 38
Item 13. Exhibits and Reports on Form 8K 38
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PART I
ITEM 1. BUSINESS
Business of the Company
FOCUS Enhancements, Inc. (the "Company" or "FOCUS") internally develops, markets
and sells worldwide a line of proprietary video conversion products for PC's and
Macintoshes(R). Based on a 1997 independent survey by Frost & Sullivan, the
Company is an industry leader in the development and marketing of PC-to-TV video
conversion products that make personal computers "TVready" and televisions
"PC-ready."
The Company's proprietary PC-to-TV video conversion products include video
output devices marketed and sold under the Company's registered trademark
"TView." All of the Company's PC-to-TV conversion products enable users to
transmit at lowcost, highquality, computer-generated images from any DOS,
Windows or Mac OS based personal computer to any television of any size with a
standard RCA or -Video interface. FOCUS' PC-to-TV technology provides sharp,
flickerfree, computergenerated images on televisions for multimedia/business
presentations, classroom/training sessions, game playing, collective viewing of
computer applications, and Internet browsing.
The Company's TV-to-PC video conversion products include video output devices
marketed and sold under the registered trademark "InVideo." All of the Company's
TV-to-PC conversion products enable users to view television signals on a
computer monitor. The technology also enables such functions as video
conferencing.
The Company markets and sells its FOCUS branded consumer products globally
through a network of distributors, volume resellers, mail order, value-added
resellers ("VARs") and original equipment manufacturers ("OEMs"). In North
America, the Company markets and sells its products through national
distributors such as Ingram Micro, D & H, Tech Data, Academic and Nuvo; national
volume resellers such as CompUSA, Micro Center, Office Max, Office Depot, Best
Buy and through third party mail order companies such as MicroWarehouse,
Multiple Zones, PC Connection and CDW.
In addition, the FOCUS branded PC-to-TV products have been selected by leading
personal computer manufacturers to be marketed with the use of their select
brand of personal computers. Compaq has included the Company's PC-to-TV products
on their selected market price lists.
The Company also markets and sells its products internationally in over 30
countries by independent distributors in each country. These independent
distributors market and sell the FOCUS branded products to retailers, mail order
companies, and VARs in their respective countries.
In addition to the FOCUS branded products, the Company markets, sells or
licenses its proprietary PC-to-TV technology to television manufacturers.
However, due to publicly reported financial difficulties of one television
manufacturer, the Company reduced its marketing and sales activities with this
customer significantly in 1998. The Company is currently in discussions with
other PC manufacturers, television manufacturers, VGA chip developers and VGA
card developers globally. There can be no assurance, however, that any of these
discussions will result in the Company entering into any new marketing, sales,
or licensing arrangements or otherwise enhance the Company's earnings.
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The Company was founded in December, 1991, as a Massachusetts corporation and
was reincorporated in Delaware in April 1993. In December 1993, the Company
acquired Lapis Technologies Inc. ("Lapis"), a developer of high-quality,
low-cost Macintosh PC to TV video graphics products. Effective September 30,
1996, the Company consummated the acquisition of TView, Inc., a developer of
PC-to-TV video conversion ASIC technology. This acquisition has played a major
strategic role in allowing FOCUS to gain a major technological lead over
competitors in the video scan conversion category and has positioned FOCUS as a
leader in PC-to-TV video conversion technology. On September 30, 1997, the
Company sold its line of computer connectivity products. On March 31, 1998, the
Company acquired selected assets of Digital Vision, Inc., a manufacturer of both
PC-to-TV and TV-to-PC products. On July 29, 1998, the Company acquired the net
assets of PC Video Conversion, Inc., a manufacturer of Professional high-end
video conversion products. In December 1998, the Company restructured this
entity into a professional products research & development group and
consolidated its operating activities to the Company's corporate headquarters.
The Company's principal executive offices are located at 600 Research Drive,
Wilmington, Massachusetts 01887. Its research and development center is located
at 9275 SW Nimbus Drive, Beaverton, Oregon 97008. The Company's European sales
and marketing office, FOCUS Enhancements B.V., is located at Schipholweg 118,
2316 XD Leiden, The Netherlands. The Company's professional A/V conversion team
is located at 16120 Caputo Drive, Suite A, Morgan Hill, CA 95037. The Company's
general telephone number is (978) 9885888 and its Worldwide Web address is
http://www.focusinfo.com.
Business Strategy
According to a report on the market in the United States for PC-to-TV scan
conversion products published by Frost & Sullivan in 1997, the size of the
market is projected to grow from approximately $57 million in 1997 to $124
million in 2000 and $200 million by 2003. The report also projects an annual
compound growth rate for the PC-to-TV conversion market of approximately 24
percent. In 1997, it was projected that 450,000 units of PC-to-TV products were
sold, and it is expected that by 2000, there will be in excess of 1.4 million
units sold.
The Company has sought to address the growth in this market, not only through
increasing emphasis on internal research and development, but also by strategic
acquisition. The Company has completed four such acquisitions since 1993, the
most recent being the acquisition of selected assets of Digital Vision, Inc., a
manufacturer of both PC-to-TV and TV-to-PC products, in March 1998, and the
acquisition of the net assets of PC Video Conversion Inc., a manufacturer of
professional high-end video conversion products, in July 1998. As part of its
strategic focus, the Company discontinued the sale of any products that were not
targeted to the PC-to-TV video conversion marketplace, which included the
Company's sale in 1997 of its line of computer connectivity products.
The Company's digital video coprocessors are primarily sold directly to OEMs
worldwide through an international sales force. During the past year, the
Company has also gained a presence in the TV/Camcorder-to-PC market while
licensing its chip technology for use in hardware devices ranging from
set-top-boxes to HDTVs. The recent emergence of HDTV, requiring multiple
progressive scan digital standards to co-exist seamlessly, has once again
heightened projections for growth in the target market segment. The Company
anticipates that numerous television manufacturers worldwide will incorporate
FOCUS' next-generation FS400 chip into high-end television models released in
1999.
Product Strategy
The Company is committed to developing stateoftheart products for the rapidly
converging computing and entertainment industries. Management believes that the
PC-to-TV video conversion marketplace shows potentially strong growth
opportunities in the coming decade. Management believes that FOCUS is well
positioned, as the market expands in the next three to five years, to develop
products that will win both market acceptance and technological acclaim.
Research and development expenses were $1,698,977 for the year ended December
31, 1998 and $1,112,487 for the year ended December 31, 1997. As a percentage of
total research and development expenses, approximately 90% of expenses represent
new product development activities.
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Marketing and Sales Strategy
The Company's marketing and sales strategy is to ensure that its products are
well positioned and well received in the high-growth channels where computers
and consumer electronics are sold. Those channels include national distributors,
volume retailers, national mail-order companies, direct retail, systems
integrators and international distributors, resellers and mail order companies.
The Company's marketing strategy employs a range of tactics to reach its
customers. The Company seeks to reach retail end users by selected advertising
in leading computer magazines, both in the United States and abroad. To increase
brand awareness, the Company also cross-markets all of its products across
disparate channels to resellers, systems integrators and distributors through
fax transmission delivery of product specifications. These tactics are outlined
below:
o Direct Marketing. The Company markets its products directly to business,
educational and end-user customers. The Company markets to these customers
through independent third party mail-order companies such as
MicroWarehouse, CDW, Global Computer Supplies, Multiple Zones, and PC
Connection.
o On-line Direct Marketing. The Company is also taking advantage of the
Internet megatrend as an essential element of its marketing plan. FOCUS has
adapted its direct marketing approach to the Internet by providing complete
product and Company information on the World Wide Web and assists customers
and prospects with both pre- and post-sales needs. In March 1999, the
Company also began accepting direct orders for its products on its Web
site.
o Customer Direct Marketing. The Company utilizes customer sponsored
marketing activities to generate global demand for its products. These
market development activities are funded as a percentage of product
purchases and the Company authorizes certain cooperative marketing programs
such as sales incentives, special pricing programs and target advertising
campaigns.
The Company's web site contains an interactive list of resellers and outlets for
its products contributing to the goal of direct access to end users and building
relationships. The Company also offers the ability to buy direct on-line through
various computer resellers including Global Computer Supplies, MicroWarehouse
and Multiple Zones International. In March 1999, the Company went live with its
new Web site that allows for direct product purchasing from FOCUS.
The Company also utilizes a sophisticated 24-hour fax-on-demand system. Each
product specification fax requested by the customer is crossmarketed for
synergistic products.
o CrossMarketing. The Company ships over 10,000 products per month, and a
FOCUS PC-to-TV product guide is provided in all shipped packages. This
strategy is designed to increase customer awareness of other FOCUS
products, and aids the Company's brand-recognition marketing goals.
o Display Advertising. The Company utilizes target advertising in popular
computer and consumer journals for the development of lead generation and
product brand recognition. The Company has advertised in magazines such as
Selling Power, Advanced Imaging, Mobile Computing, Laptop Buyer's Guide,
Inc. Magazine, Technology & Learning, and Presentations.
o Global Distribution. The Company has made significant investments over the
last several years in creating a global reseller/VAR channel. In 1995, the
Company had approximately 250 resellers globally. As of March 1999, the
Company has over 2,200 active resellers globally.
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In the United States and Canada, the Company markets and sells its products
through national resellers such as CompUSA, Office Max, Office Depot, Best Buy,
Micro Center, Midwest Micro, Fry's Electronics, and J&R Music World. The Company
markets and sells its products through national distributors such as Ingram
Micro, Nuvo Electronics of Canada, Tech Data, D&H Distributing and Academic
Distributing. The Company also markets and sells its products through
third-party mail order resellers such as MicroWarehouse, Multiple Zones, PC
Connection and CDW.
In the rest of the world, the Company's products are sold to resellers,
independent mail order companies and distributors in Latin America, France, the
United Kingdom, Scandinavia, Germany, Switzerland, Italy, the Czech Republic,
Russia, Australia, Japan, China, Singapore, and the Republic of Korea.
Additionally, in February 1996, the Company established a European Sales and
Marketing office in Amsterdam to expand the number of and to service its
European partners.
o Telemarketing and Telesales. The Company is receiving and placing over
50,000 calls per year. The Company utilizes telemarketing and telesales
programs.
Telemarketing. The Company gathers valuable marketing data from callers. This
data allows the Company to continuously analyze its market data such as customer
type, media response and product interest. The Company also receives
registration cards that provide the Company with marketing information such as
product quality, service quality and sales representative product knowledge.
Further, in 1998 a rebate program was established which required the completion
of an information card in order to receive the rebate.
Reactive Telesales. The Company receives calls and product orders from its lead
generation marketing efforts such as advertising, targeted business reply cards
and product guides (catalog) mailings.
Products and Applications
FOCUS develops internally all of its PC-to-TV video conversion products, both
external boxes and ASICs, thereby allowing the Company to market and sell a
proprietary group of products to the PC-to-TV video conversion marketplace. All
of the Company's products are compatible with both Windows and Mac OS personal
computers. FOCUS' products allow PC owners to utilize any television as a large
screen computer display for use in presentations, training, education, video
conferencing, Internet viewing and home gaming.
The Company's primary focus within the video/graphics category is in the
conversion of standard PC video output (VGA) into television video input (NTSC
or PAL). FOCUS' broad line of PC-toTV products easily allows the user to display
Windows or Mac OS video output directly to a standard television or to
videotape. These products are currently available as either a boardlevel product
or an external set-top device. FOCUS currently sells its PC-to-TV video
conversion products under the TView(R) brand. These products have a variety of
features geared toward the needs of business, education and consumer customer
groups. The Company has developed various proprietary enhancements for its
PC-to-TV products including image stabilization, which eliminates all flicker,
and TrueScale(R) video compression technology which ensures proper aspect ratios
on the television screen even when a computer image is compressed to fit on a
television.
Consumer PC-to-TV Video Scan Conversion Products
1. External Set-Top Boxes. The Company currently offers four models of external
settop boxes under the TView brand. The Company sells the TView Micro, Micro
XGA, the TView Silver and the TView Gold, all of which are compatible with both
Windows- and Mac OS-based personal computers. All the external settop boxes
weigh less than 7 ounces, and are easily connected to the VGA video port of the
computer and a television through the cables provided.
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2. PCMCIA Card. The Company also offers a PCMCIA card under the TView brand that
provides PC-to-TV conversion capabilities to laptop computer users. Sold as the
TView Gold Card, this PCMCIA card fits into any laptop computer with a type II
or type III PC card slot. The TView Gold Card permits the user to make large
screen presentations without the size and weight associated with presentation
monitors and portable projection devices.
3. Internal Card. The Company also offers a PCI card under the TView brand that
provides PC-to-TV conversion capabilities to desktop computer users. Sold as the
TView Gold PCI Card, this card fits into any computer with a PCI card slot. The
TView Gold PCI Card permits the user to make presentations on any television.
All FOCUS products are shipped with the Company's proprietary Electronic
Marker(TM) software which turns the computer screen cursor into a drawing tool,
allowing the user to highlight or annotate text and graphics directly on the
screen.
Commercial PC-to-TV Video Scan Conversion Products
Internal Board Level Products for PCs and TVs. For those environments where
portability is less important, such as classrooms or home entertainment systems,
the Company offers board level products that can be installed directly into a
personal computer or television. The Company currently offers board level
products for OEM televisions.
Professional PC-to-TV Video Scan Conversion Products
The Company's TView Pro AV products are high-end video conversion devices that
address the high quality standards of the professional broadcast and
presentation markets. The Company offers each of its professional products in
desktop, rackmount, and board-level forms. The TView Pro AV products are the
most advanced broadcast quality conversion products in the marketplace. These
products allow the user to take any high-resolution computer image and project
it onto any compatible NTSC/PAL display or VCR or over a videoconference link.
The HyperConverter 1280 is the most advanced product in the market that brings
1280 x 1024 broadcast quality conversion to the enterprise. The QuadScan is a
line Quadrupler/Scaler that eliminates visible scan lines and flicker from
standard video.
Video Scan Conversion Integrated-Circuit Products (CHIPS)
Integrated Circuits. The Company currently offers one integrated circuit
product: the TView FS310. The FS310 is utilized on the Company's board level
products developed for both consumer and commercial applications. The TView
FS310 is the Company's third generation PC-to-TV video encoder designed to
increase the video conversion capabilities of FOCUS' products while reducing the
cost of manufacturing the Company's products. The TView FS310 supports
resolutions up to 1024 x 768 and features proprietary "video scaling" technology
whereby the image on the television is scaled both horizontally and vertically
to ensure that the entire contents of the computer screen are displayed on the
television with minimal loss to video quality. Both of these integrated circuits
can be used for the creation of products for televisions, PCs, information
appliances, video gaming products and external scan conversion devices. It is
this area where the Company intends to focus its research and development
efforts, furthering its core competency in this type of technology and expanding
the application and use of video scan conversion to address digital television,
LCD panels and plasma displays markets.
In February of 1999, the Company announced its FS400 digital video coprocessor.
The FS400 supports high-resolution, faster speed, progressive scan displays, and
Macrovision for DVD. It also delivers such features with lower power
consumption, a smaller footprint and does so at half the cost of the FS300. The
Company plans to launch two more ASICs in 1999.
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TV/Camcorder-to-PC Conversion Consumer Products
InVideo capture cards allow computers to capture and manipulate images and
videos originally displayed on a television, camcorder, or other conventional
video device. This technology is driving the burgeoning market for video
conferencing products. FOCUS' InVideo TV tuner cards allow for the
cost-effective conversion of analog television signals to digital video signals
for output on a computer monitor.
In March 1999, the Company announced two new InVideo products: the InVideo(TM)
USB Capture and the InVideo(TM) USB TV Tuner. The InVideo(TM) USB Capture allows
users to access video from any NTSC/PAL video source and save it directly to any
computer. FOCUS' InVideo(TM) USB Capture combines MMX-enhanced software with
powerful video capture hardware and can be connected to a camcorder, VCR, DVD
video player, or any device that outputs NTSC or PAL video for full
motion/full-color video capture. InVideo USB Capture offers plug and play
installation for hardware platforms that support Windows 98 and MacOS 8.x
operating systems.
The InVideo USB TV Tuner provides plug and play installation for any computer
with a USB port. Users can connect it to camcorders, VCRs, DVD video players,
and other video devices for full-color, full-motion video capture, or television
viewing on the desktop. Additionally, it is compatible with Apple iMac, G3
Desktops and Towers, and G3 Notebooks.
PC-to-TV Video Scan Conversion Applications
Television Display Device. The large screen area of a TV monitor makes it an
inexpensive way to present computer graphics and text to a large audience or
classroom environment. The Company's products can be used with a TV monitor for
presentations, education, training, video teleconferencing, Internet viewing,
and video gaming applications.
o Presentations. TView products are ideal for sales and business
presentations. In particular, because of the lightweight and small size of
the products, they have been embraced by mobile presenters and sales forces
as a costeffective and space effective tool.
o Education and Training. In education, teachers and corporate trainers see
the benefit of using computers in the classroom to create an interactive
learning environment. Because TView products allow the use of one computer
for multiple students, teachers and curriculum developers no longer need to
be constrained in their use of computers for instructional purposes.
o Internet Viewing. TView products also take advantage of the rise in
popularity of the Internet and the advent of Internetrelated products for
television. By allowing current PC owners to adapt their existing
technology to display on a television, TView products bridge the gap
between current and future Internet usage by offering the full
functionality of a PC on a television.
o Video Gaming. TView products make the PC gaming experience larger than life
by allowing users to play PC games on a television. By connecting a PC's
sound and video ports to a television, the gaming enthusiast can share in
the gaming experience with a group or simply play along with the impact of
a big screen television.
Print to Video. The TView systems will output the computer images directly to a
VCR allowing for an inexpensive way to print anything created on a Windows or
Mac OS personal computer to video tape.
Mirroring Mode. The Company's proprietary software allows the presenter to use
the small computer screen as a mirroring console to the same images displayed on
the larger TV monitor. Training of applications can be performed from the
Windows or Mac OS personal computer while the audience observes the images on
the TV monitor.
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TV-to-PC Video Conversion Applications
The InVideo line of products allow television or camcorder images to be imported
into any computer with fully scalable, full-motion, full-color graphics for use
in desktop publishing, video-conferencing and video e-mail. This product is used
by businesses, web designers and distance learning customers who want to stream
video clips, create CD multimedia presentations and send video e-mail.
The two new InVideo offerings expand the potential applications. Combining
InVideo USB Capture with videoconferencing software allows users the ability to
host Internet videoconferences at their desktops. The InVideo USB TV Tuner
enables notebook customers to seamlessly integrate the InVideo USB TV Tuner into
their USB port, turning any notebook with USB into a mobile media center.
Major Customers
Sales to major television manufacturers in 1998 totaled approximately $2,646,000
or 14% of the Company's revenues as compared to approximately $2,345,000 or 11%
of revenues for 1997. Sales to a major distributor in 1998 represented
approximately $5,686,000 or 31% of the Company's revenues as compared to
approximately $3,319,000, or 16% of revenues for 1997.
Customer Support
Management believes that its future success will depend, in part, upon the
continued strength of customer relationships. To ensure customer satisfaction,
the Company provides customer service and technical support through a
five-days-per-week "hot line" telephone service. The Company uses 800 telephone
numbers for customer service and a local telephone number for technical support
(the customer pays for the phone charge on technical support). The customer
service and support lines are currently staffed by technicians who provide
advice free of charge to ensure customer satisfaction and obtain valuable
feedback on new product concepts. In order to educate its own telephone support
personnel, the Company also periodically conducts inhouse training programs and
seminars on new products and technology advances in the industry.
The Company offers this same level of support for its entire domestic market
including its direct market customers who purchase the Company's products
through computer superstores or system integrators. The Company also provides
technical support to its international resellers and distributors. The Company's
international resellers and distributors also provide local support to the
customers for their respective markets.
The Company provides customers with a one- to threeyear warranty on all
products. The Company repairs or replaces a defective product which is still
under warranty coverage, and substantially all the components which the Company
purchases are also covered by vendor warranties of comparable duration. Returned
products with defective components are returned by the Company to the component
vendors for repair or replacement. Product returns, exclusive of reseller stock
balancing, averaged approximately 22% and 3% of total product revenue during the
years ended December 31, 1998 and 1997, respectively. The increase in product
returns was principally the result of the consolidation of one of the Company's
distribution channels. During 1998, the Company expanded its distribution
network into retail office superstores. The Company engaged with three North
American superstore retail chains representing approximately 2,400 aggregate
storefronts. Under the terms of the distribution agreements, each store was
inventoried with three distinct products with in-store stocking levels of three
units per product offering. In addition, the Company invested approximately
$500,000 in target marketing, point of purchase displays and insertion
advertisements in catalogs. However, the sales-out of the Company's products in
these stores were weak, prompting the Company to consolidate this channel in
December 1998 from three office superstore customers to two, and to reduce the
product offerings with the remaining superstores. The result of this decision
was the return of approximately $3,400,000 of finished goods inventory.
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Competition
The Company currently competes with other developers of PC-to-TV conversion
products, TV-to-PC conversion products and with developers of videographic
integrated circuits. Although the Company believes that it is a leader in the
PC-to-TV conversion product marketplace, the videographic integrated circuit
market is intensely competitive and characterized by rapid technological
innovations. This has resulted in new product introductions over relatively
short time periods with frequent advances in price/performance ratios.
Competitive factors in these markets include product performance, functionality,
product quality and reliability, as well as volume pricing discounts, customer
service, customer support, marketing capability, corporate reputation, brand
recognition and increases in relative price/performance ratios for products
serving these markets. In the PC-to-TV conversion product market, the Company
competes with companies such as AI Tech and AVerMedia. In the TV-to-PC market,
the Company competes with other video-in and digital frame capture manufacturers
such as Hauppauge and A.T.I. In the videographic integrated circuits market, the
Company competes with Averlogic and Fairchild Semiconductor.
Certain of the Company's competitors have greater technical and capital
resources, more marketing experience, and larger research and development staffs
than the Company. Management believes that it competes favorably on the basis of
product quality and technical benefits and features. The Company also believes
it provides competitive pricing, extended warranty coverage, and strong customer
relationships, including selling, servicing and aftermarket support. However,
there can be no assurance that the Company will be able to compete successfully
in the future against existing companies or new entrants to the marketplace.
Manufacturing
In the manufacture of its products, the Company relies primarily on turnkey
subcontractors who utilize components purchased or specified by the Company. The
"turnkey" house is responsible for component procurement, board level assembly,
product assembly, quality control testing, and in some cases, final packout and
direct shipment. All subcontracted turnkey houses currently used by the Company
are ISO 9002 certified. During 1998, the Company relied and currently continues
to rely on two turnkey manufacturers for approximately 90% of the Company's
product manufacturing.
Upon receipt of a customer's order, the Company's telemarketing representative
enters the order into the Company's computerized order entry and inventory
management system. Once the customer's credit has been verified and approved by
the finance department, the orders are electronically dispatched to operations
for order fulfillment and shipment. The Company then performs final packaging
and fulfillment of product orders with most customer orders being shipped in
less than three business days from the date they are placed into the system. For
certain commercial PC-to-TV video conversion products, the Company's turnkey
manufacturers ship directly to the OEM customer and forward-shipping information
to the Company for billing purposes.
Quality control is maintained through standardized ISO 9002 quality assurance
practices at the build site and random testing of finished products as they
arrive at the Company's fulfillment center. Management believes that the turnkey
model helps it to lower inventory and staff requirements, maintain better
quality control and product flexibility and achieve quicker product turns and
better cash flow.
All customer returns are processed by the Company in its fulfillment center.
Upon receipt of a returned product, a trained testing technician at the Company
tests the product to diagnose the problem. If a product is found to be defective
the unit is either returned to the turnkey subcontractor for rework and repair
or is repaired by the Company and returned to the customer. The majority of the
Company's defective returns are repaired or replaced and returned to customers
within five business days. In 1998, product returns that are determined to be
defective represented approximately 0.4% of the total product revenues.
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Intellectual Property and Proprietary Rights
The Company currently has five patents pending and one patent issued, four of
which relate to its PC-to-TV video conversion chips, and anticipates filing
another two patent applications in the second quarter of 1999. Patent
applications have also been filed to secure intellectual property rights in
foreign jurisdictions. The Company has also filed applications to register eight
trademarks to add to its two currently registered trademarks. Historically, the
Company has relied principally upon a combination of copyrights, common law
trademarks and trade secret laws to protect the rights to its products that it
markets under the FOCUS and TView brand names.
Upon joining the Company, employees and consultants are required to execute
agreements providing for the nondisclosure of confidential information and the
assignment of proprietary knowhow and inventions developed on behalf of the
Company. In addition, the Company seeks to protect its trade secrets and knowhow
through contractual restrictions with vendors and certain large customers. There
can be no assurance that these measures will adequately protect the
confidentiality of the Company's proprietary information or that others will not
independently develop products or technology that are equivalent or superior to
those of the Company.
Additionally, in connection with OEM and VAR agreements, the Company often seeks
to require manufacturers to display the Company's logo conspicuously on their
product. Management expects that this should increase name recognition and
further the association of the Company's name with the associated goods.
Because of the rapid pace of technological innovation in the Company's markets,
management believes that in addition to the patents filed and issued, the
Company's success is greatly attributable to the creative skills and experience
of its employees, the frequency of Company product offerings and enhancements,
product pricing and performance features, its diversified marketing strategy,
and the quality and reliability of its support services
Management Information Systems
Year 2000
General
The Company's Year 2000 compliance project ("The Project") is proceeding on
schedule. The Project is addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and the year
2000. In early 1998, in order to improve access to business information and to
strengthen its infrastructure through common, integrated computing systems
across the Company, the Company began a business systems replacement project
with systems that use programs from a nationally known business software company
("System"). The installation of the new systems, which are expected to make
approximately 90 percent of the Company's business computer systems Year 2000
compliant, is scheduled for completion by mid-1999. The System will replace a
non-compliant accounting and manufacturing system. Implementation of the System
is on schedule and approximately 50 percent complete. To facilitate the Project,
The Company has retained outside consultants with expertise in wide area
networking ("WAN"), systems integration and business/contact data management.
The Company has developed a contingency plan to make the programs that are
scheduled to be replaced by the System Year 2000 compliant. The contingency plan
includes contracted on-site support, work-flow modification, and integration of
Year 2000 compliant systems. At the end of first quarter 1999, management agreed
that there was not a need to implement the contingency plan at that time. The
decision will be re-evaluated monthly through year-end. Remaining business
software programs are expected to be made Year 2000 compliant through The
Project, including those supplied by vendors, or they will be retired. None of
the Company's other information technology ("IT") projects have been delayed due
to the implementation of The Project.
11
<PAGE>
Project
The Project is being implemented in two phases: Phase I, installation of the
hardware and business applications, preceded the WAN installation and the
integration of various communications systems. Phase I was 75% completed on
December 31, 1998. Phase II is expected to be completed by June 30, 1999.
The Project is divided into two major sections - infrastructure and applications
software (sometimes collectively referred to as "IT Systems") and third-party
suppliers and customers ("External Agents"). The general phases common to all
sections are: (1) inventorying Year 2000 items; (2) assigning priorities to
identified items; (3) assessing the Year 2000 compliance of items determined to
be material to the Company; (4) repairing or replacing material items that are
determined not to be Year 2000 compliant; (5) testing material items; and (6)
designing and implementing contingency and business continuation plans for each
organization and company location.
At September 30, 1998, the inventory and priority assessment phases of each
section of the Project had been completed. While substantially complete, the
process of assessing Year 2000 compliance of its material items and repairing or
replacing such items continues on an ongoing basis. Material items are those
believed by the Company to have a risk involving the safety of individuals, or
that may cause damage to property or the environment, or that have a material
effect on the Company's revenues. The testing phases of the Project will be
performed by the Company and will be ongoing as hardware or system software is
remedied, upgraded or replaced.
The infrastructure portion of the IT section consists of hardware and systems
software other than applications software. The Company estimates that
approximately 90 percent of the activities required to achieve infrastructure
Year 2000 compliance had been completed at December 31, 1998. All infrastructure
activities are expected to be completed by June 30, 1999. Contingency planning
for infrastructure is also substantially complete.
The application software portion of the IT section includes both the conversion
of applications software that is not Year 2000 compliant and, where available
from the supplier, the replacement of such software. The Company estimates that
the software conversion phase was approximately 50 percent complete at December
31, 1998, and the remaining conversions are expected to be completed by
mid-1999.
The testing phase for application software is ongoing and is expected to be
completed by mid-1999. The vendor software replacements and upgrades are
presently behind schedule, although the Company currently believes that
replacements and upgrades will be completed on schedule by mid-1999. Contingency
planning for application software has begun and is scheduled for completion by
mid-1999.
The External Agents section includes the process of identifying and prioritizing
critical suppliers and customers at the direct interface level, and
communicating with them about their plans and progress in addressing their own
Year 2000 issues. Detailed evaluations of the most critical third parties have
been initiated. These evaluations will be followed by the development of
contingency plans, which are scheduled for completion by mid-1999. The Company
estimates that this section was on schedule at December 31, 1998. Follow-up
reviews of External Agents are expected to be undertaken through the remainder
of 1999.
12
<PAGE>
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The estimated total cost of the Project is approximately $300,000. The total
amount expended on the Project through December 31, 1998, was $200,000, of which
approximately $190,000 related to the cost to repair or replace software and
related hardware problems, and approximately $10,000 related to the cost of
identifying and communicating with External Agents. The estimated future cost of
completing the Project is estimated to be approximately $100,000; $80,000 to
repair or replace software and related hardware and $20,000 to identify and
communicate with External Agents. Funds for the Project are provided from a
separate budget of $300,000 for all items other than External Agent costs, which
are included in existing operating budgets. Ancillary costs of implementing the
System are not included in these cost estimates.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Project is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material External Agents. The Company believes that, with the implementation of
new business systems and completion of the Project as scheduled, the possibility
of significant interruptions of normal operations should be reduced.
Readers are cautioned that forward-looking statements contained in the year 2000
Update should be read in conjunction with the Company's disclosures under the
heading: "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS" herein.
The Company is including the following cautionary statement to take advantage of
the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
Where any such forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, the Company cautions that,
while it believes such assumptions or bases to be reasonable and makes them in
good faith, assumed facts or bases almost always vary from actual results, and
the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result, or be achieved or accomplished.
Taking into account the foregoing, the following are identified as important
risk factors that could cause actual results with respect to the Company's Year
2000 compliance to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company:
o The dates on which the Company believes the Project will be completed and
the System will be implemented are based on management's best estimates,
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved, or that there will not be a delay
in, or increased costs associated with, the implementation of the Project.
13
<PAGE>
o A delay in the implementation of the System could impact the Company's
readiness for transactions involving the Euro currency in connection with
the Company's European sales activities.
o Other specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the availability and
cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by
third-parties and suppliers, the ability to implement interfaces between
the new systems and the systems not being replaced, and similar
uncertainties.
o Due to the general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the Year 2000 readiness of third-parties
and the interconnection of global businesses, the Company cannot ensure its
ability to timely and cost-effectively resolve problems associated with the
Year 2000 issue that may materially and adversely affect its operations and
business, or expose it to third-party liability.
Personnel
As of December 31, 1998, the Company employed 54 people on a fulltime basis, of
which 14 are in research and development, 15 in marketing and sales, 4 in
customer support, 9 in operations, and 12 in finance and administration.
Backlog
At December 31, 1998, the Company had a backlog of approximately $282,000 for
products ordered by customers as compared to a backlog of $4,400,000 at December
31, 1997, a decrease of $4,118,000 or 94%. The Company expects to fill these
orders in 1999. The decrease in backlog in 1998 as compared to 1997 is primarily
due to production delays on the FS300 products in the fourth quarter of 1997.
Generally, management does not believe backlog for products ordered by customers
is a meaningful indicator of sales that can be expected for a particular time
period.
Item 2. PROPERTIES
As of December 31, 1998, the Company leased approximately 50,000 square feet of
space at four locations. The Company leased approximately 32,000 square feet of
space in Sudbury, Massachusetts, which was used for administration, sales,
marketing, customer service, limited assembly, quality control, packaging and
shipping. This lease originally was scheduled to expire on July 30, 2001 but the
Company obtained permission from its landlord to terminate the lease as of April
15, 1999. On February 22, 1999, the Company relocated this office to Wilmington,
Massachusetts to provide better access to customers and employees while reducing
its monthly rental payments from $18,910 to $16,380 per month. The company
leases additional space in the following locations: Orinda, California, Morgan
Hill, California, Beaverton, Oregon, and Leiden, Netherlands. The Orinda
facility is mainly used for research and development with approximately 500
square feet at $500 per month. The Morgan Hill facility is mainly used for
high-end video conversion development and final production, with approximately
11,640 square feet at $5,878 per month, expiration being March 2000. The
Beaverton facility is mainly used for research and development, with
approximately 4,700 square feet at $3,631 per month, expiration being June 30,
2000. The Company is currently in negotiations for new space in Beaverton,
Oregon. The Company's European sales and marketing subsidiary, FOCUS
Enhancements, B.V., occupies approximately 1,000 square feet of space in the
Leiden facility. The rent on this facility is approximately $2,735 per month and
the lease expires June 30, 2001. The Company believes that its existing
facilities are adequate to meet current requirements and that it can readily
obtain appropriate additional space as may be required on comparable terms.
14
<PAGE>
Item 3. LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims and legal proceedings
that arise in the ordinary course of business. Currently there are no claims or
legal proceedings which, in the opinion of management, would have a material
adverse effect on the Company's financial position or results of operation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended December
31, 1998 to a vote of security holders of the Company, whether through
solicitation of proxies or otherwise.
15
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in the Company's Common Stock and public warrants (the "Warrants")
commenced on May 25, 1993, when the Company completed its initial public
offering, and since that time the Company's Common Stock and Warrants have
traded principally on the NASDAQ SmallCap Market under the symbol "FCSE" and
"FCSEW", respectively. The Company's Common Stock and Warrants were also traded
on the Boston Stock Exchange under the symbols "FCS" and "FCSW", respectively,
during the period May 26, 1993 through March 7, 1997. On May 27, 1998, the
Company's Warrants expired. The following table sets forth the range of
quarterly high and low bid quotations for the Company's Common Stock and
Warrants as reported by NASDAQ. The quotations represent interdealer quotations
without adjustment for retail markups, markdowns or commissions, and may not
necessarily represent actual transactions. The closing bid price of the
Company's Common Stock on the NASDAQ SmallCap Market on March 31, 1999 was
$1.625 per share.
<TABLE>
<CAPTION>
Warrants Common Stock
High Bid Low Bid High Bid Low Bid
<S> <C> <C> <C> <C>
Calendar 1998 Quotations
First Quarter $ 1.25 $ 0.50 $ 4.25 $ 2.50
Second Quarter $ 1.17 $ 0.03 $ 4.75 $ 2.38
Third Quarter Expired Expired $ 3.47 $ 1.19
Fourth Quarter Expired Expired $ 1.28 $ 1.19
Calendar 1997 Quotations
First Quarter $ 0.44 $ 0.31 $ 2.25 $ 1.63
Second Quarter $ 0.88 $ 0.25 $ 3.63 $ 1.56
Third Quarter $ 4.31 $ 0.44 $ 6.31 $ 2.06
Fourth Quarter $ 5.56 $ 1.06 $ 7.50 $ 2.88
</TABLE>
As of March 3, 1999, there were 229 holders of record of the Company's
18,005,090 shares of Common Stock outstanding on that date. The Company
estimates that approximately 6,466 shareholders hold securities in street name.
The Company does not know the actual number of beneficial owners who may be the
underlying holders of such shares.
The Company has not declared nor paid any cash dividends on its Common Stock
since its inception. The Company's bank line of credit prohibits the payment of
cash dividends. The Company intends to retain future earnings, if any, for use
in its business.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
On March 31, 1998, the Company acquired selected assets of Digital Vision, Inc.,
a manufacturer of both PC-to-TV and TV-to-PC products. The Company has two new
products as a result of the acquisition, identified as its InVideo product line.
Sales of this product line totaled approximately $500,000 yielding gross profit
of approximately $200,000 in 1998. Sales related expenses totaled $200,000 in
1998. This acquisition resulted in no additional personnel being added to the
Company.
16
<PAGE>
On July 30, 1998, the Company acquired the net assets of PC Video Conversion,
Inc. ("PC Video"), a manufacturer of Professional A/V products. Revenues from
date of acquisition were approximately $700,000 in 1998 yielding approximately
$500,000 in gross margin. Operating expenses totaled approximately $600,000 in
1998. In December 1998, the Company restructured the acquired business of PC
Video into a professional products research and development center and
consolidated its operating activities at the Company's corporate office. The
Company accrued $70,000 for estimated restructuring changes in 1998. In December
1998, this R&D center launched a newly developed, high quality, high resolution
professional audio visual scan converter, the TView Gold Pro AV for the
broadcast industry.
In connection with the Company's sale of its line of computer connectivity
products in 1997, the Company acquired 189,701 shares of the common stock of
Advanced Electronic Support Products, Inc. ("AESP").
Due to a prolonged decline in the per share market price of the AESP stock
investment, the Company adjusted this investment to its estimated net realizable
value. This resulted in a charge to earnings of approximately $346,000 in 1998.
Results of Operations
Year ended December 31, 1998 as compared to year ended December 31, 1997
The following table sets forth, for the periods indicated, income and expense
items included in the Consolidated Statements of Operations, expressed as a
percentage of net sales:
Year Ended December 31,
-----------------------
1998 1997
---- ----
Net sales 100 % 100 %
Cost of goods sold 84 72
---- ----
Gross profit 16 28
---- ----
Operating expenses:
Sales, marketing and support 37 22
General and administrative 12 9
Research and development 9 5
Depreciation and amortization 8 2
Impairment of goodwill 17 --
---- ----
Total operating expenses 83 38
---- ----
Loss from operations (67) (10)
Interest expense, net (1) (1)
Other income 1 2
Loss on securities available for sale (2) --
Loss before income taxes (69) (9)
Income tax expense -- --
---- ----
Net loss (69%) (9%)
==== ====
17
<PAGE>
Net Sales
Net sales for the year ended December 31, 1998 were $18,440,000 as compared with
$21,026,000 for the year ended December 31, 1997, a decrease of $2,586,000, or
12%. This decrease was principally due to the Company's decision to consolidate
its reseller channels. This resulted in finished goods returns of approximately
$6,856,000 in the fourth quarter of 1998 ("Q498"). This consolidation was
implemented by management to re-direct inventory from non-performing sales
channels to other high performing channels. Products returned in Q498 are
scheduled to ship to customers throughout 1999. During the year ended December
31, 1998, the Company had a net sales increase to US Resellers (22%) while it
had decreases in net sales to OEM customers (a decrease of 53%), Other sales (a
decrease of 6%) and International customers (a decrease of 42%).
In 1998, the growth in net sales to US Resellers (Distributors, Retailers, VAR's
and Education segments) were comprised of approximately $12,498,000 as compared
to $10,285,000 in 1997, an increase of $2,213,000 or 22%. Net sales included
sales to a major distributor totaling approximately $5,686,000 or 31% as
compared to $3,319,000 or 16% in 1997. The increase is a result of the addition
of major retailers that were directed to this distributor as well as continued
sales growth in existing channels.
During 1998, net sales to OEM customers were approximately $3,866,000 as
compared to $8,138,000 in 1997, a decrease of $4,272,000 or 53%. The decline in
OEM sales was primarily due to the Company's decision not to ship its PC-to-TV
products to a large television manufacturer that is experiencing financial
difficulty. In addition, a significant OEM customer utilizing the FS310 Digital
Video Co-Processor for the Asian marketplace delayed its third and fourth
quarter 1998 procurement requirements to the second quarter of 1999.
Other net sales in 1998 were approximately $1,472,000 as compared to $1,571,000
in 1997, a decrease of $99,000 or 6%. Other sales in 1997 principally consisted
of networking product sales. The Company sold its networking product line in
September, 1997 to AESP. In 1998, other sales are primarily comprised of sales
of high-end video conversion products acquired from the PC Video acquisition.
Net sales to International customers in 1998 were approximately $605,000
compared to $1,033,000 in 1997, a decrease of $428,000 or 42%. In 1997, sales
were principally from networking products that the Company no longer distributes
due to the sale of this product line. In 1998, international sales were
comprised exclusively of PC-to-TV products.
Cost of Goods Sold
Cost of goods sold was $15,411,000, or 84% of net sales, for the year ended
December 31, 1998, as compared with $15,092,000 or 72% of net sales, for the
year ended December 31, 1997, an increase of $319,000 or 2.1%. In the fourth
quarter of 1998, the Company performed a detailed review of its inventories. As
a result of this review, the Company identified certain excess and obsolete
inventory items and also determined that the cost of certain inventory items
required adjustments to their estimated net realizable value. As a result of
this inventory review, the Company charged approximately $1,929,000 to expenses
in the fourth quarter of 1998, thereby increasing its inventory reserves to
approximately $2,168,000 at December 31, 1998. In addition, the Company
recognized an increase of $240,000 in market development costs in 1998 as
compared to 1997 as a result of its expansion into the office superstore retail
market. Exclusive of the inventory adjustments and market development expenses,
cost of sales in 1998 were significantly lower as a percentage of sales in 1998
as compared to 1997. This is a result of a cost advantage of utilizing the
Company's proprietary FS300 integrated circuit in the manufacturing of its
products.
During the fourth quarter of 1998, the Company reduced cost of sales by
$3,400,000, representing the cost of product sales returns from major customers,
including anticipated sales returns in the first quarter of 1999. The Company
also adjusted cost of sales by accruing for price protection claims on prior
products sold as the Company's management decided in the fourth quarter of 1998
to reduce its suggested retail price in 1999 to remain competitive. This accrual
resulted in a charge of approximately $645,000.
18
<PAGE>
Sales, Marketing and Support Expenses.
Sales, marketing and support expenses were $6,902,000, or 37% of net sales, for
the year ended December 31, 1998, as compared with $4,648,000, or 22% of net
sales, for the year ended December 31, 1997, an increase of $2,254,000 or 49%.
The increase in sales, marketing and support expenses in absolute dollars is
primarily the result of increased marketing and advertising expenditures related
to the Company's efforts to expand its OEM and domestic distribution channels
and to introduce the new FOCUS Scan 310 Chip products throughout 1998. The
Company also engaged in many high priced exclusive advertisements including USA
Today, Inc. Magazine and major US retailers weekly catalogs. The advertisement,
marketing and support expenses totaled approximately $2,826,000 in the fourth
quarter of 1998 as compared to approximately $1,500,000 in the same quarter of
1997.
General and Administrative Expenses.
General and administrative expenses for the year ended December 31, 1998 were
$2,166,000 or 12% of net sales, as compared with $1,974,000 or 9% of net sales,
for the year ended December 31, 1997, an increase of $192,000 or 10%. The
increase in terms of absolute dollars and as a percentage of net sales is
primarily due to increases in staffing of approximately $140,000, professional
services of $60,000 and acquisition related expenses of $118,000 offset by a
reduction of bad debts of $130,000.
Research and Development Expenses.
Research and development expenses for the year ended December 31, 1998 were
$1,699,000 or 9% of net sales, as compared with $1,112,000, or 5% of net sales,
for the year ended December 31, 1997, an increase of $587,000 or 53%. The
increase in research and development expenses in both absolute dollars and as a
percentage of revenues is due primarily to an incremental $461,000 in expenses
resulting from the acquisition of PC Video. The Company also increased staffing
and compensation at its Beaverton, Oregon research and development center
amounting to approximately $120,000.
Depreciation and Amortization.
Depreciation and amortization expenses for the year ended December 31, 1998 were
$1,500,000 or 8% of net sales, as compared with $426,000 or 2% of net sales, for
the year ended December 31, 1997, an increase of $1,074,000. In the fourth
quarter of 1998, the Company performed a detailed review of its property and
equipment accounts. As a result of this review, certain assets were written off
and the estimated useful lives of certain assets were revised. The effect of
these write-offs and revisions resulted in additional depreciation expense of
approximately $766,000. In addition, the Company recorded additional
amortization of goodwill resulting from the acquisition of Digital Vision, Inc.
and PC Video Conversion, Inc. totaling approximately $146,000.
Interest Expense, Net.
Net interest expense for the year ended December 31, 1998 was $226,000, or 1% of
net sales, as compared to $266,000, or 1% of net sales, for the year ended
December 31, 1997, a decrease of $40,000 or 15%. The reduction in interest
expense is principally attributable to a reduction in outstanding debt balances
and the reduction of the prime lending rate combined with reduced fees
associated with the extension of the Company's revolving line of credit.
Impairment of Goodwill
The Company recognized a write-off of $3,054,000 in 1998 representing impaired
goodwill resulting from the acquisitions of Lapis Technologies, Inc. ("Lapis"),
Digital Vision, Inc. ("Digital Vision") and PC Video Conversion, Inc. ("PC
Video").
19
<PAGE>
The Company acquired Lapis in December, 1993 and utilized its video conversion
technology in its products through 1998. In 1997, the Company began developing
its own proprietary video conversion technology and in Q198 introduced its FS300
video conversion ASIC to the market place. During 1998, the Company began
including this ASIC in its manufactured products and simultaneously began the
end-of-life cycle for Lapis based products. By the end of Q498, all remaining
inventory incorporating Lapis technology was disposed of by sale or write-off.
The Company wrote-off the balance of approximately $543,000 of impaired goodwill
on Lapis Technologies, Inc.
The Company acquired Digital Vision on March 31, 1998 to obtain its TV-to-PC
product line. Upon evaluation of the product line, the Company deemed that only
two products warranted inclusion in its product portfolio. However, this line,
the InVideo product line was not widely accepted by the Company's customer base
due to significant competition in its category, limited product features in
comparison with the competition, and its cost structure required pricing higher
than many of the competing products. In addition, no proprietary technology was
acquired with this acquisition. The Company achieved sales, gross profit and
expenses of $500,000, $200,000 and $200,000 respectively for the InVideo product
line in 1998. As result of an impairment analysis in Q498, the Company
determined that the acquired goodwill was impaired. The remaining goodwill was
valued using a discounted cash flow model that resulted in a write-off of
approximately $1,070,000 of impaired goodwill.
On July 30, 1998 the Company purchased the net assets of PC Video. This
acquisition was intended to provide the Company with an entry into high quality,
professional audio/video scan conversion market. Upon review of the product
offerings of PC Video, the Company realized that the product quality,
manufacturing capacity, and distribution network were inadequate to provide
positive operating income from this venture on an on-going basis and
discontinued producing all products of the former PC Video. The engineering
resources pertaining to product design and technology vision were evaluated and
deemed exceptional by management. Accordingly, the Company decided to
restructure the PC Video operation into a high-end, professional A/V research
and development center in Q498 tasked to produce new high quality, professional
A/V product utilizing the Company's proprietary ASIC technology. During 1998,
sales of legacy PC Video products were approximately $700,000 yielding gross
profits of approximately $500,000 offset by operating expenses of approximately
$600,000. The Company performed an impairment analysis in Q498 utilizing a
discounted cash flow model, resulting in a write-off of impaired goodwill of
approximately $1,441,000.
Other Income.
For the year ended December 31, 1998, the Company had other income of $100,000
or 0.5% of net sales as compared to other income of $510,000 or 2% of net sales
for the year ended December 31, 1997, a decrease of $410,000. The primary reason
for this reduction is that in 1997 there was a gain of $349,000 due to the sale
of the Company's networking product line to AESP.
Loss on Stock Investment
On September 30, 1997, the Company sold its line of computer connectivity
products to AESP for 189,701 shares of AESP common stock. Included in the sale
were customer lists and the right to use the FOCUS networking brand name to
market the product line as well as certain of AESP's complementary products. In
connection with this transaction, the Company recorded other income in the
amount of $358,000. During 1998, the fair market value of this investment
declined 58%. At December 31, 1998, there is no indication that the fair market
value of this investment will increase substantially in the foreseeable future,
therefore the Company recognized a loss on this investment of approximately
$346,000 in the fourth quarter of 1998.
20
<PAGE>
Net Loss.
For the year ended December 31, 1998, the Company reported a net loss of
$12,787,000, or $0.78 per share (basic), as compared to a net loss of
$1,986,000, or $.16 per share (basic), for the year ended December 31, 1997, an
increase in loss of $10,801,000. For the quarter ended December 31, 1998, the
Company recorded a net loss of approximately $14,235,000. This loss resulted
from reduced sales in the quarter due to lower than anticipated sell through of
the Company's products and higher than expected inventory levels at certain
retail customers, which resulted in significant sales returns in the fourth
quarter. In addition, the Company made significant adjustments in the fourth
quarter. The effect of the sales returns and the significant fourth quarter
adjustments are as follows: product returns from non-performing resellers
(approximately $3,455,000), impaired goodwill (approximately $3,054,000),
inventory adjustments (approximately $1,929,000), marketing programs
(approximately $1,480,000), fixed asset adjustments (approximately $766,000),
price protection accruals (approximately $645,000) and revaluation of stock
investments (approximately $346,000).
Financial Condition
Total Assets.
Total Assets decreased $1,184,000 or 9%, from December 31, 1998 to December 31,
1997. The decrease in assets is due to: reductions of securities available for
sale by $346,000, accounts receivable by $2,985,000 and goodwill by $439,000
offset by increases of cash and certificates of deposit by $662,000, inventory
by $1,959,000, and property, plant and equipment by $204,000. Securities
available for sale decreased by 58% in 1998 compared with 1997 primarily due to
the reduction in market value of the 189,701 shares of AESP stock held at
December 31, 1998. Accounts receivable decreased by 54% in 1998 compared with
1997 principally due to product returns in Q498 from non-performing reseller
channels. Goodwill decreased by 35% in 1998 compared with 1997 primarily due to
the write-off of impaired goodwill associated with Lapis, Digital Vision and PC
Video. The increase in inventory in 1998 as compared with 1997 is the result of
the aforementioned product returns in Q498.
Total Liabilities.
Total liabilities increased $1,007,000, or 11% from December 31, 1997 to
December 31, 1998. The increase is primarily due to: increases of accounts
payable by $484,000, accrued liabilities by $955,000, and capital leases by
$265,000 offset by decreases of notes payable by $696,000. Accounts payable
increased $484,000 or 9% in 1998 compared with 1997 primarily due to increased
purchases of inventory for anticipated Q498 sales that did not materialize due
to sufficient stocking levels in reseller channels. Accrued liabilities
increased by $954,000, principally from the result of accruals for marketing and
advertising programs in Q498 to further develop reseller markets and to create
end user demand at the office superstore retail stores. Capital leases increased
mainly due to system hardware and software upgrades to satisfy Year 2000
computing requirements.
Stockholders' Equity.
Stockholders' equity decreased $2,191,000 from December 31, 1997 to December 31,
1998. The decrease is primarily due to the net loss incurred in fiscal year 1998
of $12,787,000 and the purchase of treasury stock for $700,000, offset by the
issuance of common stock resulting from the exercise of common stock options and
warrants, as well as a private offering of the Company's common stock. In
addition, the Company issued common stock in conjunction with the acquisitions
Digital Vision and PC Video.
21
<PAGE>
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through the
public and private sale of common stock, operating income, shortterm borrowing
from private lenders, favorable credit arrangements with vendors and suppliers,
and a line of credit with its commercial bank ($620,000 at December 31, 1998).
Net cash used in operating activities for the years ended December 31, 1998 and
1997 was $4,592,000 and $4,657,000, respectively. In 1998, net cash used in
operating activities consisted primarily of the net loss of $12,787,000, and
increases in inventories of $1,587,000, accounts payable of $387,000, accrued
liabilities of $916,000 with decreases in accounts receivable of $3,325,000. In
addition, the Company had a decrease in value of marketable securities of
$346,000 and write-off of impaired goodwill of $3,054,000. In 1997, net cash
used in operating activities consisted primarily of the net loss of $1,986,000,
and increases in accounts receivable of $2,325,000, inventories of $2,014,000,
prepaid expenses and other assets of $406,000, accounts payable of $2,176,000,
and accrued expenses of $228,000. In addition, the Company had a gain on
settlement of accounts payable of $244,000 and securities received on sale of
networking assets of $595,000.
Net cash used in investing activities for the years ended December 31, 1998 and
1997 was $2,042,000 and $653,000, respectively. In 1998, cash used in investing
activities consisted primarily of the purchase of property and equipment of
$858,000 and cash paid in acquisitions, net of cash received, of $931,000. In
1997, cash used in investing activities consisted primarily of purchases of
property and equipment of $654,000.
Net cash from financing activities for the years ended December 31, 1998 and
1997 was $7,042,000 and $5,616,000, respectively. In 1998, the Company received
$2,827,000 in net proceeds from private offerings of Common Stock and $7,004,000
from the exercise of common stock options and warrants. The proceeds in 1998
were offset by $1,954,000 in payments on notes payable, $700,000 in payments for
treasury stock acquired, and payments made under capital lease obligations of
$135,000. In 1997, the Company received $5,578,000 in net proceeds from private
offerings of common stock and $504,000 in net proceeds from the exercise of
common stock options and warrants. The proceeds in 1997 were offset by $297,000
in payments on notes payable to banks and $169,000 in payments under capital
leases.
As of December 31, 1998, the Company had working capital of $1,435,000, as
compared to working capital of $2,619,000 at December 31, 1997, a decrease of
$1,184,000. The Company's cash and certificates of deposit were $1,382,000 at
December 31, 1998, an increase of $662,000, over amounts at December 31, 1997.
On March 3, 1998, the Company issued 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 financing 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. As a result of this provision, on December 2, 1998 the
warrant holder exercised their warrants and purchased 327,645 shares of common
stock at an aggregate exercise price of $1.2188 per share resulting in gross
proceeds of $399,000. 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 $173,000 yielding net proceeds of $2,827,000. 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 June 3, 1998, the Company received gross proceeds of $6,147,000 as a result
of the conversion 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 conversion. 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.
22
<PAGE>
In November 1998, the Company negotiated and received a waiver of certain
restrictive covenants contained in its revolving line of credit with its
commercial bank, together with a revision of the loan covenants and an agreement
to extend the line until December 15, 1998. At December 31, 1998, the Company
had borrowings under its line of credit of $620,000 with the expectation that
the Company would refinance this indebtedness shortly thereafter. On March 31,
1999, the Company repaid all monies owed on this line of credit with its
commercial bank totaling approximately $637,000 from proceeds received under a
$2,000,000 accounts receivable financing agreement with the same commercial
bank. This financing agreement allows for advances on accounts receivable not to
exceed 80% of qualified invoices. The bank charges interest on the outstanding
balance at a rate of the prime lending rate plus 4.5%. In addition, under the
terms of this agreement the bank has been issued a warrant to purchase 100,000
shares of the Company's common stock at a price of $1.70 per share. At March 31,
1999, the Company had borrowings under this agreement of approximately $970,000.
The Company maintains incentive stock option plans for all employees and
directors. Management believes that these plans provide long term incentives to
employees and directors and promote longevity of service. The Company prices
issued options at the closing of NASDAQ market price of its common stock on the
date of the option issuance. In addition, the Company maintains the right to
re-price the options under such plans to reflect devaluation in the market value
of its common stock. On September 1, 1998, the Company re-priced all employee
and director options under all plans to $1.22 per share for those options priced
in excess of this value. This price represented the closing market price of the
Company's common stock on September 1, 1998. On February 22, 1999, the Company
re-priced all employee options under all plans to $1.0625 per share for all
options priced in excess of this amount. This price represented the closing
market price for the Company's common stock on February 22, 1999. The FASB has
issued a proposed interpretative release - Stock Compensation - Interpretation
of APB No. 25, which will have a prospective impact on the Company's stock
option plans, if adopted.
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.
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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 availableforsale securities and foreign currency
items, 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 paidincapital in the equity section of the balance sheet. The Company
adopted these disclosure requirements beginning in the first quarter of 1998.
23
<PAGE>
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its generalpurpose financial statements, and changes in the
measurement of segment amounts from period to period.
The FASB has issued a proposed interpretive release, Stock compensation -
Interpretation of Opinion 25 (Interpretation). The Interpretation will provide
accounting guidance on several issues that are not specifically addressed in
Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to
Employees. Two of the issues discussed in the Interpretation could result in
significant accounting changes for many companies, the accounting for re-pricing
of employee stock options, and the definition of an "employee" for purposes of
applying APB No. 25.
The effective date of the proposed Interpretation would be the issuance date of
the final Interpretation (expected to be in September, 1999). If adopted, the
Interpretation would be applied prospectively, but would cover events that occur
after December 15, 1998. There would be no effect on financial statements for
the period prior to the effective date of the final interpretation.
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 10KSB 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.
24
<PAGE>
Item 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements and the related report of
independent accountants are presented in pages F-1 - F-22, which are contained
in this Annual Report immediately following page 41. The consolidated financial
statements filed in this Item 7 are as follows:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants F1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F2
Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997 F3
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1997 F4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 F5
Notes to Consolidated Financial Statements F7
</TABLE>
25
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
26
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
OCCUPATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the nominees to be elected at the
meeting of the Company's stockholders to be held on July 26, 1999 (the
"Meeting"), the current directors who will continue to serve as directors beyond
the Meeting, and the executive officers of the Company, their ages, and the
positions currently held by each such person with the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Thomas L. Massie 38 Chairman of the Board, President and Chief Executive Officer
William B. Coldrick(2) 57 Vice Chairman of the Board
Timothy E. Mahoney(1)(2) 42 Director
John C. Cavalier (1) 58 Director
Dr. Robert C. Eimers 51 Director
William Dambrackas 55 Director
Christopher P. Ricci 34 Sr. Vice President, General Counsel and Secretary
Gary M. Cebula 40 Vice President of Finance and Administration, and Treasurer
Thomas Hamilton 49 Vice President of Research & Development
Steve R. Morton 50 Vice President of Engineering
Brett A. Moyer 41 Vice President of Pro A/V Sales
Steven Wood 40 Vice President of Pro A/V Engineering
Richard J. O'Connell 41 Vice President of Consumer Sales
William R. Schillhammer III 45 Vice President of OEM Sales
- ---------------------
<FN>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</FN>
</TABLE>
27
<PAGE>
Directors to be Elected at the Meeting
Thomas L. Massie is Chairman of the Board, Chief Executive Officer,
President, and a co-founder of the Company and has served in these positions
since 1992. He has more than 14 years of experience in the computer industry as
well as related business management experience. From 1990 to 1992, Mr. Massie
was the Senior Vice President of Articulate Systems, responsible for worldwide
sales, marketing and operations. Articulate Systems is a multi-million dollar
developer and manufacturer of voice control and communications products for the
PC marketplace. Articulate Systems was acquired by Dragon Systems in 1997. From
1986 to 1990, Mr. Massie was the Chairman of the Board, and founder of MASS
Microsystems. MASS Microsystems is a publicly-held developer of multimedia
hardware products and high-end removal storage subsystems. Mr. Massie led MASS
Microsystems from business plan to $30 million in profitable revenues. MASS
Microsystems achieved a successful public offering in 1989 and was acquired by
Ramtek in 1992. From 1985 to 1986, Mr. Massie was the co-founder and Executive
Vice President of Sales and Marketing for MacMemory, Inc. Mac Memory was a
multi-million-dollar developer of custom memory and acceleration products that
was acquired in 1986 by Cyclone Technologies. From 1979 to 1984, Mr. Massie was
a Non-Commissioned Officer for the U.S. Army, 101st Airborne Division. Mr.
Massie is a member of the Board of Directors of the Hockey Academy. The Hockey
Academy is a private, multi-million dollar hockey program development company.
John C. Cavalier has served as a Director of the Company since May
1992. He has more than 29 years of business management experience. Since
November 1996, Mr. Cavalier has been President, CEO and a Director of MapInfo
Corporation, a software developer. Prior thereto, Mr. Cavalier joined Amdahl
Company in early 1993 as Vice President and General Manager of Huron, Amdahl's
software business. In July of 1993, he was also appointed President and CEO of
Antares Alliance Group, a joint venture between Amdahl and EDS. From July 1990
to July 1992, he was President, Chief Executive Officer and a director of
Bimillenium Company, a software development company. Bimillenium is a developer
of scientific software for the Macintosh and UNIX marketplace. From April 1987
to January 1992, Mr. Cavalier was a Director of MASS Microsystems. He was
President, Chief Executive Officer and a director of ShareBase Company, a
database systems company, from November 1987 to June 1990. He earned his
undergraduate degree from the University of Notre Dame and an MBA from Michigan
State University.
Directors Whose Terms Extend Beyond the Meeting
William B. Coldrick has served as a Director of the Company since
January 1993, Vice Chairman of the Company since July 1994 and as Executive Vice
President of the Company from July 1994 to May 1995. Mr. Coldrick is currently a
principal of Enterprise Development Partners, a consulting firm serving emerging
growth companies that he founded in April 1998. From July 1996 to April 1998,
Mr. Coldrick was Vice President and General Manager of Worldwide Channel
Operations for the Computer Systems Division of Unisys Corp. In March 1991, Mr.
Coldrick retired as Senior Vice President, U.S. Sales, for Apple Computer, Inc.,
which he joined in 1982. As Senior Vice President, U.S. Sales, for Apple
Computer, Mr. Coldrick was responsible for leading all sales, support, service,
distribution and channel activities for Apple throughout the United States.
Previously at Apple, Mr. Coldrick held the position of Vice President and
General Manager for Western Operations, and was responsible for overseeing
sales, marketing, service and support for Apple's largest business unit in the
field organization. In a prior position as National Sales Director, U.S. Sales,
Mr. Coldrick directed the expansion of the U.S. field sales force. Mr. Coldrick
also held the position of Area Sales Director of the Northeast Area. Before
joining Apple, Mr. Coldrick spent 14 years with Honeywell Information Systems,
where he held a number of positions including Regional Marketing Director. Mr.
Coldrick holds a Bachelor of Science degree in Marketing from Iona College in
New Rochelle, New York.
28
<PAGE>
Timothy E. Mahoney has served as Director of the Company since March
1998. He has more than 18 years of experience in the computing industry. Mr.
Mahoney founded Union Atlantic L.C., in 1994, a merchant bank providing
professional management and capital for emerging technology companies. Since
1996, Mr. Mahoney has served as Chairman of Tallard Technologies BV, a PC
products distributor / value added reseller serving Latin America. From 1991 to
1994 he was President of SyQuest Technology, SyDos Division, responsible for
expanding distribution channels for SyQuest's hard disk drive products. From
1986 to 1991, Mr. Mahoney was President of Rodine Systems, Inc., a provider of
Macintosh mass storage peripherals. He earned his BA degree in computer science
and business from West Virginia University and an MBA degree from George
Washington University.
Robert C. Eimers, Ph.D. is a recognized expert in the assessment and
development of both managers and organizations. He is currently Vice President
of Human Resources for Scotsman Industries, a company based in Vernon Hills,
Illinois, which manufactures and distributes commercial refrigeration equipment
worldwide. Dr. Eimers earned a Bachelor of Arts degree from Wesleyan University
in 1970 and a doctoral degree in Psychology from the University of Rochester in
1978. Since that time, he has distinguished himself as a consulting psychologist
with two prominent firms, Organizational Psychologists and Medina & Thompson. He
has also served as the senior human resources executive of three Fortune 500
companies, Household International, Sonoco Products Company and Service
Merchandise. His first-hand experience on both sides of the table has provided
Dr. Eimers with an in-depth understanding of the factors which influence both
individual and organizational performance.
William A. Dambrackas has over 22 years of management experience in the
computer industry. He founded Equinox Systems (Nasdaq: EQNX) 16 years ago and
since then, has served as the company's Chairman, President and Chief Executive
Officer. Equinox develops high-performance server-based communications products
for Internet access and commercial systems. Mr. Dambrackas also currently serves
on the Board of Directors of the Florida Venture Forum, an organization that
serves the needs of venture capital investors and emerging growth companies.
Prior to founding Equinox in 1983, Mr. Dambrackas held senior engineering
management positions at Racal-Milgo from 1979 to 1983 and Infotron Systems
from1976 to 1979. He also has held design engineering positions at GTE-Ultronic
Systems from 1969 to 1976, Thiokol Corporation from 1968 to 1969, and RCA
television recording systems from 1966 to 1968. Mr Dambrackas has been issued 3
United States Patents for data communications inventions and he was honored as
Florida's "Entrepreneur of the Year" in 1984.
Executive Officers
Christopher P. Ricci joined the Company as Sr. Vice President, General
Counsel and Secretary in 1998. From 1996 to 1998, Mr. Ricci was a member of the
intellectual property group for the Boston law firm of Sullivan & Worcester,
LLP, where he advised on a variety of issues including patent prosecution,
trademark prosecution, licensing of technology in both domestic and foreign
markets, methods of protecting and exploiting intellectual property, as well as
supporting litigation and corporate acquisitions. From 1993 to 1996 Mr. Ricci
also worked as in-house counsel to the electronic imaging division of Polaroid
Corporation and was previously a partner at Lambert & Ricci, PC, a Boston
intellectual property law firm. Prior to entering the legal profession, Mr.
Ricci worked for five years as an electrical engineer designing computer control
systems. Mr. Ricci received his law degree from New England School of Law. He
graduated from the University of Massachusetts at Amherst with a bachelor's
degree in electrical engineering and a minor in applied mathematics. He has also
earned a certificate in software engineering from Northeastern University. Mr.
Ricci has lectured and been published both domestically and abroad on a variety
of business and intellectual property law subjects.
29
<PAGE>
Gary M. Cebula joined the Company as Vice President of Finance and
Administration, and Treasurer in 1998. He has more than 15 years of experience
in finance, administration, and operations management. From 1996 to 1998, Mr.
Cebula was Vice President and Chief Financial Officer of Hanold Holding
Corporation, a manufacturer of student uniforms. From 1986 to 1996, Mr. Cebula
was Vice President and Controller of Continental Resource, Inc., a multi-million
dollar distributor of Personal Computers. From 1982 to 1986, Mr. Cebula held
various financial positions at General Electric Corporation. His diversified
background includes mergers and acquisitions, strategic planning for entity
consolidations, financial reporting, cash management and debt restructuring. Mr.
Cebula is a graduate of General Electric's Financial Management Program, and
earned a BS in Accounting and an MS in Taxation from Bentley College in Waltham,
Massachusetts.
Thomas Hamilton joined the Company in September 1996 when the Company
acquired TView, Inc. From 1992 to 1996, Mr. Hamilton was Executive Vice
President and Co-Founder of TView, Inc. Mr. Hamilton grew TView from inception
to a $5 million per year revenue before being acquired by FOCUS. He co-developed
proprietary video processing technology central to FOCUS' business. From 1987 to
1992, Mr. Hamilton was the Vice President of Engineering at Summit Design, a
publicly held Integrated Circuit design software company, in Beaverton, Oregon
having approximately $20 million in annual sales. From 1975 to 1987, he served
in various engineering and marketing management positions at Tektronix Inc.,
Wilsonville, Oregon. Mr. Hamilton has a BS in Mathematics from Oregon State
University.
Steve R. Morton joined the Company as Vice President of Engineering in
September 1996 when the Company acquired TView, Inc. From 1992 to 1996, Mr.
Morton was Executive Vice President and Co-Founder of TView, Inc. where he
co-developed proprietary video processing technology central to FOCUS' business.
From 1971 to 1992, Mr. Morton held various engineering management positions at
Tektronix Inc including serving as general manager of Tektronix' Digital Signal
Processing Group and Engineering Manager for the Spectrum Analyzer Division from
1986 to 1992. Mr. Morton holds a BSEE from Oregon State University and an MSEE
from the University of Portland.
Brett A. Moyer joined the Company in May 1997, and has assumed the role
of Vice President of Pro A/V Sales. Mr. Moyer brings over 10 years of global
sales, finance and general management experience from Zenith Electronics
Corporation, where he was most recently the Vice President and General Manager
of Zenith's Commercial Products Division. Mr. Moyer has also served as Vice
President of Sales Planning and Operations at Zenith where he was responsible
for forecasting, customer service, distribution, MIS, and regional credit
operations. Mr. Moyer has a Bachelor of Arts in Economics from Beloit College in
Wisconsin and a Masters of International Management with a concentration in
finance and accounting from The American Graduate School of International
Management (Thunderbird).
Steven Wood joined the Company as Vice President of Pro A/V Engineering
in August 1998 when the Company acquired PC Video. From 1992 to 1998, Mr. Wood
was President and co-founder of PC Video, where he grew PC Video from inception
to over $2.5 million in profitable revenue. From 1990 to 1992, he held the
position of Sales and Marketing Manager at Redlake Corporation, a world leader
in high speed image acquisition. From 1986 to 1990, Mr. Wood held the position
of Image Processing Product Specialist at MetraByte (subsequently acquired by
the Keithly Corporation). Mr. Wood started his career in Computer Graphics/Image
Processing/Video Electronics with Matrox Electronics in Montreal. Mr. Wood has a
Bachelor's degree in Engineering from McGill University in Montreal, Canada.
Richard J. O'Connell joined FOCUS in 1995. As Vice President of Channel
Sales, Mr. O'Connell is responsible for all consumer sales in North America and
the Pacific Rim. Mr. O'Connell has over 15 years experience as a high level
sales professional. As a principal of a company he previously founded, he was
responsible for the Company's sales distribution. Recently, Mr. O'Connell has
held various sales management positions with McCaw Cellular (1989-1992) and
Daewoo-Leading Edge Computer (1992-1995).
30
<PAGE>
William R. Schillhammer III joined the Company in 1998 with over 12
years of experience in global sales and marketing. From 1996 to 1998, Mr.
Schillhammer was Vice President of Marketing and Sales for Digital Vision, Inc.,
a multi-million dollar developer of video conversion products. From 1990 to 1996
Mr. Schillhammer held various senior management positions for Direct Imaging,
Inc., most recently serving as President. From 1989 to 1990 he was the Vice
President of Sales for Mega Scan Technology, Inc. From 1988 to 1989 Mr.
Schillhammer was a Vice President for Number Nine Computer Corporation, a
publicly held multi-million dollar company. From 1980 to 1988 he held various
management positions with Intel Corporation. Mr. Schillhammer graduated from
Dartmouth College with a Bachelor's degree in Engineering.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (the "SEC"). Such persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on the Company's review of the copies of such forms
received by it or written representations from certain reporting persons, the
Company believes that during the year ended December 31, 1998, all filing
requirements applicable to its directors, executive officers and
greater-than-10% beneficial owners were met.
Item 10. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth certain information with respect to the
annual and long-term compensation for services in all capacities to the Company
for the fiscal years ended December 31, 1998, 1997, and 1996, of those persons
who were, at December 31, 1998, (i) the Company's Chief Executive Officer and
(ii) other executive officers of the Company receiving total cash and bonus
compensation in excess of $100,000 (the "Named Officers"). The Company did not
grant any restricted stock awards or stock appreciation rights or make any long
term incentive plan payouts to the individuals named in the tables below during
the fiscal year indicated.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation (1) Long-Term Compensation
Name and Fiscal Salary Bonus Other Annual Securities Underlying
Principal Position Year ($) ($) Compensation($)(2) Options/SAR(3)
------------------ ---- --- --- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Thomas L. Massie 1998 $150,000 $132,833 -- 200,000
CEO, President and 1997 $150,000 $ 45,000 -- 500,000
Chairman of the Board 1996 $150,000 -- -- 250,000
Christopher P. Ricci 1998 $150,000 $ 27,500 -- 125,000
Sr. Vice President and 1997 -- -- -- --
General Counsel 1996 -- -- -- --
Brett Moyer 1998 $130,000 $ 41,000 -- 100,000
Vice President of 1997 $130,000 $ 45,000 -- 250,000
Pro AV Sales 1996 -- -- -- --
Richard J. O'Connell 1998 $ 90,000 -- $ 48,357 (4) 100,000
Vice President of 1997 $ 90,000 $ 25,360 $ 37,262 (4) 20,000
Consumer Sales 1996 $ -- -- -- 50,000
31
<PAGE>
Thomas Hamilton 1998 $110,000 $ 5,000 -- 25,000
Vice President of Research 1997 $110,000 $ 4,179 -- --
and Development 1996 $ 27,293 -- -- 80,000
- -------------------------------------
<FN>
(1) Includes salary and bonus payments earned by the Named Officers in the year indicated, for services rendered in
such year, which were paid in the following year.
(2) Excludes perquisites and other personal benefits, the aggregate annual amount of which for each officer was less
than the lesser of $50,000 or 10% of the total salary and bonus reported.
(3) Long-term compensation table reflects the grant of non-qualified and incentive stock options granted to the named
persons in each of the periods indicated.
(4) Includes compensation based on sales commissions.
</FN>
</TABLE>
The following table sets forth information concerning options granted
during the fiscal year ended December 31, 1998 to the executives named in the
Summary Compensation Table above. The Company did not grant any stock
appreciation rights during the fiscal year.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Percentage of
Total Options
Granted to Individual Grants
Shares Subject to Employees in ------------------
Name Options Granted FY 1998(1) Exercise Price Expiration Date
- ---- --------------- ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Thomas L. Massie 200,000 14.8% $1.22 9/01/03
Christopher P. Ricci 125,000 9.3% $1.22 9/01/03
Brett Moyer 100,000 7.4% $1.22 9/01/03
Richard J. O'Connell 100,000 7.4% $1.22 9/01/03
Thomas Hamilton 25,000 1.9% $1.22 9/01/03
- -------------------------------------
<FN>
(1) Net of cancellations, a total of 1,347,698 options were granted to employees, directors and
consultants in 1998 under the Company's stock option plans, the purpose of which is to provide
incentives to employees, directors and consultants who are in positions to make significant
contributions to the Company.
</FN>
</TABLE>
The following table sets forth information concerning option exercises
during fiscal year 1998 and the value of unexercised options as of December 31,
1998 held by the executives named in the Summary Compensation Table above.
32
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
Number of Value of
Unexercised Unexercised,In-the-
Options at Money Options at
December 31,1998 December 31, 1998
Shares Acquired (Exercisable/ (Exercisable/
on Exercise(#) Value Realized($) Unexercisable) Unexercisable)(1)
-------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Thomas L. Massie -0- -0- 416,667 $120,625.07
(Exercisable) (Exercisable)
533,333 $115,999.93
(Unexercisable) (Unexercisable)
Christopher P. Ricci -0- -0- 0 (Exercisable) $ 0 (Exercisable)
125,000 $27,187.51
(Unexercisable) (Unexercisable)
Brett Moyer -0- -0- 83,334 $18,125.15
(Exercisable) (Exercisable)
266,666 $57,999.86
(Unexercisable) (Unexercisable)
Richard J. O'Connell -0- -0- 70,000 $14,875.00
(Exercisable) (Exercisable)
130,000 $ 27,625.00
(Unexercisable) (Unexercisable)
Thomas Hamilton -0- -0- 53,333 $11,599.93
(Exercisable) (Exercisable)
51,667 $11,237.57
(Unexercisable) (Unexercisable)
- -------------------------------------
<FN>
(1) Value is based on the difference between option exercise price and the fair-market value at December 31,
1998 ($1.4375 per share, the closing price as quoted on the NASDAQ SmallCap Market at the close of
trading on December 31, 1998) multiplied by the number of shares underlying the option.
</FN>
</TABLE>
Employment Agreements
The Company and Thomas L. Massie are parties to an Employment Contract
effective January 1, 1992, as amended to date, which renews automatically such
that it is always effective for a period of three years, subject to certain
termination provisions. This Employment Contract includes a one-year
non-competition provision following termination of employment. Pursuant to this
Employment Contract, Mr. Massie serves as Chairman of the Board, President and
Chief Executive Officer of the Company. This Employment Contract requires a
lump-sum severance payment to Mr. Massie of three times his aggregate
compensation or allowances then in effect if Mr. Massie is terminated without
cause during the term of the contract. In addition, the vesting of all options
held by Mr. Massie shall be accelerated so as to be immediately exercisable. The
Employment Contract provides for bonuses as determined by the Board of Directors
and employee benefits, including health and disability insurance, in accordance
with the Company's policies.
33
<PAGE>
The Company and Brett Moyer are parties to an Employment Contract
effective May 15, 1997, as amended to date, which renews automatically after
December 31, 1999, for one year terms, subject to certain termination
provisions. Pursuant to this Employment Contract, Mr. Moyer serves as Vice
President of Pro AV Sales. This Employment Contract requires the vesting of all
options held by Mr. Moyer shall be accelerated so as to be immediately
exercisable if Mr. Moyer is terminated without cause during the term of the
contract. The Employment Contract provides for bonuses as determined by the
Board of Directors and employee benefits, including health and disability
insurance, in accordance with the Company's policies.
The Company and Christopher P. Ricci are parties to an Employment
Contract effective March 1, 1999, as amended to date, which renews automatically
after December 31, 2000, for one year terms, subject to certain termination
provisions. Pursuant to this Employment Contract, Mr. Ricci serves as Senior
Vice President and General Counsel of the Company. This Employment Contract
requires the vesting of all options held by Mr. Ricci shall be accelerated so as
to be immediately exercisable if Mr. Ricci is terminated without cause during
the term of the contract. The Employment Contract provides for bonuses as
determined by the Board of Directors and employee benefits, including health and
disability insurance, in accordance with the Company's policies.
The Company and Steven Morton are parties to an Employment Contract
effective October 17, 1996, as amended to date, which renews automatically after
December 31, 1999, for one year terms, subject to certain termination
provisions. Pursuant to this Employment Contract, Mr. Morton serves as Vice
President of Engineering. This Employment Contract requires the vesting of all
options held by Mr. Morton shall be accelerated so as to be immediately
exercisable if Mr. Morton is terminated without cause during the term of the
contract. The Employment Contract provides for bonuses as determined by the
Board of Directors and employee benefits, including health and disability
insurance, in accordance with the Company's policies.
The Company and Thomas Hamilton are parties to an Employment Contract
effective October 17, 1996, as amended to date, which renews automatically after
December 31, 1998, for one year terms, subject to certain termination
provisions. Pursuant to this Employment Contract, Mr. Hamilton serves as Vice
President of Research & Development. This Employment Contract requires the
vesting of all options held by Mr. Hamilton shall be accelerated so as to be
immediately exercisable if Mr. Hamilton is terminated without cause during the
term of the contract. The Employment Contract provides for bonuses as determined
by the Board of Directors and employee benefits, including health and disability
insurance, in accordance with the Company's policies.
The Company and Richard O'Connell are parties to an Employment Contract
effective January 1, 1996, as amended to date, which renews automatically after
December 31, 1999, for one year terms, subject to certain termination
provisions. Pursuant to this Employment Contract, Mr. O'Connell serves as Vice
President of Consumer Sales. This Employment Contract requires the vesting of
all options held by Mr. O'Connell shall be accelerated so as to be immediately
exercisable if Mr. O'Connell is terminated without cause during the term of the
contract. The Employment Contract provides for bonuses as determined by the
Board of Directors and employee benefits, including health and disability
insurance, in accordance with the Company's policies.
The Company and Gary M. Cebula are parties to an Employment Contract
effective April 1, 1998, as amended to date, which renews automatically after
December 31, 1999, for one year terms, subject to certain termination
provisions. Pursuant to this Employment Contract, Mr. Cebula serves as Vice
President of Finance & Administration. This Employment Contract requires the
vesting of all options held by Mr. Cebula shall be accelerated so as to be
immediately exercisable if Mr. Cebula is terminated without cause during the
term of the contract. The Employment Contract provides for bonuses as determined
by the Board of Directors and employee benefits, including health and disability
insurance, in accordance with the Company's policies.
34
<PAGE>
The Company and J. Steven Wood are parties to an Employment Contract
effective August 1, 1998, as amended to date, which renews automatically on a
month-to-month basis after July 30, 2001, subject to certain termination
provisions. Pursuant to this Employment Contract, Mr. Wood serves as Vice
President of Pro AV Engineering. This Employment Contract requires the vesting
of all options held by Mr. Wood shall be accelerated so as to be immediately
exercisable if Mr. Wood is terminated without cause during the term of the
contract. The Employment Contract provides for bonuses as determined by the
Board of Directors and employee benefits, including health and disability
insurance, in accordance with the Company's policies.
Compensation of Directors
Directors of the Company receive no direct cash compensation for their
services as directors. In 1998, the Company paid Union Atlantic L.C. $155,652
for marketing consulting services rendered, agency services, and standard
business expenses in connection with the Company's acquisition of PC Video.
Timothy Mahoney, who is a Focus Director, is a partner of Union Atlantic.
On March 19, 1997, the Board of Directors elected to terminate the 1995
Directors Plan and all options granted thereunder. By a unanimous vote of the
Directors, the Board established the 1997 Directors Plan and authorized the
grant of options to purchase up to 1,000,000 shares of Common Stock under the
plan. On March 19, 1997, options to purchase 200,000 shares at an exercise price
of $1.88 per share were granted to Mr. Cavalier, options to purchase 100,000
shares at an exercise price of $1.88 per share were granted to each of Messrs.
Coldrick and Mahoney and options to purchase 50,000 shares at an exercise price
of $1.88 per share were granted to a now former director. All of the options are
subject to various vesting provisions.
On September 1, 1998, the Board of Directors approved the re-pricing of
all of the aforementioned options granted to current directors (totaling options
to purchase 400,000 shares) to a price of $1.22 per share, the fair-market value
on the date of such re-pricing.
On September 1, 1998, the Board of Directors approved the 1998
Non-qualified Stock Option (NQSO) Plan. The 1998 NQSO Plan authorized the grant,
subject to approval by the Company's stockholders, on September 1, 1998 of stock
options for 75,000 shares of Common Stock to each of Mr. Mahoney and Mr.
Coldrick and for 100,000 shares to Mr. Cavalier, each of whom is neither an
employee nor officer of the Company. Each of Mr. Massie and Mr. Wood also
received a grant, subject to approval by the Company's stockholders, of 200,000
shares under the 1998 NQSO Plan. Mr. Moyer received a grant, subject to approval
by the Company's stockholders, of 100,000 shares under the 1998 NQSO Plan. All
such options have an exercise price of $1.22, the fair-market value on the date
of grant. Upon joining the Board of Directors on February 22, 1999, Dr. Eimers
was granted, subject to approval by the Company's stockholders, a stock option
of 100,000 shares of Common Stock under the 1998 NQSO Plan at an exercise price
of $1.0625, the fair-market value on the date of grant. Upon joining the Board
of Directors on April 22, 1999, Mr. Dambrackas was granted, subject to approval
by the Company's stockholders, a stock option of 100,000 shares of Common Stock
at an exercise price of $1.4063, the fair-market value on the date of grant.
35
<PAGE>
The Company maintains the right to reprice options that it may grant
under its existing stock option plans. On September 1, 1998, the Company
repriced all employee and director options under all plans to $1.22 per share
for those options priced in excess of this value. This price represented the
closing market price of the Company's common stock on September 1, 1998. On
February 22, 1999, the Company repriced all employee options under all plans to
$1.0625 per share for all options priced in excess of this amount. This price
represented the closing market price of the Company's common stock on February
22, 1999.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock on April 22, 1999 by (i) each
person known to the Company who beneficially owns 5% or more of the 18,005,090
outstanding shares of its Common Stock, (ii) each director of the Company, (iii)
each executive officer identified in the Summary Compensation Table above, and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated below, to the knowledge of the Company, all persons listed
below have sole voting and investment power with respect to their shares of
Common Stock, except to the extent authority is shared by spouses under
applicable law.
<TABLE>
<CAPTION>
Amount of Beneficial Ownership
------------------------------
Name and Address of Beneficial Owner Number of Shares Percent(1)
- ------------------------------------ ---------------- ----------
<S> <C> <C>
Thomas L. Massie (2) 1,019,648 5.66
John C. Cavalier (3) 227,185 1.26
William B. Coldrick (4) 334,292 1.86
Timothy E. Mahoney (5) 79,667 *
Dr. Robert C. Eimers (6) 0 *
William Dambrackas (7) 0 *
Christopher P. Ricci (8) 33,334 *
Gary M. Cebula (9) 19,667 *
Brett A. Moyer (10) 178,667 *
Thomas Hamilton (11) 128,975 *
Steve R. Morton (12) 127,975 *
Steven Wood (13) 132,796 *
Richard J. O'Connell (14) 115,171 *
William R. Schillhammer III (15) 24,000 *
All officers and directors as a group (14 persons)(16) 2,421,377 13.45
- -------------------------------------
<FN>
* Less than 1% of the outstanding Common Stock.
(1) Unless otherwise indicated, each person possesses sole voting and investment power
with respect to the shares.
(2) Includes 72,821 shares of Common Stock held by Mr. Massie's wife and children. Also
includes 583,333 shares issuable pursuant to stock options exercisable at April 30,
1999 or within 60 days thereafter but excludes 366,667 shares issuable pursuant to
outstanding stock options that are not currently exercisable.
36
<PAGE>
(3) Includes 9,519 shares of Common Stock held in trust for Mr. Cavalier. Also includes
216,666 shares issuable pursuant to stock options exercisable at April 30, 1999, or
within 60 days thereafter. Excludes 108,334 shares issuable pursuant to outstanding
stock options that are not currently exercisable.
(4) Includes 7,369 shares of Common Stock held in escrow. Also includes 316,667 shares of
Common Stock issuable pursuant to outstanding stock options exercisable at April 30,
1999, or within 60 days thereafter. Excludes 108,333 shares of Common Stock issuable
pursuant to outstanding stock options that are not currently exercisable.
(5) Includes 76,667 shares issuable pursuant to stock options exercisable at April 30,
1999, or within 60 days thereafter. Does not include 108,333 shares issuable pursuant
to outstanding stock options that are not exercisable at April 30, or within 60 days
thereafter.
(6) Does not include 100,000 shares issuable pursuant to outstanding stock options that
are not exercisable at April 30, 1999, or within 60 days thereafter.
(7) Does not include 100,000 shares issuable pursuant to outstanding stock options that
are not exercisable at April 30, 1999, or within 60 days thereafter.
(8) Includes 33,334 shares issuable pursuant to stock options exercisable at April 30,
1999, or within 60 days thereafter. Does not include 116,666 shares issuable pursuant
to outstanding stock options that are not exercisable at April 30, 1999, or within 60
days thereafter.
(9) Includes 16,667 shares issuable pursuant to stock options exercisable at April 30,
1999, or within 60 days thereafter. Does not include 58,333 shares issuable pursuant
to outstanding stock options that are not exercisable at April 30, 1999, or within 60
days thereafter.
(10) Includes 166,667 shares issuable pursuant to stock options exercisable at April 30,
1999, or within 60 days thereafter. Does not include 183,333 shares issuable pursuant
to outstanding stock options that are not exercisable at April 30, 1999, or within 60
days thereafter.
(11) Includes 14,400 shares of Common Stock held by Mr. Hamilton's children. Includes
53,333 shares issuable pursuant to stock options exercisable at April 30, 1999, or
within 60 days thereafter. Does not include 76,667 shares issuable pursuant to
outstanding stock options that are not exercisable at April 30, 1999, or within 60
days thereafter.
(12) Includes 53,333 shares issuable pursuant to stock options exercisable at April 30,
1999, or within 60 days thereafter. Does not include 76,667 shares issuable pursuant
to outstanding stock options that are not exercisable at April 30, 1999, or within 60
days thereafter.
(13) Includes 122,796 shares owned by a corporation of which Mr. Wood is the sole
shareholder. Does not include 200,000 shares issuable pursuant to outstanding stock
options that are not exercisable at April 30, 1999, or within 60 days thereafter.
(14) Includes 110,000 shares issuable pursuant to stock options exercisable at April 30,
1999, or within 60 days thereafter. Does not include 90,000 shares issuable pursuant
to outstanding stock options that are not exercisable at April 30, 1999, or within 60
days thereafter.
(15) Includes 20,000 shares issuable pursuant to stock options exercisable at April 30,
1999, or within 60 days thereafter. Does not include 117,000 shares issuable pursuant
to outstanding stock options that are not exercisable at April 30, 1999, or within 60
days thereafter.
(16) Includes 1,176,319 shares of Common Stock. Also includes 1,621,667 shares issuable
pursuant to options and warrants to purchase Common Stock exercisable at April 30,
1999, or within 60 days thereafter.
</FN>
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, the Company paid Union Atlantic L. C. $155,652 for marketing
consulting services rendered, agency services and standard business expenses in
connection with the Company's acquisition of PC Video. Timothy Mahoney, who is a
FOCUS director, is a partner of Union Atlantic.
37
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
The following exhibits, required by Item 601 of Regulation SB, are filed as a
part of this Annual Report on Form 10KSB or are incorporated by reference to
previous filings as indicated by the footnote immediately following the exhibit.
Exhibit numbers, where applicable, in the left column correspond to those of
Item 601 of Regulation SB.
Exhibit Item No. Item and Description
1.4 Form of Stock Escrow Agreement (1)
2.1 Agreement of Merger, dated April 12, 1993, between FOCUS
Enhancement, Inc., a Massachusetts corporation, and the
Company (1)
2.2 Certificate of Merger, as filed with the Delaware Secretary of
State on April 12, 1993 (1)
2.3 Articles of Merger, as filed with the Massachusetts Secretary
of State on April 14, 1993 (1)
2.4 Agreement and Plan of Reorganization and Merger between the
Company, FOCUS Acquisition Corporation and Lapis Technologies,
Inc. dated as of November 29, 1993 (2)
3.1 Second Restated Certificate of Incorporation of the Company
(1)
3.2 Certificate of Amendment to Second Restated Certificate of
Incorporation of the Company (3)
3.3 Restated Bylaws of the Company (1)
4.1 Specimen certificate for Common Stock of the Company (1)
4.2 Specimen certificate for Redeemable Common Stock Purchase
Warrant (1)
4.3 Form of Warrant Agreement between the Company, Mellon
Securities Trust Company and Thomas James Associates, Inc. (1)
4.4 Form of Warrant issued to Thomas James Associates, Inc. (1)
10.1 Amended and Restated Employment Contract between the Company
and a Corporate Officer, effective January 1, 1992 (1)
10.2 1992 Stock Option Plan, as amended (4)
10.3 Form of Incentive Stock Option Agreement, as amended, under
the 1992 Stock Option Plan, as amended (1)
10.4 Form of NonQualified Stock Option Agreement, as amended, under
the 1992 Stock Option Plan, as amended (1)
10.5 1993 NonEmployee Director Stock Option Plan (4)
10.6 Form of NonQualified Stock Option Agreement under the 1993
NonEmployee Director Stock Option Plan (4)
38
<PAGE>
10.7 Credit Agreement between the Company, Lapis and Silicon Valley
Bank dated January 20, 1994 (4)
10.8 Promissory Note in the principal amount of $2,000,000, dated
as of January 20, 1994, made by the Company and Lapis to the
order of Silicon Valley Bank (4)
10.9 Security Agreement, dated as of January 20, 1994, by the
Company in favor of Silicon Valley Bank (4)
10.10 Security Agreement, dated as of January 20, 1994, by Lapis in
favor of Silicon Valley Bank (4)
10.11 Pledge Agreement, dated as of January 20, 1994, by the Company
in favor of Silicon Valley Bank (4)
10.12 Purchase and Sale Agreement, dated as of May 25, 1994, between
the Company and Inline Software, Inc. (5)
10.13 Master Purchase Agreement, dated as of August 12, 1994,
between the Company and Apple Computer, Inc. (5)
10.14 Forbearance Letter, dated as of October 6, 1994, to the
Company from Silicon Valley Bank (5)
10.15 Note and Warrant Subscription Agreement, dated as of October
18, 1994, between the Company and a Private Lender (5)
10.16 Security Agreement, dated as of October 18, 1994, between the
Company and a Private Lender (5)
10.17 Term Line of Credit Note, dated October 18, 1994, by the
Company in favor of a Private Lender (5)
10.18 Warrant WK issued to a Private Lender, dated as of October 18,
1995 (5)
10.19 Intercreditor and Subordination Agreement, dated as of October
18, 1994, by and between the Company, a Private Lender and
Silicon Valley Bank (5)
10.20 Debt Extension Agreement, dated as of February 22, 1995, by
and between the Company and a Private Lender (5)
10.21 1995 NonEmployee Director Stock Plan (7)
10.22 Form of NonQualified Stock Option Agreement under the 1995
NonEmployee Director Stock Plan (6)
10.23 Form of Settlement Agreement between the Company and Lapis
Technologies, Inc. Shareholders (7)
10.24 Manufacturing Agreement between the Company and a manufacturer
(7)
10.25 Loan Document Modification Agreement dated as of April 5, 1996
by and between the Company, Lapis Technologies, Inc. and
Silicon Valley Bank (8)
10.26 Amended and Restated Promissory Note dated as of April 5, 1996
in favor of Silicon Valley Bank (8)
39
<PAGE>
10.27 Amendment No. 2 to the Note and Warrant Subscription Agreement
dated as of June 28, 1996 between the Company and a Private
Lender (8)
10.28 Amended and Restated Term Line of Credit Note dated as of June
28, 1996 in favor of a Private Lender (8)
10.29 Security Agreement dated as of June 28, 1996 between the
Company and a Private Lender (8)
10.30 Warrant W96/6, dated June 28, 1996, issued to a Private Lender
(8)
10.31 Agreement dated as of June 28, 1996 between the Company and a
manufacturer (8)
10.32 Security Agreement dated as of June 28, 1996 between the
Company and a manufacturer (8)
10.33 Amendment to Master Purchase Agreement between the Company and
TV OEM. (10)
10.34 Lease Agreement between the Company and Cummings Properties
for the facility at 142 North Road, Sudbury, Massachusetts
(10)
10.35 Agreement of Plan of Merger dated September 30, 1996, by and
among the Company, FOCUS Acquisition Corp., and TView, Inc.
(9)
10.36 Form of Stock Subscription Agreement between the Company and
various investors in the December 95 Offering (11)
10.37 Form of Amendment No. 1 to Stock Subscription Agreement dated
April 1996 between the Company and various investors in the
December 95 Offering (11)
10.38 Form of Warrant issued to various investors pursuant to
Amendment No. 1 (11)
10.39 Form of Subscription Agreement between the Company and various
investors in the March 97 Offering (11)
10.40 Form of Warrant issued to the placement agent in the March 97
Offering (11)
10.41 1997 Director Stock Option Plan (12)
10.42 Form of Director Stock Option Agreement (12)
10.43 Key Officer NonQualified Stock Option Agreement for a
Corporate Officer (12)
10.44 Key Officer NonQualified Stock Option Agreement for a
Corporate Officer (12)
10.45 Key Officer NonQualified Stock Option Agreement for a
Corporate Officer (12)
10.46 Subscription Agreement between the Company and Smith Barney
Fundamental Value Fund, Inc. dated September 8, 1997 (13)
10.47 Form of Warrant dated September 10, 1997 issued to designees
of the placement agent (13)
10.48 Lease by Wakefield Ready Mixed Concrete Co., Inc. to FOCUS
Enhancements, Inc. dated December 1, 1998
11 Statement re Computation of Earnings [Loss] Per Share
40
<PAGE>
21 Subsidiaries of the Company
23 Consent of Wolf & Company P.C., Independent Accountants
27 Financial Data Schedule for year ended December 31, 1998
- ----------
1 Filed as an exhibit to the Company's Registration Statement on Form SB2,
No. 3360248B, and incorporated herein by reference.
2 Filed as an exhibit to the Company's Current Report on Form 8K dated
November 29, 1993, and incorporated herein by reference.
3 Filed as an exhibit to the Company's Form 10QSB for the period ended
September 30, 1995, and incorporated herein by reference.
4 Filed as an exhibit to the Company's Form 10KSB for the year ended December
31, 1993, and incorporated herein by reference.
5 Filed as an exhibit to the Company's Form 10KSB for the year ended December
31, 1994, and incorporated herein by reference.
6 Filed as an exhibit to the Company's Registration Statement on Form S8, No.
3380651, filed with the Commission on December 19, 1995, and incorporated
herein by reference.
7 Filed as an exhibit to the Company's Registration Statement on Form SB2,
No. 3380033, and incorporated herein by reference.
8 Filed as an exhibit to the Company's Form 10QSB for the period ended June
30, 1995, and incorporated herein by reference.
9 Filed as an exhibit to the Company's Form 8K dated November 4, 1996.
10 Filed as an exhibit to the Company Form 10KSB for the year ended December
31, 1995 and incorporated herein by reference.
11 Filed as an exhibit to the Company's Registration Statement on Form S3, No.
33326911, filed with the Commission on May 12, 1997, and incorporated
herein by reference.
12 Filed as an exhibit to the Company's Registration Statement on Form S8, No.
33333243, filed with the Commission on August 8, 1997, and incorporated
herein by reference.
13 Filed as an exhibit to the Company's Form 8K dated September 10, 1997.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fiscal quarter ended
December 31, 1998.
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FOCUS Enhancements, Inc. Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of FOCUS
Enhancements, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FOCUS
Enhancements, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ WOLF & COMPANY, P.C.
WOLF & COMPANY, P.C.
Boston, Massachusetts
April 9, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,128,380 $ 719,851
Certificate of deposit 253,067 --
Securities available for sale 248,983 595,000
Accounts receivable, net of allowances of $649,987 and $820,998 at December 31,
1998 and 1997, respectively 2,553,139 5,538,132
Inventories 5,948,624 3,989,604
Prepaid expenses and other current assets 217,092 470,907
------------ ------------
Total current assets 10,349,285 11,313,494
Property and equipment, net 1,272,477 1,068,918
Other assets, net 304,498 288,482
Goodwill, net 810,673 1,249,750
------------ ------------
Total assets $ 12,736,933 $ 13,920,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 702,057 $ 2,220,000
Current portion of long-term debt 283,180 --
Obligations under capital leases 119,536 102,320
Accounts payable 5,999,694 5,515,913
Accrued liabilities 1,810,025 855,961
------------ ------------
Total current liabilities 8,914,492 8,694,194
Deferred income 84,212 84,212
Obligations under capital leases, noncurrent 321,760 73,855
Long-term debt, net of current portion 538,597 --
------------ ------------
Total liabilities 9,859,061 8,852,261
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 25,000,000 shares authorized, 18,005,090 and 180,051 140,102
14,010,186 shares issued and outstanding at December 31, 1998 and 1997,
respectively
Additional paidin capital 38,913,304 27,339,892
Accumulated deficit (35,198,935) (22,411,611)
Note receivable, common stock (316,418) --
Treasury stock at cost, 450,000 shares (700,130) --
------------ ------------
Total stockholders' equity 2,877,872 5,068,383
------------ ------------
Total liabilities and stockholders' equity $ 12,736,933 $ 13,920,644
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-2
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
------------------------
1998 1997
---- ----
Net sales $ 18,440,226 $ 21,026,011
Cost of goods sold 15,410,912 15,091,641
------------ ------------
Gross profit 3,029,314 5,934,370
------------ ------------
Operating expenses:
Sales, marketing and support 6,901,546 4,647,657
General and administrative 2,166,352 1,973,502
Research and development 1,698,977 1,112,487
Depreciation and amortization expense 1,499,496 425,989
Impairment of goodwill 3,053,880 --
------------ ------------
Total operating expenses 15,320,251 8,159,635
------------ ------------
Loss from operations (12,290,937) (2,225,265)
Interest expense, net (225,802) (266,095)
Loss on securities available for sale (346,017) --
Other income, net 100,073 510,378
------------ ------------
Loss before income taxes (12,762,683) (1,980,982)
Income tax expense 24,641 5,097
------------ ------------
Net loss $(12,787,324) $ (1,986,079)
============ ============
Loss per common share:
Basic $ (0.78) $ (0.16)
============ ============
Diluted $ (0.78) $ (0.16)
============ ============
Weighted average common shares outstanding:
Basic 16,336,872 12,727,934
============ ============
Diluted 16,336,872 12,727,934
============ ============
The accompanying notes are an integral part of the
consolidatedfinancial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 and 1997
Common Stock Note Total
------------------- Additional Accumulated Receivable, Treasury Stockholders'
Shares Amount Paid-in Capital Deficit Common Stock Stock Equity
------ ------ --------------- ------- ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 11,301,845 $ 113,018 $ 21,285,037 $ (20,425,532) $ -- $ -- $ 972,523
Issuance of common stock 315,160 3,152 501,287 -- -- 504,439
upon exercise of stock --
options and warrants
Issuance of common stock 2,393,181 23,932 5,553,568 -- -- 5,577,500
from private offerings, net --
of issuance cost of
$359,431
Net loss -- -- -- (1,986,079) -- -- (1,986,079)
---------- --------- ------------ ------------ ---------- --------- ----------
Balance at December 31, 1997 14,010,186 140,102 27,339,892 (22,411,611) -- -- 5,068,383
Issuance of common stock 2,429,958 24,299 7,296,082 (316,418) -- 7,003,963
upon exercise of stock --
options and warrants
Issuance of common stock 1,092,150 10,922 2,816,433 -- -- -- 2,827,355
from private offerings, net
of issuance costs of
$172,645
Issuance of common stock 472,796 4,728 1,460,897 -- -- -- 1,465,625
for acquisitions of Digital
Vision, Inc. and PC Video
Conversion, Inc.
Purchase of treasury stock -- -- -- -- -- (700,130) (700,130)
Net loss -- -- -- (12,787,324) -- -- (12,787,324)
---------- ----------- ------------ ----------- ---------- ------------ -----------
Balance at December 31, 1998 18,005,090 $180,051 $ 38,913,304 $(35,198,935) $ (316,418) $ (700,130) $2,877,872
========== =========== ============ ============ ========== ============ ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
Cash flows from operating activities: 1998 1997
---- ----
<S> <C> <C>
Net loss $(12,787,324) $ (1,986,079)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,499,496 425,989
Amortization of discount on note payable 17,696 --
Gain on settlement of accounts payable -- (244,176)
Securities received on sale of networking assets -- (595,000)
Deferred income -- 84,212
Loss on securities available for sale 346,017 --
Write down of impaired goodwill 3,053,880 --
Changes in operating assets and liabilities, net of the effects of acquisitions;
(Increase) decrease in accounts receivable 3,324,750 (2,324,567)
Decrease (increase) in inventories (1,587,185) (2,014,223)
Decrease (increase) in prepaid expenses and other assets 237,799 (405,559)
Increase (decrease) in accounts payable 386,892 2,175,805
Increase (decrease) in accrued liabilities 916,044 227,657
------------ ------------
Net cash used in operating activities (4,591,935) (4,655,941)
------------ ------------
Cash flows from investing activities:
Increase in certificate of deposit (253,067) --
Purchase of property and equipment (858,011) (653,926)
Cash paid in acquisitions, net of cash received (930,563) --
------------ ------------
Net cash used in investing activities (2,041,641) (653,926)
------------ ------------
Cash flows from financing activities:
Payments on notes payable and long-term debt (1,953,900) (297,458)
Payments under capital lease obligations (135,183) (168,657)
Payments for purchase of treasury stock (700,130) --
Net proceeds from private offerings of common stock 2,827,355 5,577,500
Net proceeds from exercise of common stock options and warrants 7,003,963 504,439
------------ ------------
Net cash provided by financing activities 7,042,105 5,615,824
------------ ------------
Net increase in cash and cash equivalents 408,529 305,957
Cash and cash equivalents at beginning of year 719,851 413,894
------------ ------------
Cash and cash equivalents at end of year $ 1,128,380 $ 719,851
============ ============
F-5
<PAGE>
Supplemental Cash Flow Information:
Interest paid $ 200,129 $ 153,549
Income taxes paid 5,020 5,414
Equipment acquired under capital leases 400,304 140,034
</TABLE>
Sale of networking assets (Note 7)
Supplemental schedule of non-cash 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 (liabilities) 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)
=============
On July 29, 1998, the Company purchased certain assets and assumed certain
liabilities of PC Video Conversion Inc. as follows:
Fair value of tangible assets acquired $ 613,336
Fair value of liabilities assumed (80,367)
-----------
Fair value of net assets acquired 532,969
Common stock issued (350,000)
Cash paid (700,000)
Note payable (910,085)
Acquisition costs (229,781)
-----------
Excess of cost over fair value of net assets acquired $(1,656,897)
============
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business of the Company. FOCUS Enhancements, Inc. (the "Company" or
"FOCUS") is involved in the development and marketing of proprietary PC-to-TV
convergence products for Windows(TM) and Mac(TM) OS based personal computers.
The Company's products, which are sold globally through original equipment
manufacturers (OEM's) and resellers, merge computer generated graphics and
television displays for presentations, training, education, video
teleconferencing, Internet viewing and home gaming markets. Based on a targeted
product plan and its experience in video conversion technology, FOCUS has
developed a strategy to play a major role in the PC-to-TV convergence industry.
Over 90% of the components for the Company's products are manufactured
on a turnkey basis by two vendors, Pagg Corporation and Asia ITN Corporation. In
the event that these vendors were to cease supplying the Company, management
believes that alternative turnkey manufacturers for the Company's products could
be secured. However, the Company would most likely experience short-term delays
in the shipments of its products.
The personal computer enhancements market is characterized by extensive research
and development and rapid technological change resulting in product life cycles
of nine to eighteen months. Development by others of new or improved products,
processes or technologies may make the Company's products or proposed products
obsolete or less competitive. Management believes it necessary to devote
substantial efforts and financial resources to enhance its existing PC-to-TV
products and to develop new products. There can be no assurance that the Company
will succeed with these efforts.
Basis of Presentation. The consolidated financial statements include
the accounts of the Company and its whollyowned subsidiaries PC Video
Conversion, Inc., Lapis Technologies, Inc., TView, Inc., and FOCUS Enhancements
B.V. (a Netherlands corporation). 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. On July 29,
1998, the Company acquired certain assets and assumed certain liabilities of PC
Video Conversion, Inc. in a transaction accounted for under the purchase method
of accounting. All intercompany accounts and transactions have been eliminated
upon consolidation.
The results of operations of Digital Vision, Inc. have been included in
the accompanying consolidated financial statements since April 1, 1998. The
results of operations of PC Video Conversion, Inc. have been included in the
accompanying consolidated financial statements since July 29, 1998. The
following unaudited pro forma information presents a summary of the consolidated
results of operations of the Company as if the acquisitions had occurred at the
beginning of the periods presented.
Years Ended December 31,
------------------------
1998 1997
---- ----
Net sales $ 20,023,000 $ 24,098,000
Loss from operations (11,753,700) (1,797,000)
Net loss (12,254,500) (1,559,300)
Net loss per common share
Basic $ (.73) $ (.12)
Diluted $ (.73) $ (.12)
F-7
<PAGE>
Use of Estimates. The process of preparing financial statements in
conformity with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues and expenses. Actual results may differ from estimated amounts.
Significant estimates used in preparing these financial statements related to
accounts receivable allowances, stock balancing allowances, inventory valuation,
deferred tax asset valuation and the recoverability of goodwill related to
acquisitions. It is at least reasonably possible that the estimates will change
within the next year.
Financial Instruments. The carrying amounts reflected in the
consolidated balance sheets for cash, receivables and accounts payable
approximate the respective fair values due to the shortterm maturity of these
instruments. Notes payable and long-term debt approximate the respective fair
values as these instruments bear interest at terms that would be available
through similar transactions with other third parties. The fair value of
securities available for sale are based on the quoted market prices.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Securities Available for Sale. Securities available for sale consist of
marketable equity securities carried at fair value, with unrealized gains and
losses reported as a separate component of stockholders' equity. Declines in the
fair value of securities available for sale below their cost that are deemed to
be other than temporary are reflected in operations as realized losses.
Revenue Recognition. Revenue from product sales is recognized when
products are shipped. Revenue from sales to distributors may be subject to
agreements allowing rights of return and price protection. The Company provides
allowances for potential uncollectible amounts, estimated stock balancing and
future returns, exchanges and price protection credits.
Concentration of Credit Risk. As of December 31, 1998, a major
distributor represented approximately 14% of the Company's accounts receivable,
a major retailer represented approximately 13% of the Company's accounts
receivable and a major television manufacturer customer represented
approximately 20% of the Company's accounts receivable. As of December 31, 1997,
the same major distributor, represented approximately 35% of the Company's
accounts receivable, and a major television manufacturer customer represented
approximately 12% of the Company's accounts receivable. The Company provides
credit to customers in the normal course of business with terms generally
ranging between 30 to 90 days. The Company does not usually require collateral
for trade receivables, but attempts to limit credit risk through its customer
credit evaluation process.
Inventories. Inventories are stated at the lower of cost or market
value using the firstin, firstout method, but not in excess of net realizable
value. The Company periodically reviews its inventories for potential slow
moving or obsolete items and provides valuation allowances for specific items,
as appropriate.
Property and Equipment. Property and equipment are recorded at cost and
depreciated using the straightline method over the estimated useful lives of the
related assets as set forth below. Equipment leased under capital leases is
stated at the present value of future lease obligations and is amortized over
estimated useful lives.
Category Depreciation Period
- -------- -------------------
Equipment 3 years
Furniture and fixtures 5 years
Tooling and dies 1-2 years
Purchased software 1-3 years
Leasehold improvements Lesser of 5 years or the term of the lease
F-8
<PAGE>
Goodwill. Goodwill resulting from business combinations is amortized on
a straightline basis over periods ranging from five to seven years. The Company
evaluates the net realizable value of goodwill periodically based on a number of
factors including operating results, business plans, budgets and economic
projections. The Company's evaluation also considers nonfinancial data such as
market trends, customer relationships, product development cycles and changes in
management's market emphasis.
Advertising and Sales Promotion Costs. Advertising and sales promotion
costs are expensed as incurred. Advertising expense was approximately $3,309,000
and $1,715,000 for the years ended December 31, 1998 and 1997, respectively.
Research and Development. Research and development costs are expensed
as incurred.
Product Warranty Costs. The Company's warranty period for its products
is generally one to three years. Estimated future costs for initial product
warranties are not material.
Income Taxes. Deferred taxes are determined based on the differences
between the financial statement and tax basis carrying amounts of assets and
liabilities, using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are provided if, based
upon the weight of available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
Foreign Currency Translation. The functional currency of the Company's
foreign subsidiary, FOCUS Enhancements, B.V., is its local currency, the Gilder.
Financial statements are translated into U.S. dollars using the exchange rates
at each balance sheet date for assets and liabilities and using a weighted
average exchange rate for each period for revenue, expenses, gains and losses.
Foreign exchange gains or losses, which are not material, are recognized in
income for the years presented.
Stock Compensation Plans. In 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for StockBased Compensation." This statement encourages all
entities to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the fair value of the award which is recognized over the service
period, which is usually the vesting period. However, it also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under the Company's stock option
plan have no intrinsic value at the grant date, accordingly, under APB Opinion
No. 25, no compensation cost is recognized. The Company has elected to continue
with the accounting prescribed in APB Opinion No. 25 and, as a result, must make
pro forma disclosures of net income and earnings per share and other disclosures
as if the fair value based method of accounting had been applied.
Net Income (Loss) Per Share. In February 1997, FASB issued 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 weightedaverage 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 years ended December 31, 1998 and 1997, options and warrants
applicable to 4,937,645 shares and 6,681,903 shares, respectively were
antidilutive and excluded from the diluted earnings per share computation.
F-9
<PAGE>
Recent Accounting Pronouncements. 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 availableforsale securities
and foreign currency items, 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 paidincapital in the equity
section of the balance sheet. The Company adopted these disclosure requirements
beginning in the first quarter of 1998. There was no accumulated comprehensive
income at December 31, 1998 and 1997.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its generalpurpose financial statements, and changes in the
measurement of segment amounts from period to period.
The FASB has issued a proposed interpretive release, Stock Compensation -
Interpretation of Opinion 25 (Interpretation). The Interpretation will provide
accounting guidance on several issues that are not specifically addressed in
Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to
Employees. Two of the issues discussed in the Interpretation could result in
significant accounting changes for many companies, the accounting for repricing
of employee stock options, and the definition of an "employee" for purposes of
applying APB No. 25.
The effective date of the proposed Interpretation would be the issuance date of
the final Interpretation (expected to be in September, 1999). If adopted, the
Interpretation would be applied prospectively, but would cover events that occur
after December 15, 1998. There would be no effect on financial statements for
the period prior to the effective date of the final interpretation.
2. Fourth Quarter of 1998
In the fourth quarter of 1998, the Company sustained a net loss of
$14,235,000. This loss was due to significant sales returns and certain year-end
adjustments made in the fourth quarter. A summary of the effect of sales returns
and the significant year-end adjustments follows:
Description Amount
- ----------- ------
Sales returns $3,455,000
Impairment loss goodwill 3,054,000
Inventory adjustments 1,929,000
Fixed asset adjustments 766,000
Price protection accruals 645,000
Write down of investment 346,000
Marketing accruals 1,480,000
F-10
<PAGE>
3. Inventories
Inventories at December 31, consist of the following:
1998 1997
---- ----
Raw materials $ 230,364 $ 685,160
Finished goods 5,718,260 3,304,444
----------- -----------
Totals $ 5,948,624 $ 3,989,604
=========== ===========
In the fourth quarter of 1998, the Company performed a detailed review of its
inventories. As a result of this review, the Company identified certain excess
and obsolete inventory items and also determined that the cost of certain
inventory items required adjustments to their estimated net realizable value. As
a result of this inventory review, the Company charged approximately $1,929,000
to expenses in the fourth quarter of 1998, thereby increasing its inventory
reserves to approximately $2,168,000 at December 31, 1998.
4. Property and Equipment
Property and equipment consist of the following at:
December 31,
------------
1998 1997
---- ----
Equipment $ 878,471 $1,478,696
Furniture and fixtures 132,522 442,749
Leasehold and improvements 134,599 179,573
Tooling and dies 492,406 548,639
Purchased software 29,100 70,632
---------- ----------
1,667,098 2,720,289
Less accumulated depreciation and
amortization 394,621 1,651,371
---------- ----------
Net book value $1,272,477 $1,068,918
========== ==========
Depreciation and amortization expense related to property and equipment
for the years ended December 31, 1998 and 1997 totaled $1,135,259 and $ 208,633,
respectively.
In the fourth quarter of 1998, the Company performed a detailed review
of its property and equipment accounts. As a result of this review, certain
assets were written off and the estimated useful lives of certain assets were
revised. The effect of these revisions and write-offs resulted in additional
depreciation expense of approximately $766,000.
5. Other Assets
Notes Receivable.
On January 5, 1996, an officer of the Company borrowed $40,000 under a
promissory note bearing interest at 8.5% per annum. This amount is in addition
to an existing $30,000 promissory note to the same officer. In November 1998,
the same officer of the Company borrowed an additional $70,000 under a
promissory note bearing interest at 8.5% per annum.
F-11
<PAGE>
Restricted Assets
As part of the Company's acquisition of TView, Inc. in September 1996, the
Company assumed a $125,000 irrevocable standby letter of credit with a bank to
secure office space in Beaverton, Oregon. During 1997, the Company placed
$125,000 in an interest bearing account at the Company's bank to secure the
letter of credit. This amount has been recorded as an other asset as of December
31, 1998 and 1997.
6. Notes Payable / Security Arrangements
Line of Credit, Bank.
As of December 31, 1998, the Company maintained a revolving line of credit with
a bank. 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 $620,000 and $720,000 at December 31, 1998 and 1997, respectively,
bear interest at the bank's prime rate plus 1% (8.75% at December 31, 1998).
Under the terms of the line of credit agreement, the Company was required to
comply with certain restrictive covenants and was in violation of certain of
these covenants at December 31, 1998. On March 31, 1999, the Company repaid all
monies owed on this line of credit with its commercial bank totaling
approximately $637,000 from proceeds received under a $2,000,000 accounts
receivable financing agreement with the same commercial bank. The agreement
allows for advances on accounts receivable not to exceed 80% of qualified
invoices. Interest is charged on the outstanding balance at a rate of the prime
lending rate plus 4.5%. Under the terms of this agreement the bank has been
issued warrants to purchase 100,000 shares of the Company's common stock at a
price of $1.70 per share. At March 31, 1999, the Company had borrowings under
this agreement of approximately $969,500.
Term Line of Credit.
On July 10, 1998, the Company paid off in full $1,500,000 to an unrelated party
under a term line of credit.
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 prime rate plus 2% (9.75 % at
December 31, 1998). The outstanding balance is payable in monthly installments,
with interest, until the loan expiration date of June 30, 1999. At December 31,
1998, the outstanding amount owed on this loan was $82,057.
Long-Term Debt.
On July 29, 1998, the Company issued a $1,000,000 note payable to a related
party in conjunction with the acquisition of PC Video providing for the payment
of principal and interest at 3.5 % over a period of 36 months. The Company
computed a discount of $89,915 on this note based on its incremental borrowing
rate. Maturities of long-term debt at December 31, 1998 are as follows:
1999 $ 283,180
2000 312,556
2001 226,041
---------
Total $ 821,777
=========
F-12
<PAGE>
Vendor Security Agreement
In June 1996, the Company entered into a security agreement with its principal
contract manufacturer and inventory supplier regarding certain amounts owed by
the Company to the supplier. At December 31, 1998 and 1997, the outstanding
amounts owed the supplier were approximately $2,375,000 and $2,533,000
respectively. The amounts owed the supplier are secured by a tertiary position
security interest in certain of the Company's assets and amounts past due bear
interest at 10.25%. There was no interest expense for the years ended December
31, 1998 and 1997.
7. Other Income
Sale of Networking Assets.
Effective September 30, 1997, the Company sold its line of computer connectivity
products to Advanced Electronic Support Products, Inc. ("AESP") for 189,701
shares of AESP common stock. Included in the sale were customer lists and the
rights to use the FOCUS networking brand name to market the product line as well
as certain of AESP's complementary products. In connection with this
transaction, the Company recorded other income in the amount of $358,288,
securities available for sale in the amount of $595,000 (discounted 15% to
reflect temporary restrictions on the common stock), and deferred income of
$84,212. In addition, the Company sold networking inventory to AESP in the
amount of $159,000 at cost. A director of the Company is also a director of
AESP. At December 31, 1998, the fair value of the securities available for sale
was $248,983. The Company recorded a loss of $346,017 on the securities
available for sale in 1998 as the decline in value was considered to be other
than temporary.
Accounts Payable.
During the year ended December 31, 1997, the Company recognized a total of
$244,176 of other income in connection with the release of selected obligations
and the reduction of certain accounts payable.
8. Commitments
Leases.
The Company leases office facilities and certain equipment under operating
leases. Under the lease agreements, the Company is obligated to pay for
utilities, taxes, insurance and maintenance. Total rent expense for the years
ended December 31, 1998 and 1997 was approximately $351,000 and $300,000,
respectively.
The Company leases certain computer and office equipment under capital leases
with fiveyear terms. The carrying values of assets under capital leases were
$496,982 and $236,301 at December 31, 1998 and 1997, respectively, which is net
of accumulated amortization of $442,901and $40,421, respectively. The cost and
net book value of capitalized leased assets are included in property and
equipment.
Minimum lease commitments at December 31, 1998 are as follows:
Capital Leases Operating Leases
-------------- ----------------
1999 $ 165,614 $ 491,607
2000 162,613 317,285
2001 114,595 254,382
2002 62,387 216,216
2003 40,449 210,660
Thereafter -- 51,984
--------- -----------
Total minimum lease payments 545,658 $ 1,542,134
========= ===========
F-13
<PAGE>
Less amounts representing interest 104,362
---------
Present value of minimum obligations 441,296
Less current portion 119,536
---------
Non-current portion $ 321,760
=========
Employment Agreements.
The Company has employment agreements with certain corporate officers. The
agreements are generally one to three years in length and provide for minimum
salary levels. These agreements include severance payments of approximately one
to three times each officer's annual compensation.
Letter of Credit.
In July, 1998, the Company entered into an agreement with a subcontractor. As
part of the agreement the Company's bank issued a $250,000 irrevocable stand-by
letter of credit to secure payment of the vendor's invoices. The Company placed
$250,000 in an interest bearing account at the Company's bank to secure the
letter of credit. This amount is recorded in current assets as of December 31,
1998.
Purchase Commitment.
The Company has agreed to purchase a minimum of $2,500,000 of cables and other
products from Advanced Electronic Support Products, Inc. ("AESP") during the
three-year period ending September 29, 2000, with a one year automatic renewal.
In return, the Company has received certain pricing commitments over the term of
the master purchase agreement. For the period October 1, 1997 through March 31,
1999, the Company purchased approximately $685,000 of products from AESP. In the
event that the Company does not purchase at least $2,500,000 of cables and other
products during the initial threeyear term of the master purchase agreement, the
Company must pay AESP an amount equal to 20% of the difference between
$2,500,000 and the aggregate amount of purchases.
9. Stockholders' Equity
Common Stock.
On March 3, 1998, the Company received 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 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. During December 1998, the investor exercised its warrants to acquire
327,645 shares for approximately $399,000.
The Company received gross proceeds of $6,146,888 as a result of the conversion
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
conversion. 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
expiration on May 27, 1998.
F-14
<PAGE>
During the year ended December 31, 1998, the Company issued at various times,
453,111 shares of common stock resulting from other exercises of options and
warrants, receiving cash and notes receivable of approximately $774,000. On June
1, 1998, the Company recorded a note receivable in the amount of $316,418 in
connection with the exercise of stock options to purchase 171,000 shares of
common stock by a former director. The note is due on demand and bears interest
at 8% due quarterly. At December 31, 1998, the note receivable has been recorded
as an offset to stockholders' equity.
On January 15, 1997, the Company sold 75,000 shares of its common stock for
gross proceeds of $138,750, in connection with a private offering to foreign
investors. This stock is unregistered and was subject to restrictions on trading
in the United States for a period of forty days. In connection with the
offering, the Company paid $26,250 to the placement agent. Net proceeds of the
private offering were approximately $112,500. On February 12, 1997, the Company
sold 218,181 shares of common stock for gross proceeds of $338,181 in connection
with a private offering to foreign investors. This stock is unregistered and was
subject to restrictions on trading in the United States for a period of forty
days. In connection with the offering, the Company incurred fees of $38,181
receiving net proceeds of $300,000.
On March 27, 1997, the Company completed a financing of $1,650,000 in gross
proceeds for the sale of 1,100,000 shares of common stock in a private placement
to unaffiliated accredited investors. The shares issued as part of this
transaction were registered through Form S3 with the Securities and Exchange
Commission on May 12, 1997. Fees and expenses associated with this offering
amounted to $55,000 yielding net proceeds of $1,595,000. In connection with this
transaction, the Board of Directors authorized the grant of warrants to the
placement agent to purchase 110,000 shares of the Company's common stock at
$1.6875 per share exercisable for a period of five years.
On September 10, 1997, the Company sold 1,000,000 shares of common stock for
$3,810,000 in gross proceeds in a private placement to Smith Barney Fundamental
Value Fund, Inc. Because the last sale price of the Company's common stock was
less than $3.00 per share for 20 consecutive trading days during the 12 month
period following the closing, the Company issued seven year warrants to purchase
333,000 shares of common stock at $3.00 per share to the investor. The shares
issued and issuable as part of this transaction were registered on a Form S3
with the Securities and Exchange Commission. Fees and expenses associated with
this offering amounted to approximately $240,000, yielding net proceeds of
$3,570,000. In connection with this transaction, the Board of Directors
authorized the grant of warrants to the placement agent to purchase 100,000
shares of the Company's common stock at $6.00 per share exercisable for a period
of five years.
During the year ended December 31, 1997, the Company issued at various times,
121,596 shares of common stock resulting from the exercise of public and private
warrants, receiving proceeds of approximately $209,700. Additionally, during the
year ended December 31, 1997, stock options to purchase 193,564 shares of common
stock were exercised for proceeds of approximately $294,700.
F-15
<PAGE>
Common Stock Purchase Warrants.
Common stock warrant activity is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ------------------------------
Grant Price Grant Price
Shares Range Shares Range
---------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Warrants outstanding at 3,715,507 $0.90 - $9.11 3,218,060 $0.90 - $9.11
beginning of year
Anti-dilution adjustment 61,237 298,910
Warrants granted 682,074 $2.75 - $4.21 323,333 $1.69 - $6.00
Warrants exercised (2,035,180) $1.22 - $3.73 (121,596) $1.69 - $1.69
Warrants canceled (1,405,309) $3.25 - $3.81 (3,200) $1.29 - $2.35
------------ ------------- ----------- -------------
Warrants outstanding at 1,018,329 $0.90 - $9.11 3,715,507 $0.90 - $9.11
end of year ============ ============= ============ =============
Warrants exercisable at 1,018,329 $0.90 - $9.11 3,657,174 $0.90 - $9.11
end of year ============ ============= ============ =============
Weighted average fair
value of warrants granted $1.25 $1.87
during the year
</TABLE>
1992 Stock Option Plan.
The Company's 1992 Stock Option Plan (the "Plan"), provides for the granting of
incentive and nonqualified options to purchase up to approximately 1,800,000
shares of common stock. Incentive stock options may be granted to employees of
the Company. Nonqualified options may be granted to employees, directors or
consultants of the Company. Incentive stock options may not be granted at a
price less than 100% (110% in certain cases) of the fairmarket value of common
stock at date of grant. Nonqualified options may not be granted at a price less
than 85% of fairmarket value of common stock at date of grant. As of December
31, 1998, all options granted under the plan were issued at market value at the
date of grant. Options generally vest annually over a threeyear period and are
exercisable over a fiveyear period from date of grant. The term of each option
under the Plan is for a period not exceeding ten years from date of grant.
During 1998 and 1997, the Board of Directors authorized reductions in the
exercise price of certain options granted under the plan to prices reflecting
the market value on the re-pricing date. As of December 31, 1998, options under
the Plan to purchase 1,494,316 shares of the Company's common stock were
outstanding with exercise prices of $1.22 to $1.34 per share.
1993 Director Stock Option Plan.
The 1993 Director Plan offers nonqualified stock options to members of the Board
of Directors who are neither employees nor officers of the Company. The 1993
Director Plan authorized the grant of options to purchase up to an aggregate of
125,000 shares of common stock. As of December 31, 1998, there were no options
outstanding under this plan.
1995 Director Stock Option Plan.
In August 1995, the Board of Directors adopted the 1995 Director Stock Option
Plan (the "1995 Director Plan"), subject to stockholder approval that was
received on July 15, 1996. The 1995 Director Plan authorized the grant of
options to purchase up to an aggregate of 400,000 shares of common stock. On
March 19, 1997, the options granted under the 1995 Plan were canceled and a new
1997 Director Stock Option Plan was established.
F-16
<PAGE>
1995 Key Officer Non Qualified Stock Options.
In April 1995, the Board of Directors authorized and ratified on June 26, 1995,
the issuance to two officers warrants to purchase an aggregate of 500,000 shares
of Series A Preferred Stock at $1.10 per share. In accordance with their terms,
the Series A warrants were automatically exchanged for nonqualified options to
purchase an equivalent number of shares of common stock at $1.10 per share in
August 1995. The options are 100% vested and expire in April 2002. As of
December 31, 1998, options to purchase 500,000 shares of the Company's common
stock were outstanding with an exercise price of $1.10 per share.
1997 Director Stock Option Plan.
In March 1997, the Board of Directors adopted the 1997 Director Stock Option
Plan (the "1997 Director Plan"), subject to stockholder approval which was
received on July 25, 1997. The 1997 Director Plan authorized the grant of
options to purchase up to an aggregate of 1,000,000 shares of common stock. Each
nonemployee director who was in office on March 19, 1997 received an automatic
grant of an option to purchase shares of common stock ranging between 100,000
and 200,000 shares based on time of service. The exercise price per share of
options granted under the 1997 Director Plan is 100% of the market value of the
common stock of the Company on the date of grant. Options granted under the 1997
Director Plan are exercisable over a fiveyear period with vesting determined at
varying amounts over a three year period. As of December 31, 1998, options under
the 1997 Director Plan to purchase 450,000 shares of the Company's common stock
were outstanding with an exercise price between $ 1.22 and $1.88 per share.
1997 Key Officer Non Qualified Stock Options.
In March 1997, the Board of Directors authorized the grant of nonqualified stock
options to certain key officers of the Company (the "1997 Key Officer
Agreements"). The 1997 Key Officer Agreements related to the grant of options to
purchase up to an aggregate of 920,000 shares of common stock. The exercise
price per share of options granted under the 1997 Key Officer Agreements equaled
100% of the market value of the common stock of the Company on the date of
grant. Options granted under the 1997 Key Officer Agreements are exercisable in
installments over a three-year period. As of December 31, 1998, options under
the 1997 Key Officer Agreements to purchase 750,000 shares of the Company's
common stock were outstanding with exercise prices of $1.22 per share.
1998 Director Stock Option Plan.
On September 1, 1998, the Board of Directors adopted, subject to stockholder
approval, the 1998 Non-qualified Stock Option Plan (the "1998 NQSO Plan"). The
1998 NQSO Plan authorized the grant of options to purchase up to an aggregate of
1,250,000 shares of common stock. Each nonemployee director who was in office on
September 1, 1998 received an automatic grant of an option, subject to
stockholder approval, to purchase 75,000 shares of common stock. Employee
officers and directors received a grant of an option to purchase shares of
common stock ranging from 10,000 to 200,000 shares based upon time of service.
The exercise price per share of options granted under the 1998 NQSO Plan is 100%
of the market value of the common stock of the Company on the date of grant.
Options granted under the 1998 NQSO Plan are exercisable over a fiveyear period
with vesting determined at varying amounts over a three year period. As of
December 31, 1998, options under the 1998 NQSO Plan to purchase 750,000 shares
of the Company's common stock were outstanding with an exercise price of $1.22.
A summary of the status of the Company's outstanding stock options as of
December 31, 1998 and 1997, and the changes during the years then ended, is
presented below:
F-17
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------------------------ -----------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding 2,966,396 $1.81 1,763,604 $2.57
at beginning of year
Options granted 3,873,680 1.42 1,923,750 1.88
Options exercised (394,778) 1.90 (193,564) 1.52
Options canceled (2,525,982) $1.96 (527,394) 3.17
------------ -----------
Options outstanding 3,919,316 $1.22 2,966,396 $1.81
============ ===========
at end of year
Options exercisable 1,289,536 $1.20 954,830 $1.54
============ ===========
at end of year
Weighted average fair value of $ .92 $1.12
options granted during the year
</TABLE>
Information pertaining to options outstanding at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Prices Outstanding Remaining Exercise Exercisable Exercise
12/31/98 Life Price 12/31/98 Price
-------- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$1.10 500,000 1.26 yrs $1.10 500,000 $1.10
$1.22 3,232,948 4.67 yrs 1.22 727,293 1.22
$1.34 136,368 4.90 yrs 1.34 12,243 1.34
$1.88 50,000 3.20 yrs 1.88 50,000 1.88
Outstanding at 3,919,316 4.22 yrs 1.22 1,289,536 1.20
December 31, 1998 ========= =========
</TABLE>
Stockbased Compensation.
At December 31, 1998, the Company has four plans and non-plan stock options that
are described above. The Company applies APB Opinion No. 25 and related
interpretations in accounting for the plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans. Had compensation cost for
the Company's stockbased compensation plans and nonplan stock options
outstanding been determined based on the fair value at the grant dates for
awards under those plans consistent with the method prescribed by SFAS No. 123,
the Company's net loss and loss per share would have been adjusted to the pro
forma amounts indicated below:
F-18
<PAGE>
Years ended December 31,
------------------------
1998 1997
---- ----
Net loss As reported ($12,787,324) ($1,986,079)
Pro forma ($14,483,121) ($2,840,079)
Basic loss per share As reported ($ .78) ($ .16)
Pro forma ($ .89) ($ .22)
Diluted loss per share As reported ($ .78) ($ .16)
Pro forma ($ .89) ($ .22)
Common stock equivalents have been excluded from all calculations of loss per
share and pro forma loss per share in 1998 and 1997 because the effect of
including them would be antidilutive.
The fair value of each grant is estimated on the date of the grant using the
BlackScholes optionpricing model with the following weightedaverage assumptions
used for grants in 1998 and 1997, respectively; dividend yield of 0.0 percent;
expected volatility of 75% and 66%, riskfree interest rates of 6.0% and 5.0% and
expected lives of 5.0 and 5.0 years.
In addition, the Company maintains the right to re-price the options under such
plans to reflect devaluation in the market value of its common stock. On
September 1, 1998, the Company re-priced all employee and director options under
all plans to $1.22 per share for those options priced in excess of this value.
This price represented the closing market price of the Company's common stock on
September 1, 1998. On February 22, 1999, the Company re-priced all employee
options under all plans to $1.0625 per share for all options priced in excess of
this amount. This price represented the closing market price for the Company's
common stock on February 22, 1999. The FASB has issued a proposed interpretative
release - Stock Compensation - Interpretation of APB No. 25, which will have a
prospective impact on the Company's stock option plans, if adopted.
10. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
Allocation of the provision for income taxes between federal and state income
taxes is as follows:
Years Ended December 31,
------------------------
Current: 1998 1997
---- ----
Federal income taxes $ -- $ --
State income taxes 24,641 5,097
------- -------
24,641 5,097
Deferred federal and state income taxes -- --
------- -------
$24,641 $ 5,097
======= =======
F-19
<PAGE>
The differences between the provisions for income taxes from the benefits
computed by applying the statutory Federal income tax rate are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Benefit computed at statutory rate (34%) ($4,339,000) ($ 673,500)
State income tax benefit, net of federal tax ( 766,000) ( 124,000)
Increase in valuation allowance on deferred tax asset 5,029,000 536,000
Other, net 100,641 266,597
----------- -----------
$ 24,641 $ 5,097
=========== ===========
</TABLE>
The net deferred tax asset consists of the following:
December 31,
------------------------------
1998 1997
---- ----
Deferred tax asset $ 15,065,000 $ 10,036,000
Deferred tax liability -- --
Valuation allowance on deferred tax asset (15,065,000) (10,036,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Net operating loss carry forward $ 9,909,000 $ 6,872,000
Income tax credit carry forward 185,000 173,000
Tax basis in excess of book basis of fixed assets 157,000 137,000
Book inventory cost less than tax basis 867,000 157,000
Reserve for bad debts not deductible for income taxes 260,000 328,000
Tax basis in excess of book basis of other assets 466,000 465,000
Tax basis in subsidiaries in excess of book value 3,221,000 1,904,000
------------ ------------
15,065,000 10,036,000
Valuation allowance on deferred tax asset (15,065,000) (10,036,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
A summary of the change in the valuation allowance on deferred tax assets is as
follows:
Years Ended December 31,
------------------------
1998 1997
---- ----
Balance at beginning of year $10,036,000 $ 9,500,000
Addition to the allowance for the benefit of net
operating loss carry forwards not recognized 5,029,000 536,000
----------- -----------
Balance at end of year $15,065,000 $10,036,000
=========== ===========
F-20
<PAGE>
At December 31, 1998, the Company has the following carry forwards available for
income tax purposes:
Federal net perating loss carry forwards expiring in
various amounts through 2013 $ 24,772,000
============
State net operating loss carry forwards expiring in
various amounts through 2003 $ 20,772,000
============
Credit for research activities $ 185,000
============
Due to the uncertainty surrounding the realization of these favorable tax
attributes, the Company has placed a valuation allowance against its otherwise
recognizable net deferred tax assets. The net operating loss carry-forwards may
be subject to annual limitations based on ownership changes in the Company's
common stock as provided in Section 382 of the Internal Revenue Code.
11. Business Combinations
Lapis Technologies, Inc. On December 16, 1993, FOCUS issued 500,000 shares of
its common stock, subject to adjustment based on the value of the common stock,
in exchange for all of the outstanding common stock of Lapis Technologies, Inc.
("Lapis"). The business combination was accounted for using the purchase method
of accounting. From May to August 1995, the Company settled substantially all
claims by the former Lapis shareholders arising from the Company's acquisition
of Lapis by issuing 123,879 shares of common stock to the former Lapis
shareholders. This stock issuance was accounted for as an adjustment to the
purchase price. Negotiations are ongoing to settle the claims of two remaining
Lapis shareholders but the outcome is not expected to be material to the
Company's financial position.
In the fourth quarter of 1998, as a result of its evaluation of the impairment
of intangible assets related to this acquisition, the Company wroteoff the
balance of the goodwill in the amount of approximately $543,000. The evaluation
considered the Company's recent acquisitions, the declining Macintosh
marketplace, shifting of the market to PC-based products and technological
advances, and projected future sales of Lapis products. At December 31, 1997,
the balance of the goodwill was $657,140 net of accumulated amortization and
writeoffs of $2,341,607.
TView, Inc. Effective September 30, 1996, FOCUS acquired all of the capital
stock of TView, Inc. ("TView"). The business combination has been accounted for
using the purchase method of accounting. Accordingly, the purchase price was
allocated to the assets acquired based on their estimated fair value. This
accounting treatment resulted in approximately $716,000 of goodwill that will be
amortized over its estimated benefit period of seven years. At December 31, 1998
and 1997, the balance of the goodwill was $488,355 and $592,610, net of
accumulated amortization of $227,669 and $123,414, respectively.
On March 31, 1998, the Company issued 350,000 shares of common stock valued at
approximately $1,115,600 in conjunction with the acquisition of certain assets
of Digital Vision, Inc. ("Digital Vision"). 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 liabilities 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). At March 31, 1998, the Company
recorded goodwill of approximately $1,322,000 as a result of this acquisition.
F-21
<PAGE>
In the fourth quarter of 1998, as a result of its evaluation of the impairment
of intangible assets related to this acquisition, the Company wroteoff a portion
of the goodwill in the amount of approximately $1,070,000. Upon evaluation of
the product line, the Company deemed that only two products warranted inclusion
in its family of products. However, this In-Video product line was not widely
accepted by the Company's customer base due to significant competition in its
category, limited product features in comparison with the competition, and its
cost structure required pricing higher then many of the competing products. In
addition, no proprietary technology was acquired with this acquisition. As a
result of a discounted cash flow analysis in December 1998, the Company
determined goodwill recorded on the acquisition of Digital Vision should be
written down to approximately $127,000. The operations of Digital Vision have
been included in the financial statements of the Company since April 1, 1998.
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 at
3.5% over a period of 36 months. The Company computed a discount of $89,915 on
the note based on its incremental borrowing rate. In addition, the Company
issued 122,796 shares of common stock as a result of the acquisition, which were
valued at $350,000 and the Company has agreed to register the shares under the
Securities Act of 1933, as amended, by no later than May 15, 1999. The Company
also assumed $80,367 of liabilities in connection with this acquisition. The
acquisition was accounted for as a purchase and resulted in goodwill of
approximately $1,657,000.
The Company paid Union Atlantic LC $155,652 for marketing consulting services
rendered, agency services and standard business expenses in connection with the
purchase of PC Video. A Director of the Company is a partner of Union Atlantic.
In the December 1998, as a result of its evaluation of the impairment of
intangible assets related to this acquisition, the Company wroteoff a portion of
the goodwill in the amount of approximately $1,441,000 resulting in a December
31, 1998 balance of approximately $195,000. The evaluation considered a limited
distribution network, limited product features in comparison with the
competition, and the lack of proprietary technology. However, after an
evaluation of the technical engineering resources and product vision, management
of the Company restructured the PC Video business into a professional products
research and development center and consolidated its remaining operating
activities into its corporate office. This restructuring resulted in
approximately $70,000 in one-time charges in 1998.
12. Segment Information
The Company operates in one business segment: the development, manufacturing,
marketing and sale of computer enhancement devices for personal computers and
televisions. Sales to a major television manufacturer in 1998 totaled
approximately $2,646,000 or 14% of the Company's revenues as compared to
approximately $2,345,000, or 11% of revenues for 1997. Sales to a major
distributor in 1998 represented approximately $5,686,000, or 31% of the
Company's revenues as compared to approximately $3,319,000 or 16% of revenues
for 1997. During 1998, the Company discontinued sales to a major manufacturer of
personal computers as compared to approximately $5.6 million, or 27% of net
sales for the year ended December 31, 1997.
Sales outside North America for the year ended December 31, 1998 were
approximately $951,000, principally to Europe ($604,000) and Asia ($347,000).
Sales outside North America for the year ended December 31, 1997 were
approximately $2,969,000, principally to Europe ($1,667,000), Asia ($1,267,000)
and Latin America ($35,000).
F-22
<PAGE>
13. Employee Benefit Plan
Effective July 1, 1998, the Company has implemented a Section 401(k) Profit
Sharing Plan (the "401(k) Plan") for all eligible employees. The Company may
make discretionary contributions to the 401(k) Plan. Employees are permitted to
make elective deferrals of up to 15% of employee compensation and employee
contributions to the 401(k) Plan are fully vested at all times. Company
contributions become vested over a period of five years. The Company has made no
contributions to the 401(k) Plan as of December 31, 1998.
F-23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10KSB/A to be signed on its
behalf by the undersigned, thereunto duly authorized.
FOCUS ENHANCEMENTS, INC.
By: /s/ Thomas L. Massie
Thomas L. Massie
President, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Thomas L. Massie President, CEO & April 30, 1999
Thomas L. Massie Chairman of the Board
/s/ Gary M. Cebula Vice President of Finance April 30, 1999
Gary M. Cebula & Administration
(Principal Accounting Officer)
/s/ John C. Cavalier
John C. Cavalier Director April 30, 1999
/s/ William B. Coldrick
William B. Coldrick Director April 30, 1999
_______________________
Timothy E. Mahoney Director
/s/ Robert C. Eimers
Robert C. Eimers Director April 30, 1999
/s/ William Dambrackas
William Dambrackas Director April 30, 1999
42
LEASE
BY
WAKEFIELD READY MIXED CONCRETE CO., INC.
TO
FOCUS ENHANCEMENTS, INC.
Dated: December 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
1. IDENTIFICATIONS.......................................................... 1
3. THE BUILDING AND COMMON AREAS............................................ 1
4. TENANT IMPROVEMENTS...................................................... 2
5. TERM..................................................................... 3
6. USE OF THE PREMISES; LICENSES AND PERMITS................................ 3
7. BASIC RENT; ADDITIONAL RENT.............................................. 3
8. TAXES.................................................................... 6
9. INSURANCE; WAIVERS OF SUBROGATION........................................ 8
10. UTILITIES............................................................... 9
11. REPAIRS AND MAINTENANCE................................................. 10
12. COMPLIANCE WITH LAWS AND REGULATIONS.................................... 10
13. ALTERATIONS BY TENANT; SIGNAGE.......................................... 11
14. LANDLORD'S ACCESS....................................................... 11
15. INDEMNITIES............................................................. 12
16. CASUALTY DAMAGE......................................................... 12
17. CONDEMNATION............................................................ 13
18. LANDLORD'S COVENANT OF QUIET ENJOYMENT.................................. 14
19. TENANT'S OBLIGATION TO QUIT; HOLDOVER................................... 14
20. TRANSFERS OF TENANT'S INTEREST.......................................... 15
21. TRANSFERS OF LANDLORD'S INTEREST........................................ 16
22. MORTGAGEES' RIGHTS...................................................... 16
23. TENANT'S DEFAULT; LANDLORD'S REMEDIES................................... 17
24. REMEDIES CUMULATIVE; WAIVERS............................................ 18
25. BROKER.................................................................. 18
i
<PAGE>
26. NOTICES................................................................. 19
27. ESTOPPEL CERTIFICATE.................................................... 19
28. BIND AND INURE; LIMITED LIABILITY OF LANDLORD........................... 19
29. CAPTIONS................................................................ 20
30. INTEGRATION............................................................. 20
31. SEVERABILITY; CHOICE OF LAW............................................. 20
32. ENFORCEMENT OF RIGHTS................................................... 20
33. TENANT COVENANT AGAINST HAZARDOUS MATERIALS............................. 20
34. RECORDING............................................................... 21
35. [SECURITY DEPOSIT] TO BE DETERMINED..................................... 21
36. OPTION TO EXTEND........................................................ 22
ii
<PAGE>
LEASE
1. Identifications
This Lease is made as of December 1, 1998, by and between WAKEFIELD
READY MIXED CONCRETE CO., INC., a Massachusetts corporation, having an address
at One New Salem Street, P. 0. Box 540, Wakefield, Massachusetts 01880
("Landlord") and FOCUS ENHANCEMENTS, INC., a Delaware corporation, having an
address at 142 North Road, Sudbury, Massachusetts 01776 ("Tenant").
2. The Premises: Parking
In consideration of the Basic Rent, Additional Rent, and other payments
and covenants of Tenant hereinafter set forth, and upon the following terms and
conditions, Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord approximately 22,725 rentable square feet of floor space (measured by
BOMA/ANSI Standards), located as shown on the floor plan attached hereto as
Exhibit A-1 (the "Premises"), in a certain building (the "Building"), which has
been constructed by Landlord, on a certain parcel of land containing
approximately 18.6 acres located at 600 Research Drive, Wilmington,
Massachusetts (the "Property"), said land is more particularly described in
Exhibit A hereto. The Premises are leased together with rights, in common with
Landlord and all others (including any other tenant or tenants of the Building
or the Property) claiming under Landlord or otherwise from time to time lawfully
entitled thereto, to use the Common Areas, as hereinafter defined, for their
intended purposes. Tenant shall have access free of charge to a minimum of three
(3) unassigned parking spaces per one thousand (1,000) rentable square feet of
floor space provided that Landlord shall designate four (4) of such parking
spaces in the vicinity of the main entrance to the leased premises at "FOCUS
RESERVED" and Landlord shall also designate three (3) of such parking spaces in
the vicinity of the main entrance for the use of Tenant's visitors. Landlord
shall have no responsibility, however, to enforc said parking restrictions.
3. The Building and Common Areas
The Building is a single story brick and glass structure containing
approximately 100,256 rentable square feet of floor space.
The Common Areas shall consist of (i) the common entrance area(s) and
all other such common areas of the Building and (ii) the driveways, walkways,
parking areas and other common areas of the Property. Landlord reserves the
right to alter the Common Areas from time to time during the Term (as
hereinafter defined) provided that no alteration shall (i) reduce the minimum
number of Tenant's parking spaces specified in Section 2 above, or (ii)
materially alter the Premises as improved by the Tenant Improvements (as
hereinafter defined), without written consent of Tenant).
<PAGE>
4. Tenant Improvements
On the Commencement Date, Landlord shall deliver the Premises to Tenant
in accordance with the plans and specifications attached hereto as Exhibit B
("Tenant Improvements"). Landlord shall cause the Tenant Improvements to be
completed as soon as practicable but in no event later than February 1, 1999, in
(i) a good and workmanlike manner, (ii)<-1- 95>in accordance with the plans and
specifications for Tenant Improvements, (iii) using first-class materials, (iv)
with no negligence or defects in the design, materials or workmanship, (v) free
and clear of mechanics' liens, and (vi) except as otherwise permitted under
variances or other deviations duly obtained, in compliance with all applicable
laws, by-laws, ordinances, codes, rules, regulations, orders and other lawful
requirements of governmental bodies having jurisdiction.
The Tenant's Improvements shall be deemed to be complete when (i) the
Premises are in clean condition, free of all debris, rubbish and building
materials; (ii) a temporary or permanent certificate of occupancy has been
issued for the Premises by the appropriate governmental authority; and (iii) all
other governmental approvals for occupancy of the Premises have been obtained.
For twelve (12) months after the date the Premises are completed,
Landlord shall promptly remedy any defect of materials or workmanship in or
affecting the Tenant Improvements, if reasonably practicable, within ten (10)
business days of when Tenant gives notice of such defect to Landlord within
twelve (12) months after the date the Premises are completed. Tenant shall
receive the benefit of any Construction Warranties obtained by Landlord with
respect to areas of the Premises or Tenant Improvements to be maintained and
repaired by Tenant hereunder. Otherwise, any warranty made by any person in
connection with the construction of the Premises and Tenant Improvements or as
to any materials, equipment of other items contained and incorporated herein
shall inure to the benefit of and be deemed to have been made to Landlord,
copies of which shall be delivered to Tenant. Landlord shall (i) assign to
Tenant all warranties, causes of action or claims, whether in contract or in
tort, that Landlord has with respect to the portions of the Premises to be
maintained by Tenant hereunder; and (ii) assign to Tenant all permits and
governmental approvals issued to Landlord for portions of the Premises to be
maintained or repaired by Tenant. Landlord shall inform Tenant of all written
construction and equipment warranties existing in favor of Landlord which relate
to or affect the Premises or Tenant Improvements (the "Construction Warranties")
and shall cooperate with Tenant in enforcing the Construction Warranties and (to
the extent Landlord has the right to do so) in bringing any suit that may be
necessary to enforce the rights of Landlord and Tenant thereunder.
Tenant and Tenant's representatives may enter the Premises commencing
upon execution of this Lease in order to (i) inspect the status of construction,
and (ii) install trade fixtures, data and telecommunications equipment and other
necessary equipment in the Premises provided such installation does not
interfere with Landlord's installation of the Tenant Improvements, and such
entry shall be subject to all of the terms and conditions of this Lease, except
that such entry shall not be deemed to commence Tenant's obligation to pay Basic
Rent or Additional Rent due hereunder prior to the date on which the same is to
commence as hereinafter provided, unless Tenant commences to use the Premises
for Tenant's normal business activities therein.
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Landlord acknowledges and agrees that Tenant shall have the right to
install an electricity generator at Tenant's expense in a mutually agreeable
location on or near the Premises provided that Tenant shall have first obtained
any permits or approvals required by law in connection therewith.
5. Term
The term of this Lease (the "Term") shall commence on February 1, 1999,
or such earlier date agreed to by the parties if completion of the Tenant's
Improvements in accordance with Section 4 above has occurred (the "Term
Commencement Date") and shall expire, unless earlier terminated in accordance
with the terms hereof, at 5:00 p.m. on the last day of the month which is two
(2) months after the fifth anniversary of the Term Commencement Date. Each
calendar year or portion thereof following the Term Commencement Date shall be
defined as a "Lease Year."
6. Use of the Premises; Licenses and Permits
Tenant shall use the Premises only for general office, engineering,
research and development, purchasing, light packaging, warehousing and
distribution purposes, to the extent now and hereafter from time to time
permitted under applicable laws, by-laws, ordinances, codes, rules, regulations,
orders and other lawful requirements of governmental bodies having jurisdiction.
Tenant, any permitted subtenants, licensees, invitees and any other users of the
Premises shall apply in their own names for and obtain at their own expense any
and all licenses, permits and other approvals which may be required from
governmental bodies in connection with any particular use of the Premises during
the Term.
7. Basic Rent; Additional Rent
a.Basic Rent. Tenant shall, beginning on the Rent Commencement Date (as defined
later herein) and throughout the remaining Term, pay basic rent ("Basic Rent")
to Landlord annually in the amount of $196,571.25 ($8.65 per rentable square
foot) during the first two years of the Term, in the amount of $202,252.50 ($
8.90 per rentable square foot) during the third year of the Term and in the
amount of $207,933.75 ($9.15 per rentable square foot) during the fourth and
fifth years of the Term. Beginning on April 1, 1999 ("Rent Commencement Date"),
Basic Rent shall be payable in advance on the first day of each month in equal
monthly installments of $16,380.94 during the first two years of the Term,
$16,854.37 during the third year of the Term and $17,327.81 during the last two
years of the Term, in each case to Landlord at the address set forth above or
such other address as Landlord may hereafter specify by 30 days prior written
notice to Tenant, without counterclaim, set off, deduction or defense except a
otherwise herein expressly stated.
Notwithstanding the commencement date of this Lease, Tenant may occupy
the Premises upon full completion of the Tenant Improvements and production of
all required insurance certificates without obligation for the payment of Base
Rent until the Rent Commencement Date.
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<PAGE>
All other terms, covenants and conditions of this Lease shall apply during any
such rent free period.
(b) Additional Rent. This Lease is intended by the parties hereto to be
a so-called "net" lease, to the end that the Basic Rent shall be received by
Landlord net of all costs and expenses related to the Premises as set forth in
this Lease, and net of Tenant's Share, as hereinafter defined, of all Common
Expenses. The same shall be paid to Landlord upon demand as additional rent
(sometimes referred to as "Additional Rent") in the same manner as Basic Rent.
Tenant's Share is 22.67% (being the ratio of the rentable square footage of the
Premises to the rentable square footage of the Building).
Tenant shall also pay as Additional Rent, promptly upon being billed
therefor by Landlord, any and all charges, costs, expenses, and obligations of
every kind and nature whatever as Landlord may from time to time actually incur
in good faith with regard to the Premises or the operation or maintenance
thereof, except as otherwise expressly agreed in this Lease, including, without
limiting the generality of the foregoing, reasonable attorneys' fees incurred by
Landlord in connection with any amendments to, consents under and subleases and
assignments of this Lease requested by Tenant, other than subleases or
assignments pursuant to Paragraph 20(b) hereof and, following a Default of
Tenant, in connection with the enforcement of rights and pursuit of the remedies
of Landlord under this Lease (whether during or after the expiration or
termination of the Term).
(c) "Common Expenses" shall mean any and all charges, costs and
expenses of every kind and nature whatever, which Landlord may from time to time
incur and the value, based on competitive rates, of any materials and services
which Landlord may reasonably provide in good faith with respect to the
ownership, operation and maintenance of the Building and the Property,
including, without limitation, any and all costs and expenses incurred by
Landlord in connection with: (i) making customary and reasonable repairs to and
undertaking maintenance of the Building (including fire protection sprinkler
systems) or the Property, including interior alterations to the Common Areas of
the Building; (ii) providing utilities, including heat to the Common Areas of
the Building; (iii) providing watering, landscaping and lawn care for the
Property; (iv) sanding, plowing and removal of snow and ice from the driveways,
walkways and parking areas; (v)<-1- 95>lighting for the Property; (vi)
maintaining the insuranc required to be maintained by Landlord pursuant to
Paragraph 8 hereof and (vii) the reasonable annual amortized portion of any
capital replacement cost except to the extent excluded under Subparagraph (d)
below. Landlord's responsibilities for watering, landscaping, lawn care and for
snow removal as provided for herein above shall be completed in a good and
workmanlike manner to maintain a professional appearance. Snow removal shall
include maintaining parking areas and the driveway serving the building in
usable condition for vehicles and pedestrians during snow conditions. Landlord
shall use commercially reasonable efforts to cause. Snow removal shall be
completed by 7:30 A.M. on all non-holiday weekdays. Without limiting the
foregoing, Landlord agrees to seed all bare areas in front of the leased
premises.
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(d) Exclusions. The following shall not constitute Common Expenses for
the purposes of this Lease; (i) legal fees, brokerage commissions, advertising
costs and other related expenses incurred in connection with the leasing or
ownership of the Building; (ii) repairs, alterations, additions, improvements or
replacements made to rectify or correct any defect in the design, materials or
workmanship of the Building or Common Areas or to comply with any requirements
of any governmental authority in effect as of the effective date of this Lease;
(ii) costs defined by generally accepted accounting principals as capital costs
for repairs and replacements to the structure of the Building, including the
structural steel footings, exterior walls, roof deck, main sprinkler line, roof
membrane, all underground or under slab utilities; (iv) damage and repairs
attributable to condemnation, fire or other casualty; (v) damage and repairs
covered under any warranty or insurance policy carried by Landlord in connection
with the Building or Property; (vi) damage and repairs necessitated by the
negligence or willful misconduct of Landlord or Landlord's employees,
contractors or agents; (vii) executive salaries of Landlord; (viii) salaries of
service personnel to the extent that such service personnel perform services not
solely in connection with the management, operation, repair or maintenance of
the Building or Common Areas; (ix) Landlord's general overhead expenses not
related to the Building; (x) payments of principal or interest on any mortgage
or other encumbrance including ground lease payments and points, commissions and
legal fees associated with financing; (xi) depreciation; (xii) legal fees,
accountants' fees and other expenses incurred in connection with disputes with
Tenant or other tenants or occupants of the Building or associated the
enforcement of any leases or defense of Landlord's title to or interest in the
Building or any part thereof; (xiii) costs (including permit, license and
inspection fees) incurred in renovating or otherwise improving, decorating,
painting or altering space for other tenants or other occupants or vacant space
in the Building; (xiv) costs incurred due to violation by Landlord or any other
tenant in the Building of the terms and conditions of any lease; (xv) the cost
of any service provided to Tenant or other occupants of the Building for which
Landlord is entitled to be reimbursed; (xiv)<-1- 95>charitable or political
contribution; (xvii) any cos or expense related to the testing for removal,
transportation or storage or Hazardous Materials (as defined in Paragraph 33 of
this Lease) from the Property, Building or Premises; (xviii) interest, penalties
or other costs arising out of Landlord's failure to make timely payments of its
obligations; (xix) costs incurred in connection with any portion of the Building
which is used for parking and for which parking fees are charged; (xx) property
management fees of any property management firm in excess of three percent (3%)
of the gross revenues of the Building; and (xxi) costs incurred in advertising
and promotional activities for the Building.
(e) Limitations on Collection. Landlord shall not collect in excess of
one hundred percent (100%) of Common Expenses, or any item of cost more than
once, nor shall Landlord collect more than Tenant's Share of the Common Expenses
from Tenant. Any Common Expenses charged Landlord by any of its affiliates for
goods or services provided to the Building shall not exceed the prevailing cost
thereof that would be charged to Landlord by non-affiliated parties in arm's
length transactions. All Common Expenses shall be directly attributable to the
operations, maintenance, management and repair of the Property and Building and
shall be determined in accordance with generally accepted accounting principles
and practices, consistently applied.
5
<PAGE>
(f) Periodic Payment. Tenant shall, upon receipt of written notice from
Landlord, prepay to Landlord monthly as Additional Rent, in the same manner as
Basic Rent, one twelfth (1/12) of the total of all such amounts as Landlord may
from time to time reasonably estimate will be payable annually by Tenant under
this Paragraph 7, which prepayments shall be applied, without interest, to such
amounts as actually become payable.
Within ninety (90) days after the close of each Lease Year, Landlord
shall deliver to Tenant a written statement of Tenant's Share of the Common
Expenses for such Lease Year prepared by Landlord from Landlord's books and
records, in reasonable detail, and computed in accordance with general
accounting principles consistently applied. If on the basis of such statement
Tenant owes an amount that is more or less than the estimated payments for such
calendar year previously made by Tenant, Tenant or Landlord, as the case may be,
shall pay the deficiency to the other party within thirty (30) days after
delivery of the statement. Any such deficiency payable by Tenant shall be
considered Additional Rent for purposes of this Lease.
(g) Audit. Landlord shall keep for a period of at least twelve (12)
months after the expiration of each calendar year, full and accurate books,
records and supporting documents in connection with Landlord's annual statement
of Common Expenses. Tenant shall have the right to challenge the accuracy of any
Common Expenses, and, if Tenant challenges any Common Expenses, Landlord shall
make Landlord's books and supporting documents available to Tenant and Tenant
may inspect the same. The Commo Expenses shall be appropriately adjusted on the
basis of such audit. Landlord's current estimate is that Tenant's Share of
Common Expenses, Taxes (Paragraph 8) and Utilities (Paragraph 10) during the
first 12 months of the Term should not exceed $39,768.75. If Tenant discovers
that Landlord has overstated any Common Expenses and/or Additional Rent payable
under this Agreement, Landlord shall promptly refund the overstated amount, with
interest at the rate of one (1) percent per month and if such overstated amount
is more than 115% of Tenant's Share of Common Expenses, Landlord shall pay
Tenant the reasonable costs of Tenant's audit.
(h) Interest on Late Payment. If any payment of Basic Rent or
Additional Rent is not paid to Landlord within any applicable grace period, then
at Landlord's option, without notice and in addition to all other remedies
hereunder, Tenant shall pay upon demand to Landlord as Additional Rent, interest
thereon at an annual rate of ten percent (10%), to be computed from the date
such Basic Rent or Additional Rent was originally due through the date when paid
in full. Notwithstanding the foregoing, such interest shall not be imposed if
Tenant shall make payment within 10 days after written notice from Landlord that
such payment has not been timely received provided, however, that in no event
shall Landlord be obligated to give more than two such notices in any 12 month
period prior to assessing such interest against Tenant.
8. Taxes
Tenant shall pay or cause to be paid to Landlord throughout the Term
(or, where appropriate, directly to the authority by which the same are assessed
or imposed, with evidence of such payment to Landlord) as Additional Rent not
later than ten (10) days prior to the date the same are due or twenty (20) days
after receipt of written notice thereof to Tenant, whichever is later, all taxes
and excises upon the personal property and equipment of Tenant located at the
6
<PAGE>
Premises or the Property and the Tenant Share of the Taxes (as hereinafter
defined) and the entire amount of any interest, penalties and costs attributable
to delayed payment thereof where such delay is the fault of Tenant. "Taxes"
shall mean any and all real estate taxes, betterment and special assessments
(provided that Landlord shall elect to pay any such betterment and special
assessments over the longest period permitted by applicable law) or amounts in
lieu or in the nature thereof and any other taxes, levies, water rents, sewer us
charges and other excises, franchises, imposts and charges, general and special
of whatever name and nature, and whether or not now within the contemplation of
the parties hereto, which may now or hereafter be levied, assessed or imposed by
The Commonwealth of Massachusetts, the Town of Wilmington or any other
non-federal authority, or become a lien, upon all or any part of the Property,
the Building, the Premises, the use or occupation thereof, or upon Landlord and
Tenant in respect thereof, or upon the basis of rentals thereof or therefrom, or
upon the estate hereby created or upon Landlord by reason of ownership of the
reversion.
Notwithstanding the foregoing, none of the following shall constitute
taxes for the purposes of this Lease, and nothing contained herein shall be
deemed to require Tenant to pay any of the following: (i) any state, local,
federal, personal or corporate income tax measured by the income of Landlord;
(ii) any estate, inheritance taxes, or gross rental receipts tax; (iii) any
franchise, succession or transfer taxes; (iv) interest on taxes or penalties
resulting from Landlord's failure to pay taxes; (v) any increases in taxes
attributable to additional improvements to the Building unless such improvements
are constructed for Tenant's sole benefit; (vi) real estate taxes resulting from
overstandard improvements made by other tenants and (vii) any taxes which are
essentially payments to a governmental agency for the right to make improvements
to the Building or surrounding area; provided, however, that if some method or
type of taxation shall replace the current method of assessment of real estate
taxe in whole or in part, or the type thereof, or if additional types of taxes
are imposed upon the Property or Landlord ("New Taxing Method"), Tenant agrees
that such taxes or other charges shall be deemed to be, and shall be, Taxes
hereunder and Tenant shall pay an equitable share of the same as an additional
charge computed in a fashion consistent with the method of computation herein
provided, to the end that Tenant's share thereof shall be, to the maximum extent
practicable, comparable to that which Tenant would bear under the foregoing
provisions. In the event of a New Taxing Method which measures income to
Landlord, Tenant shall have no liability with respect thereto unless such tax
treats income derived from real property differently from income derived from
other sources, and Tenant's share thereof shall be calculated as if the Property
were the only property of Landlord subject to such tax.
Tenant shall, upon receipt of written notice from Landlord, prepay to
Landlord monthly as Additional Rent, in the same manner as Basic Rent,
one-twelfth (1/12) of the total of all such amounts as Landlord may from time to
time reasonably estimate will be payable annually by Tenant under this Paragraph
8, which prepayments shall be applied without interest to such amounts as
actually become payable. As soon as any such amounts so payable are actually
determined, Landlord shall deliver to tenant a written statement thereof, which
shall include copies of the tax bills. Appropriate adjustments of any
overpayment and underpayment shall be made within thirty (30) days after
delivery of the statement.
7
<PAGE>
Subject to the rights of any Mortgagees, if Landlord shall receive any
tax refund or reimbursement of Taxes or sum in lieu thereof with respect to any
tax year, then out of any balance remaining thereof after deducting Landlord's
expenses reasonably incurred in obtaining such refund, Landlord shall pay to
Tenant, provided there does not then exist a Default of Tenant, an amount equal
to such refund or reimbursement or sum in lieu thereof (together with Tenant's
share of any interest actually received by Landlord in connection with such
abatement) multiplied by Tenant's share; provided, that in no event, shall
Tenant be entitled to receive more than the payments made by Tenant on account
of Taxes for such tax year pursuant to this paragraph. If a Default of Tenant
exists, then while such Default of Tenant remains outstanding, Landlord may
retain Tenant's share of such refund or reimbursement as security towards the
cure thereof.
9. Insurance; Waivers of Subrogation
Tenant shall, at its own cost and expense, obtain and throughout the
Term shall maintain, with companies qualified to do business in Massachusetts
and reasonably acceptable to Landlord, commercial general liability insurance
(with broad form contractual liability) under which Tenant is named insured and
Landlord (and such other persons as are in privity of estate with Landlord as
may be set out in a notice from time to time) are listed as additional insured
as their respective interests may appear, and insuring on an occurrence basis
against claims for bodily injury, death or property damage occurring to, upon or
about the Premises in limits of $2,000,000 per occurrence /$4,000,000 aggregate
(combined single limit) for bodily injury or death and property damage and
insurance covering contents of, and personal property and trade fixtures located
in, the Premises. Notwithstanding the foregoing, the risk of loss to all
contents of, and personal property and trade fixtures located in, the Premises
is upon Tenant, and Landlord shall have no liability with respect thereto unless
such loss is due to the negligence or willful misconduct of Landlord. The above
commercial general liability insurance policy shall be non-cancelable and
non-amenable with respect to Landlord and Landlord's said designees without
thirty (30) days prior written notice. Tenant shall provide Landlord with
certificates of insurance evidencing the foregoing (but in limits of $1,000,000
per occurrence/$3,000,000 aggregate) and thereafter from time to time at
Landlord's request together with reasonable evidence of umbrella coverage which
increases the limits to $2,000,000 per occurrence/$4,000,000 aggregate. Landlord
acknowledges that Tenant has provided a copy of Tenant's current policy and
agrees that such policy satisfies Landlord's insurance requirements.
Nothing in this Paragraph 9 shall prevent Tenant from carrying any of
the insurance required of Tenant hereunder in the form of a blanket and/or
umbrella insurance policy or policies which cover other properties owned or
operated by Tenant in addition to the Premises.
Landlord shall obtain and throughout the Term shall maintain, with
companies qualified to do business in Massachusetts and reasonably acceptable to
Tenant and any Mortgagees, for the benefit as named insured of Landlord and any
Mortgagees as their respective interests may appear, with losses first payable
to such Mortgagees under a standard mortgagee endorsement: (i) insurance against
lost rentals from the Building for a period of one year; (ii) so-called
"casualty" insurance against loss or damage to the Building and the Tenant
Improvements such as may result from fire and such other casualties as are
normally covered by an "extended coverage"
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<PAGE>
endorsement, such casualty insurance to be in an amount equal to the replacement
cost of the Building; (iii) boiler and machinery insurance on any Building steam
boilers, pressure vessels and pressure piping and miscellaneous electrical
apparatus, engines, pumps, and compressors, fans and blowers, with so-called
"standard blanket coverage" (15 HP and over); and (iv) a policy of commercial
general liability insurance having a combined single limit for bodily injury and
property damage of not less than One and One-Half Million Dollars
($1,500,000.00) per occurrence and general aggregate insurance in an amount of
not less than Two Million Dollars. The policy shall provide coverage for blanket
contractual liability (except for the negligence or willful misconduct of the
non-insured party), premises and personal injury coverage, together with a
cross-liability severability of interest provision. In the case of commercial
general liability insurance, the policy shall also provide for aggregate
coverage at each location and for reinstatement of the aggregate in the event
the limits of the policy are exhausted. Insurance required hereunder shall be
written by companies licensed to do business in the state in which the Premises
are located and have a General Policyholder's rating of at least A8 as set forth
in the most current issue of Best's Insurance Guide.
Landlord and Tenant each hereby release the other from any liability
for any loss or damage to the Building, the Premises or other property and for
injury to or death of persons occurring on the Property or in the Building or
the Premises or in any manner growing out of or connected with Tenant's use and
occupation of the Premises, the Building or the Property or the condition
thereof, whether or not caused by the negligence or other fault of Landlord,
Tenant or their respective agents, employees subtenants, licensees, invitees or
assignees; provided, however, that this release (i) shall apply notwithstanding
the indemnities set forth in Paragraph 15, but only to the extent that such loss
or damage to the Building or other property or injury to or death of persons is
covered (or required by this Lease to be covered) by insurance which protects
Landlord or Tenant or both of them as the case may be; (ii) shall not be
construed to impose any other or greater liability upon either Landlord or
Tenant then would have existed in the absence hereof; and (iii) shall be in
effect only to the extent and so long as the applicable insurance policies waive
subrogation and provide that this release shall not affect the right of the
insured to recover under such policies, which clauses shall be obtained by the
parties hereto whenever available. If waivers of subrogation are not obtainable
under a party's policies or are obtainable only at an additional cost, said
party shall notify the other party which, if it desires to have the waiver of
subrogation, shall pay said additional cost.
10. Utilities
Landlord shall, at Landlord's expense, install separate meters to
measure gas, water, and electricity consumption by the Tenant, in which event
Tenant shall be billed for such water and sewer use charges imposed in respect
of the usage indicated by such meter and Tenant shall, at its own cost and
expense, arrange and pay for such utilities provided to the Premises during the
Term, including, without limitation, electricity (including electricity for air
conditioning), gas, water, telephone service, security and fire protection,
cleaning and trash removal.
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11. Repairs and Maintenance
(a) Tenant's Obligation. Except as provided in Subparagraph 11(b)
below, during the Term, Tenant, at its own cost and expense, shall: (i) maintain
and make all necessary repairs to the electrical, mechanical, heating,
ventilating and air conditioning, plumbing and other systems inside the Premises
(other than those repairs for which Landlord is responsible as provided
elsewhere in this Lease, e.g., Paragraph 4) and shall maintain a service
contract with respect to the heating, ventilating and air conditioning system
with a company or companies reasonably acceptable to Landlord in connection
therewith; (ii) subject to Paragraph 9, make any repairs to the Building and the
Property necessitated by the acts or negligence of Tenant or its agents,
employees or invitees; (iii) obtain and maintain a service contract for dumpster
service and janitorial services within the Premises with a company or companies
reasonably acceptable to Landlord, and (iv) make all interior non-structural
repairs, replacements and renewals necessary to keep the Premises in as good
condition, order and repair as the same are at the Commencement of the Term or
thereafter may be put, reasonable wear and use and damage by fire or other
casualty only excepted (it being understood, however, that the foregoing
exception for reasonable wear and use shall not relieve Tenant from the
obligation to keep the Premises in good order, repair and condition, free from
accumulation of dirt, rubbish and other debris. Landlord agrees to provide a
suitable location for the dumpster adjacent to or within a reasonable distance
from a rear egress of the Premises.
(b) Landlord's Obligations. From and after the Commencement of and
during the Term Landlord shall make all repairs, replacements and renewals
necessary: (i) to keep in good and sound condition the structure of the
Building, including but not limited to steel, footings, exterior walls, roof
deck, main sprinkler line, roof membrane, and all underground or under-slab
utilities; (ii) to keep the electrical, mechanical, plumbing, sprinkler and
other systems serving the Building generally or the Common Areas in as good
condition, order and repair as the same are at the commencement of the Term or
thereafter may be put; (iii)<-1- 95>to keep the parking areas, driveways,
walkways, and other improvements on the Property in good condition, free of
snow, and sanded as appropriate, and to keep all lawns and landscaped areas of
the Property watered, fertilized and neatly trimmed and (iv) subject to Tenant's
obligations in (a) above, to use commercially reasonable efforts to keep the
Premises free of pests and vermin. Damage by acts or negligence of Tenant or its
agents, employees or invitees shall be charged to Tenant as Additional Rent
hereunder and, without limiting the generality of the foregoing, Tenant shall be
responsible for any loss, cost or damage resulting from activities on the roof
of the Building conducted by Tenant, its agents, employees and contractors which
cause damage to the roof.
12. Compliance with Laws and Regulations
Tenant and Landlord shall, with respect to areas of the Premises under
its sole control, comply, at its own cost and expense, with: (i) all applicable
laws, by-laws, ordinances, codes, rules, regulations, orders, and other lawful
requirements of governmental bodies having jurisdiction, whether or not
foreseeable, and whether or not they involve any changes in governmental policy,
which are applicable to the Premises, the fixtures and equipment therein and
thereon; (ii) all orders, rules and regulations of the National Board of Fire
Underwriters, or any other body hereafter constituted exercising similar
functions, which may be applicable to the
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Premises, the fixtures and equipment therein or thereon or the use thereof; and
(iii) the requirements of all policies of public liability, fire and all other
types of insurance at any time in force with respect to the Premises, the
Building or the Property and the fixtures and equipment therein and thereon.
Without limiting the generality of the foregoing, Tenant shall
continually during the Term of this Lease maintain the Premises in accordance
with all laws, codes and ordinances from time to time in effect and all
directions, rules and regulations of the proper officers of governmental
agencies having jurisdiction, and the standards recommended by the Boston Board
of Fire Underwriters, and shall, at Tenant's expense, obtain all permits,
licenses and the like required by applicable law. To the extent that the
Premises constitute a "Place of Public Accommodation" within the meaning of the
Americans With Disabilities Act of 1990, Tenant shall be responsible for making
the Premises comply with such act provided, however, that Landlord shall be
responsible for making the Premises comply with such act to the extent the
Premises failed to comply therewith on the Term Commencement Date. Landlord is
solely responsible for any exterior or structural modifications which are
required by either law or insurer.
13. Alterations by Tenant; Signage
Tenant shall make no alterations, additions or improvements in or to
any portion of the Premises involving an expenditure in excess of Ten Thousand
Dollars and 00/100 ($10,000.00), or any portion of the Building or the Property
without Landlord's prior written consent, and without first providing Landlord
with suitable assurances that Tenant will complete the same at no expense to
Landlord and without any mechanics' or materialmen's lien upon the Property.
Landlord shall not unreasonably withhold , condition or delay its consent for
interior, non-structural alterations, additions and improvements to the Premises
consistent with the use of the Premises as contemplated hereby; provided that
any such consent to interior, non-structural alterations, additions and
improvements may, at Landlord's election, be conditioned upon Tenant being
obligated to remove the same at the expiration or earlier termination of this
Lease and to restore the Premises to its condition prior to such alterations,
additions and improvements.
Subject to covenants applicable to the Property and the Town of
Wilmington Sign Regulations/By-Laws, Tenant shall be permitted to install its
own exterior building standard signage, as are described in detail in Exhibit C
attached hereto and incorporated herein by reference and Tenant's name shall be
added to the Property directory.
14. Landlord's Access
Tenant shall permit Landlord and any Mortgagees and their authorized
representatives to enter the Premises (i) at all reasonable times during usual
business hours for the purposes of inspecting the same, exercising such other
rights as it or they may have hereunder or under any mortgages and exhibiting
the same to other prospective tenants, purchasers or mortgagees upon at least
twenty-four (24) hours' prior written notice, and (ii) at any time and without
notice in the event of emergency.
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Landlord and any Mortgagee and their respective agents, employees and
contractors shall conduct all of their activities on the Premises in a manner
designed to minimize interference to Tenant and Tenant's use of the Premises.
15. Indemnities
Tenant shall protect, defend (with counsel approved by Landlord in its
reasonable discretion), indemnify and save Landlord harmless from and against
any and all claims and liabilities arising from: (i) the conduct or management
by Tenant or by anyone claiming under Tenant of or from any work or thing
whatsoever done in or about the Premises during the Term by Tenant or by anyone
claiming under Tenant and from any condition existing, or any injury to or death
of persons or damage to property occurring or resulting from an occurrence,
during the Term in or about the Premises; and (ii) any breach or default on the
part of Tenant in the performance of any covenant or agreement on the part of
Tenant to be performed pursuant to the terms of this Lease or from any negligent
act or omission on the part of Tenant or any of its agents, employees,
subtenants, licensees, invitees or assignees, provided however, that Landlord
(i) gives Tenant timely notice of such claim, suit or proceeding and (ii)
assists and cooperates in the defense or settlement of the same in a
commercially reasonable manner. Tenant further agrees to indemnify Landlord from
and against all costs, expenses (including reasonable attorneys' fees) and other
liabilities incurred in connection with any such indemnified claim or action or
proceeding brought thereon, any and all of which, if reasonably suffered, paid
or incurred by Landlord, Tenant shall pay promptly upon receipt of written
demand to Landlord as Additional Rent. Tenant duty to indemnify Landlord under
this Paragraph 15 shall survive the expiration and termination of this Lease
with respect to any claims or liability occurring prior to such expiration or
termination.
Notwithstanding the foregoing, nothing herein shall be deemed to
require Tenant to indemnify, defend, protect or hold Landlord harmless from any
liability, obligations, claims, damages, penalties, cause of action, cost or
expense to the extent caused directly or indirectly by the gross negligence or
willful misconduct of Landlord or Landlord's agents, employees, contractors or
invitees.
Notwithstanding the foregoing, Tenant shall be entitled to a credit
against any sums coming due to Landlord under the foregoing indemnity in an
amount equal to any proceeds of insurance actually received by Landlord (net of
any reasonable costs or expenses incurred by Landlord in connection with
settlement or collection thereof, including reasonable attorneys' fees) with
respect to any matter which is the subject of the foregoing indemnity; provided,
however, that Landlord shall have no obligatio to seek recovery from any insurer
nor shall the foregoing be deemed to impose any obligation upon Landlord to
maintain insurance other than that which is specifically required to be
maintained by Landlord elsewhere in this Lease.
16. Casualty Damage
Except as provided below, in the event of partial or total destruction
of the Premises during the Term by fire or other casualty, Landlord shall, at
its sole expense, as promptly as practicable after receipt of any insurance
proceeds available as a result of such casualty, repair
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(or, in the event such insurance proceeds are not available as a result of
Landlord's failure to maintain property insurance, after such event of fire or
other casualty), reconstruct or replace the portions of the Premises destroyed
to the same condition in which they existed prior to such destruction. During
the period of such repair, reconstruction and replacement and until such time as
Tenant's business may be fully resumed on the Premises, there shall be an
equitable abatement of Basic Rent and Additional Rent in proportion to the loss
of usable floor area in the Premises.
(a) Termination. If the Building or the Premises is so extensively
destroyed by fire or other casualty that the Premises cannot reasonably be
expected to be susceptible of repair, reconstruction or replacement within a
period of one hundred fifty (150) days from the date work were to commence
thereon, either party may terminate this Lease immediately upon notice thereof
to the other and the obligation of Tenant, if any, to pay Basic Rent and
Additional Rent to Landlord shall terminate as of the date of such notice.
Landlord shall notify Tenant within thirty (30) days of such event of damage or
destruction whether the Building or the Premises can be fully repaired or
restored within the one hundred fifty (150) day period. If the Building or the
Premises can be fully repaired or restored within the one hundred fifty (150)
day period, this Lease shall remain in full force and effect, except that Basic
Rent and Additional Rent shall abate as described above, and Landlord shall, and
subject to th rights of any Mortgages, diligently repair and restore the damage
as soon as possible. In the event of any notice of termination pursuant to this
Paragraph 16, this Lease shall terminate as of, and Basic Rent and Additional
Rent shall be appropriately apportioned through and abated from and after, the
date of such notice of termination.
(b) Damage or Destruction at End of Term. If the Building or the
Premises is damaged or destroyed during the last twelve (12) months of the Term
of the Lease, and the Building or the Premises cannot be fully repaired or
restored by Landlord within thirty (30) days after the date of the damage or
destruction, either Landlord or Tenant may terminate this Lease upon notice to
the other, unless Tenant, within 30 days of the date of the fire or other
casualty, elects to exercise its option to extend the Term. Whether or not
terminated hereunder, there shall be an equitable abatement of Basic Rent and
Additional Rent in proportion to the loss of usable floor area in the Premises.
17. Condemnation
If more than ten percent (10%) of the usable floor area of the
Premises, or more than twenty-five percent (25%) of the parking spaces then
available for use by Tenant shall be taken by eminent domain or appropriated by
public authority, Landlord or Tenant may terminate this Lease by giving written
notice to the other within thirty (30) days after such taking or appropriation
unless in the case of a taking of parking spaces, Landlord within thirty (30)
days after any such notice of termination fro Tenant gives written notice to
Tenant of Landlord's assumption of the obligation to replace the parking area so
taken with comparable replacements elsewhere on the Property. In the event of
such a termination, this Lease shall terminate as of the date of Tenant must
surrender possession or, if later, the date Tenant actually surrenders
possession, and the Basic Rent and Additional Rent reserved shall be apportioned
and paid to and as of such date. Whether or not terminated hereunder, there
shall be an equitable abatement
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of Basic Rent and Additional Rent in proportion to the loss of usable floor area
in the Premises and/or parking spaces.
If part of the Premises is taken or appropriated by public authority as
aforesaid and this Lease is not terminated as set forth above, Landlord shall,
subject to the rights of any Mortgagees, apply any such damages and compensation
awarded (net of the costs and expenses, including reasonable attorneys' fees,
incurred by Landlord in obtaining the same) to secure and close so much of the
Premises or other improvements constituting part of the Premises as remain and
shall promptly restore the Building and the Premises to the same condition as
they existed immediately prior to such taking or appropriation; and in such
event this Lease shall continue in full force and effect, except that there
shall be an equitable abatement of Basic Rent and Additional Rent in proportion
to the loss of usable floor area in the Premises after giving effect to such
restoration, from and after the date Tenant must surrender possession or, if
later, the date Tenant actually surrenders possession.
Landlord hereby reserves, and Tenant hereby assigns to Landlord, any
and all interest in and the claims to the entirety of any damages or other
compensation by way of damages which may be awarded in connection with any such
taking or appropriation, except so much of such damages or award as is
specifically and separately awarded to Tenant and expressly attributable to
trade fixtures or moving expenses of Tenant.
18. Landlord's Covenant of Quiet Enjoyment
Landlord covenants that Tenant, upon paying the Basic Rent and
Additional Rent provided for hereunder and performing and observing all of the
other covenants and provisions hereof, may peaceably and quietly hold and enjoy
the Premises for the Term as aforesaid, without hindrance or ejection by any
persons lawfully claiming under Landlord to have title to the Premises superior
to Tenant subject, however, to all of the terms and provisions of this Lease and
to all matters of record; the foregoing covenant of quite enjoyment is in lieu
of any other covenant of quiet enjoyment, express or implied.
19. Tenant's Obligation to Quit; Holdover
Tenant shall, upon the expiration of the Term or earlier termination of
this Lease, leave and peaceably and quietly surrender and deliver to Landlord
the Premises and any replacements or renewals thereof in the order, condition
and repair required by Paragraph 11 hereof and the other provisions of this
Lease, except, however, that Tenant shall first remove any trade fixtures and
equipment and any alterations, additions and improvements which Landlord has
required be removed pursuant to the terms of Paragraph 13 hereof (including any
alterations, additions and improvements, for which Landlord's consent was not
required under Paragraph 13), restoring the Premises in each case to its
condition prior to the installation of such fixtures or the undertaking of such
alterations, additions or improvements, as the case may be, reasonable wear and
tear and damage by casualty or taking excepted.
If Tenant fails to quit the Premises at the expiration of the Term or
earlier termination of this Lease, Tenant shall be a tenant-at-sufferance and
shall pay to Landlord with respect to any
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holdover period all Additional Rent and a sum equal to 150% of the Basic Rent
("Holdover Rent").
The provisions of this Paragraph 19 shall expressly survive the
expiration or earlier termination of this Lease.
20. Transfers of Tenant's Interest
(a) Except as hereinafter set forth, Tenant covenants and agrees that
whether voluntarily, involuntarily, by operation of law or otherwise neither
this Lease nor the term and estate hereby granted, nor any interest herein or
therein, will be assigned, mortgaged, pledged, encumbered or otherwise
transferred, except as provided by Section 20(b) herein below, and that neither
the Premises nor any part thereof will be encumbered in any manner by reason of
any act or omission on the part of Tenant, or used or occupied or permitted to
be used or occupied, by anyone other than Tenant, or for any use or purpose
other than a Permitted Use, or be sublet (which term, without limitation, shall
include granting of concessions, licenses and the like) in whole or in part, or
be offered or advertised for assignment or subletting without Landlord's prior
written consent, not to be unreasonably withheld, conditioned or delayed.
Without limiting the foregoing, any agreement pursuant to which: (x) Tenant is
relieved from the obligation to pay, or a third party agrees to pay on Tenant's
behalf, all or any portion of Basic Rent, Additional Rent or other charges due
under this Lease; and/or (y) a third party undertakes or is granted the right to
assign or attempt to assign this Lease or sublet or attempt sublet all or any
portion of the Premises, shall for all purposes hereof be deemed to be an
assignment of this Lease and subject to the provisions of this Paragraph 20. The
provisions of this paragraph (a) shall apply to a transfer (by one or more
transfers) of a majority of the stock or partnership interests or other
evidences of ownership of Tenant as if such transfer were an assignment of this
Lease.
Tenant shall reimburse Landlord as Additional Rent, upon receipt of
demand, for any reasonable costs that may be incurred by Landlord in connection
with any proposed assignment or sublease and any request for consent thereto
pursuant to this subparagraph (a), including without limitation the costs of
making investigations as to the acceptability of any proposed assignee or
subtenant and attorneys' fees.
(b) The provisions of paragraph (a) shall not apply to an assignment of
this Lease or sublease of the whole or any portion of the Premises to any
affiliate or subsidiary of Tenant, or to an entity owning Tenant as a
subsidiary, or to any entity resulting from a consolidation or merger of Tenant
with any other entity, or an entity acquiring a majority of Tenant's issued and
outstanding capital stock or a substantial portion of Tenant's physical assets,
provided that in any such event:
(i) Tenant gives Landlord advance written notice
describing the transaction and confirms by written
instrument in form reasonably satisfactory to
Landlord that, notwithstanding the transaction,
Tenant remains bound by all of the obligations of
Tenant hereunder; and
(ii) the assignee agrees directly with Landlord, by
written instrument in form reasonably satisfactory to
Landlord, to be bound by all the
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obligations of Tenant hereunder including, without
limitation, the covenant against further assignment
and subletting.
21. Transfers of Landlord's Interest
Landlord shall have the right from time to time to sell or mortgage its
interest in the Property, the Building and the Premises, to assign its interest
in this Lease, or to assign from time to time the Basic Rent, Additional Rent or
other sums and charges at any time paid or payable hereunder by Tenant to
Landlord, to any Mortgagees or other transferees designated by Landlord. In any
such case Tenant shall pay the Basic Rent, Additional Rent and such other sums
and charges so assigned, subject to the terms of the Lease, upon receipt from
Landlord of written notice, to such Mortgagees and other transferees at the
addresses mentioned in and in accordance with terms of such instruments of
designation.
22. Mortgagees' Rights
This Lease is and shall be subject and subordinate to any mortgage (and
to any amendments, extensions, increases, refinancing or restructuring thereof)
of the Property, the Building or the Premises, whether such mortgage is filed
prior or subsequent to the execution, delivery or the recording of this Lease or
any notice hereof (the holder from time to time of any such mortgage is
hereinafter called the "Mortgagee"). The foregoing subordination shall be
self-operative and automatically effective a to any existing mortgage or
mortgage filed subsequent to the execution and delivery hereof; provided, that
(i) Landlord shall obtain for the benefit of Tenant an agreement from any future
Mortgagee that, for so long as there exists no default beyond applicable grace
periods under this Lease by Tenant, the Mortgagee will not, in foreclosing
against or taking possession of the Premises or otherwise exercising its rights
under such mortgage, terminate this Lease or disturb Tenant's possession of the
Premises hereunder, or words of similar import and (ii) such subordination shall
not otherwise restrict or limit the rights or increase the obligations of Tenant
under this Lease. Tenant hereby agrees to execute, acknowledge and deliver in
recordable form such instruments confirming and evidencing the foregoing
subordination as Landlord or any such Mortgagee may from time to time reasonably
require.
Provided that Tenant has been provided with written notice of such
mortgage and appropriate addresses to which notice should be sent, no notice
from Tenant of any default by Landlord in its obligations shall be valid, and
Tenant shall not attempt to terminate this Lease, withhold Basic Rent or
Additional Rent or exercise any other remedy which may arise by reason of any
such default, unless Tenant first gives such notice to such Mortgagee and
provides such Mortgagee with reasonable time after suc notice to cure such
default. Tenant shall and does hereby agree, upon default by Landlord under any
mortgage, to attorn to and recognize the Mortgagee or anyone else claiming under
such mortgage, including a purchaser at a foreclosure sale, upon receipt of
written request from a successor to the interest of Landlord under this Lease,
to execute, acknowledge and deliver in recordable form such evidence of this
attornment, and to make payments of Basic Rent and Additional Rent hereunder
directly to the Mortgagee or any such successor, as the case may be, provided
that this Lease shall continue in full force and effect as a direct lease
between such Mortgagee or successor and Tenant. Tenant may comply with the
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instructions given it by such Mortgagee or successor without the need to verify
Landlord's default under the subject mortgage. Any Mortgagee may, at any time,
by giving written notice to, and without any further consent from, Tenant,
subordinate its mortgage to this Lease, and thereupon the interest of Tenant
under this Lease shall automatically be deemed to be prior to the lien of such
mortgage without regard to the relative dates of execution. delivery or
recording thereof or otherwise.
23. Tenant's Default; Landlord's Remedies
If Tenant shall: (i) default in the payment when due of any Basic Rent,
Additional Rent, or any other charges hereunder, and such default shall continue
for ten (10) days after receipt of written notice from Landlord of such default;
or (ii) if Tenant shall default in the performance or observance of any of the
other covenants contained in this Lease on Tenant's part to be performed or
observed and shall fail, within thirty (30) days after receipt of written notice
from Landlord of such default, to cure such default, or if such cure cannot
reasonably be completed within thirty (30) days, if Tenant fails to commence
such cure within the thirty (30) day period, and thereafter diligently complete
it within sixty (60) days following the end of said thirty (30) day period; or
(iii) if the estate hereby created shall be taken on execution, or by other
process of law or if Tenant shall be found, under Title 11 of the United States
Code as from time to time in effect, or under any applicable law, other than
said Title 11, of any jurisdiction relating to the liquidation or reorganization
of debtors or to the modification or alteration of the rights of creditors, to
be bankrupt or insolvent, or an order by a court of competent jurisdiction shall
be entered approving its liquidation or reorganization or any modification or
alteration of the rights of its creditors (which order is not discharged within
45 days after such entry) or assuming custody of, or appointing a receiver or
other custodian for, all or substantial part of its property (in every such
case, a "Default of Tenant"); then, and in any of said cases, Landlord may, to
the extent permitted by law, immediately or at any time thereafter and without
demand or notice, terminate this Lease and enter into and upon the Premises, or
any part thereof in the name of the whole, and repossess the same as of
Landlord's former estate, and, by any lawful means, expel Tenant and those
claiming through or under Tenant and remove its effects without being deemed
guilty of any manner of trespass, and without prejudice to any remedies which
might otherwise be used for arrears of rent or preceding breach of covenant.
No termination or repossession provided for in this Paragraph 23 shall
relieve Tenant or any guarantor of the obligations of Tenant under this Lease of
or from its liabilities and obligations under this Lease, all of which shall
survive any such termination or repossession. In the event of any such
termination or repossession, Tenant shall pay to Landlord either: (i) in advance
on the first day of each month, for what would have been the entire balance of
the Term one-twelfth (1/12) (and a pro rata portion thereof for any fraction of
a month) of the annual Basic Rent, Additional Rent and all other amounts for
which Tenant is obligated hereunder, less, in each case, the actual net receipts
by Landlord by reason of any reletting of the Premises after deducting
Landlord's expenses in connection with such reletting, including, without
limitation, removal, storage and repair and renovation costs and reasonable
brokers' and attorneys' fees; or (ii) at the option of Landlord exercisable by
Landlord's giving notice to Tenant within thirty (30) days after any such
termination, an amount equal to the amount by which the payments of Basic Rent
and Additional Rent reasonably estimated to be payable for the balance of the
Term after
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the date of the exercise of said option would exceed the payments reasonably
estimated to be the fair rental value of the Premises over such period,
determined as of such date. Landlord will use reasonable efforts to mitigate its
damages.
Without thereby affecting any other right or remedy of Landlord
hereunder, Landlord may, at its option, cure for Tenant's account any default by
Tenant hereunder which remains uncured after said thirty (30) days' notice of
default from Landlord to Tenant, and the cost to Landlord of such cure shall be
deemed to be Additional Rent and shall be paid to Landlord by Tenant with the
installment of Basic Rent next accruing, together with interest thereon, from
the date so expended until the date repaid at the annual rate of ten percent
(10%). Without thereby affecting any other right or remedy of Landlord
hereunder, Landlord may, at its option, charge Tenant a late charge in the
amount of five percent (5%) of the amount overdue in connection with any Basic
Rent or Additional Rent not paid within five (5) days of the date when due.
Notwithstanding the foregoing, in the event Tenant wishes to contest a payment
to be made by Tenant to a third party and provided that Tenant has provided
Landlord with security or other assurances reasonably satisfactory to Landlord
that such contest shall have no adverse effect on Landlord or the Property,
Landlord shall forbear exercising the rights set forth in this grammatical
paragraph with respect to such payment while such contest is undertaken.
24. Remedies Cumulative; Waivers
Except as stated otherwise herein, the specific remedies to which
either party may resort under the terms of this Lease are cumulative and are not
intended to be exclusive of any other remedies or means of redress to which that
party may be lawfully entitled under any provision of this Lease or otherwise.
The failure of Landlord or Tenant to insist in any one or more instances upon
the strict performance of any of the covenants of this Lease shall not be
construed as a waiver or relinquishment fo the future of such covenant. A
receipt by Landlord, or payment by Tenant, of Basic Rent or Additional Rent with
knowledge of the breach of any covenant hereof shall not be deemed a waiver of
such breach, and no waiver, change, modification or discharge by Landlord or
Tenant of any provision in this Lease shall be deemed to have been made or shall
be effective unless expressed in writing and signed by an authorized
representative of Landlord or of Tenant, as the case may be. In addition to the
other remedies in this Lease provided, Landlord or Tenant, as the case may be,
shall be entitled to the restraint by injunction of the covenants, conditions or
provisions of this Lease, or to a decree compelling performance of or compliance
with any of such covenants, conditions or provisions.
25. Broker
Tenant warrants and represents that it has not dealt with any real
estate broker other than CB/Richard Ellis Whittier Partners and Meredith & Grew,
Incorporated (the "Brokers") in connection with the Premises or this Lease. Full
payment to the Brokers will be made by Landlord pursuant to a separate
agreement. Tenant shall indemnify and hold Landlord harmless from and against
any liability for commissions due any real estate broker or finder other than
the Broker with whom Tenant has dealt in connection with this Lease.
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26. Notices
Any notices or other communications hereunder shall be in writing and
delivered by hand or mailed, postage prepaid, by registered or certified mail,
return receipt requested, or delivered by generally-recognized overnight
delivery service, if to Landlord at the address first set forth above, if to
Tenant at the address first set forth above, and if to any Mortgagee at such
address as it may specify by such written notice to Landlord and Tenant, or at
such other address as any of them may from tim to time specify by like notice to
the others. Any such notice shall be deemed given when personally delivered or,
if mailed, three business days after having been mailed as herein provided,
unless mailed by generally-accepted overnight delivery service, in which case
notice shall be deemed given one business day after having been so mailed.
27. Estoppel Certificate
Each party shall, from time to time, within twenty (20) days after
receipt of written request from the other party or any Mortgagee, execute,
acknowledge and deliver, without charge, to the other party, the Mortgagee or
any other person designated, a statement in writing certifying: (i) that this
Lease is unmodified and in full force and effect (or if there have been
modifications, identifying the same by the date thereof and specifying the
nature thereof); (ii) that, to the knowledge of the certifying party, there
exist no defaults (or if there be any defaults, specifying the same); (iii) the
amount of the Basic Rent, the dates to which the Basic Rent, Additional Rent and
other sums and charges payable hereunder have been paid; (iv) that, to the
knowledge of the certifying party, there exist no claims against the other party
hereunder except for the continuing obligations under this Lease (or if the
certifying party has any such claims, specifying the same); and (v) such other
matters as the requesting party or the Mortgagee may reasonably request.
28. Bind and Inure; Limited Liability of Landlord
All of the covenants, agreements, stipulations, provisions, conditions
and obligations herein expressed and set forth shall be considered as running
with the land and shall extend to, bind and inure to the benefit of Landlord and
Tenant, which terms as used in this Lease shall include their respective
successors and assigns where the context hereof so admits.
Neither Landlord nor any principal of Landlord shall have any
individual or personal liability for the fulfillment of the covenants,
agreements and obligations of Landlord hereunder, Tenant's recourse and
Landlord's liability hereunder being limited to the Property and the Building
and the rents accruing therefrom. The term "Landlord" as used in this Lease
shall refer to the owner or owners from time to time of the Property or the
Building, it being understood that no such owner shall have any liability
hereunder for matters arising from and after the date such owner ceases to have
any interest in the Property or the Building, provided that the successor to
such owner expressly assumes in writing the covenants, agreements and
obligations of Landlord hereunder. Landlord shall in no event be in default in
the performance of any of Landlord's obligations hereunder unless and until
Landlord shall have failed to perform such obligations within thirty (30) days,
or if such failure is of such a natur that Landlord cannot reasonably remedy the
same within such thirty (30) day period, Landlord shall fail to commence
promptly
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(and in any event within such thirty (30) day period) to remedy the same and to
prosecute such remedy to completion with diligence and continuity.
29. Captions
The captions for the numbered paragraphs of this Lease are provided for
reference only and they do not constitute a part of this agreement or any
indication of the intentions of the parties hereto.
30. Integration
All prior written and oral agreements between the parties and all prior
representations made by either party to the other with respect to the subject
matter hereof have been incorporated in this instrument or otherwise satisfied
prior to the execution hereof.
31. Severability; Choice of Law
If any provision of this Lease shall be declared to be void or
unenforceable either by law or by a court of competent jurisdiction, the
validity or enforceability of remaining provisions shall not thereby be
affected. This Lease is made under, and shall be construed in accordance with,
the laws of The Commonwealth of Massachusetts.
32. Enforcement of Rights
All reasonable costs or expenses, including reasonable attorneys' fees,
incurred by Landlord in connection with amendments to, consents under and
subleases and assignments of this Lease (other than assignments or subleases
described in Paragraph 20(b) above) shall be paid by Tenant to Landlord upon
receipt of written demand. All reasonable costs or expenses, including
reasonable attorney's fees, incurred by Tenant in connection with amendment to
and consents under this Lease requested by Landlord shall be paid by Landlord to
Tenant upon receipt of written demand. All reasonable costs or expenses,
including reasonable attorneys' fees, incurred by a party in enforcing its
rights or remedies hereunder, whether during or after the expiration or
termination of the term, shall be paid by the party prevailing in such
enforcement of rights and remedies. Moreover, if either party hereto is, without
fault on its own part, made a party to any action instituted by or against the
other party to this Lease du to such other party's fault, such other party shall
indemnify the party innocently involved and save it harmless against and from
all such cost and expense incurred therein including, without limitation,
reasonable attorneys' fees.
33. Covenants Regarding Hazardous Materials
Tenant shall not cause or allow any of its employees, agents,
customers, visitors, invitees, licensees, contractors, assignees or subtenants
(collectively "Tenant's Parties") to cause any Hazardous Materials to be brought
on to, used, generated, stored or disposed of, on or about the Property. Tenant
shall indemnify, defend by counsel reasonably acceptable to Landlord, protect
and hold Landlord harmless from and against all liabilities, losses, costs and
expenses, demands,
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causes of action, claims, or judgments directly or indirectly arising out of (i)
the violation of the foregoing covenant or (ii) the use, generation, storage or
disposal of Hazardous Materials by Tenant or any of Tenant's Parties on the
Property. Tenant's obligations pursuant to the foregoing indemnity shall survive
the termination of this Lease. Hazardous Materials shall include but not be
limited to those substances defined as "hazardous substances," "toxic
substances," "pollutants" or "contaminants' in the Comprehensive Environmental
Response, Liability and Recovery Act, as amended ("CERCLA"), 42 U.S.C. Section
9601 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section
1802, the Resources Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C.
Section 6901, et seq or Massachusetts Common Laws Chapter 21E.
34. Recording
Tenant agrees not to record this Lease, but, if the Term of this Lease
(including any extended term) is seven (7) years or longer, each party hereto
agrees, on the request of the other, to execute a so-called notice of lease in
recordable form and complying with applicable law and reasonably satisfactory to
Landlord's attorneys. In no event shall such document set forth the rent or
other charges payable to Tenant under this Lease; and any such document shall
expressly state that it is executed pursuant to the provisions contained in this
Lease, and is not intended to vary the terms and conditions of this Lease.
35. (a) A security deposit equal to $49,142.82 [three (3) months Basic Rent]
will be paid upon execution and delivery of this Lease, and Landlord shall hold
the same throughout the Term of this Lease as security for the performance by
Tenant of all obligations on the part of Tenant hereunder and under any other
leases or occupancy agreements that may hereafter be entered into between
Landlord and Tenant relative to the Property. Landlord shall have the right from
time to time without prejudice to an other remedy Landlord may have on account
thereof, to apply such deposit, or any part thereof, to Landlord's damages
arising from, or to cure, any default of Tenant hereunder or under any other
such lease or occupancy agreement. If Landlord shall so apply any or all of such
deposit, Tenant shall immediately deposit with Landlord the amount so applied to
be held as security hereunder. If at the expiration of the Term and surrender of
the Premises in accordance with this Lease there then exists no Default of
Tenant (or event or circumstances which, with the passage of time or the giving
of notice, or both, would constitute a Default of Tenant), Landlord shall return
the deposit, or so much thereof as shall have theretofore not been applied in
accordance with the terms of this Paragraph 35, to Tenant within ten (10)
business days of such surrender. While Landlord holds such deposit, Landlord
shall hold the same in a separate account in a Massachusetts bank, and shall
credit to Tenant's account the amount o any interest actually paid by such bank
with respect thereto (after deducting any fees or other charges imposed on
Landlord in respect of such account). Tenant hereby certifies that it is aware
that the Federal Deposit Insurance Corporation ("FDIC") coverages apply only to
a cumulative maximum amount of $100,000 for each individual deposit for all of
depositor's accounts at the same or related institution. Further, Tenant agrees
that Landlord assumes no responsibility for, nor will Tenant hold Landlord
liable for, any loss occurring with arises from the fact that the amount of the
security deposit exceeds $10,000 or from the fact that the excess amount will
not be insured by FDIC, or that FDIC insurance is not available on certain types
of bank instruments. If Landlord conveys Landlord's interest under this Lease,
the deposit, or any part thereof not
21
<PAGE>
previously applied, shall be turned over by Landlord to Landlord's grantee, and,
if so turned over, Tenant agrees to look solely to such grantee for prope
application of the deposit in accordance with the terms of this Paragraph 35,
and the return thereof in accordance herewith. The holder of a mortgage shall
not be responsible to Tenant for the return or application of any such deposit,
whether or not it succeeds to the position of Landlord hereunder, unless such
deposit shall have been actually received in hand by such holder.
36. Option to Extend
(a) Provided that, at the time of such exercise, (i) there exists no
Default of Tenant; (ii) this Lease is still in full force and effect; and (iii)
Tenant shall not have assigned this Lease or sublet any or all of the Premises
(except as permitted pursuant to Paragraph 20(b), Tenant shall have the right to
extend the Term of this Lease as to the Premises originally leased hereunder for
one extended term (the "Extended Term") of five (5) years. The Extended Term
shall commence on the day immediately following the expiration date of the
Initial Term, and shall end on the day immediately preceding the fifth
anniversary of the first day of the Extended Term. Tenant shall exercise such
option by giving Landlord written notice of its desire to do so, not later than
twelve (12) months prior to the expiration of the Initial Term, it being agreed
that time shall be of the essence with respect to the giving of such notice. The
giving of such notice shall automatically extend the Term of this Lease for the
Extended Term of this Lease for the Extended Term, and no instrument of renewal
need be executed. In the event that Tenant fails to give such notice to
Landlord, the Term of this Lease shall automatically terminate at the end of the
Initial Term, and Tenant shall have no further right or option to extend the
Term of this Lease. The Extended Term shall be on all the terms and conditions
of this Lease, except that: (i) Landlord shall have no obligation to pay any
construction or improvements to the Premises, with respect to the Extended Term;
and (ii) the Basic Rent for the Extended Term shall be determined in accordance
with Paragraph 36(b).
(b) The Basic Rent for the Extended Term shall be the greater of (i)
Fair Market Rental Value of the Premises (as hereinafter defined) as of the
commencement of the Extended Term, determined without regard to Tenant's right
to extend, as agreed by the parties or (ii) the Basic Rent for the last year of
the Term, it being understood that during the Extended Term, Additional Rent
shall continue to be calculated in accordance with Paragraph 7.
(c) (i) The term "Fair Market Rental Value" shall mean the annual fixed
rent that a willing tenant would pay and a willing landlord would accept, each
acting in its own best interest and without duress, in an arms-length lease of
the premises in question as of the date (the "Determination Date") on which the
same is to become effective. If Landlord and Tenant shall fail to agree upon the
Fair Market Rental Value within five (5) months before the Determination Date,
then Landlord and Tenant each shall give notice (the "Determination Notice") to
the other setting forth their respective determinations of the Fair Market
Rental Value, and, subject to the provisions of paragraph (ii) below, either
party may apply to the American Arbitration Association or any successor thereto
for the designation of an arbitrator satisfactory to both parties to render a
final determination of the Fair Market Rental Value. The arbitrator shall be a
real estate appraiser or consultant who shall have at lease ten (10) years'
continuous experience
22
<PAGE>
as a commercial real estate broker or appraiser, and having significant
experience with property similar to the Building in the greater Boston area. The
arbitrator shall conduct such hearings and investigations as the arbitrator
shall deem appropriate and shall, within thirty (30) days after having been
appointed, choose one of the determinations set forth in either Landlord's or
Tenant's Determination Notice, and that choice by the arbitrator shall be
binding upon Landlord and Tenant. Each party shall pay its own counsel fees and
expenses, if any, in connection with any arbitration under this paragraph (k),
and the parties shall share equally all other expenses and fees of any such
arbitration. The determination rendered in accordance with the provisions of
this paragraph (ii) shall be final and binding in fixing the Fair Market Rental
Value. The arbitrator shall not have the power to add to, modify, or change any
of the provisions of this Lease.
(ii) In the event that the determination of the Fair Market Rental
Value set forth in the Landlord's and Tenant's Determination Notices shall
differ by less than five percent (5%) per square foot of Premises Rentable Area
per annum for each year for which the same is being determined, then the Fair
Market Rental Value shall not be determined by arbitration, but shall instead be
set by taking the average of the determinations wet forth in Landlord's and
Tenant's Determination Notices. Only if the determinations set forth in
Landlord's and Tenant's Determination Notices shall differ by more than 5% per
square foot of Premises Rentable area per annum for any year for which the same
is being determined shall the actual determination of Fair Market Rental Value
be made by an arbitrator as set forth in paragraph (i) above.
(iii) If for any reason the Fair Market Rental Value shall not have
been determined prior to the Determination Date, then, until the Fair Market
Rental Value and, accordingly, the Basic Rent shall have been finally
determined, Tenant shall pay Basic Rent, shall have been finally determined,
Tenant shall pay Basic Rent at the rate quoted by Landlord in Landlord's
Determination Notice, but subject to the limitations of Paragraph 36(b) hereof.
Upon final determination of the Fair Market Rental Value, an appropriate
adjustment to the Basic Rent theretofore paid by Tenant from and after the
Determination Date shall be made reflecting such final determination, and
Landlord or Tenant, as the case may be, shall promptly credit or pay,
respective, to the other any overpayment of deficiency, as the case may be, in
the payment of Basic Rent from the Determination Date to the date of such final
determination.
37. Force Majeure
The time for performance of any act required to be done by either party
shall be extended by a period equal to an delay caused by or resulting form an
act of God, war, civil commotion, fire, casualty, labor difficulties, shortages
of labor or materials or equipment, governmental regulation, act or default of
the other party, or other causes beyond such party's reasonable control (which
shall not, however, the availability of funds).
38. Tenant's Right Of First Offer. If during the term of this Lease Landlord
desires to lease (to someone other than a tenant of the Building having an
option to extend or expand, or a first right to lease all or a portion of such
space) all or a portion of the Building not included in the Premises (the "First
Offer Space"), Landlord shall so notify Tenant setting forth the terms and
conditions on which Landlord is willing to so lease the First Offer Space, and
including a form of
23
<PAGE>
the standard lease then in use for the Building. Tenant may, by giving Landlord
notice within fifteen (15) days after receipt of Landlord's notice, elect to
lease the First Offer Space on the terms and conditions set forth in Landlord's
notice. If Tenant shall so elect, Tenant shall within ten (10) days after such
election enter into a lease incorporating the terms and conditions set forth in
Landlord's notice. If Tenant shall fail to make such election within such 15-day
period, or to enter into such lease within such 10-day period, Tenant shall have
no further rights with respect to the First Offer Space, and Landlord shall
thereafter be free to lease any or all of the First Offer Space to such party or
parties, and on such terms and conditions, as Landlord may deem appropriate.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed in duplicate under seal as of the date first above written.
WAKEFIELD READY MIXED
CONCRETE CO., INC.
By: /s/ David Schelzi
Title: President
Hereunto duly authorized
FOCUS ENHANCEMENTS, INC.
By: /s/ T. L. Massie
Title: President & CEO
Hereunto duly authorized
24
<PAGE>
EXHIBIT A
[Graphic omitted showing floor plan]
<PAGE>
EXHIBIT B
The modifications described in the attached plan shall include without
limitation:
1. install locks on interior doors per Tenant's
specifications;
2. install doorstops on all interior and exterior doors;
3. install an ambient air conditioning system to allow
year-round air conditioner use in the office areas
only;
4. install wall-to-wall carpeting throughout the office
portion of the leased premises of high grade and
quality;
5. install vinyl-composite tile in the warehouse
restrooms;
6. install high-quality ceramic tile in the office
restrooms;
7. install a number of ceiling fans in the warehouse
portion of the leased premises sufficient to cool
such area;
8. install digital thermostats to govern all heating and
cooling requirements;
9. lay a finish coat of pavement in the rear parking lot
area of the building;
10. remove all dirt and debris from the rear parking lot
area of the building;
11. repair concrete around second loading dock; and
12. remove the construction trailer from the main parking
lot.
EXHIBIT 11
FOCUS ENHANCEMENTS, INC.
STATEMENT OF COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Net loss $(12,787,324) $ (1,986,079)
============ ============
Basic:
Weighted average number of common shares outstanding 16,336,872 12,727,934
============ ============
Diluted:
Weighted average number of common shares outstanding 16,336,872 12,727,934
Weighted average common equivalent shares -- --
------------ ------------
Weighted average number of common
Shares outstanding used to calculate per share data 16,336,872 12,727,934
============ ============
Loss per share
Basic $ (.78) $ (.16)
Diluted $ (.78) $ (.16)
</TABLE>
EXHIBIT 21
SUBSIDIARIES
The following is a list of subsidiaries of Focus Enhancements, Inc.
Name State of Incorporation
- ---- ----------------------
Lapis Technologies, Inc. California
TView, Inc. Oregon
PC Video Conversion, Inc. Delaware
FOCUS Enhancements B.V. Netherlands
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
FOCUS Enhancements, Inc. on Form S-8 (Nos. 33-80498, 33-80651 and 333-33243) and
on Form S-3 (Nos. 33-80033, 333-26911, 333-43285, 333-49467 and 333-57923) of
our report, dated April 9, 1999 on the consolidated financial statements of
FOCUS Enhancements, Inc. as of December 31, 1998 and 1997 and for the years then
ended, which report is included in this Annual Report on Form 10-KSB/A.
/s/ WOLF & COMPANY, P.C.
WOLF & COMPANY, P.C.
Boston, Massachusetts
April 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,128,380
<SECURITIES> 248,983
<RECEIVABLES> 3,203,126
<ALLOWANCES> 649,987
<INVENTORY> 5,948,624
<CURRENT-ASSETS> 10,349,285
<PP&E> 1,667,098
<DEPRECIATION> (394,621)
<TOTAL-ASSETS> 12,736,933
<CURRENT-LIABILITIES> 8,914,492
<BONDS> 860,357
0
0
<COMMON> 180,051
<OTHER-SE> 2,697,821
<TOTAL-LIABILITY-AND-EQUITY> 12,736,933
<SALES> 18,440,226
<TOTAL-REVENUES> 18,440,226
<CGS> 15,410,912
<TOTAL-COSTS> 15,320,251
<OTHER-EXPENSES> (100,074)
<LOSS-PROVISION> 346,017
<INTEREST-EXPENSE> 225,802
<INCOME-PRETAX> (12,762,683)
<INCOME-TAX> 24,641
<INCOME-CONTINUING> (12,787,324)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,787,324)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
