<PAGE>
Exhibit 99.1
THIS NOTE AND ALL SECURITIES ISSUED UPON CONVERSION OF THIS NOTE HAVE BEEN
ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT")
SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE COMPANY
OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT
THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER NOR IS IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS
LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.
FOCUS ENHANCEMENTS, INC.
SECURED CONVERTIBLE PROMISSORY NOTE
$2,362,494.20 October 26, 2000
FOR VALUE RECEIVED, FOCUS Enhancements, Inc, a Delaware corporation (the
"Company"), with its principal office at 600 Research Drive, Wilmington,
Massachusetts 01887, unconditionally promises to pay to the order of Carl Berg
(the "Payee" or the "Holder"), or registered assigns, the principal amount of
Two Million Three Hundred Sixty Two Thousand, Four Hundred Ninety Four Dollars
and Twenty Cents ($2,362,494.20) or such amount thereof as may be outstanding
(the principal balance as it may change from time to time being the "Principal
Amount") on October 26, 2003 (the "Maturity Date") together with accrued and
unpaid interest thereon, in the manner set forth herein. The Company further
agrees to pay interest on the Principal Amount at the rate per annum of "Prime"
rate of interest plus 1% on the outstanding Principal Amount. The Principal
Amount is payable in such coin or currency of the United States of America as at
the time of payment shall be legal tender for the payment of public and private
debts. Interest shall be calculated from and including from the date of this
Note to but not including the date such Principal Amount has been repaid in
full. Interest shall be paid quarterly (based upon a calendar quarter) on the
twenty-fifth day of each quarter and shall be calculated on the basis of a 365-
day or 366-day year, as the case may be, for the actual number of days elapsed.
The Prime rate of interest rate shall be determined on the date of this Note and
shall be adjusted every July 1 and January 1 of each year (the "Interest Rate
Determination Date") based on the Prime rate published in Western Edition of The
Wall Street Journal on the last business day immediately preceding the Interest
Rate Determination Date.
Each payment by the Company pursuant to this Note shall be made without
set-off or counterclaim and in immediately available funds.
The Company (i) waives presentment, demand, protest or notice of any kind
(other than notice of default) in connection with this Note and (ii) agrees, in
the event of an Event of Default, to pay to the holder of this Note, on demand,
all reasonable costs and expenses (including legal fees) incurred in connection
with the enforcement and collection of this Note.
<PAGE>
1. Security Agreement. This Note is entitled to the benefit of that
certain Security Agreement, dated of even date herewith, between Payee and the
Company (as amended from time to time hereafter, the "Security Agreement"),
pursuant to which Payee is granted a first priority security interest in the
Collateral (as such term is defined in the Security Agreement). This Note shall
be subject to the terms and conditions set forth in such Security Agreement.
2. Conversion into Common Stock.
A. Conversion. Upon the occurrence of a Triggering Event (as
defined herein), the Principal Amount of this Note shall, at the discretion of
Payee, be converted into such number of shares of common stock, $0.01 par value
per share, of the Company ("Common Stock"), equal to the Principal Amount of the
Note divided by the Conversion Price (as defined below). Upon the conversion of
the Principal Amount into Common Stock, the Company shall deliver to the Payee
the required Common Stock and take all action necessary to register such Common
Stock under the Securities Act of 1933, as amended, as soon as practicable.
B. Conversion Price. The Conversion Price shall equal the average
of the closing bid and ask price of the Common Stock on the last trading day
immediately preceding the date of this Note.
C. Triggering Event. For the purpose of this Note , a Triggering
Event is the occurrence of both of the following events: (i) the Company has
settled or resolved all litigation matters regarding CRA Associates, Inc. and
the shareholder derivative litigation which exists as of the date of this Note
as described in the Company's 10-Q for the quarter ended June 30, 2000 (the
"Litigation"); and (ii) the Company has reported a profit for two consecutive
quarters at or after the settlement or resolution of the Litigation.
D. Optional Conversion. The Note can also be converted pursuant to
the conversion mechanism set forth in Section 2.A. above at any time upon the
mutual agreement of the Company and the Holder. Furthermore, the Holder, upon
written notice to the Company, can elect to accept payment of interest on the
Note in the form of Common Stock. The value of such Common Stock issued in lieu
of interest payments shall be based on the average of the closing bid and ask
price of the Common Stock on the last trading day immediately preceding the date
interest is payable.
E. Mechanics of Conversion. In the event Payee has chosen to
convert the outstanding Principal Amount pursuant to Section 2.D above, Payee
shall give written notice to the Company of its election to effectuate such
conversion on the date specified in such notice (such date, the "Conversion
Date"). On the Conversion Date, the outstanding Principal Amount shall be
converted automatically into the Common Stock at the Conversion Price without
further action by the Payee and whether or not this Note has been surrendered to
the Company or its transfer agent, and Payee shall be deemed to be the
shareholder of record as of the Conversion Date with respect to the Common
Stock. Any unpaid interest will be immediately due and payable. Within
fourteen days subsequent to the Conversion Date, Payee shall surrender this Note
to the Company or its
-2-
<PAGE>
transfer agent, duly marked cancelled and, in exchange therefor, Payee shall
receive from the Company share certificates evidencing the Common Stock in the
name or names in which Payee wishes such certificate or certificates for the
Common Stock to be issued. If within fourteen days of the Conversion Date, Payee
is unable to deliver this Note, Payee shall notify the Company or its transfer
agent that such Note has been lost, stolen or destroyed and shall deliver to the
Company a written acknowledgement that the obligations evidenced by this Note,
shall have been upon the Conversion Date, be deemed fully satisfied, and, if
requested by the Company, Payee shall execute an agreement reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with inability of Payee to deliver such Note.
F. Issue Taxes. The Company shall pay any and all stamp, issue and
other taxes that may be payable in respect of the issuance or delivery of the
Common Stock.
G. Reservation of Stock Issuable Upon Conversion. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
this Note as described in this Section 2, such number of its shares of Common
Stock from time to time issuable upon the conversion hereof. If at any time
such number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of this Note, the Company will take all such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock, to such number of shares as shall be sufficient for such
purpose, including, without limitation, obtaining the requisite stockholder
approval of any necessary amendment to the Company's certificate of
incorporation.
H. Fractional Shares. No fractional shares shall be issued upon the
conversion of this Note into the Common Stock. If the conversion would result
in the issuance of a fraction of a share of Common Stock, the Company shall, in
lieu of issuing any fractional share, pay Payee who is otherwise entitled to
such fraction a sum in cash equal to the average of the bid and ask price of the
Common Stock on the last day of trading prior to the Conversion Date.
3. Consolidation; Merger; Reclassification.
A. In case of any consolidation with or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of substantially all of the property
and assets of any nature of the Company, such successor, leasing, or purchasing
corporation, as the case may be, shall (i) execute with Payee an agreement
providing that Payee shall have the right thereafter to receive upon conversion
of this Note solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such consolidation,
merger, sale, lease, or conveyance by a holder of the number of shares of Common
Stock into which this Note might have been converted immediately prior to such
consolidation, merger, sale, lease, or conveyance; and (ii) make effective
provision in its certificate of incorporation or otherwise, if necessary, to
effect such agreement.
B. In case of any reclassification or change of the shares of Common
Stock issuable upon conversion of this Note in accordance with Section 2 hereof
(other than a change in par value or from no par value to a specified par
value), or in case of any consolidation or merger of another corporation into
the Company in which the Company is the continuing corporation and
-3-
<PAGE>
in which there is a reclassification or change (including a change to the right
to receive cash or other property) of the shares of Common Stock issuable upon
the conversion of this Note in accordance with Section 2 hereof (other than a
change in par value, or from no par value to a specified par value), Payee shall
have the right thereafter to receive upon conversion of this Note solely the
kind and amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such reclassification, change,
consolidation, or merger by a holder of the number of shares of Common Stock
into which this Note might have been converted immediately prior to such
reclassification, change, consolidation, or merger.
C. The above provisions of this Section 3 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
4. Call Feature and Maturity Date. The Note shall be callable in
the event the Company has not completed the merger pursuant to the Merger
Agreement, provided (i) the Holder gives the Company 90 days written notice;
(ii) the lack of completion of the merger pursuant to the Agreement was not
caused in whole or in part by the Holder or the board of directors of Videonics,
Inc.; and (iii) the Holder has voted his shares of Videonics, Inc. in favor of
the merger. Except as otherwise set forth in this Note, this Note shall be
payable in full on the Maturity Date.
5. Covenants of Company
A. Affirmative Covenants. The Company covenants and agrees that, so
long as this Note shall be outstanding, it will perform the obligations set
forth in this Section 5A:
(i) Taxes and Levies. The Company will promptly pay and
discharge all taxes, assessments, and governmental charges or levies imposed
upon the Company or upon its income and profits, or upon any of its property,
before the same shall become delinquent, as well as all claims for labor,
materials and supplies which, if unpaid, might become a lien or charge upon such
properties or any part thereof; provided, however, that the Company shall not be
required to pay and discharge any such tax, assessment, charge, levy or claim so
long as the validity thereof shall be contested in good faith by appropriate
proceedings and the Company shall set aside on its books adequate reserves in
accordance with generally accepted accounting principles ("GAAP") with respect
to any such tax, assessment, charge, levy or claim so contested;
(ii) Maintenance of Existence. The Company will do or cause to be
done all things reasonably necessary to preserve and keep in full force and
effect its corporate existence, rights and franchises and comply with all laws
applicable to the Company, except where the failure to comply would not have a
material adverse effect on the Company;
(iii) Maintenance of Properties. The Company will at all times
maintain, preserve, protect and keep its properties used or useful in the
conduct of its business in good repair, working order and condition, and from
time to time make all needful and proper repairs, renewals, replacements and
improvements thereto as shall be reasonably required in the conduct of its
business;
(iv) Books and Records. The Company will at all times keep true
and correct books, records and accounts reflecting all of its business affairs
and transactions in accordance with GAAP. Such books and records shall be open
at reasonable times and upon reasonable notice to the inspection of the Payee or
its agents; and
-4-
<PAGE>
(v) Compliance with Obligations, Laws, Etc. The Company shall
comply with all of the obligations which it has incurred or to which it becomes
subject pursuant to any contract or agreement, whether oral or written, express
or implied, the breach of which might have a material adverse effect upon its
business or financial condition, unless and to the extent that the same are
being contested in good faith and by appropriate proceedings and adequate
reserves have been set aside on its books with respect thereto. The Company
shall comply with all applicable laws, rules and regulations of all governmental
authorities.
(vi) Notice of Certain Events. The Company will give prompt
written notice (with a description in reasonable detail) to the Payee of:
(a) the occurrence of any Event of Default or any event
which, with the giving of notice or the lapse of time, would constitute an Event
of Default; and
(b) the delivery of any notice effecting the acceleration
of any indebtedness in excess of $100,000.
(vii) The Offering. The Company will take any and all action
necessary and/or advisable to authorize the Common Stock (including, but not
limited to, obtaining all approvals and/or consents of the Board of Directors),
and effectuate the conversion of this Note into Common Stock.
B. Negative Covenants. The Company covenants and agrees that,
so long as this Note shall be outstanding, it will perform the obligations set
forth in this Section 5B (without the express prior written consent of the
Payee):
(i) Sales of Assets. The Company will not, without the prior
written consent of the Holder, sell, transfer, lease or otherwise dispose of,
all or a substantial part of its properties or assets to any person or entity,
provided that this clause (i) shall not restrict any disposition made in the
ordinary course of business;
(ii) Redemptions. The Company will not redeem or repurchase any
outstanding equity securities of the Company, except for (a) repurchases of
unvested or restricted shares of Common Stock at cost from employees,
consultants or members of the Board of Directors pursuant to repurchase options
of the Company (1) currently outstanding; or (2) hereafter entered into pursuant
to a stock option plan or restricted stock plan approved by the Company's Board
of Directors; or (b) rescission offers necessary or appropriate to address
violations of applicable securities laws;
(iii) Indebtedness. The Company will hereafter not voluntarily
create, incur or assume, contingently or otherwise, any indebtedness which is
not expressly subordinated in right of payment to this Note;
(iv) Negative Pledge. The Company will not hereafter create,
incur, assume or suffer to exist any mortgage, pledge, hypothecation,
assignment, security interest,
-5-
<PAGE>
encumbrance, lien (statutory or other), preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any conditional sale or other title retention agreement and any
financing lease) (each, a "Lien") upon any of its property, revenues or assets,
whether now owned or hereafter acquired; and
(v) Dividends. The Company will not declare or pay any cash
dividends or distributions on its outstanding capital stock.
6. Events of Default
A. The term "Event of Default" shall mean any of the events set
forth in this Section 6A:
(i) Non-Payment of Obligations. The Company shall default in the
payment of the principal of this Note as and when the same shall become due and
payable, whether by acceleration or otherwise, which default shall continue
uncured after five (5) days written notice from Holder;
(ii) Non-Performance of Affirmative Covenants. The Company shall
default in the due observance or performance of any covenant set forth in
Section 5A, which default shall continue uncured after five (5) days from
Holder;
(iii) Non-Performance of Negative Covenants. The Company shall
default in the due observance or performance of any covenant set forth in
Section 5B hereof; and/or
(iv) Bankruptcy, Insolvency, Etc. The Company shall:
(a) admit in writing its inability to pay its debts as they
become due;
(b) apply for, consent to, or acquiesce in, the appointment
of a trustee, receiver, sequestrator or other custodian for the Company or any
of its property, or make a general assignment for the benefit of creditors;
(c) in the absence of such application, consent or
acquiesce in, permit or suffer to exist the appointment of a trustee, receiver,
sequestrator or other custodian for the Company or for any part of its property;
(d) permit or suffer to exist the commencement of any
bankruptcy, reorganization, debt arrangement or other case or proceeding under
any bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Company, and, if such case or proceeding is not
commenced by the Company or converted to a voluntary case, such case or
proceeding shall be consented to or acquiesced in by the Company or shall result
in the entry of an order for relief; or
(e) take any corporate or other action authorizing, or in
furtherance of, any of the foregoing.
-6-
<PAGE>
(v) Default; Cross-Default. The Company shall default (i) in any
of the covenants of the Security Agreement executed herewith as same may be
amended from time to time hereafter or (ii) in the payment when due of any
amount payable under any other obligation of the Company for money borrowed in
excess of $250,000.
B. Action if Bankruptcy. If any Event of Default described in
clauses (iv)(a) through (d) of Section 6A shall occur, the outstanding principal
amount of this Note and all other obligations hereunder shall automatically be
and become immediately due and payable, without notice or demand.
C. Action if Other Event of Default. If any Event of Default (other
than any Event of Default described in clauses (iv)(a) through (e) of Section 6A
shall occur for any reason, whether voluntary or involuntary, and be continuing,
the Holder may, upon notice to the Company, declare all or any portion of the
Principal Amount of the Note, together with interest accrued thereon, to be due
and payable and any or all other obligations hereunder to be due and payable,
whereupon the full unpaid principal amount hereof, such accrued interest and any
and all other such obligations which shall be so declared due and payable shall
be and become immediately due and payable, without further notice, demand, or
presentment.
7. Representations of the Company. The Company represents and warrants to
the Payee that:
A. Good Standing. The Company is a corporation duly organized,
existing and in good standing under the laws of the State of Delaware and has
the corporate power to conduct the business which it conducts and proposes to
conduct.
B. Authorization of Notes. The issuance and delivery of the Note has
been duly and validly authorized.
C. Legal Proceedings. Except as disclosed in the Company's 10-Q for
the quarter ended June 30, the Company knows of no pending or threatened legal
or governmental proceedings to which the Company is a party which could
materially adversely affect the business, property, financial condition or
operations of the Company.
D. Non-Contravention. The Company is not in violation of or default
under, nor will the issuance of this Note, and the incurrence of the obligations
herein set forth, result in a violation of, or constitute a default under, the
Company's Articles of Incorporation or By-Laws, as amended, any material
obligations, agreement, covenant or condition contained in any bond, debenture,
note or other evidence of indebtedness or in any material contract, indenture,
mortgage, loan agreement, lease, joint venture or other agreement or instrument
to which the Company is a party or by which it or any of its properties may be
bound or any material order, rule, regulation, writ, injunction, or decree of
any government, governmental instrumentality or court, domestic or foreign.
-7-
<PAGE>
8. Miscellaneous.
A. Parties in Interest. All covenants, agreements and undertakings
in this Note binding upon the Company or the Payee shall bind and inure to the
benefit of the successors and permitted assigns of the Company and the Payee,
respectively, whether so expressed or not.
B. Governing Law. This Note shall be governed by and construed in
accordance with the internal laws of the State of California without regard to
the conflicts of laws principles thereof. In the event of any such action or
proceeding, the party prevailing therein shall be entitled to payment from the
other party hereto of its reasonable counsel fees and disbursements in an amount
judicially determined.
C. Waiver of Jury Trial. THE PAYEE AND THE COMPANY HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH, THIS NOTE OR ANY OTHER DOCUMENT OR INSTRUMENT EXECUTED AND
DELIVERED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE PAYEE OR THE COMPANY.
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PAYEE'S PURCHASING THIS NOTE.
D. Notices. Any notice, request, or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered, or if mailed by registered or certified mail,
postage prepaid, or if delivered by nationally recognized overnight delivery
service at the respective addresses of the parties as set forth herein. Any
party hereto may by notice so given change its address for future notice
hereunder.
E. No Stockholder Rights. Nothing contained in this Note shall be
construed as conferring upon the Holder or any other person the right to vote or
to consent or to receive notice as a stockholder in respect to meetings of
stockholders for the election of directors of the Company or any other matters
or any rights whatsoever as a stockholder of the Company; and no dividends shall
be payable or accrued in respect of this Note.
F. No Withholding. All payments by the Company under this Note
shall be made without set-off or counterclaim and be free and clear and without
deduction or withholding for any taxes or fees of any nature whatever, unless
the obligation to make such deduction or withholding is imposed by law.
G. Prepayment. The Company may prepay interest and/or principal, in
part or in full, at any time without penalty.
H. Modifications. None of the terms or provisions of this Note may
be excluded, modified, or amended expect by a written instrument duly executed
on behalf of the Holder and the Company expressly referring to this Note and
setting forth the provisions so excluded, modified, or amended.
-8-
<PAGE>
I. Integration. This Note is an integrated instrument and taken
together with the documents referred to herein or executed herewith, are the
final agreement of the Payee and the Company with respect to the subject matter
hereof and thereof.
IN WITNESS WHEREOF, this Note has been executed and delivered on the date
specified above by the duly authorized representative of the Company.
FOCUS ENHANCEMENTS, INC.
By: /s/ Brett Moyer
-----------------------------------
Name: Brett Moyer
Title: EVP, COO
-9-
