As filed with the Securities and Exchange Commission on November 22, 2000
Registration No. 333-48942
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
FOCUS ENHANCEMENTS, INC.
(Exact name of registrant as specified in its Charter)
-----------------------------
Delaware 04-3186320
(State or other jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or organization)
1-11860
(Primary Standard Industrial
Classification Code Number)
600 Research Drive
Wilmington, Massachusetts 01887
(978) 988-5888
(address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Brett A. Moyer
Chief Operating Officer
Focus Enhancements, Inc.
600 Research Drive
Wilmington, Massachusetts 01887
(978) 988-5888
(name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Neil Aronson, Esq. Gregory A. Gehlmann, Esq.
Mintz, Levin, Cohn, Ferris, Jerrold F. Petruzzelli, Esq.
Glovsky and Popeo PC Manatt, Phelps & Phillips, LLP
One Financial Center 1501 M Street N.W., Suite 700
Boston, MA 02111 Washington, D.C. 20005
(617) 542-6000 (202) 463-4300
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective and all other conditions to the proposed merger described herein have
been satisfied or waived.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
We incorporate by reference into this prospectus important business and
financial information about Videonics and about us. This information is not
included in, or delivered with, this prospectus. We will provide you with a copy
of any and all of the information that we incorporate by reference in this
prospectus, without charge, upon written or oral request. If we do not
specifically incorporate by reference in this prospectus exhibits to the
documents that we incorporate in this prospectus, then we will not provide
copies of those exhibits. TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THE
INFORMATION NO LATER THAN DECEMBER 21, 2000.
Focus stock is listed on the NASDAQ SmallCap Market with the ticker symbol:
"FCSE." On October 26, 2000, the closing price of one of Focus common stock on
the NASDAQ SmallCap Market was $1.25.
Our principal executive offices are located at 600 Research Drive, Wilmington,
Massachusetts, 01887, and our telephone number is (978) 988-5888.
Neither the Securities and Exchange Commission, nor any state securities
commission, has approved or disapproved of these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" AT PAGE 13
The date of this Prospectus is November __, 2000
<PAGE>
VIDEONICS, INC.
1370 DELL AVENUE
CAMPBELL, CALIFORNIA 95008
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To our shareholders:
The Annual Meeting of Shareholders of Videonics, Inc., a California corporation,
will be held at 1370 Dell Avenue, Campbell, California 95008 at 1 p.m.,
California time, on December 28, 2000, for the following purposes:
1. Consider and vote upon a proposal to adopt a merger agreement between
Focus Enhancements, Inc., PC Video Conversion, Inc. and Videonics,
Inc., whereby Videonics will become a wholly-owned subsidiary of Focus
and each share of Videonics common stock will be converted into 0.87
shares of Focus common stock;
2. Elect four (4) directors of Videonics for terms expiring at the 2001
Annual Meeting of Shareholders;
3. Ratify the selection of PricewaterhouseCoopers LLP as Videonics'
accountants for the year ending December 31, 2000; and
4. Transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
If you were a shareholder of record at the close of business on November 10,
2000, you may vote at the meeting or any postponement or adjournment of the
meeting.
If you sign the proxy card enclosed, you also permit the proxy holder to vote,
in their discretion, upon other matters that may come before the annual meeting.
As of the date of mailing, the Videonics Board of Directors is not aware of any
other matters that may come before the annual meeting.
It is important that all Videonics shareholders vote. We urge you to sign and
return the enclosed proxy as promptly as possible, regardless of whether or not
you plan to attend the meeting in person. If you do attend the meeting, you may
then withdraw your proxy and vote in person.
By Order of the Board of Directors
/s/ Michael D'Addio
---------------------------------------
Michael D'Addio, Chairman of the Board
Dated: November 27, 2000
<PAGE>
FOCUS ENHANCEMENTS, INC.
600 RESEARCH DRIVE
WILMINGTON, MASSACHUSETTS 01887
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To our shareholders:
The Annual Meeting of Shareholders of Focus Enhancements, Inc., a Delaware
corporation, will be held at the Crowne Plaza Hotel, Woburn, Massachusetts at
4:00 p.m., Massachusetts time on December 28, 2000, for the following purposes:
1. Consider and vote upon a proposal to adopt a merger agreement between
Focus, PC Video Conversion, Inc. and Videonics, Inc., whereby Videonics
will become a wholly-owned subsidiary of Focus and each share of
Videonics common stock will be converted into 0.87 shares of Focus
common stock;
2. Amend Focus' Certificate of Incorporation to increase the authorized
number of shares of common stock from 30,000,000 to 50,000,000;
3. Elect one (1) Class II director of Focus to serve a three-year term;
4. Approve Focus' 2000 Non-Qualified Stock Option Plan;
5. Ratify the selection of Wolf & Company, P.C. as Focus' accountants for
the year ending December 31, 2000; and
6. Transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
If you were a shareholder of record at the close of business on November 10,
2000, you may vote at the meeting or any postponement or adjournment of the
meeting.
If you sign the proxy card enclosed, you also permit the proxy holder to vote,
in their discretion, upon other matters that may come before the annual meeting.
As of the date of mailing, the Focus Board of Directors is not aware of any
other matters that may come before the annual meeting.
It is important that all Focus shareholders vote. We urge you to sign and return
the enclosed proxy as promptly as possible, regardless of whether or not you
plan to attend the meeting in person. If you do attend the meeting, you may then
withdraw your proxy and vote in person.
By order of the Board of Directors
/s/ Brett A. Moyer
---------------------------------------
Brett A. Moyer, Chief Operating Officer
Dated: November 27, 2000
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER .................................................................. 1
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS ......................................................... 3
The Companies ........................................................................................... 3
Overview of the Merger Agreement ........................................................................ 3
Conditions to Completion of the Merger .................................................................. 3
Reasons for the Merger .................................................................................. 4
Focus Board of Directors' Position on the Fairness of the Merger to Focus Shareholders .................. 5
Recommendations of the Boards of Directors .............................................................. 5
Shareholder Approvals ................................................................................... 5
The Annual Meetings ..................................................................................... 5
What You Will Receive in the Merger ..................................................................... 5
Focus Board of Directors and Management Following the Merger ............................................ 6
Certain Federal Income Tax Consequences ................................................................. 6
Accounting Treatment .................................................................................... 6
Comparison of Shareholder's Rights ...................................................................... 6
Interests of Officers, Directors and the Controlling Shareholders in the Merger ......................... 6
Dissenters' Rights and Appraisal Rights ................................................................. 6
Market Price Information ................................................................................ 7
For More Information .................................................................................... 7
SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL INFORMATION ................................................................................. 8
Focus Summary Selected Historical Financial Information ................................................. 8
Videonics Summary Selected Historical Financial Information ............................................. 9
Summary Selected Unaudited Pro Forma Combined Condensed Consolidated Financial
Information ............................................................................................ 10
Comparative Unaudited Historical and Pro Forma Per Share Data ........................................... 11
Comparative Per share Market Information ................................................................ 12
RISK FACTORS ............................................................................................ 13
Risks Related to the Merger ............................................................................. 13
Risks Related to Focus and Videonics .................................................................... 14
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS .............................................. 18
INTRODUCTION ............................................................................................ 19
THE ANNUAL MEETING OF FOCUS SHAREHOLDERS ................................................................ 19
When will the meeting be held? .......................................................................... 19
What is the purpose of the Focus meeting? ............................................................... 19
Who can vote at the Focus meeting? ...................................................................... 19
How do I vote by proxy? ................................................................................. 19
How many votes do I have? ............................................................................... 20
Can I change my vote after I return my proxy card? ...................................................... 20
How do I vote in person? ................................................................................ 20
What constitutes a quorum? .............................................................................. 20
What vote is required for each proposal? ................................................................ 20
What are the costs of solicitation of proxies? .......................................................... 21
Can I make a proposal at the next meeting? .............................................................. 21
Proposal 1 .............................................................................................. 21
Proposal 2 .............................................................................................. 21
Proposal 3 .............................................................................................. 22
Proposal 4 .............................................................................................. 23
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Page
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Proposal 5 .............................................................................................. 25
THE ANNUAL MEETING OF VIDEONICS SHAREHOLDERS ............................................................ 26
When will the meeting be held? .......................................................................... 26
What is the purpose of the Videonics meeting? ........................................................... 26
Who can vote at the Videonics meeting? .................................................................. 26
How do I vote by proxy? ................................................................................. 26
How many votes do I have? ............................................................................... 27
Can I change my vote after I return my proxy card? ...................................................... 27
How do I vote in person? ................................................................................ 27
What constitutes a quorum? .............................................................................. 27
What vote is required for each proposal? ................................................................ 27
What are the costs of solicitation of proxies? .......................................................... 27
Can I make a proposal at the next meeting? .............................................................. 27
Proposal 1 .............................................................................................. 28
Proposal 2 .............................................................................................. 28
Proposal 3 .............................................................................................. 28
INFORMATION ABOUT FOCUS ................................................................................. 29
The Business ............................................................................................ 29
PC Video Conversion, Inc. ............................................................................... 29
Security Ownership of Certain Beneficial Owners and Management .......................................... 30
Information Regarding Directors and Executive Officers .................................................. 31
Executive Compensation .................................................................................. 33
Repricing of Stock Options/Additional Option Plans ...................................................... 34
Employment Agreements ................................................................................... 35
Subsequent Separation and Consulting Agreements ......................................................... 36
Focus Board Meetings and Committees ..................................................................... 36
Compensation of Directors ............................................................................... 36
Certain Relationships and Related Transactions .......................................................... 36
Section 16(A) Beneficial Ownership Reporting Compliance ................................................. 36
Recent Developments ..................................................................................... 37
INFORMATION ABOUT VIDEONICS ............................................................................. 38
The Business ............................................................................................ 38
Security Ownership of Certain Beneficial Owners and Management .......................................... 38
Information Regarding Directors and Executive Officers .................................................. 39
Executive Compensation .................................................................................. 40
Employment Agreements ................................................................................... 41
Videonics Board Meetings and Committees ................................................................. 41
Remuneration of Non-Employee Directors .................................................................. 41
Report of the Compensation Committee with respect to Executive Compensation ............................. 42
Compensation Committee Interlocks and Insider Participation in Compensation Decisions ................... 42
Performance Measurement Comparison ...................................................................... 43
Certain Relationships and Related Transactions .......................................................... 44
Section 16(A) Beneficial Ownership Reporting Compliance ................................................. 44
THE MERGER .............................................................................................. 44
General ................................................................................................. 44
Background of the Merger ................................................................................ 45
Opinion of the Financial Advisor to Focus ............................................................... 46
Focus' Reasons for the Merger ........................................................................... 46
Recommendation of the Focus Board ....................................................................... 48
Videonics' Reasons for the Merger ....................................................................... 48
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Page
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Recommendation of the Videonics Board ................................................................... 49
Interests of Certain Persons in the Merger .............................................................. 49
Effective Time of the Merger ............................................................................ 50
Structure of the Merger ................................................................................. 50
Effects of the Merger ................................................................................... 50
Merger Consideration .................................................................................... 50
Effect of the Merger on Videonics Stock Options and Warrants ............................................ 51
Transfer of Shares ...................................................................................... 51
Conditions to Completion of the Merger .................................................................. 51
Management and Operations of Focus and Videonics Following the Merger ................................... 52
Operations of Focus and Videonics if the Merger is not Completed ........................................ 52
Certain Federal Income Tax Consequences ................................................................. 52
Accounting Treatment .................................................................................... 54
Restrictions on Sales of Shares by Affiliates of Videonics and Focus .................................... 54
Listing on NASDAQ of Focus Common Stock to be Issued in the Merger ...................................... 54
Federal Securities Laws Consequences .................................................................... 54
Dissenters' Rights ...................................................................................... 55
OPINION OF FINANCIAL ADVISOR RETAINED BY THE FOCUS BOARD OF DIRECTORS ................................... 56
The Market Multiple Approach ............................................................................ 58
The Discounted Cash Flow Approach ....................................................................... 59
THE MERGER AGREEMENT .................................................................................... 61
General ................................................................................................. 61
Conversion of Shares .................................................................................... 61
Representations and Warranties .......................................................................... 62
Conduct of Business Before the Merger ................................................................... 62
No Solicitation ......................................................................................... 64
Conditions .............................................................................................. 65
Termination; Termination Fees ........................................................................... 66
Amendment and Waiver .................................................................................... 68
PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION ......................................... 69
Overview ................................................................................................ 69
Unaudited Pro Forma Condensed Consolidated Balance Sheet (As of September 30, 2000) ..................... 70
Unaudited Pro Forma Condensed Consolidated Statement of Operations (For the nine
months ended September 30, 2000) ....................................................................... 71
Unaudited Pro Forma Condensed Consolidated Statement of Operations (For the year
ended December 31, 1999) ............................................................................... 72
Notes To Unaudited Pro Forma Combined Condensed Financial Statements .................................... 73
COMPARISON OF SHAREHOLDER RIGHTS OF FOCUS AND VIDEONICS ................................................. 77
EXPERTS ................................................................................................. 84
LEGAL MATTERS ........................................................................................... 84
OTHER MATTERS ........................................................................................... 84
WHERE YOU CAN FIND MORE INFORMATION ..................................................................... 84
ACCOMPANYING DOCUMENTS .................................................................................. 86
iii
<PAGE>
APPENDICES
Page
----
APPENDIX A--Agreement and Plan of Merger, dated as of August 30, 2000, among
Focus Enhancements, Inc., PC Video Conversion, Inc. and Videonics, Inc. ..................... A-1
APPENDIX B--Dissenters' Rights under Chapter 13 of the California General
Corporation Law ............................................................................. B-1
APPENDIX C--Certificate of Amendment of the Certificate of Incorporation of Focus
Enhancements, Inc ........................................................................... C-1
APPENDIX D--Opinion of Union Atlantic Capital L.C. financial advisors to Board of
Directors of Focus .......................................................................... D-1
APPENDIX E--Focus Enhancements, Inc. 2000 Non-Qualified Stock Option Plan ............................... E-1
APPENDIX F--Annual Report on Form 10-KSB/A of Focus Enhancements, Inc. for the
Fiscal Year Ended December 31, 1999 ......................................................... F-1
APPENDIX G--Quarterly Report on Form 10-Q of Focus Enhancements, Inc. for the
Quarter Ended September 30, 2000 ............................................................ G-1
APPENDIX H--Annual Report on Form 10-K of Videonics, Inc. for the Fiscal Year
Ended December 31, 1999 ..................................................................... H-1
APPENDIX I--Quarterly Report on Form 10-Q of Videonics, Inc. for the Quarter Ended
September 30, 2000 .......................................................................... I-1
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What is the proposed transaction?
A: Videonics will merge with a subsidiary of Focus. As a result, Videonics
will become a wholly-owned subsidiary of Focus, and Videonics
shareholders will exchange their shares of Videonics common stock for
shares of Focus common stock.
Q: What will I receive in the merger?
A: Common shareholders of Videonics, other than those exercising rights of
dissent, will receive 0.87 shares of Focus common stock for each share
of Videonics common stock they own. Videonics common shareholders will
receive a cash payment in place of any fractional share of Focus common
stock you would have otherwise received.
Q: What shareholder approvals are needed?
A: For Videonics, the affirmative vote of the holders of a majority of the
outstanding shares of Videonics common stock is required to adopt the
merger agreement. Each holder of Videonics common stock is entitled to
one vote per share. As of November 10, 2000, the record date for the
Videonics annual meeting, Videonics directors and executive officers
and their affiliates owned approximately 50% of the outstanding shares.
A: For Focus, the affirmative vote of a majority of the outstanding shares
of Focus common stock is required to adopt the merger agreement and to
amend the Focus Certificate of Incorporation to increase the number of
authorized shares of Focus common stock from 30,000,000 to 50,000,000.
Each holder of Focus common stock is entitled to one vote per share. As
of November 10, 2000, the record date for the Focus annual meeting,
Focus directors and executive officers and their affiliates owned
approximately 5% of the outstanding shares.
Q: Are we voting on anything else at the annual meeting?
A: Yes. Videonics shareholders also will be electing four (4) directors
and ratifying the appointment of auditors. % Focus shareholders also
will be electing one director, approving Focus' 2000 Non-Qualified
Stock Option Plan and ratifying the appointment of auditors.
Q: What do I need to know?
A: After carefully reading and considering the information contained in
this joint proxy statement/prospectus, please respond by completing,
signing and dating your proxy card and returning it in the enclosed
postage paid envelope as soon as possible so that your shares may be
represented at the annual meeting.
Q: What if I don't vote?
A:
o If you fail to respond, it will have the same effect as a vote
against the merger.
o If you respond and do not indicate how you want to vote, your
signed proxy will be counted as a vote in favor of the merger.
o If you respond and abstain from voting, your proxy will have the
same effect as a vote against the merger.
1
<PAGE>
Q: Can I change my vote after I have delivered my proxy?
A: Yes. You can change your vote at any time before your proxy is voted at
the annual meeting. You can do this in one of three ways. First, you
can revoke your proxy. Second, you can submit a new proxy to the
secretary of Focus or Videonics, as appropriate, before the annual
meeting. If your shares are held in an account at a brokerage firm or
bank, you should contact your brokerage firm or bank to change your
vote. Third, if you are a holder of record, you can attend the annual
meeting and vote in person.
Q: Should I send in my stock certificate now?
A: No. After the merger is completed, you will receive written
instructions from the exchange agent on how to exchange your stock
certificates for shares of Focus. Please do not send in your stock
certificates with your proxy.
Q: Where will shares of Focus common stock being issued to Videonics'
shareholders be listed?
A: We intend to apply to list these additional shares on the Nasdaq
SmallCap Market under the symbol "FCSE".
Q: When do you expect the merger to be completed?
A: We are working to complete the merger as quickly as possible. We expect
to complete the merger before the end of 2000.
Q: Who can help answer my questions?
A: If you have any questions about the merger or how to submit your proxy,
or if you need additional copies of this joint proxy
statement/prospectus or the enclosed proxy card, you should contact:
o if you are a Videonics shareholder:
Videonics, Inc.
Investor Relations
1370 Dell Avenue
Campbell, California 95008
(408) 866-8300
[email protected]
o if you are a Focus shareholder:
Focus Enhancements, Inc.
Investor Relations
600 Research Drive
Wilmington, MA 01887
(978) 988-5888
[email protected]
2
<PAGE>
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this document and may
not contain all of the information that is important to you. To better
understand the merger and for a more complete description of the legal terms of
the merger, you should read the following summary with the more detailed
information included elsewhere, or that we incorporate by reference, in this
joint proxy statement/prospectus. You may obtain information incorporated by
reference into this joint proxy statement/prospectus without charge by following
the instructions in the section entitled "Where You Can Find More Information."
THE COMPANIES
Videonics, Inc. (see page 38)
Videonics, Inc., a California corporation, is engaged in the design,
manufacture and sale of affordable, high quality, real time, digital video
post-production equipment. Its products process, edit and mix raw video footage
as well as enhance such footage with audio, special effects and titles,
resulting in professional quality video production. Videonics equipment is used
throughout the world in the production of videos.
Videonics' common stock is listed on the NASDAQ SmallCap Market under
the symbol "VDNX". Its principal offices are located at 1370 Dell Avenue,
Campbell, California 95008, and its telephone number is (408) 866-8300.
Focus Enhancements, Inc. (see page 29)
Focus Enhancements, Inc., a Delaware corporation, internally develops
proprietary technology for the conversion and enhancement of PC and Macintosh
output for display on televisions and large-screen monitors, and markets and
sells, worldwide, a line of video conversion products using this technology.
Focus' common stock is listed on the NASDAQ SmallCap Market under the
symbol "FCSE." Its principal offices are located at 600 Research Drive,
Wilmington, MA 01887, and its telephone number is (978) 988-5888.
PC Video Conversion, Inc. (see page 29)
PC Video Conversion, Inc. is a Delaware corporation and a wholly-owned
subsidiary of Focus formed solely for the purpose of effecting the merger with
Videonics. Its principal office is located at 600 Research Drive, Wilmington, MA
01887, and its telephone number is (978) 988-5888.
THE MERGER
Overview of the Merger Agreement
Pursuant to a merger agreement dated August 30, 2000, among Focus,
Videonics and PC Video Conversion, PC Video Conversion will merge with and into
Videonics, with Videonics as the surviving corporation. As a result, Videonics
will become a wholly-owned subsidiary of Focus. The merger agreement is attached
as Appendix A to this joint proxy statement/prospectus and we encourage you to
read it carefully.
Conditions to Completion of the Merger. (see page 51) Each of Focus'
and Videonics' obligations to complete the merger is subject to the satisfaction
or waiver of specified conditions, including those listed below:
o the merger agreement must be adopted by the shareholders of both
Focus and Videonics;
o the shareholders of Focus must approve an amendment to the
Certificate of Incorporation of Focus to increase the number of
its authorized shares of common stock to 50,000,000;
3
<PAGE>
o Focus must amend its 2000 Non-Qualified Stock Option Plan and
submit the plan to its shareholders for approval.
o no law, injunction or order preventing the merger may be in
effect;
o any applicable waiting period under U.S. antitrust laws must
expire or be terminated;
o the shares of Focus common stock to be issued in the merger must
have been approved for listing on the Nasdaq SmallCap Market;
o we must have complied with our respective covenants in the merger
agreement;
o our respective representations and warranties in the merger
agreement must be true and complete;
o we each must receive an opinion of tax counsel to the effect that
the merger will qualify as a tax-free exchange or reorganization,
or both; and
o the continuing accuracy, as of the date we complete the merger,
of the representations and warranties of each of Focus and
Videonics contained in the merger agreement.
Termination of the Merger Agreement. (see page 66) We can jointly agree
to terminate the merger agreement at any time. Either of us may also terminate
the merger agreement if:
o the merger is not completed on or before December 31, 2000, so
long as the failure to complete the merger is not the result of
the failure by the party terminating the agreement to fulfill any
of its obligations under the merger agreement;
o government actions do not permit the completion of the merger;
o shareholders of either company do not vote to adopt the merger
agreement or Focus shareholders do not adopt the amendment to the
Certificate of Incorporation to increase the number of authorized
shares of common stock;
o the other party has failed to recommend the merger agreement or
has withdrawn such support; or
o the other party breaches its representations, warranties or
covenants in the merger agreement in a material way.
Termination Fees. (see page 66) The merger agreement provides that in
several circumstances, Focus or Videonics may be required to pay a $300,000
termination fee.
"No Solicitation" Provisions. (see page 64) The merger agreement
contains detailed provisions prohibiting Focus and Videonics from seeking an
alternative transaction. These "no solicitation" provisions prohibit us, as well
as our officers, directors, subsidiaries and representatives from taking any
action to solicit an acquisition proposal. The merger agreement does not,
however, prohibit either of us or our respective Boards of Directors from
considering, and potentially recommending, an unsolicited bona fide written
superior proposal from a third party.
Completion and Effectiveness of the Merger. (see page 61) We will
complete the merger when all of the conditions to completion of the merger are
satisfied or waived in accordance with the merger agreement. The merger will
become effective when we file certificates of merger with the appropriate
states. We expect to complete the merger by the end of 2000.
Reasons for the Merger (see pages 46 and 48)
The Boards of Directors of Videonics and Focus believe that the merger
provides Videonics and Focus shareholders with an investment in a larger and
more diversified enterprise that is well positioned to take advantage of new
opportunities and to meet competitive challenges in a manner that will enhance
shareholder value for various reasons, including the following:
o Videonics and Focus have a unique opportunity to take advantage
of the complementary strategic fit of their businesses, combining
their operations to create a stronger commercial entity in the
market for video products and technologies.
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<PAGE>
o The merger presents opportunities for more efficient and
profitable operations. As a combined company, we will have
greater financial strength, operational efficiencies,
distribution, earning power and growth potential than either of
us would have on our own.
The Focus Board of Directors' Position on the Fairness of the Merger to Focus
Shareholders (see page 46)
In considering the fairness to Focus of the merger consideration to be
paid by Focus to Videonics shareholders, the Focus Board of Directors reviewed
and relied, in part, on an analysis of the ranges of potential values of the
shares of Videonics common stock that resulted from the application of several
accepted valuation methodologies. This analysis, including the selection of
valuation methodologies, was prepared by Union Atlantic Capital L.C., financial
advisors to the Focus Board of Directors in connection with the merger. Details
of Union Atlantic's analysis of the fairness of the merger to Focus are included
in the joint proxy statement/prospectus (see page 69). A copy of the opinion of
Union Atlantic rendered to the Focus Board of Directors is included in this
joint proxy statement/prospectus as Appendix D. Union Atlantic did not consider
or render any opinion as to the fairness of the merger consideration to the
shareholders of Videonics.
Recommendation of the Boards of Directors
Videonics. (see page 49) The Videonics Board of Directors believes that
the merger is advisable and fair and in the best interest of Videonics and its
shareholders and unanimously recommends that you vote for the adoption of the
merger proposal.
Focus (see page 48). The Focus Board of Directors believes that the
merger is advisable and fair and in the best interest of Focus and its
shareholders and unanimously recommends that you vote for the adoption of the
merger proposal.
Shareholder Approvals
Approval of Videonics Shareholders. (see page 27) The affirmative vote
of the holders of a majority of the shares of Videonics common stock outstanding
as of the record date is required to adopt the merger agreement. As of the
record date, Videonics directors and executive officers and their affiliates
owned approximately 50% of the outstanding shares of common stock.
Approval of Focus Shareholders. (see page 20) The affirmative vote of
the holders of a majority of the shares of Focus common stock outstanding as of
the record date is required to adopt the merger agreement and the amendment to
the Certificate of Incorporation of Focus. As of the record date, Focus
directors and executive officers and their affiliates owned approximately 5% of
the outstanding shares of common stock.
The Annual Meetings
Annual Meeting of Videonics Shareholders. (see page 26) The Videonics
annual meeting will be held at 1370 Dell Avenue, Campbell, California 95008 at
1:00 p.m., California time, on December 28, 2000.
Annual Meeting of Focus Shareholders. (see page 19) The Focus annual
meeting will be held at the Crowne Plaza Hotel, Woburn, Massachusetts 01801 at
4:00 p.m., Massachusetts time, on December 28, 2000.
What You Will Receive in the Merger (see pages 50 and 51)
Each share of Videonics common stock issued and outstanding shall be
converted into and become 0.87 shares of common stock, par value $0.01 per
share, of Focus. Each option or warrant granted by Videonics to purchase shares
of Videonics common stock which is outstanding and unexercised immediately prior
to the merger will be assumed by Focus and converted into an option or warrant
to purchase shares of Focus common stock in such amount and at such exercise
price as provided below:
5
<PAGE>
o the number of shares of Focus common stock to be subject to the
new option or warrant shall be equal to the product of (i) the
number of shares of Videonics common stock subject to the
Videonics option or warrant and (ii) 0.87;
o the exercise price per share of Focus common stock under the new
option or warrant shall be equal to (i) the exercise price per
share of the Videonics common stock under the Videonics option or
warrant divided by (ii) 0.87; and
o upon each exercise of a Videonics option or warrant by a holder
thereof, the aggregate number of shares of Focus common stock
deliverable upon such exercise shall be rounded down, if
necessary, to the nearest whole share and the aggregate exercise
price shall be rounded up, if necessary, to the nearest cent.
Videonics shareholders should not send in any stock certificates with
their proxy card. A transmittal letter with instructions for the surrender of
Videonics stock certificates will be mailed to Videonics shareholders as soon as
practicable after completion of the merger.
FocusBoard of Directors and Management Following the Merger (see page 52)
The initial Board of Directors of Focus upon completion of the merger
will consist of seven directors, three of whom will be selected by the Board of
Directors of Videonics and four of whom will be selected by the Board of
Directors of Focus.
Michael L. D'Addio will hold the positions of President and Chief
Executive Officer and Thomas L. Massie will remain as Chairman of the Board of
Focus for the remainder of the current term.
Certain Federal Income Tax Consequences (see page 52)
The merger is intended to be a tax-free reorganization in which no gain
or loss will be recognized by Focus and Videonics and no gain or loss will be
recognized by Focus and Videonics shareholders, except for tax payable on cash
received by Videonics shareholders instead of fractional shares of Focus common
stock. A condition to the merger is that Focus and Videonics each receive an
opinion of counsel to the effect that the merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended.
Accounting Treatment (see page 54)
We intend to account for the merger as a "purchase", as that term is
used under generally accepted accounting principles. This means that, for
accounting and financial reporting purposes, Focus will make a determination of
the fair value of Videonics' assets and liabilities in order to allocate the
purchase price to the assets acquired and the liabilities assumed.
Comparison of Shareholder's Rights (see page 77)
There are differences between the rights you have as a holder of
Videonics common stock and the rights you will have as a holder of Focus common
stock.
Interests of Officers, Directors and the Controlling Shareholders in the Merger
(see page 49)
Certain officers and directors and other members of the management of
Videonics and Focus have certain interests in the merger that are different
from, or in addition to, the interests of shareholders of Videonics and Focus
generally. These interests include the potential for positions as directors or
officers of Focus, acceleration of stock options and the right to continued
indemnification by Focus for any acts or omissions occurring prior to the
merger.
Dissenters' Rights and Appraisal Rights (see page 55)
Holders of Videonics common stock who do not wish to accept shares of
Focus in the merger will be entitled to exercise dissenters' rights pursuant to
the provisions of Chapter 13 of the California General Corporations Law. In
accordance with these provisions, dissenting Videonics shareholders will have
the right to be paid in cash the fair market value of their Videonics common
stock as determined
6
<PAGE>
by appraisal based upon circumstances immediately prior to the date the proposed
merger was announced, excluding any appreciation or depreciation as a
consequence of the merger, by fully complying with the procedures set forth in
the California General Corporation Law. The failure of a dissenting Videonics
shareholder to comply timely and properly with such procedures will result in
the termination or waiver of such rights.
Market Price Information (see page 7)
Shares of each of Focus and Videonics common stock are traded on the
Nasdaq SmallCap Market. On August 30, 2000, the last trading day before the
public announcement of the merger, the closing price of Focus and Videonics
common stock was $1.72 and $0.88, respectively. Based on the exchange ratio of
0.87, the pro forma equivalent per share value of the Videonics common stock on
August 30, 2000 was approximately $1.01 per share.
For More Information (see page 84)
More information regarding Focus and Videonics is available from their
public filings with the Securities and Exchange Commission. See "Where You Can
Find More Information".
If you have any questions about the merger or the information contained
in this joint proxy statement/prospectus, please contact Focus Investor
Relations at:
Focus Enhancements, Inc.
Investor Relations
600 Research Drive
Wilmington, MA 01887
(978) 988-5888
[email protected]
or Videonics Investor Relations at:
Videonics, Inc.
Investor Relations
1370 Dell Avenue
Campbell, California 95008
(408) 866-8300
[email protected]
7
<PAGE>
SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following tables present a summary of (i) selected historical
financial data of Focus, (ii) selected historical financial data of Videonics
and (iii) selected unaudited pro forma combined condensed consolidated financial
data of Focus and Videonics, which reflects the merger.
Focus Summary Selected Historical Financial Information
<TABLE>
The following tables highlight selected historical financial
information of Focus derived from the audited historical consolidated financial
statements and related notes for each of the years in the five-year period ended
December 31, 1999 and the unaudited consolidated financial statements for the
nine months ended September 30, 2000 and 1999. The historical information is
only a summary, and you should read it in conjunction with the historical
financial statements and related notes contained in the annual and quarterly
reports of Focus which are attached to, or incorporated by reference into, this
joint proxy statement/prospectus.
<CAPTION>
Fiscal Year Ended(1)
-----------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements Of Operations Data:
Net sales ............................ $ 17,100 $ 15,076 $ 21,026 $ 18,440 $ 17,183
Gross profit ......................... 7,354(2) 188(3) 5,934 (4) 3,029 (5) 6,639 (6)
Net income (loss) .................... 329(2) (10,722)(3) (1,986)(4) (12,787)(5) (1,480)(6)
Basic net income (loss)
per share ........................... $ 0.05(2) $ (1.19)(3) $ (0.16)(4) $ (0.78)(5) $ (0.08)(6)
Diluted net income (loss)
per share ........................... $ 0.04(2) $ (1.19)(3) $ (0.16)(4) $ (0.78)(5) $ (0.08)(6)
</TABLE>
Nine Months Ended(1)
---------------------
Sept. 30, Sept. 30,
1999 2000
-------- --------
(in thousands, except per share
amounts)
Consolidated Statements Of Operations Data:
Net sales ........................................ $ 12,342 $ 12,130
Gross profit ..................................... 6,020 3,751 (7)
Net income (loss) ................................ 299 (5,208)(7)
Basic net income (loss)
per share ....................................... $ 0.02 $ (0.21)(7)
Diluted net income (loss)
per share ....................................... $ 0.02 $ (0.21)(7)
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended(1) Ended(1)
-------------------------------------------------------------------- ---------
Sept. 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit) ............... $ 862 $(1,008) $ 2,619 $ 1,435 $ 5,633 $ 1,950
Net property, plant &
equipment .............................. 418 484 1,069 1,272 969 781
Total assets ............................ 8,960 7,907 13,921 12,737 15,015 12,399
Current portion of long-term
debt ................................... 133 124 103 403 442 363
Long-term debt (less current
portion) ............................... 26 81 74 860 428 254
Shareholders' equity .................... 3,587 973 5,068 2,878 9,207 6,403
<FN>
------------------
(1) Focus paid no cash dividends during the periods indicated.
(2) Results for 1995 include fourth quarter charges of $300,000 for the
write-down of Focus' inventory to its net realizable value and a $151,000
adjustment of goodwill on Inline to its net realizable value.
(3) Results for 1996 include third quarter charges of $1.3 million to adjust
goodwill on Lapis and Inline to its net realizable value and a charge of
$2.0 million related to the write off in-process R&D pursuant to the
acquisition of Tview. In the fourth quarter, Focus incurred a $400,000
charge to increase its reserve for stock balancing. Additionally, in
December 1996 Focus sold certain inventory to a barter exchange
organization in exchange for barter or cash equivalent purchase credits of
approximately 1,700,000. Focus recorded this transaction as a long-term
asset at approximately $1,164,000 based on the estimated fair value of the
products exchanged. This amount was subsequently written-off as of December
31, 1996.
(4) Results for 1997 include $2.5 million in returns in the fourth quarter due
to product obsolescence. Additionally, effective September 30, 1997, Focus
sold its line of computer connectivity products to Advanced Electronic
Support Products, Inc. (AESP) for 189,701 shares of AESP common stock. In
connection with this transaction, Focus recorded other income in the amount
of $358,288, securities available for sale in the amount of $595,000 and
deferred income of $84,212. In addition, the Company sold networking
inventory to AESP in the amount of $159,000 at cost.
(5) Results for 1998 include fourth quarter adjustments of $3.5 million related
to the return of products from non-performing resellers, $1.9 million in
write-offs for obsolete inventory, $3.1 million write down of goodwill to
its net realizable value related to Lapis, Digital Vision and PC Video
Conversion, $2.1 million in additional accrued expenses, $766,000 in
8
<PAGE>
write-off of fixed assets and $346,000 in write down of a marketable
securities to its net realizable value.
(6) Results for 1999 include fourth quarter adjustments of $367,000 for the
return of products from discontinued resellers, $527,000 in write-offs of
obsolete inventory, $383,000 in write-offs of non-performing accounts
receivable, $254,000 in additional accrued expenses, and $284,000 in stock
compensation and other charges.
(7) Results for the nine months ended September 30, 2000 include charges of
$207,000 for additional inventory reserves, $603,000 related to the
write-down of inventory as a result of a physical inventory taken at the
end of the second quarter, $302,000 in accounting fees and $292,000 in
legal fees pertaining to the 1999 annual audit and special investigation
and $2.1 million in legal judgement expense related to CRA Systems.
</FN>
</TABLE>
Videonics Summary Selected Historical Financial Information
<TABLE>
The following tables highlight selected historical financial
information of Videonics derived from the audited historical consolidated
financial statements and related notes for each of the years in the five-year
period ended December 31, 1999 and the unaudited consolidated financial
statements for the nine months ended September 30, 2000 and 1999. The historical
information is only a summary, and you should read it in conjunction with the
historical financial statements and related notes contained in the annual and
quarterly reports of Videonics which are attached to, or incorporated by
reference into, this joint proxy statement/prospectus.
<CAPTION>
Fiscal Year Ended(1) Nine Months Ended(1)
----------------------------------------------------------------- --------------------
Sept. 30, Sept. 30,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements Of Operations Data:
Net sales .......................... $ 33,561 $ 29,195 $ 19,955 $ 19,672 $ 14,226 $ 10,901 $ 9,087
Gross profit ....................... 16,401 13,929 6,055(4) 6,084(3) 5,411(2) 4,568 3,549
Net income (loss) .................. 3,746(5) 744 (13,441)(4) (6,713)(3) (2,634)(2) (1,905) (1,194)
Basic net income (loss)
available for common
shareholders per share ............ $ 0.69(5) $ 0.13 $ (2.34)(4) $ (1.15)(3) $ (0.45)(2) $ (0.31) $ (0.20)
Diluted net income (loss)
available for common
shareholders per share ............ $ 0.65(5) $ 0.13 $ (2.34)(4) $ (1.15)(3) $ (0.45)(2) $ (0.31) $ (0.20)
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended(1) Ended(1)
----------------------------------------------------------------------- ----------
Sept. 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital .................... $20,127 $21,412 $ 9,902 $ 4,404 $ 3,823 $ 2,871
Net property, plant & equipment .... 1,350 2,037 2,438 1,507 513 299
Total assets ....................... 27,350 27,958 15,694 9,164 6,089 5,472
Long-term debt ..................... -- -- -- -- 1,035 1,035
Shareholders' equity ............... 24,149 25,731 12,606 5,927 3,346 2,177
<FN>
------------------
(1) Videonics paid no cash dividends during the periods indicated.
(2) Results for 1999 include a $650,000 charge in the fourth quarter for the
write-down of Videonics' inventory to its net realizable value.
(3) Results for 1998 include a $1.3 million charge in the fourth quarter for
the write-down of the Videonics' open systems inventory to its net
realizable value.
(4) Results for 1997 include: a $1.9 million write-off of intangible assets
related to Nova Systems; a $1.6 million increase in inventory reserves for
components rendered obsolete by product revisions of which approximately
$608,000 related to PowerScript and $265,000 related to KUB Systems and
$700,000 related to excess and obsolete assets at Nova Systems; a $124,000
increase in warranty reserves for PowerScript hardware updates; a tax
charge of $5.9 million due to the establishment of a valuation allowance
against Videonics' deferred tax assets; and a $100,000 charge for the
reduction of approximately 12 percent of Videonics' work force. The total
of these charges equaled $9.6 million.
(5) Results for 1995 include a one-time charge of $1,965,000 for purchase of
in-process research and development related to the acquisition of Nova
Systems assets. Without this one-time charge, the net income of $3,746,000
would have been $5,075,000 or $0.88 per share.
</FN>
</TABLE>
9
<PAGE>
Summary Selected Unaudited Pro Forma Combined Condensed Consolidated Financial
Information
We are providing the following summary selected unaudited pro forma
combined condensed consolidated financial data to give you a better picture of
what the results of operations and the financial position of the combined
businesses of Focus and Videonics might have looked like had the merger occurred
on January 1, 1999 for income statement purposes and on September 30, 2000 for
balance sheet purposes. This information is provided for illustrative purposes
only and does not show what the results of operations or financial position of
Focus would have been if the merger with Videonics actually occurred on the
dates assumed. In addition, this information does not indicate what Focus'
future consolidated operating results or consolidated financial position will
be.
How The Pro Forma Financial Data Was Prepared
The following summary selected unaudited pro forma combined condensed
consolidated financial statements combine Focus' historical financial position
at September 30, 2000 with Videonics' historical financial position at September
30, 2000 and the historical results of operations of Focus for fiscal year ended
December 31, 1999 with Videonics for the fiscal year ended December 31, 1999 and
the nine months ended September 30, 2000, for both Focus and Videonics. The pro
forma statement of operations data assumes the combination occurred on January
1, 1999 while the pro forma balance sheet data assumes the combination took
place on September 30, 2000.
These Pro Forma Financial Statements Are Based On Assumptions
These statements reflect the issuance of 0.87 of a share of Focus
common stock for each outstanding share of Videonics common stock, the exchange
ratio specified in the merger agreement. We assumed the value of the Focus
shares to be issued for outstanding Videonics shares to be $8.0 million, based
on 5.9 million Videonics shares outstanding as of September 30, 2000 and the
conversion value of a Videonics share at the time of the merger agreement. We
increased this value by approximately $423,000 for the value of all outstanding
vested Videonics options to be assumed by Focus and by approximately $695,000
for transaction costs associated with the merger.
The allocation of the aggregate purchase price of approximately $9.1
million will be finalized following receipt of the closing balance sheet of
Videonics and a final independent appraisal of certain tangible and intangible
assets of Videonics. The excess of the purchase price over the fair value of the
acquired Videonics net tangible and identifiable intangible assets will then be
allocated to goodwill.
The aggregate purchase price is expected to be allocated as follows,
based upon a preliminary independent appraisal of Videonics (in thousands):
Tangible assets .............................................. $ 5,472
Intangible assets acquired:
Tradename .................................................... 317
In-process research and development .......................... 387
Assembled workforce .......................................... 1,001
Goodwill ..................................................... 1,715
Existing technology .......................................... 3,495
Long-term debt ............................................... (1,035)
Other liabilities ............................................ (2,260)
-------
Net estimated purchase price allocation ...................... $ 9,092
=======
Because the valuation has not been completed, the actual amount of the
allocations could vary from the estimates above. The tangible assets of
Videonics consist primarily of property, plant and equipment, cash and cash
equivalents and accounts receivable and inventory. In-process research and
development has not reached technological feasibility at the acquisition date
and will be immediately charged to operations in the period the merger is
consummated. The amounts allocated to existing technology, tradename and
assembled workforce will be amortized over the estimated useful life of
10
<PAGE>
three years. The purchase price in excess of net tangible and identifiable
intangible assets will be allocated to goodwill and amortized over its expected
useful life of five years.
You should read these summary pro forma financial statements with the
historical financial statements
<TABLE>
This selected consolidated financial data is based on, and should be
read in conjunction with, the historical consolidated financial statements and
the related notes thereto of Focus and Videonics, respectively, incorporated
herein by reference.
<CAPTION>
Fiscal Year Nine Months
Ended Ended
December 31, 1999 Sept. 30, 2000
----------------- --------------
(in thousands, except per share data)
<S> <C> <C>
Pro Forma Combined Condensed Consolidated Statement Of Operations Data:
Net sales .......................................................................... $ 31,409 $ 21,217
Loss from operations ............................................................... (5,451) (5,461)
Net loss ........................................................................... (5,836) (7,691)
Net loss per share; basic and diluted .............................................. $ (0.24) $ (0.26)
Weighted average common shares; basic and diluted .................................. 23,876 30,135
</TABLE>
Sept. 30, 2000
(in thousands)
---------------
Pro Forma Combined Condensed Consolidated Balanced Sheet Data:
Cash and cash equivalents and short-term investments ............. $ 3,040
Working capital .................................................. 2,926
Total assets ..................................................... 24,399
Long-term obligations ............................................ 1,289
Shareholders' equity ............................................. 13,213
Comparative Unaudited Historical and Pro Forma Per Share Data
<TABLE>
In the following tables, we provide you with certain historical per
share data and combined per share data on an unaudited pro forma basis after
giving effect to the merger, assuming that 0.87 of a share of Focus common stock
is issued in exchange for each share of Videonics common stock. This data should
be read along with the summary financial data and the historical financial
statements of Focus and the notes thereto that are incorporated by reference.
The pro forma information is presented for illustrative purposes only. You
should not rely on the pro forma financial information as an indication of the
combined financial position or results of operations of future periods or the
results that actually would have been realized had the entities been a single
entity during the periods presented.
<CAPTION>
Fiscal Year Nine Months
Ended Ended
December 31, 1999 Sept. 30, 2000
----------------- --------------
<S> <C> <C>
Historical--Focus
Basic and diluted net loss per share ........................................... $ (0.08) $ (0.21)
Book value per share(1) ........................................................ $ 0.38 $ 0.25
11
<PAGE>
Fiscal Year Nine Months
Ended Ended
December 31, 1999 Sept. 30, 2000
----------------- --------------
Historical--Videonics
Basic and diluted net loss per share ........................................... $ (0.45) $ (0.20)
Book value per share(1) ........................................................ $ 0.57 $ 0.37
Fiscal Year Nine Months
Ended Ended
December 31, 1999 Sept. 30, 2000
----------------- --------------
Unaudited Pro Forma Combined Net Loss Per Share
Pro forma net loss per Focus share(2) .................................................. $ (0.24) $ (0.26)
Equivalent pro forma net loss per Videonics share(3) ................................... $ (0.21) $ (0.23)
At Sept. 30, 2000
-----------------
Unaudited Pro Forma Combined Book Value
Per Share Pro forma book value per Focus share(4) ........................................................ $ 0.43
Equivalent pro forma book value per Videonics share(3) ................................................... $ 0.37
<FN>
------------------
(1) Historical book value per share is computed by dividing shareholders'
equity by the number of shares of common stock outstanding at the end of
each period presented.
(2) Shares used to calculate pro forma basic and diluted loss per share for the
year ended December 31, 1999 were determined by adding the 5.1 million
shares assumed to be issued in exchange for the outstanding Videonics
shares to Focus' 18.7 million weighted average shares outstanding for the
year ended December 31, 1999 for a total of 23.8 million shares. Shares
used to calculate pro forma basic and diluted loss per share for the nine
months ended September 30, 2000 were determined by adding 5.1 million
shares assumed to be issued in exchange for the outstanding Videonics
shares to Focus' 25.0 million weighted average shares outstanding for the
nine months ended September 30, 2000 for a total of 30.1 million shares.
(3) The Videonics pro forma equivalent per share amounts are computed by
multiplying the combined pro forma per share amounts by the exchange ratio
of 0.87 of a share of Focus common stock for each share of Videonics common
stock.
(4) Shares used to calculate pro forma book value per Focus share at September
30, 2000 were determined by adding the 5.1 million shares assumed issued
for the Videonics shares to Focus' absolute shares outstanding at September
30, 2000 of 25.9 million.
</FN>
</TABLE>
Comparative Per Share Market Information
Focus common stock is listed on the NASDAQ under the symbol "FCSE."
Videonics common stock is listed on the NASDAQ under the symbol "VDNX".
The following table presents the closing prices per share of Videonics
common stock and the closing prices per share of Focus common stock on the
following dates:
o August 30, 2000, the last trading day before the public
announcement that Focus would acquire the Videonics common shares
at an exchange ratio of 0.87; and
o November 20, 2000.
The chart also presents, in the line entitled "Equivalent Per Share
Price," the pro forma equivalent price per share of Videonics common stock as of
the dates specified. Videonics pro forma equivalent price per share was
determined by multiplying the closing prices of Focus' stock as of the specified
dates by the exchange ratio of 0.87.
At August 30, 2000 At November 20, 2000
------------------ --------------------
Videonics .......................... $ 0.88 $ 0.94
Focus .............................. $ 1.72 $ 1.06
Equivalent Per Share Price ......... $ 1.50 $ 0.92
12
<PAGE>
RISK FACTORS
In addition to the other information contained in or incorporated by
reference into this joint proxy statement/prospectus, you should carefully
consider the following risk factors in deciding whether to vote for the merger.
Risks Related to the Merger
The exchange ratio will not be adjusted to reflect changes in the price of
Focus common stock or Videonics common stock.
We have fixed the exchange ratio at 0.87 shares of Focus common stock
for each share of Videonics common stock. We will not adjust the exchange ratio
to reflect fluctuations in the market value of shares of Focus common stock or
Videonics common stock. If Videonics shareholders do not properly exercise their
dissenters' rights in connection with the merger, they will be locked into the
exchange ratio and will not be able to capture gains from possible increases in
the value of Videonics common stock. Videonics shareholders may incur losses if
the value of Focus common stock decreases.
The merger may not qualify as a tax-free reorganization.
If the Internal Revenue Service succeeds in establishing that the
merger does not qualify as a tax-free reorganization, Videonics shareholders
will recognize a taxable gain or loss at the time of the merger based on the
difference between the value of the Focus shares Videonics shareholders receive
in the merger and the tax basis of the shares they exchange.
The anticipated benefits of the merger may not be realized.
The success of the merger will depend, in part, on the ability of Focus
to realize the anticipated growth opportunities and synergies, from combining
the businesses of Focus and Videonics. Achieving the benefits of the merger will
depend in part on:
o effectively and efficiently integrating the policies, procedures
and operations of Videonics and Focus;
o successfully retaining and attracting key employees of the
combined company, including operating management and key
technical personnel, during a period of transition and in light
of the competitive employment market; and
o while integrating the combined company's operations, maintaining
adequate focus on our core businesses in order to take advantage
of competitive opportunities and to respond to competitive
challenges.
If members of the management team of the combined company are not able
to develop strategies and implement a business plan that achieves these
objectives, the anticipated benefits of the merger may not be realized, which
would have an adverse impact on our combined company and the market prices of
shares of Focus common stock.
Fluctuations in market prices may cause the value of the shares of Focus
common stock that Videonics shareholders receive to be less than the value
of their shares of Videonics common stock prior to the merger.
Upon completion of the merger, each share of Videonics common stock
will be exchanged for 0.87 of a share of Focus common stock. There will be no
adjustment for changes in the market price of Focus common stock or Videonics
common stock. In addition, neither Videonics nor Focus may terminate the merger
agreement or "walk away" from the merger solely because of changes in the market
price of Focus common stock or Videonics common stock. Accordingly, the specific
dollar value of Focus common stock that Videonics shareholders will receive upon
the merger's completion will depend on the market value of Focus common stock
when the merger is completed and may decrease from the date you submit your
proxy. The share price of Focus common stock is by nature
13
<PAGE>
subject to the general price fluctuations in the market of publicly traded
equity securities and has experienced significant volatility. We urge you to
obtain recent market quotations for Focus common stock and Videonics common
stock
Directors of Focus and Videonics have potential conflicts of interest in
recommending that you vote in favor of adoption of the merger agreement.
A number of directors of Focus and a number of directors of Videonics
who recommend that you vote in favor of the adoption of the merger agreement
have employment or severance agreement or benefit arrangements that provide them
with interests in the merger that are different from yours. The initial Board of
Directors of Focus upon completion of the merger will consist of seven
directors, three of whom will be selected by the Board of Directors of Videonics
and four of whom will be selected by the Board of Directors of Focus.
Following the merger, Michael L. D'Addio, Chief Executive Officer and
Chairman of Videonics, will hold the positions of President and Chief Executive
Officer of Focus and Thomas L. Massie will remain as Chairman of the Board of
Focus for the remainder of the current term.
The receipt of compensation benefits or other benefits in the merger,
including the vesting of stock options, or the continuation of indemnification
arrangements for current directors of Focus and Videonics following completion
of the merger, may influence these directors in making their recommendation that
you vote in favor of the adoption of the merger agreement.
Carl Berg, a director of Videonics has loaned $2.3 million to Focus in
the form of a convertible promissory note. See "Focus may be required to repay a
$2.3 million promissory note if the merger is not completed."
Furthermore, a principle of Union Atlantic, Capital L.C., the company
issuing a fairness opinion to Focus shareholders, is also a member of the board
of directors of Focus.
Risks Related to Focus and Videonics
Focus has been named as a defendant in an alleged class action alleging
violation of federal securities laws.
The lawsuits allege that Focus and its Chairman and certain other
present and former officers violated federal securities laws in connection with
a number of allegedly false or misleading statements and seek certification as
class actions on behalf of persons alleged to have purchased stock from July 17,
1997 to February 19, 1999 or between November 15, 1999 to March 1, 2000,
respectively. Focus believes that it has consistently complied with the federal
securities laws, and does not believe at this time that this litigation will
result in a material adverse effect on its financial condition. Nonetheless, the
management time and resources that could be required to respond effectively to
such claims and to defend Focus vigorously in such litigation could adversely
impact our management's administrative capabilities.
Focus is involved as a defendant in litigation with CRA Systems, Inc.
In 1996 CRA Systems, Inc., a Texas corporation, and Focus entered into
an agreement, the terms and nature of which were subsequently disputed by the
parties. Focus contended the transaction was simply a sale of inventory for
which Focus was never paid. CRA contended otherwise. CRA brought suit against
Focus for breach of contract contending that Focus grossly exaggerated the
demand for the product, and the margin of profit which was available to CRA
regarding this project. CRA sought to recover out-of-pocket losses exceeding
$100,000, and lost profits of $400,000 to $1,000,000. A jury trial in May 2000
in federal district court in Waco, Texas, resulted in a verdict in favor of CRA
for $848,000 actual damages and $1,000,000 punitive damages. On October 10,
2000, the court rendered a judgement in favor of CRA for actual damages,
punitive damages, attorneys fees, costs and interest; the judgment totaled
approximately $2,000,000. Focus intends to file an appropriate post-judgment
motion requesting that this judgment be reduced significantly, and will pursue
an appeal to the United States Court of Appeals for the Fifth Circuit in New
Orleans, Louisiana. To suspend enforcement of the judgment pending determination
of its post-judgment motion and appeal, Focus is required to post
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a bond in the approximate amount of $2.3 million (being the approximate amount
of the judgment plus 10% to cover interest and costs of CRA). On October 27,
2000, Focus submitted a bond and filed its post-judgement motion. In connection
with this judgment, Focus has recorded an expense of $2.1 million in the period
ended September 30, 2000. See also, "Focus may be required to repay a $2.3
million promissory note if the merger is not completed."
Focus will need to raise additional capital.
Historically, Focus has met its short- and long-term extra cash needs
through debt and the sale of common stock in private placements in that cash
flow from operations has been insufficient to fund its operations. For example,
during 1998, it received $2,827,355 in net proceeds from private offerings of
common stock and $7,003,963 from the exercise of common stock options and
warrants. In 1999, Focus received $4,4413,978 in net proceeds from private
offerings of common stock and $2,596,023 from the exercise of common stock
options and warrants. For the nine months ended September 30, 2000, Focus
received $1,284,000 in net proceeds from private offerings of common stock and
$1,068,862 from the exercise of stock options and warrants. Future capital
requirements will depend on many factors, including cash flow from operations,
continued progress in research and development programs, competing technological
and market developments, and Focus' ability to market its products successfully.
If Focus requires additional equity or debt financing in the future, there can
be no assurance that sufficient funds will be raised. Moreover, any equity
financing would result in dilution to our then-existing shareholders and any
additional debt financing may result in higher interest expense. Any financing,
if available, may be on terms unfavorable to Focus. If adequate funds are not
available, Focus may be required to curtail its activities significantly. See
also "Focus is involved as a defendant in litigation with CRA Systems, Inc."
Focus may be required to repay a $2.3 million promissory note if the merger
is not completed.
On October 26, 2000 Focus issued a secured promissory note in the
approximate principal amount of $2.3 million in favor of Carl Berg, a
shareholder and director of Videonics. The note is convertible into common stock
of Focus under certain conditions. In the event the merger is not completed, the
promissory note can be called and become payable in full upon 90-days notice
from Mr. Berg, at his sole discretion. The promissory note is secured by a
security agreement in favor of Mr. Berg granting him a security interest in
first priory over substantially all of the assets of Focus. In the event that
the merger is not completed, there is no assurance that Mr. Berg will not seek
repayment of the promissory note.
Videonics is dependent on a major shareholder and bank to fund its
operations and is currently in default on its line of credit with the bank.
Videonics has incurred losses and negative cash flows from operations
for each of the two years in the period ended September 30, 2000 and is
dependent upon support from a substantial shareholder, a line of credit from a
bank and upon generating sufficient revenues from existing and soon to be
released products in order to fund operations. During 1999, management took
steps to further reduce costs, including the sale of its Nova Systems Division,
and its German subsidiary, both of which had incurred losses in the two years
immediately preceding their sale. Videonics is assessing its product lines to
identify how to enhance existing or create new distribution channels. During the
first quarter of 2000, Videonics introduced three new products. Two of those
products began shipping late in the first quarter with the third product
shipping in July. Although there can be no assurances, Videonics is currently
developing and expects to introduce two more products during the first half of
2001.
Videonics has obtained a $1.0 million asset based line of credit from
Venture Banking Group, a division of Cupertino National Bank, secured by
substantially all of Videonics' assets. At September 30, 2000 Videonics was in
default with Venture Banking Group. As of November 13, 2000, Videonics and
Pacific Business Funding, an affiliate of Venture Banking Group, had signed an
agreement to repay Venture Banking Group and in turn loan Videonics $400,000 on
a fully secured basis. Interest will be calculated at a rate of 12%. The loan
will be due and payable at the earlier of the completion of the proposed merger
with Focus Enhancements, Inc., or February 5, 2001. As of November 20,
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<PAGE>
2000, an aggregate of $400,000 is outstanding under the line of credit with
Venture Banking Group. Videonics expects to secure additional financing when the
loan becomes due. However, there can be no assurance that such additional
financing will be available at all or on terms that are acceptable to Videonics.
Videonics has incurred significant delays in the introduction of new
products.
As the complexity of Videonics' product designs and feature sets
continues to increase, Videonics may continue to experience product development
delays that would and has had in the past an adverse effect on the profitability
of our operations. There can be no assurance that it will be successful in the
timely development of new products to replace or supplement existing products or
that Videonics will be successful in integrating acquired products or
technologies with its current business. Delays in new product development have
had an adverse material impact on our growth in 1999, 1998 and 1997. Similar
adverse effects on results of operations can be expected until new products are
successfully introduced and accepted by end users.
Focus relies on sales to a few major customers for a large part of its
revenues.
For the year ended December 1999, approximately 26% of Focus' revenues
were derived from sales to a major distributor, approximately 14% of its
revenues were derived from sales to two major retailers, and approximately 8% of
its revenues were derived from sales to a major consumer electronics
manufacturer. Management expects that sales to these customers will continue to
represent a significant percentage of Focus' future revenues. Focus does not
have long-term contracts requiring any customer to purchase any minimum amount
of products. There can be no assurance that Focus will continue to receive
orders of the same magnitude as in the past from existing customers or we will
be able to market its current or proposed products to new customers. Loss of any
major customer would have a material adverse effect on the Focus business as a
whole.
Videonics received a significant portion of its revenue from one customer
in 1999.
During 1999 sales to one customer accounted for 13% of Videonics total
revenues. Any termination by a significant customer of its relationship with
Videonics or material reduction in the amount of business such a customer does
with Videonics could materially adversely effect Videonics' business, financial
condition or operating results. For 1998 and 1997, no one customer accounted for
more than 10% of revenues.
International sales are subject to significant risk.
Protectionist trade legislation in either the United States or other
countries, such as a change in the current tariff structures, export compliance
laws or other trade policies, could adversely affect our companies ability to
sell in international markets. Furthermore, revenues from outside the United
States are subject to inherent risks related thereto, including currency rate
fluctuations, the general economic and political conditions in each country.
There can be no assurance that the economic crisis and currency issues,
currently being experienced in certain parts of the world will not have a
material adverse effect on our companies' revenue or operating results in the
future.
Both companies have a long history of operating losses.
Both companies have experienced limited profitability since their
inception. As of September 30, 2000, Focus had an accumulated deficit of
$41,887,000, and the accumulated deficit of Videonics was $18,548,000. Focus and
Videonics respectively incurred net losses of $1,480,000 and $2,634,000 for the
year ended December 31, 1999, and $12,787,000 and $6,713,000 for the year ended
December 31, 1998. Focus had a net loss of $5,208,000 for the first nine months
of 2000. Videonics had a net loss of $1,194,000 for the first nine months of
2000. There can be no assurance that the newly merged company will be
profitable.
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Focus relies on a single vendor for 90% of its product components.
Approximately 90% of the components for the products of Focus are
manufactured by a single vendor on a turnkey basis. This vendor is located
overseas. If this vendor experiences production or shipping problems for any
reason, Focus in turn could experience delays in the production and shipping of
Focus products, which would have an adverse effect on our results of operations.
Focus' products may become obsolete very quickly.
The computer peripheral markets are characterized by extensive research
and development and rapid technological change resulting in short product life
cycles. Development by others of new or improved products, processes or
technologies may make our products or proposed products obsolete or less
competitive. We must devote substantial efforts and financial resources to
enhance our existing products and to develop new products. There can be no
assurance that we will succeed with these efforts.
Our businesses are very competitive.
The computer peripheral markets are extremely competitive. Focus
currently competes with other developers of video conversion products and with
video-graphic integrated circuit developers. Many of our competitors have
greater market recognition and greater financial, technical, marketing and human
resources. Although Focus is not currently aware of any announcements by its
competitors that would have a material impact on its operations, there can be no
assurance that Focus will be able to compete successfully against existing
companies or new entrants to the marketplace.
The video production equipment market is highly competitive and is
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over the
life of a product. Competition is fragmented with several hundred manufacturers
supplying a variety of products to this market. Videonics anticipates increased
competition in the video post-production equipment market from both existing
manufacturers and new market entrants. Increased competition could result in
price reductions, reduced margins and loss of market share, any of which could
materially and adversely affect our business, financial condition and results of
operations. There can be no assurance that it will be able to compete
successfully against current and future competitors.
Videonics' competitors have greater financial, technical, marketing,
sales and customer support resources, greater name recognition and larger
installed customer bases than us. In addition, some of our competitors also
offer a wide variety of video equipment, including professional video tape
recorders, video cameras and other related equipment. In some cases, these
competitors may have a competitive advantage based upon their ability to bundle
their equipment in certain large system sales.
We are dependent on our suppliers.
Focus and Videonics purchase all of their parts from outside suppliers
and from time to time experience delays in obtaining some components or
peripheral devices. Additionally, the companies are dependent on sole source
suppliers for certain components. We attempt to reduce the risk of supply
interruption by evaluating and obtaining alternative sources for various
components or peripheral devices when such sources are available. However, there
can be no assurance that supply shortages will not occur in the future which
could significantly increase the cost, or delay shipment of, our products, which
in turn could adversely affect our results of operations.
We may not be able to protect our proprietary information.
Although Focus has filed eight patent applications with respect to its
PC-to-TV video-graphics products, currently only four patents have been issued.
Focus treats its technical data as confidential and relies on internal
non-disclosure safeguards, including confidentiality agreements with employees,
and on laws protecting trade secrets to protect its proprietary information.
There can be no assurance that these measures will adequately protect the
confidentiality of Focus proprietary information or prove valuable in light of
future technological developments.
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<PAGE>
Our quarterly financial results are subject to significant fluctuations.
Focus has been unable in the past to accurately forecast our operating
expenses. Its revenues currently depend heavily on volatile customer purchasing
patterns. If actual revenues are less than projected revenues, Focus may be
unable to reduce expenses proportionately, and its operating results, cash flows
and liquidity would likely be adversely affected.
Videonics has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in the
future. The fluctuation in revenues in the periods reflected above are
attributable to various factors, including the timing of new product
introductions and shipments, variations in product mix sold, and private label
sales. In 1999 and 1998, Videonics' delay in the sales of previously announced
new products had a significant effect on Videonics' results of operations, and
there can be no assurance that Videonics will be able to introduce and timely
sell new products on a basis which will avoid quarterly fluctuations in the
future, or even that such new products will be successful in the marketplace.
Videonics typically operates without a significant amount of backlog.
Videonics typically operates with a small amount of backlog.
Accordingly, it generally does not have a material backlog of unfilled orders,
and revenues in any quarter are substantially dependent on orders booked in that
quarter. Any significant weakening in customer demand would therefore have and
has had in the past an almost immediate adverse impact on Videonics' operating
results.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus and the documents incorporated by
reference into this joint proxy statement/prospectus (see "Where You Can Find
More Information") include forward-looking statements about Focus and Videonics
within the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. These statements relate to expectations concerning matters that are
not historical facts, such as future financial performance, anticipated
developments, business strategy, projected costs and plans and objectives of
Focus and Videonics. Many of these statements are preceded by, followed by or
otherwise include the words "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" or other similar expressions. These statements
may be made expressly in this document or may be incorporated by reference to
other documents Focus and Videonics have filed with the SEC.
Although each of Focus and Videonics believes that such forward-looking
statements are reasonable, neither of us can assure you that such expectations
will prove to be correct. Forward looking statements are not guarantees of
future performance and are subject to risks and uncertainties that may cause
actual results of Focus or Videonics to be materially different from any future
results expressed or implied by either Focus or Videonics. The risks and
uncertainties include those risks, uncertainties and risk factors identified,
among other places, under "Risk Factors" in this document.
The most important circumstances that could prevent Focus from
achieving our stated goals include, but are not limited to, the following:
o We may not be able to integrate Videonics into our existing
business or make the combined businesses profitable.
o The market price of Focus common stock may decline as a result of
the merger and make it difficult to raise capital to fund
operations or to attract employees seeking compensation through
appreciation in stock options.
o Focus may not be able to develop new products, adapt to rapid
technological change, and introduce new products in order to
remain competitive.
o Changes in governmental regulations may adversely affect demand
for our products.
o The merger could adversely affect combined financial results.
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These cautionary statements should not be construed by you as an
exhaustive list or as any admission by Focus or Videonics regarding the adequacy
of disclosures made by either company. Neither of us can always predict or
determine after the fact what factors would cause actual results to differ
materially from those indicated by the forward-looking statements or other
statements. All cautionary statements should be read as being applicable to all
forward-looking statements wherever they appear. Focus and Videonics do not
undertake any obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed herein might not occur.
INTRODUCTION
This joint proxy statement/prospectus provides information about our
annual meetings to be held on December 28, 2000. The purpose of each of the
annual meetings is to elect directors, ratify auditors and to consider and vote
upon the proposal to approve the merger agreement and the transactions
contemplated thereby, as more fully explained in this joint proxy
statement/prospectus. In addition, in connection with the merger, Focus
shareholders shall consider and vote upon a proposal to amend its Certificate of
Incorporation to increase the number of authorized shares of common stock from
30,000,000 to 50,000,000 and to approve a new stock option plan.
The Boards of Directors of Videonics and Focus unanimously approved the
merger agreement and recommend that their respective shareholders vote for all
proposals to be considered at the annual meetings.
ANNUAL MEETING OF FOCUS SHAREHOLDERS
When will the meeting be held?
This joint proxy statement/prospectus is being furnished to holders of
Focus common stock in connection with the solicitation of proxies by the Focus
Board of Directors at the Focus annual meeting to be held on December 28, 2000,
at the Crowne Plaza, 2 Forbes Road, Woburn, MA 01801, at 4:00 p.m.,
Massachusetts time and at any adjournments or postponements of the meeting.
What is the purpose of the Focus meeting?
The Focus annual meeting is being held so that shareholders of Focus
may: (i) consider and vote upon a proposal to adopt the merger agreement; (ii)
consider and vote upon a proposal to amend Focus' Certificate of Incorporation
to increase the authorized number of shares of common stock from 30,000,000 to
50,000,000; (iii) elect one (1) Class II director to serve for a three-year
term; (iv) consider and vote upon a proposal to approve Focus' 2000
Non-Qualified Stock Option Plan; (v) consider and vote upon a proposal to ratify
the selection of Wolf & Company, P.C. as Focus' independent auditors for the
fiscal year ending December 31, 2000; and (vi) consider and vote upon such other
business that properly comes before the Focus annual meeting or any adjournment
or postponement of the Focus annual meeting. By approving the merger agreement,
you also will be approving the other transactions contemplated by the merger
agreement.
Who can vote at the Focus meeting?
If you own Focus common stock as of the close of business on November
10, 2000 you can vote at the meeting. On the record date, there were 25,900,203
shares of Focus common stock outstanding and entitled to vote, held by
approximately 11,200 holders of record.
How do I vote by proxy?
You vote your proxy by completing the proxy card enclosed in accordance
with its instructions, signing and dating the proxy and returning it in the
postage-paid envelope. You may also just sign and date your proxy card and
return it. Whether you plan to attend the meeting or not, we urge you to
complete, sign and date the enclosed proxy card and to return it promptly in the
envelope provided. Returning the proxy card will not affect your right to attend
the meeting and vote in person.
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If you properly fill in your proxy card and send it to us in time to
vote, your "proxy" (one of the individuals named on your proxy card) will vote
your shares as you have directed. If you sign the proxy card but do not make
specific choices, your proxy will vote your shares as recommended by the Board
of Directors as follows:
o "FOR" the election of the nominee for director;
o "FOR" the merger agreement;
o "FOR" the amendment to the Certificate of Incorporation;
o "FOR" the 2000 Non-Qualified Stock Option Plan; and
o "FOR" ratification of the appointment of Wolf & Company, P.C. as
independent accountants for the year ending December 31, 2000.
The proxy card confers authority on the proxy named in the proxy card
to vote with respect to:
o The election of any person as a director should the nominee be
unable to serve, or for good cause, will not serve, matters
incident to the conduct of the meeting; and
o Other proposals for which management did not have notice at least
120 days prior to the date on which we mailed our notice of
annual meeting for the prior year's annual meeting of
shareholders.
On these other matters, your proxy will vote in accordance with the
recommendation of the Focus Board of Directors, or, if no recommendation is
given, in their own discretion. At the time this joint proxy
statement/prospectus was mailed, we knew of no matters that needed to be acted
upon at the meeting, other than those discussed in this joint proxy
statement/prospectus.
How many votes do I have?
The number of votes you have is dependent on the number of shares of
Focus common stock you own. Each share of Focus common stock entitles you to one
vote. The proxy card indicates the number of shares of common stock that you
own.
Can I change my vote after I return my proxy card?
Yes. Even after you have submitted your proxy, you may change your vote
at any time before the proxy is exercised if you file with the Secretary of
Focus either a notice of revocation or a duly executed proxy bearing a later
date. The powers of the proxy holders will be suspended if you attend the
meeting in person and so request. Attendance at the meeting will not by itself
revoke a previously granted proxy.
How do I vote in person?
If you plan to attend the meeting and vote in person, we will give you
a ballot form when you arrive. However, if your shares are held in the name of
your broker, bank, or other nominee, you must bring a proxy card and letter from
the nominee authorizing you to vote the shares and indicating that you are the
beneficial owner of the shares on November 10, 2000, the record date for voting.
What constitutes a quorum?
The presence at the meeting, in person or by proxy, of the holders of a
majority of the shares of Focus common stock outstanding on the record date will
constitute a quorum, permitting the conduct of business at the meeting. Proxies
that are marked as abstentions will be included in the calculation of the number
of shares considered to be present at the meeting.
What vote is required for each proposal?
The affirmative vote of the holders of a majority of the shares of
Focus' common stock outstanding as of the record date is required to adopt the
proposal to amend Focus' Certificate of Incorporation to increase the number of
authorized shares of common stock to 50,000,000. Approval
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of the proposals for the adoption of the merger agreement and the issuance of
shares in connection with the merger, approval of the 2000 Non-Qualified Stock
Option Plan and the ratification of Wolf & Company, P.C. as Focus' independent
auditors requires in each case the affirmative vote of a majority of the shares
present and voting at the Focus annual meeting. The director who receives the
most votes will be elected.
As of the record date, Focus directors and executive officers and their
affiliates owned approximately 5% of the outstanding shares of Focus common
stock.
What are the costs of solicitation of proxies?
We will bear the costs of this solicitation, including the expense of
preparing, assembling, printing and mailing this joint proxy
statement/prospectus and the material used in this solicitation of proxies. The
proxies will be solicited principally through the mails, but directors, officers
and regular employees of Focus may solicit proxies personally or by telephone.
Although there is no formal agreement to do so, we may reimburse banks,
brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expense in forwarding these proxy materials to their principals. In
addition, Focus will be using Morrow & Company for proxy solicitation at a cost
of approximately ten thousand dollars ($10,000).
Can I make a proposal at the next meeting?
If you want a proposal included in next year's proxy statement for the
next annual meeting of shareholders of Focus, Focus must receive the proposal at
its principal executive offices not later than October 29, 2001. In order to
curtail controversy as to the date on which a proposal was received by Focus, we
suggest that proponents submit their proposals by certified mail return receipt
requested.
Information on the Focus Proposals
PROPOSAL 1
Approval of Merger Agreement
For a discussion of the merger and the merger agreement, see "The
Merger", "Opinion of Financial Advisor Retained By Focus Board Of Directors,"
"The Merger Agreement," "The Pro Forma Combined Condensed Consolidated Financial
Information" and "Comparison Of Shareholders Rights Of Focus and Videonics" on
pages 44, 56, 61, 69 and 77 of the joint proxy statement/prospectus.
The Focus Board of Directors recommends that shareholders vote FOR the
approval of the merger agreement.
PROPOSAL 2--FOCUS MEETING ONLY
Increase in the Number of Authorized Shares Of Common Stock
The Focus Board of Directors recommends that you vote to amend the
Focus Certificate of Incorporation to increase the number of authorized shares
of common stock, $ 0.01 par value per share, from 30,000,000 to 50,000,000
shares. Of the 30,000,000 shares of common stock that are currently authorized,
25,900,203 shares were issued and outstanding as of November 10, 2000, the
record date for the Focus annual meeting. Shares of Focus common stock,
including the additional shares proposed for authorization, do not have
preemptive or similar rights.
If the proposed amendment is approved by the shareholders, the
additional authorized common stock may be issued by Focus without any further
action or approval by the shareholders. The purpose of the proposed amendment is
to provide additional authorized shares of common stock for possible use in
connection with the merger, as well as possible future financings, investment
opportunities, acquisitions, employee benefit plan distributions, other
distributions, such as stock
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dividends or stock splits, or for other corporate purposes. As of the record
date for the Focus annual meeting, taking into account shares reserved for
issuance under existing warrants, options and other commitments of Focus, the
Focus Board of Directors has the authority to issue approximately, 317,581
additional shares of common stock. If Focus does not increase the number of
shares, its ability to undertake these types of transactions or distributions in
the future will be significantly restricted. Except as set forth below, Focus
has no specific plans or commitments at this time for the issuance of the
additional authorized shares of common stock that would be added by the proposed
amendment, but desires to position itself to do so if and when the need arises
or market conditions otherwise warrant.
<TABLE>
New Shares To Be Issued
<CAPTION>
Reason Number of shares of common stock
------ --------------------------------
<S> <C>
Proposed Merger with Videonics(1) ............................................................. 5,132,000
Shelf Registration ............................................................................ 1,400,000
Investment Bankers fee in connection with the merger(2) ....................................... 186,000
2000 Stock Option Plan(3) ..................................................................... 5,000,000
<FN>
------------------
(1) Subject to the approval of the merger agreement by the shareholders of
Videonics and Focus. Number of shares is subject to change based on number
of shares outstanding.
(2) Investment Bankers fee is subject to change based on number of shares
issued in connection with the merger and the share price at the time of the
shareholder approval.
(3) Subject to the approval by the shareholders of Focus. "See Proposal 4."
</FN>
</TABLE>
The issuance of additional shares of common stock could, under certain
circumstances, have an anti takeover effect. For example, Focus could issue
shares to dilute the equity ownership and corresponding voting power of a
shareholder or group of shareholders who may oppose the policies or strategic
plan of Focus' existing management. Such additional shares could enable the
Focus Board of Directors to make it more difficult or discourage an attempt by
another person or entity to obtain control of Focus. The Focus Board of
Directors has no present intention of issuing any of the additional authorized
shares of common stock for such purposes. A copy of the Certificate of Amendment
of the Focus Certificate of Incorporation is attached as Appendix C.
The Focus Board of Directors recommends that shareholders vote FOR the
approval of the amendment to Focus' Certificate of Incorporation to increase the
number of authorized shares of Focus common stock from 30,000,000 to 50,000,000.
PROPOSAL 3--FOCUS MEETING ONLY
Election of Class of Directors
Focus' Certificate of Incorporation divides the Board of Directors into
three classes. Two Class I directors, Messrs. Massie and Cavalier, were elected
at the Focus annual meeting of shareholders on July 26, 1999 for a term ending
on the date of the annual meeting of Focus shareholders to be held in 2002. Two
Class III directors, Messrs. Coldrick, and Mahoney, were elected at the Focus
annual meeting of shareholders on July 29, 1998 for a term ending on the date of
the annual meeting of Focus shareholders to be held in 2001. The Class II
Director, Mr. William Dambrackas, was elected by the Focus Board of Directors at
a meeting held on April 22, 1999. Focus' Class II Director was elected for a
term ending on the date of the Focus annual meeting of shareholders to be held
in 2000. Mr. Dambrackas has been nominated by the Focus Board for re-election at
the Focus Meeting for a term of three years.
The Class II Director nominee, Mr. Dambrackas, is currently serving as
a member of the Focus Board of Directors. Shares represented by all properly
executed proxies received by the Focus Board and not otherwise marked to
withhold authority to vote for the nominee will be voted (unless the
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nominee is unable or unwilling to serve) FOR the election of the nominee. The
Focus Board of Directors knows of no reason why such nominee should be unable or
unwilling to serve, but if such should be the case, proxies may be voted for the
election of some other person or for fixing the number of directors at a lesser
number.
The Focus Board of Directors recommends that shareholders vote FOR the
election of William Dambrackas, the nominee proposed by the Focus Board of
Directors, as a Class II Director to serve until the 2003 annual meeting of
shareholders.
PROPOSAL 4--FOCUS MEETING ONLY
Approval of 2000 Non-Qualified Stock Option Plan
General.
On April 27, 2000, the Board of Directors of Focus adopted the 2000
Non-Qualified Stock Option Plan, subject to approval by Focus shareholders. On
August 15, 2000 the maximum number of options available under the 2000 Plan was
increased from 3,000,000 to 5,000,000 in order to accommodate requirements in
connection with the proposed merger. A copy of the 2000 Plan is attached as
Appendix E. On April 27, 2000, all five directors of Focus were each
automatically granted, subject to the approval by Focus shareholders, an option
to purchase 100,000 shares of common stock at a purchase price equal to the fair
market value of the common stock as of the date the shareholders approve the
2000 Plan. Four executive officers of Focus were also granted options, subject
to shareholder approval, for a total of 625,000 shares on that date.
Additionally options were granted on that date to most other Focus employees.
The exercise price of each of these additional options will be equal to the fair
market value of Focus common stock as of the date the shareholders approve the
2000 Plan.
The 2000 Plan and the grant of all options thereunder are subject to
the approval of the 2000 Plan by the affirmative vote of holders of a majority
of the shares of Focus' common stock present in person or by proxy and entitled
to vote at the meeting.
Possible Dilutive Effects of the Option Plan.
The common stock to be issued upon the exercise of options awarded
under the 2000 Plan may either be authorized but unissued shares of Focus common
stock or shares of Focus common stock purchased in the open market. In that
Focus shareholders do not have preemptive rights, to the extent that Focus funds
the 2000 Plan, in whole or in part, with authorized but unissued shares, the
interests of current shareholders will be diluted upon exercise of such options.
Description of the 2000 Non-Qualified Stock Option Plan.
The purpose of the 2000 Plan is to promote the interests of Focus by
providing an inducement to obtain and retain the services of qualified persons.
The 2000 Plan is administered by the Board of Directors of Focus. The
Board of Directors, subject to the provisions of the 2000 Plan, has the power to
interpret the 2000 Plan, to determine all questions thereunder, and to adopt and
amend any rules and regulations for the administration of the 2000 Plan as it
may deem desirable.
The 2000 Plan, as amended, authorizes the grant of options for up to
5,000,000 shares of Focus common stock, 3,053,575 of which remain available for
grant as of the record date. It was initially contemplated that the total number
of shares available under the 2000 Plan would be 3,000,000; however this number
was increased to 5,000,000 to take into account options to be granted to
Videonics employees upon completion of the merger. Outstanding options under the
2000 Plan are subject to adjustment for capital changes. If any options granted
under the 2000 Plan are surrendered before exercise or lapse without exercise,
in whole or in part, the shares reserved therefor shall continue to be available
under the 2000 Plan.
Subject to shareholder approval, each person who was a member of Focus'
Board of Directors or an executive officer of Focus on April 27, 2000, was
automatically granted on such date options as described above to purchase shares
of Focus common stock.
23
<PAGE>
The exercise price per share of options granted under the 2000 Plan is
100% of the fair-market value of Focus' common stock on the date the plan is
approved by shareholders. The option exercise price is subject to adjustment to
take into account various equity distributions, such as stock splits and stock
dividends, and other changes in Focus' capitalization.
The Plan requires that options granted thereunder will expire on the
date which is five (5) years from the date of grant.
Each option granted under the 2000 Plan first becomes exercisable upon
time periods set by the Compensation Committee of the Focus Board of Directors.
With respect to non-executive officer employees, eight and one third percent (8
1/3%) of the shares vest every three months from grant date. Options issued to
the Focus Board of Directors and the executive officers under the 2000 Plan,
shall vest in equal amounts, occurring monthly over a 3 year period or upon the
occurrence of certain events. The vesting of options on each vesting date is
conditioned on the optionee having continuously served as a member of the Focus
Board of Directors or being employed by Focus through that date.
Subject to the terms and conditions of the 2000 Plan, an option granted
under the 2000 Plan shall be exercisable in whole or in part by giving written
notice to Focus at its principal executive offices. The notice must state the
number of shares as to which the option is being exercised and must be
accompanied by payment in full for such shares.
In the event an optionee ceases to be a member of the Focus Board of
Director or an employee of Focus for any reason other than death, permanent
disability, termination without cause or termination due to a change in control
of Focus, then unexercised options granted to such optionee shall, to the extent
not then vested, immediately terminate and become void, and any options which
are then vested but have not been exercised may be exercised by the optionee
until the scheduled termination date of the option. In the event that an
optionee ceases to be a member of the Focus Board of Directors or employee of
Focus by reason of his or her permanent disability or death, any option granted
to such optionee shall be immediately and automatically accelerated and become
fully vested and all unexercised options shall be exercisable by the optionee
(or by the optionee's personal representative, heir or legatee) until the
scheduled expiration date of the option.
Any option granted pursuant to the 2000 Plan is not assignable or
transferable other than by will or by the laws of descent and distribution or
pursuant to a domestic relations order, and is exercisable during the optionee's
lifetime only by him or her.
The Focus Board of Directors may from time to time adopt amendments,
certain of which are subject to shareholder approval, and may terminate the 2000
Plan at any time, however, such action shall not affect options previously
granted.
Federal Income Tax Consequences of the 2000 Non-Qualified Stock Option
Plan.
The following discussion summarizes certain federal income tax
consequences for directors and officers of Focus receiving options under the
2000 Plan and certain tax effects on Focus. However, the summary does not
address every situation that may result in taxation. For example, it does not
address the tax implications arising from an optionee's death. Furthermore,
there are likely to be federal self-employment tax and state income tax
consequences which are not discussed herein. The Plan is not subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended,
and the provisions of Section 401(a) of the Internal Revenue Code of 1986, as
amended, are not applicable to the 2000 Plan.
o Options granted under the 2000 Plan do not qualify as "Incentive
Stock Options" under Section 422 of the Code.
o A director or officer will not recognize any taxable income upon
the grant of an option under the 2000 Plan, but will generally
recognize ordinary compensation income at the time of exercise of
the option in an amount equal to the excess, if any, of the fair
market value of the shares on the date of exercise over the
exercise price.
o When a director or officer sells the common stock acquired upon
exercise of an option, he or she generally will recognize a
capital gain or loss equal to the difference between the amount
24
<PAGE>
realized upon sale of the stock and his or her basis in the stock
(in the case of a cash exercise, the exercise price plus the
amount, if any, taxed to the director or officer as compensation
income as a result of his or her exercise of the option). If the
director's or officer's holding period for the stock exceeds one
year, the gain or loss will be long-term capital gain or loss.
o No tax deduction will be allowed to Focus upon the grant of an
option under the 2000 Plan. When a director or officer recognizes
compensation income as a result of the exercise of an option
under the 2000 Plan, Focus generally will be entitled to a
corresponding deduction for income tax purposes.
Options Granted Under the 2000 Non-Qualified Stock Option Plan are Subject
to Shareholder Approval.
<TABLE>
The following table sets forth information as of November 10, 2000 with
respect to options which were granted under the 2000 Plan, pending approval of
the 2000 Plan by Focus' shareholders, to (i) each of Focus' Chief Executive
Officer and the four other executive officers of Focus named in the Summary
Compensation Table (see "Information About Focus--Summary Compensation Table"),
(ii) all executive officers of Focus as a group, (iii) all directors of Focus,
other than those who are executive officers, as a group, and (iv) all employees
of Focus, excluding executive officers, as a group.
<CAPTION>
Number of Shares
Subject to Options
Name Granted from 2000 Plan
---- ----------------------
<S> <C>
Brett A. Moyer ............................................................................................ 200,000
Christopher P. Ricci ...................................................................................... 175,000
William Schillhammer ...................................................................................... 125,000
Thomas Hamilton ........................................................................................... 125,000
All executive officers as a group (four persons) .......................................................... 625,000
All directors of Focus, excluding executive officers, as a group (five persons) ........................... 500,000
All employees of Focus, excluding executive officers, as a group (41 persons) ............................. 821,425
Options remaining available for Grant ..................................................................... 3,053,575
</TABLE>
The exercise price per share of options granted under the 2000 Plan is
100% of the fair-market value of Focus' common stock on the date the plan is
approved by Focus shareholders. The foregoing is only a summary of the 2000 Plan
and is subject to and qualified in its entirety by reference to the complete
text of the 2000 Plan, a copy of which is included as Appendix E to this proxy
statement.
The Focus Board of Directors recommends that shareholders vote FOR the
approval of the 2000 Plan.
PROPOSAL 5--FOCUS MEETING ONLY
Ratification of Selection of Auditors
The Focus Board of Directors has selected Wolf & Company, P.C., to
serve as Focus' independent auditors for the fiscal year ending December 31,
2000. Wolf & Company, P.C. has acted as Focus' independent auditors since June,
1996. A representative of Wolf & Company, P.C. is expected to be present at the
Focus annual meeting, will have an opportunity to make a statement, and is
expected to respond to appropriate questions.
Shareholder ratification of the selection of Wolf & Company, P.C., as
Focus' independent accountants is not required by Focus' Bylaws or otherwise.
However, the Focus Board is submitting the selection of Wolf & Company, P.C., to
the shareholders for ratification as a matter of good corporate practice. If
shareholders fail to ratify the selection, the Focus Board of Directors will
reconsider whether or not to retain that firm. Even if the selection is
ratified, the Focus Board of Directors in its discretion may direct the
appointment of a different independent accounting firm at any time during the
year if the Focus Board of Directors determines that such a change would be in
the best interests of Focus and its shareholders.
25
<PAGE>
The Focus Board of Directors recommends that shareholders vote FOR
ratification of its selection of Wolf & Company, P.C. as Focus' independent
auditors for the fiscal year ending December 31, 2000.
ANNUAL MEETING OF VIDEONICS SHAREHOLDERS
When will the meeting be held?
This joint proxy statement/prospectus is being furnished to holders of
Videonics common stock in connection with the solicitation of proxies by the
Videonics Board of Directors at the Videonics annual meeting to be held on
December 28, 2000, at 1370 Dell Avenue, Campbell, California 95008 at 1 p.m.,
California time, and at any adjournments or postponements of the meeting.
What is the purpose of the Videonics meeting?
The Videonics annual meeting is being held so that shareholders of
Videonics may: (i) consider and vote upon a proposal to adopt a merger
agreement; (ii) elect four (4) directors of Videonics for terms expiring at the
2001 annual meeting of shareholders; (iii) consider and vote upon a proposal to
ratify the selection of PricewaterhouseCoopers LLP as Videonics' accountants for
the fiscal year ending December 31, 2000; and (iv) consider and vote upon such
other business that properly comes before the Videonics annual meeting or any
adjournment or postponement of the Videonics annual meeting. By approving the
merger agreement, you will also be approving the other transactions contemplated
by the merger agreement.
Who can vote at the Videonics meeting?
If you own Videonics common stock as of the close of business on
November 10, 2000, you can vote at the meeting. On the record date, there were
5,902,550 shares of Videonics common stock outstanding and entitled to vote,
held by approximately 1,785 holders of record.
How do I vote by proxy?
You vote your proxy by completing the proxy card enclosed in accordance
with its instructions, signing and dating the proxy and returning it in the
postage-paid envelope. You may also just sign and date your proxy card and
return it. Whether you plan to attend the meeting or not, we urge you to
complete, sign and date the enclosed proxy card and to return it promptly in the
envelope provided. Returning the proxy card will not affect your right to attend
the meeting and vote in person.
If you properly fill in your proxy card and send it to us in time to
vote, your "proxy" (one of the individuals named on your proxy card) will vote
your shares as you have directed. If you sign the proxy card but do not make
specific choices, your proxy will vote your shares as recommended by the Board
of Directors as follows:
o "FOR" the merger agreement;
o "FOR" the election of the nominees for director; and
o "FOR" ratification of the appointment of PricewaterhouseCoopers,
LLP as independent accountants for the year ending December 31,
2000.
The proxy card confers authority on the proxy named in the proxy card
to vote with respect to:
o The election of any person as a director should any of the
nominees be unable to serve, or for good cause, will not serve,
matters incident to the conduct of the meeting; and
o Other proposals for which management did not have notice at least
120 days prior to the date on which we mailed our notice of
annual meeting for the prior year's annual meeting of
shareholders.
On these other matters, your proxy will vote in accordance with the
recommendation of the Videonics Board of Directors, or, if no recommendation is
given, in their own discretion. At the time
26
<PAGE>
this joint proxy statement/prospectus was mailed, we knew of no matters that
needed to be acted upon at the meeting, other than those discussed in this joint
proxy statement/prospectus.
How many votes do I have?
The number of votes you have is dependent on the number of shares of
Videonics common stock you own. Each share of common stock entitles you to one
vote. The proxy card indicates the number of shares of common stock that you
own.
Can I change my vote after I return my proxy card?
Yes. Even after you have submitted your proxy, you may change your vote
at any time before the proxy is exercised if you file with the Secretary of
Videonics either a notice of revocation or a duly executed proxy bearing a later
date. The powers of the proxy holders will be suspended if you attend the
meeting in person and so request. Attendance at the meeting will not by itself
revoke a previously granted proxy.
How do I vote in person?
If you plan to attend the meeting and vote in person, we will give you
a ballot form when you arrive. However, if your shares are held in the name of
your broker, bank, or other nominee, you must bring a proxy card and letter from
the nominee authorizing you to vote the shares and indicating that you are the
beneficial owner of the shares on November 10, 2000, the record date for voting.
What constitutes a quorum?
The presence at the meeting, in person or by proxy, of the holders of a
majority of the shares of Videonics common stock outstanding on the record date
will constitute a quorum, permitting the conduct of business at the meeting.
Proxies that are marked as abstentions will be included in the calculation of
the number of shares considered to be present at the meeting.
What vote is required for each proposal?
The affirmative vote of the holders of a majority of the shares of
Videonics' common stock outstanding as of the record date is required to adopt
the merger agreement. The four nominees for director who receive the most votes
will be elected. Approval of the proposal for the ratification of
PricewaterhouseCoopers LLC as Videonics' independent auditors requires the
affirmative vote of a majority of the shares present and voting at the Videonics
annual meeting.
As of the record date, Videonics directors and executive officers and
their affiliates owned approximately 50% of the outstanding shares of Videonics
common stock.
What are the costs of solicitation of proxies?
We will bear the costs of this solicitation, including the expense of
preparing, assembling, printing and mailing this joint proxy
statement/prospectus and the material used in this solicitation of proxies. The
proxies will be solicited principally through the mails, but directors, officers
and regular employees of Videonics may solicit proxies personally or by
telephone. Although there is no formal agreement to do so, we may reimburse
banks, brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expense in forwarding these proxy materials to their principals.
Videonics shareholders should not send in any stock certificates with
their proxy card. A transmittal letter with instructions for the surrender of
Videonics stock certificates will be mailed to Videonics shareholders as soon as
practicable after completion of the merger.
Can I make a proposal at the next meeting?
Assuming the merger is not completed and you want a proposal included
in next years proxy statement for the next annual meeting of Shareholders of
Videonics, Videonics must receive at its
27
<PAGE>
principal executive offices not later than August 29, 2001. In order to curtail
controversy as to the date on which a proposal was received by Videonics, it is
suggested that proponents submit their proposals by certified mail return
receipt requested.
Information on the Videonics Proposals
PROPOSAL 1
Approval of Agreement and Plan of Merger
For a discussion of the merger and the merger agreement, see "The
Merger," "The Merger Agreement," " The Pro Forma Combined Condensed Consolidated
Financial Information" and "Comparison Of Shareholders Rights Of Focus and
Videonics" on pages 44, 61, 69 and 77 of this joint proxy statement/prospectus.
The Videonics Board of Directors recommends that shareholders vote FOR
the approval of the merger agreement.
PROPOSAL 2--VIDEONICS MEETING ONLY
Election of Directors
In accordance with Videonics' Articles of Incorporation, the entire
Videonics' Board of Directors is elected at each meeting to serve one year terms
until the next annual meeting. The current nominees, Michael L. D'Addio, Carl E.
Berg, Mark C. Hahn, and N. William Jasper, Jr. are currently serving as members
of the Videonics Board. Shares represented by all properly executed proxies
received by the Videonics Board and not otherwise marked to withhold authority
to vote for the nominees will be voted (unless a nominee is unable or unwilling
to serve) FOR the election of the nominees. The Videonics Board knows of no
reason why such nominee should be unable or unwilling to serve, but if such
should be the case, proxies may be voted for the election of some other person
or for fixing the number of directors at a lesser number.
The Videonics Board of Directors recommends that shareholders vote FOR
the election of the nominees proposed by the Board of Directors, as directors to
serve until the 2001 Annual Meeting of Videonics Shareholders.
PROPOSAL 3--VIDEONICS MEETING ONLY
Ratification Of Selection Of Auditors
The Board of Directors has selected PricewaterhouseCoopers LLP. as
Videonics' independent accountants for the year ending December 31, 2000 and has
further directed that management submit the selection of accountants for
ratification by the shareholders at this meeting. PricewaterhouseCoopers LLP has
acted as Videonics' independent auditors for fiscal years 1997, 1998 and 1999. A
representative of PricewaterhouseCoopers LLP is expected to be present at the
Videonics' meeting, will have an opportunity to make a statement, and is
expected to respond to appropriate questions.
Shareholder ratification of the selection of PricewaterhouseCoopers LLP
as Videonics' independent accountants is not required by Videonics' Bylaws or
otherwise. However, the Board is submitting the selection of
PricewaterhouseCoopers LLP to the shareholders for ratification as a matter of
good corporate practice. If the shareholders fail to ratify the selection, the
Board will reconsider whether or not to retain that firm. Even if the selection
is ratified, the Board in its discretion may direct the appointment of a
different independent accounting firm at any time during the year if the Board
determines that such a change would be in the best interests of Videonics and
its shareholders.
The Board of Directors recommends that shareholders vote FOR the
ratification of the selection of auditors.
28
<PAGE>
INFORMATION ABOUT FOCUS
The Business
Focus Enhancements, Inc., a Delaware corporation, internally develops
proprietary technology for the conversion and enhancement of PC and Macintosh
output for display on televisions and large-screen monitors, and markets and
sells worldwide a line of video conversion products using this technology. In a
1997 independent survey by Frost & Sullivan, Focus was recognized as an industry
leader in the development and marketing of PC-to-TV video conversion products
that make personal computers "TV ready" and televisions "PC ready." In 2000,
Focus has continued to solidify its leadership position with the addition of new
patents leading to industry-wide recognition. Focus has also entered into
significant new licensing agreements with original equipment manufacturers, as
well as strategic alliances with original equipment manufacturers, resellers and
national retail chains.
Focus' common stock is listed on the NASDAQ SmallCap Market under the
symbol "FCSE." Its principal offices are located at 600 Research Drive,
Wilmington, MA 01887, and the telephone number is (978) 988-5888.
Except as described in this paragraph, none of Focus' executive
officers or directors purchased or sold any shares of Focus' common stock since
the execution of the merger agreement on August 30, 2000. On September 12, 2000
John C. Cavalier, a director of Focus, sold 9,519 of shares of Focus common
stock.
Focus is subject to the disclosure requirements of the Securities
Exchange Act of 1934, as amended, and is required to file reports, proxy
statements and other information with the Commission relating to its business,
financial condition and other matters. You can inspect and copy these reports,
proxy statements and other information, at prescribed rates, at the offices of
the Commission and the NASDAQ. See "Where You Can Find More Information."
PC Video Conversion, Inc.
PC Video Conversion Inc. is a Delaware corporation and wholly-owned
subsidiary of Focus, formed for the purpose of effecting the merger. Its
principal offices are located at 600 Research Drive, Wilmington, MA 01887, and
its telephone number is (978) 988-5888.
29
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
<TABLE>
The following table sets forth certain information with respect to the
beneficial ownership of Focus common stock as of the November 10, 2000 record
date for the Focus annual meeting, (except as otherwise noted in footnotes) by:
(i) each shareholder known by Focus to own beneficially 5% or more of the
outstanding shares of Focus common stock; (ii) each director of Focus; (iii)
each of the named Focus executive officers as of the end of the most recent
fiscal year; and (iv) all executive officers and directors of Focus as a group.
<CAPTION>
Percentage of
Number of Shares Outstanding
Name Beneficially Owned Common Stock(1)
---- ------------------ ---------------
<S> <C> <C>
Thomas L. Massie(2) ................................................................ 658,023 2.5%
John C. Cavalier(3) ................................................................ 58,334 *
William B. Coldrick(4) ............................................................. 150,000 *
Timothy E. Mahoney(5) .............................................................. 58,333 *
William Dambrackas(6) .............................................................. 33,334 *
Christopher P. Ricci(7) ............................................................ 56,667 *
Brett A. Moyer(8) .................................................................. 130,000 *
Thomas Hamilton(9) ................................................................. 72,668 *
William R. Schillhammer III(10) .................................................... 93,667 *
All executive officers and directors as a group(9 persons)(11) ..................... 1,311,026 5.0%
<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 241,356 shares of common stock held directly or indirectly by Mr.
Massie. Includes 416,667 shares issuable pursuant to outstanding stock
options that are exercisable at November 10, 2000, or within 60 days
thereafter.
(3) Includes 58,334 shares issuable pursuant to outstanding stock options that
are exercisable at November 10, 2000 or within 60 days thereafter.
(4) Includes 150,000 shares issuable pursuant to outstanding stock options that
are exercisable at November 10, 2000, or within 60 days thereafter.
(5) Includes 58,333 shares issuable pursuant to outstanding stock options that
are exercisable at November 10, 2000, or within 60 days thereafter.
(6) Includes 33,334 shares issuable pursuant to outstanding stock options that
are exercisable at November 10, 2000, or within 60 days thereafter.
(7) Includes 56,667 shares issuable pursuant to outstanding stock options that
are exercisable at November 10, 2000, or within 60 days thereafter.
(8) Includes 130,000 shares issuable pursuant to outstanding stock options that
are exercisable at November 10, 2000, or within 60 days thereafter.
(9) Includes 6,000 shares of common stock held directly by Mr. Hamilton.
Includes 66,668 shares issuable pursuant to outstanding stock options that
are exercisable at November 10, 2000, or within 60 days thereafter.
(10) Includes 4,000 shares of common stock held directly by Mr. Schillhammer.
Includes 89,667 shares issuable pursuant to outstanding stock options that
are exercisable at November 10, 2000, or within 60 days thereafter.
(11) Includes 1,059,670 shares issuable pursuant to options to purchase common
stock exercisable at November 10, 2000, or within 60 days thereafter.
</FN>
</TABLE>
30
<PAGE>
Information Regarding Directors and Executive Officers
<TABLE>
The following table sets forth the nominees to be elected at the annual
meeting, the current directors who will continue to serve as directors beyond
the Focus annual meeting, and the executive officers of Focus.
<CAPTION>
Director /
Name Age(1) Position Officer Since
---- ------ -------- -------------
<S> <C> <C> <C>
Thomas L. Massie(6) ............................ 38 Chairman of the Board 1991
William B. Coldrick(3)(5) ...................... 58 Vice Chairman of the Board 1993
Timothy E. Mahoney(2)(5) ....................... 42 Director 1997
John C. Cavalier (2)(3)(6) ..................... 58 Director 1992
William Dambrackas(3)(4) ....................... 56 Director 1999
Brett A. Moyer ................................. 42 Executive Vice President & Chief
Operating Officer
Thomas Hamilton ................................ 51 Vice President of Research &
Development
William R. Schillhammer, III ................... 46 Vice President of OEM Sales
<FN>
------------------
(1) Age as of December 31, 1999
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
(4) Nominated to be elected at the Focus annual meeting
(5) Term as director to expire in 2001.
(6) Term as director to expire in 2001.
</FN>
</TABLE>
Thomas L. Massie is Chairman of the Board and a co-founder of Focus and
has served in this position since inception of the company in 1992. Mr. Massie
served as Chief Executive Officer of Focus during 1999 and 2000, but resigned
from this position effective April 30, 2000. In August 2000, Mr. Massie became
President and Chief Executive Officer of BRIDGELINE Software, Inc., an Internet
development firm. 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. 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. On May 1,
2000, Focus entered into a separation agreement with Mr. Massie whereby the
parties agreed to sever Mr. Massie's employment relationship effective April 30,
2000. Mr. Massie remains Chairman of the Focus Board of Directors and, in
addition, Focus and Mr. Massie entered into a consulting agreement on May 1,
2000. For a discussion of these agreements, see "--Subsequent Separation and
Consulting Agreements."
William B. Coldrick has served as a Director of Focus since January
1993, Vice Chairman of Focus since July 1994 and as Executive Vice President of
Focus 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. Mr. Coldrick holds a Bachelor
of Science degree in Marketing from Iona College in New Rochelle, New York.
Timothy E. Mahoney has served as Director of Focus since March 1997. 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 and in 1999 became
Chairman and Chief Operating Officer of vFinance.com, Inc., the parent company
of Union Atlantic L.C. and Union Atlantic Capital L.C. See also "Certain
Relationships and Related Transactions." Since 1996, Mr. Mahoney has served as
Chairman of Tallard Technologies BV, a PC
31
<PAGE>
products distributor / value added reseller serving Latin America. He earned his
BA degree in computer science and business from West Virginia University and an
MBA degree from George Washington University.
John C. Cavalier has served as a Director of Focus 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.
He earned his undergraduate degree from the University of Notre Dame and an MBA
from Michigan State University.
William A. Dambrackas has over 22 years of management experience in the
computer industry. He founded Equinox Systems (Nasdaq: EQNX) 17 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. Mr.
Dambrackas has been issued three United States Patents for data communications
inventions and he was honored as Florida's "Entrepreneur of the Year" in 1984.
Brett A. Moyer joined Focus in May 1997, and has assumed the role of
Executive Vice President & Chief Operating Officer. Mr. Moyer brings over 10
years of global sales, finance and general management experience from Zenith
Electronics Corporation, from February 1986 to May 1997, 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).
Thomas Hamilton joined Focus in September 1996 when Focus 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. Mr. Hamilton has a BS in
Mathematics from Oregon State University.
William R. Schillhammer III joined Focus 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. Mr. Schillhammer graduated from
Dartmouth College with a bachelor's degree in Engineering.
32
<PAGE>
Executive Compensation
<TABLE>
The following table sets forth, for the years ended December 31, 1999,
1998, and 1997, the total compensation earned by the Chief Executive Officer and
the four most highly compensated executive officers of Focus whose salary and
bonus for fiscal year 1999 exceeded $100,000 for services rendered in all
capacities.
Summary Compensation Table
<CAPTION>
Long-Term
Compensation
Annual Compensation(1)(2) Options/
Name and -------------------------------------------- -------------
Principal Position Year Salary ($) Bonus($) SARs(3)
------------------ ---- ---------- -------- -------
<S> <C> <C> <C> <C>
Thomas L. Massie .............................................. 1999 $150,000 $ 69,154 100,000
President, Chief 1998 $150,000 $132,833 200,000
Executive Officer and 1997 $150,000 $ 45,000 500,000
Chairman of the Board(4)
Christopher P. Ricci .......................................... 1999 $150,000 $ 15,200 45,000
Sr. Vice President and 1998 $150,000 $ 27,500 125,000
General Counsel(5) 1997 -- -- --
Brett Moyer ................................................... 1999 $130,000 $ 63,724(6) 40,000
Executive Vice President 1998 $130,000 $ 41,000(6) 100,000
& Chief Operating Officer 1997 $130,000 $ 45,000 250,000
Thomas Hamilton ............................................... 1999 $129,192 -- 175,000
Vice President of Research 1998 $110,000 $ 5,000 25,000
1997 $110,000 $ 4,179 --
William Schillhammer .......................................... 1999 $ 95,000 $ 52,900(6) 40,000
Vice President of OEM 1998 $ 85,000 $ 22,204(6) 122,000
Sales 1997 -- -- --
<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 $50,000 or 10%
of the total salary and bonus reported.
(3) Long-term compensation table reflects the grant of non-qualified and
incentive stock options granted to the named persons in each of the periods
indicated. Includes repriced options for 1998 and 1997.
(4) During 1999 and 2000 Mr. Massie served as President and Chief Executive
Officer of Focus. On May 1, 2000, Focus entered into a separation agreement
with Mr. Massie whereby the parties agreed to sever Mr. Massie's employment
relationship effective April 30,2000. Mr. Massie remained Chairman of the
Focus Board of Directors and, in addition, Focus and Mr. Massie entered
into a consulting agreement on May 1, 2000. For a discussion of these
agreements, see "--Subsequent Separation and Consulting Agreements."
(5) On September 6, 2000, Mr. Ricci resigned from his position as Senior Vice
President and General Counsel of Focus.
(6) Includes compensation based on sales commissions.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
The following tables sets forth as to the Chief Executive Officer and
each of the other executive officers named in the Summary Compensation Table,
certain information with respect to options to purchase shares of common stock
of Focus as of and for the year ended December 31, 1999.
Option/SAR Grants In 1999
<CAPTION>
Number of % of Total
Securities Options/
Underlying SARs Exercise
Options/ Granted to Or Base
SARs Employees Price
Granted In ($/per Exp.
Name (#)(1) 1999(2) Share) Date
---- ------ ------- ------ ----
<S> <C> <C> <C> <C>
Thomas L. Massie ................................ 100,000 8.13% $ 1.28 11/12/04
Christopher P. Ricci ............................ 25,000 3.66% $ 1.06 02/22/04
20,000 $ 1.28 11/12/04
Brett Moyer ..................................... 40,000 3.25% $ 1.28 11/12/04
Bill Schillhammer ............................... 40,000 3.25% $ 1.28 11/12/04
Thomas Hamilton ................................. 25,000 14.23% $ 1.06 02/22/04
50,000 $ 1.00 09/07/04
100,000 $ 1.28 11/12/04
<FN>
------------------
(1) The purpose of Focus' stock option plans, is to provide incentives to
employees, directors and consultants who are in positions to make
significant contributions to Focus.
(2) Focus granted options to purchase a total of 1,229,386 shares of common
stock to employees and directors in 1999.
</FN>
</TABLE>
<TABLE>
The following table sets forth information concerning options exercised
during fiscal year 1999 and the value of unexercised options as of December 31,
1999 held by the executives named in the Summary Compensation Table above.
Aggregated Option/SAR Exercises in 1999 and Fiscal Year-End Option/SAR Values
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Value Options/SARs at Year-End Options/SARs at Year-End(1)
on Exercise Realized ---------------------------- --------------------------
(#) ($) Exercisable Unexercisable Exercisable Unexercisable
------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas L. Massie ................... 500,000 1,782,000 150,000 400,000 $1,072,500 $2,812,000
Christopher P. Ricci ............... 41,668 147,505 0 128,332 $ 0 $ 904,885
Brett Moyer ........................ 200,001 708,003 0 189,999 $ 0 $1,333,241
William Schillhammer ............... 15,000 53,100 30,668 131,332 $ 213,450 $ 923,264
Thomas Hamilton .................... 88,334 312,702 0 191,666 $ 0 $1,362,745
<FN>
------------------
(1) Value is based on the difference between option exercise price and the
closing price as quoted on the NASDAQ SmallCap Market at the close of
trading on December 31, 1999 ($8.25) multiplied by the number of shares
underlying the option.
</FN>
</TABLE>
Additional Options.
For a discussion of the plan and awards granted thereunder, see
"Proposal 4 - Focus Meeting Only--Approval of 2000 Non-Qualified Stock Option
Plan," on page 31 of this joint proxy statement/ prospectus.
Repricing of Stock Options/Additional Option Plans
On March 19, 1997, the Focus Board of Directors elected to terminate
the 1995 Directors Stock Option Plan and all options granted thereunder. By a
unanimous vote, the Focus Board of Directors established the 1997 Directors
Stock Option Plan and authorized the grant of options to purchase up to
1,000,000 shares of common stock under the 1997 Directors Stock Option 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.
34
<PAGE>
Focus maintains the right to reprice options that it may grant under
its existing stock option plans. On September 1, 1998, Focus 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 Focus' common stock on September 1, 1998.
On September 1, 1998, the Focus Board of Directors approved the 1998
Non-Qualified Stock Option Plan. The 1998 Plan authorized the grant 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 Focus.
Mr. Massie received a grant of an option for 200,000 shares under the
2000 Plan. Mr. Moyer received a grant of an option for 100,000 shares under the
2000 Plan. All such options have an exercise price of $1.22, the fair market
value on the date of grant. Upon joining the Focus Board of Directors, on April
22, 1999, Mr. Dambrackas was granted, subject to approval by Focus'
shareholders, a stock option for 100,000 shares of common stock at an exercise
price of $1.4063, the fair market value on the date of grant.
Employment Agreements
Focus and Brett Moyer are parties to an employment contract effective
May 15, 1997, 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. Moyer serves as Executive Vice President & Chief
Operating Officer. This employment contract requires acceleration of vesting of
all options held by Mr. Moyer 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 Focus' policies. On May, 2000, Mr. Moyer's employment contract was amended
to extend the term until May 1, 2002, which renews automatically after May 1,
2000 for successive one year terms, subject to certain termination provisions.
Focus and Christopher Ricci were parties to an employment contract
effective March 1, 1998, as amended to date, which renewed automatically after
December 31, 2000, for one year terms, subject to certain termination
provisions. Pursuant to this employment contract, Mr. Ricci served as our Senior
Vice President, General Counsel and Secretary. This employment contract required
the acceleration of vesting of all options held by Mr. Ricci so as to be
immediately exercisable if Mr. Ricci is terminated without cause during the term
of the contract. In addition, in the case of a change in control of Focus, for
up to one year following such change in control Mr. Ricci, at his sole election,
could choose to terminate his employment, in which case Mr. Ricci would be
entitled to receive a lump sum cash payment equal to two years' salary plus the
continuation of such salary for an additional two years after such termination.
Mr. Ricci's employment contract provided for annual bonuses to be determined by
the Board of Directors and employee benefits, including health and disability
insurance, to be provided in accordance with company policies. On September 6,
2000, Mr. Ricci resigned from his position as Senior Vice President, General
Counsel and Secretary. Mr. Ricci's employment agreement was terminated on that
date and replaced with a new agreement providing for his employment by Focus as
a part-time consultant terminating April 30, 2001, unless sooner terminated by
both parties. The part-time consulting agreement provides that Mr. Ricci shall
continue to hold all of the stock options previously granted to him and requires
the acceleration of vesting of all options held by Mr. Ricci so as to be
immediately exercisable if Mr. Ricci is terminated without cause during the term
of the contract.
Focus 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
acceleration of vesting of all options held by Mr. Hamilton 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 Focus Board of Directors and employee benefits, including health and
disability insurance, in accordance with Focus' policies.
35
<PAGE>
Subsequent Separation and Consulting Agreements
On May 1, 2000, Focus entered into a separation agreement with Mr.
Massie whereby the parties agreed to sever Mr. Massie's employment relationship
effective April 30, 2000. Mr. Massie remains on the Board of Directors of Focus
and any options granted by Focus will continue to vest under their current terms
for as long as he remains a director or a consultant, whichever is longer. In
addition, under the severance agreement, Focus (i) paid Mr. Massie for all
accrued vacation and unpaid bonuses; and (ii) will forgive two notes totaling
$140,000, including all interest, owed by Mr. Massie to Focus over eight (8)
fiscal quarters, ending June 30, 2002.
In addition, Focus and Mr. Massie entered into a Consulting Agreement
on May 1, 2000, whereby Mr. Massie receives a monthly consulting fee of $11,000
plus expenses. Pursuant to the agreement, Mr. Massie will assist Focus in
financial matters, including but not limited to, the raising of long term
capital, planing product development, advising on merger and acquisitions, and
recruiting a new president for Focus. The minimum amount due under this
agreement is $110,000.
Focus Board Meetings and Committees
The Focus Board of Directors met four (4) times during the fiscal year
ended December 31, 1999. None of the directors attended fewer than 75% of the
meetings held during the period. The Focus Board of Directors also took action
by unanimous written consent in lieu of a meeting on six (6) occasions during
1999.
The Compensation Committee of the Focus Board, of which Messrs.
Cavalier and Mahoney are members, sets the compensation of the Chief Executive
Officer, reviews and approves the compensation arrangements for all other
officers of Focus and administers Focus' various stock option plans. The
Compensation Committee did not meet during the fiscal year ended December 31,
1999. The Compensation Committee also took action by unanimous written consent
in lieu of a meeting on three (3) occasions during 1999.
The Audit Committee of the Board, of which Messrs. Mahoney and Coldrick
were members in 1999, and Messrs. Cavalier, Dambrackas and Coldrick are now
members, reviews all financial functions of Focus, including matters relating to
the appointment and activities of Focus' auditors. The Audit Committee did not
meet during the fiscal year ended December 31, 1999.
The Focus Board of Directors does not currently have a standing
nominating committee. For a discussion of the nomination procedure, see
"Comparison of Shareholder Rights of Focus and Videonics--Advance Notice
Provisions for Shareholder Nominations and Proposals."
Compensation of Directors
Directors of Focus receive no direct cash compensation for their
services as directors. See, however "Repricing of Stock Options/Additional
Option Plans".
Certain Relationships and Related Transactions
Timothy Mahoney, who is a Focus director, is a principle of
vFinance.com, Inc., the parent company to Union Atlantic Capital L.C., and a
partner of Union Atlantic L.C. In 1999, Focus paid Union Atlantic L.C. $112,226
in consulting fees in connection with equity financing agreements negotiated by
Union Atlantic L.C. Union Atlantic Capital L.C. an affiliated company of Union
Atlantic L.C., will also be paid approximately $280,000 in shares of Focus
common stock for brokerage fees in connection with the merger.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Focus' directors and executive officers, and persons who own more than
10% of a registered class of Focus' equity securities, to file initial reports
of ownership and reports of changes in ownership with the Commission. Such
persons are required by SEC regulations to furnish Focus with copies of all
Section 16(a) forms they file.
36
<PAGE>
Based solely on Focus' review of the copies of such forms received by
it or written representations from certain reporting persons, that no other
reports were required, Focus believes that all filing requirements applicable to
its officers, directors, and greater than 10% beneficial owners were complied
with during this year ended December 31, 1999.
Recent Developments
CRA Systems, Inc.
In 1996 CRA Systems, Inc., a Texas corporation, and Focus entered into
an agreement, the terms and nature of which were subsequently disputed by the
parties. Focus contended the transaction was simply a sale of inventory for
which Focus was never paid. CRA contended otherwise. CRA brought suit against
Focus for breach of contract contending that Focus grossly exaggerated the
demand for the product, and the margin of profit which was available to CRA
regarding this project. CRA sought to recover out-of-pocket losses exceeding
$100,000, and lost profits of $400,000 to $1,000,000. A jury trial in May 2000
in federal district court in Waco, Texas, resulted in a verdict in favor of CRA
for $848,000 actual damages and $1,000,000 punitive damages. On October 10,
2000, the court rendered a judgment on the verdict in favor of CRA for actual
damages, punitive damages, attorneys fees, costs and interest; the judgment
totaled approximately $2.1 million. Focus intends to file an appropriate
post-judgment motion requesting that this judgment be reduced significantly, and
will pursue an appeal to the United States Court of Appeals for the Fifth
Circuit in New Orleans, Louisiana. To suspend enforcement of the judgment
pending determination of its post-judgment motion and appeal, Focus is required
to post a bond in the approximate amount of $2.3 million (being the approximate
amount of the judgment plus 10% to cover interest and costs of CRA). On October
27, 2000, Focus submitted a bond and filed its post-judgement motion. In
connection with this judgment, Focus has recorded an expense of $2.0 million in
the period ended September 30, 2000. See also "Risk Factors."
Promissory Note in the Principal Amount of $2.3 Million
On October 26, 2000 Focus issued a secured promissory note in the
approximate principal amount of $2.3 million to Carl Berg, a shareholder and
director of Videonics. The promissory note was issued in connection with a loan
made to Focus by Mr. Berg for the purpose of collateralizing the $2.3 million
bond to be posted in connection with the CRA litigation, as described above. The
promissory note has a term of three years and bears interest at a rate of prime
plus 1%. The principal amount of the note will be due at the end of its term,
with interest to be paid quarterly. Under certain circumstances, including at
the election of Mr. Berg and Focus, the promissory note is convertible into
shares of Focus common stock generally equal to the value of the promissory note
and any accrued and unpaid interest. In the event the merger is not completed,
the promissory note can be called and become payable in full upon 90-days notice
from Mr. Berg, at his sole discretion. The promissory note is secured by a
security agreement in favor of Mr. Berg granting him a security interest in
first priory over substantially all of the assets of Focus. See also "Risk
Factors--Focus may be required to repay a $2.3 million promissory note if the
merger is not completed."
37
<PAGE>
INFORMATION ABOUT VIDEONICS
The Business
Videonics, Inc., a California corporation, is engaged in the design,
manufacture, and sale of affordable, high quality, real time, digital video
post-production equipment. Videonics' products process, edit, and mix raw video
footage as well as enhance such footage with audio, special effects and titles,
resulting in professional quality video production. Videonics equipment is used
throughout the world in the production of videos.
Our common stock is listed on the NASDAQ SmallCap Market under the
symbol "VDNX." Our principal offices are located at 1370 Dell Avenue, Campbell,
California 95008, and our telephone number is (408) 866-8300.
None of Videonics' executive officers or directors purchased or sold
any shares of Videonics' common stock since the execution of the merger
agreement on August 30, 2000.
Videonics is subject to the disclosure requirements of the Securities
Exchange Act of 1934, as amended, and is required to file reports, proxy
statements and other information with the Commission relating to its business,
financial condition and other matters. You can inspect and copy these reports,
proxy statements and other information, at prescribed rates, at the offices of
the Securities Exchange Commission and the NASDAQ. See "Where You Can Find More
Information."
Security Ownership of Certain Beneficial Owners and Management
<TABLE>
The following table sets forth certain information with respect to the
beneficial ownership of Videonics common stock as of the November 10, 2000
record date for the Videonics annual meeting (except as otherwise noted in
footnotes) by: (i) each shareholder known by Videonics to own beneficially 5% or
more of the outstanding shares of Videonics common stock; (ii) each director of
Videonics; (iii) each of the named Videonics executive officers as of the end of
the most recent fiscal year; and (iv) all executive officers and directors of
Videonics as a group.
<CAPTION>
Percentage of
Number of Shares Outstanding
Name Beneficially Owned Common Stock
---- ------------------ ------------
<S> <C> <C>
Carl E. Berg(1) ...................................................................... 1,473,505 24%
Michael L. D'Addio(2) ................................................................ 921,762(3) 15%
Mark C. Hahn(2) ...................................................................... 493,515 8%
N. William Jasper, Jr.(2) ............................................................ 42,536(4) 1%
Jeffrey A. Burt ...................................................................... 66,375(5) 1%
Gary L. Williams ..................................................................... 41,504(6) *
All executive officers and directors as a group(6 persons) (7) ....................... 3,039,197 50%
<FN>
------------------
* Represents less than 1%
(1) 10050 Bandley Drive, Cupertino, CA 95014.
(2) 1370 Dell Avenue, Campbell, CA 95008.
(3) Includes 9,000 shares subject to stock options exercisable as of the
November 10, 2000 or within 60 days thereafter held by Mr. D'Addio's
spouse, an employee of Videonics.
(4) Includes 11,256 shares subject to stock options exercisable as of November
10, 2000 or within 60 days thereafter.
(5) Includes 66,375 shares subject to stock options exercisable as of November
10, 2000 or within 60 days thereafter.
(6) Includes 41,504 shares subject to stock options exercisable as of November
10, 2000 or within 60 days thereafter.
(7) Includes an aggregate of 128,135 shares included pursuant to notes
(4)--(6).
</FN>
</TABLE>
38
<PAGE>
Information Regarding Directors and Executives Officers
<TABLE>
The following table sets forth the executive officers and directors of
Videonics.
<CAPTION>
Director /
Name Age(1) Position Officer Since
---- ------ -------- -------------
<S> <C> <C> <C>
Michael L. D'Addio(2) ......... 55 Chairman of the Board, Chief 1986
Executive Officer and Director
Jeffrey A. Burt ............... 47 V.P. Operations 1992
Gary L. Williams .............. 33 V.P. Finance, Chief Financial Officer 1999
and Secretary
Carl E. Berg(2) ............... 61 Director 1987
Mark C. Hahn(2) ............... 50 Director 1986
N. William Jasper, Jr.(2) ..... 52 Director 1993
<FN>
------------------
(1) As of December 31, 1999.
(2) All four (4) directors have been nominated to be elected at the annual
meeting.
</FN>
</TABLE>
Michael L. D'Addio, a co-founder of Videonics, has served as Chief
Executive Officer and Chairman of the Board of Directors since Videonics'
inception in July 1986. In addition Mr. D'Addio served as Videonics' President
from July 1986 until November 1997. From May 1979 through November 1985 Mr.
D'Addio served as President, Chief Executive Officer and Chairman of the Board
of Directors of Corvus Systems, a manufacturer of small computers and networking
systems. Mr. D'Addio holds an A.B. degree in Mathematics from Northeastern
University.
Jeffrey A. Burt has served as Vice President of Operations of Videonics
since April 1992. From August 1991 to March 1992, Mr. Burt served Videonics as
its Materials Manager. Prior to that time, from October 1990 until July 1991,
Mr. Burt acted as a consultant to Videonics in the area of materials management.
From May 1989 to October 1990, Mr. Burt served as the Director of Manufacturing
of On Command Video. Mr. Burt holds a B.A. degree in Economics from the
University of Wisconsin at Whitewater.
Gary L. Williams has served Videonics as its Vice President of Finance,
Chief Financial Officer and Secretary since February 1999. From February 1995 to
January 1999, Mr. Williams served as Videonics' Controller. From July 1994 to
January 1995, he served as Controller for Western Micro Technology, a publicly
traded company in the electronics distribution business. From January 1990 to
June 1994, Mr. Williams worked in public accounting for Coopers & Lybrand LLP.
Mr. Williams is a Certified Public Accountant and has a Bachelors Degree in
Business Administration, with an emphasis in Accounting from San Diego State
University.
Carl E. Berg, a co-founder of Videonics, has served on Videonics' Board
of Directors since June 1987. Mr. Berg is currently Chief Executive Officer,
President and a director for Mission West Properties, a real estate company. Mr.
Berg is also a member of the Board of Directors of Integrated Device Technology,
Inc., Valence Technology, Inc., and Systems Integrated Research.
Mark C. Hahn, a co-founder of Videonics, has served as Director since
Videonics' inception in July 1986. Since November 1999, Mr. Hahn has been
employed at Facelink.com, Inc., an internet provider of web based photography
display services. From February 1996 to November 1999, Mr. Hahn served as
Videonics' Chief Technical Officer. From July 1986 to February 1996, Mr. Hahn
served as Videonics' Vice President of Research and Development. Prior to
co-founding Videonics, Mr. Hahn served as Vice President of Research and Chief
Technologist of Corvus Systems from May 1979 to February 1986. Mr. Hahn holds a
B.S. degree in Electrical Engineering from Princeton University and a M.S.
degree in Electrical Engineering from Stanford University.
N. William Jasper, Jr. joined the Board of Directors of Videonics in
August 1993. Since 1983, Mr. Jasper has been the President and Chief Operating
Officer of Dolby Laboratories, Inc.
39
<PAGE>
Executive Compensation
<TABLE>
The following table sets forth, the years ended December 31, 1999,
1998, and 1997, the total compensation earned by the Chief Executive Officer and
each of the executive officers of Videonics whose salary and bonus for fiscal
year 1999 exceeded $100,000 for services rendered in all capacities.
Summary Compensation Table
<CAPTION>
Long-Term
Annual Compensation All Other
Compensation(1) Option/ Compensation
Name and ----------------------------- --------------- ---------------
Principal Position Year Salary($) Bonus($) SARs(#) ($)
------------------ ---- --------- -------- ------- ---
<S> <C> <C> <C> <C> <C>
Michael L. D'Addio ................................ 1999 $150,000 0 0 0
Chief Executive Officer 1998 $150,000 0 0 0
1997 $130,667 0 0 0
Jeffrey A. Burt ................................... 1999 $133,462 0 0 0
Vice President of 1998 $122,693 0 30,000(2) 0
Operations 1997 $110,000 0 30,000(2) $ 30,200(3)
Gary L. Williams .................................. 1999 $118,697 0 50,000 0
Vice President of 1998 $ 94,085 0 22,504(5) 0
Finance, CFO & 1997 $ 86,020 0 16,504(6) 0
Secretary(4)
<FN>
------------------
(1) Except for annual compensation reported below, there is no other annual
compensation to report.
(2) Includes repriced options to purchase 30,000 shares of Videonics common
stock.
(3) Amounts represent gain recognized on exercise of nonstatutory stock options
issued under Videonics' 1987 Stock Option Plan.
(4) Mr. Williams was appointed Vice President of Finance and Chief Financial
Officer in February 1999.
(5) Includes repriced options to purchase 16,504 shares of Videonics common
stock.
(6) Includes repriced options to purchase 10,504 shares of Videonics common
stock.
</FN>
</TABLE>
<TABLE>
The following tables set forth as to the Chief Executive Officer and
each of the other executive officers named in the Summary Compensation Table,
certain information with respect to options to purchase shares of common stock
of Videonics as of and for the year ended December 31, 1999.
Option/SAR Grants in 1999
<CAPTION>
Number of % of Total Potential Realizable
Securities Options/ Value at Assumed Annual
Underlying SARs Exercise Rates of Stock Price
Option/ Granted to or Base Appreciation for
SARs Employees Price Option Term (3)
Granted In ($/per Exp. ---------------------------------
Name (#)(1) 1999(2) Share) Date 0% ($) 5% ($) 10% ($)
---- ------ ------- ------ ---- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeffrey A. Burt .................... 25,000 7.2% $ 0.78 2/17/09 0 $12,304 $31,143
Gary L. Williams ................... 50,000 14.4% $ 0.78 2/17/09 0 $24,608 $62,286
<FN>
------------------
(1) Options granted in this table have exercise prices equal to the fair market
value of Videonics common stock on the date of grant. All such options
typically become exercisable at a rate of 1/8 after the first full six
months of employment, and 1/8 every six months thereafter for a total four
year vesting period following the date of grant.
(2) Videonics granted options to purchase a total of 348,124 shares of common
stock to employees and Directors in 1999.
(3) Potential realizable value assumes that the stock price increases from the
date of grant until the end of the option term (10 years) at the annual
rate specified (0%, 5%, 10%). Annual compounding results in total
appreciation of 63% (at 5% per year) and 159% (at 10% per year). The 5% and
10% assumed rates of appreciation (over the deemed fair market value at the
grant date) are mandated by the rules of the Securities and Exchange
Commission and do not represent Videonics' estimate or projection of the
future growth of the price of Videonics' common stock.
</FN>
</TABLE>
<TABLE>
The following table sets forth information concerning options exercised
during fiscal year 1999 and the value of unexercised options as of December 31,
1999 held by the executives named in the Summary Compensation Table above.
40
<PAGE>
Aggregated Option/SAR Exercises in 1999 and Fiscal Year-End Option/SAR Values
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options/SARs
Acquired on Value Options/SARs at Year-End at Year-End(1)
Exercise Realized ------------------------------- ------------------------------
Name # $ Exercisable Unexercisable Exercisable Unexercisable
--------------------------- ------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael L. D'Addio ........ -- -- -- -- -- --
Jeffrey A. Burt ........... -- -- 56,375 25,625 $11,321 $ 2,078
Gary L. Williams .......... -- -- 22,691 49,813 $ 594 $ 4,156
<FN>
------------------
(1) Calculated on the basis of Videonics' common stock closing price of $0.88
on December 31, 1999, minus the exercise price.
</FN>
</TABLE>
<TABLE>
Ten-Year Option/SAR Repricing
<CAPTION>
Market Length of
Number of Price of Exercise Original
Securities Stock at Price at Option Term
Underlying Time of Time of Remaining at
Option/SAs Repricing Repricing New Date of
Repriced or or or Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment
-------------------------- --------- ------------- ----------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Burt .......... 6/24/98 30,000 $ 1.50 $ 5.00 $ 1.50 9 years 56 days
8/19/97 30,000 $ 5.00 $ 7.50 $ 5.00 8 years 177 days
Gary L. Williams ......... 6/24/98 10,504 $ 1.50 $ 5.00 $ 1.50 9 years 56 days
6/24/98 6,000 $ 1.50 $ 4.50 $ 1.50 9 years 56 days
8/19/97 10,504 $ 5.00 $ 7.50 $ 5.00 8 years 177 days
</TABLE>
Employment Agreements
Videonics has entered into Key Employee Agreements with Mr. Burt and
Mr. Williams to provide for the acceleration of option vesting under certain
circumstances upon a change in control as defined in those agreements.
Videonics Board Meeting and Committees
During the year ending December 31, 1999, there were four (4) meetings
of the Videonics Board of Directors. Each director attended 90% or more of the
meetings of the Videonics Board of Directors and Committees of the Videonics
Board of Directors on which he served, except that Mark C. Hahn only attended
two meetings during 1999.
The Audit Committee was established on December 15, 1994. The members
of the Audit Committee are Messrs. Berg and Jasper, neither of whom is an
employee of Videonics. The functions of the Audit Committee are to define the
scope of the audit, review the auditor's reports and comments, and monitor the
internal auditing procedures of Videonics. The Audit Committee did not meet
during 1999.
The Compensation Committee of the Videonics Board of Directors was
established on October 27, 1994. The members of the Compensation Committee are
Messrs. Berg and Jasper, neither of whom is employed by Videonics. The functions
of the Compensation Committee are to make recommendations to the Videonics Board
concerning salaries and incentive compensation for Videonics' executive
officers. The Compensation Committee did not meet during 1999.
Videonics does not presently have a standing Nominating Committee. For
a discussion of the nomination procedure, see "Comparison of Shareholder Rights
of Focus and Videonics -- Advance Notice Provisions for Shareholder Nomination
and Proposals."
Remuneration of Non-Employee Directors
Videonics does not compensate non-employee directors who are also major
shareholders, such as Mr. Berg, for their services. Other non-employee
directors, such as Mr. Jasper, receive $500 for each board meeting attended. In
addition, non-employee directors of Videonics who are not major
41
<PAGE>
shareholders of Videonics are granted nonstatutory stock options to purchase
4,504 shares of Videonics' common stock on August 31 of each year. During 1999,
Mr. Jasper received options to purchase 4,504 shares of Videonics' common stock
representing all options granted to directors in 1999.
Report of the Compensation Committee with respect to Executive Compensation
Videonics' executive compensation program has been designed to:
o attract and retain executives capable of leading Videonics to
meet its business objectives and to motivate them to enhance
long-term shareholder value through compensation that is
comparable to the levels offered by other companies in similar
industries;
o motivate key executive officers to achieve strategic business
initiatives and reward them for their achievement; and
o align the interests of executives with the long-term interests of
Videonics' shareholders through award opportunities resulting in
the ownership of Videonics' common stock. Annual compensation for
Videonics' executive officers may consist of three elements: cash
salary, cash incentive bonus, and stock option grants. Stock
option grants provide an incentive which focuses the executive's
attention on managing Videonics from the perspective of an owner
with an equity stake in the business. These stock options will
generally provide value to the recipient only when the price of
Videonics' stock increases above the option grant price.
The Committee recognizes that the salary paid to Mr. D'Addio,
Videonics' Chief Executive Officer, is substantially below that paid to others
in comparable positions of similar companies. The Committee increased the annual
salary of Mr. D'Addio, Videonics' CEO to $150,000 in 1997 from $92,000. The
Committee recognizes that Mr. D'Addio's current salary is still significantly
below the salary of CEOs in comparable public companies; however, Mr. D'Addio
has declined any additional increase.
During 2001, it is anticipated that the Committee will conduct annual
performance reviews comparing actual Company progress of Videonics against
annual plans. Elements of such plans, including progress on product development,
sales and marketing, expense control and organizational development, may be
considered.
Carl E. Berg
N. William Jasper Jr.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Compensation Committee consists of Messrs. Berg and Jasper, neither
of whom is employed by Videonics. There are no Compensation Committee interlocks
between Videonics and other entities involving Videonics' executive officers and
Videonics board members who serve as executive officers of such entities.
42
<PAGE>
Performance Measurement Comparison
<TABLE>
The following graph compares the yearly percentage change in the
cumulative shareholder return of the common stock of Videonics, with CRSP Total
Return Index for the Nasdaq Stock Market (Domestic Companies) and the CRSP Total
Return Index for the Nasdaq Electronic Component Companies, for the period
beginning December 31, 1995 and ending December 31, 1999. The graph assumes that
$100.00 was invested on December 31, 1995.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
<CAPTION>
Cumulative Total Return
------------------------------------------------------------------------
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Videonics, Inc. ....................................... 100 76 35 5 8
Nasdaq (Domestic) ..................................... 100 123 151 212 394
Electronic Component Companies ........................ 100 173 181 280 550
</TABLE>
43
<PAGE>
These indices are calculated on a dividend reinvested basis. Videonics
emphasizes that the performance of Videonics stock over the period shown is not
necessarily indicative of the future performance of Videonics stock.
Certain Relationships and Related Transactions
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of Videonics as to which indemnification from
Videonics is being sought nor is Videonics aware of any pending or threatened
litigation that may result in claims for indemnification by any director,
officer, employee or other agents.
At December 31, 1999, Videonics had an unsecured loan from Carl Berg, a
director and shareholder of Videonics. This loan, in the amount of $1,035,000,
bears interest at 8% per year, and is due on January 16, 2001. Accrued interest
is payable at maturity. On March 22, 2000, the loan was amended to extend the
maturity date to January 16, 2002.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Videonics' directors, executive officers, and persons who own more than
ten percent of a registered class of Videonics' equity securities, to file with
the Securities Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of Videonics.
Officers, directors and greater than ten percent shareholders are required by
Securities Exchange Commission regulations to furnish Videonics with copies of
all Section 16(a) forms they file.
To Videonics' knowledge, based solely on a review of the copies of such
reports and amendments thereto furnished to Videonics and written
representations from the reporting persons that no other reports were required,
Videonics believes that all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent (10%) beneficial owners were
complied with during the year ended December 31, 1999.
THE MERGER
General
The merger agreement provides that the merger will be consummated if
the required approvals of the Focus and Videonics shareholders are obtained and
all other conditions to the merger are satisfied or waived. Upon consummation of
the merger, PC Video Conversion, a wholly-owned subsidiary of Focus, will be
merged with and into Videonics, the separate corporate existence of PC Video
Conversion will cease, and Videonics will continue as the surviving corporation
and a wholly-owned subsidiary of Focus. Pursuant to the merger, each outstanding
share of Videonics common stock (other than shares owned by Videonics as
treasury stock or by Focus or PC Video Conversion, all of which will be canceled
and retired) will be converted into 0.87 shares of Focus common stock, subject
to dissenters' rights. A copy of the merger agreement is attached as Appendix A
to this joint proxy statement/prospectus and is incorporated by reference into
this joint proxy statement/prospectus.
Based upon the number of outstanding shares of Focus and Videonics as
of November 10, 2000, the record date for the annual meetings of Focus and
Videonics, the shareholders of Videonics immediately prior to the consummation
of the merger would own approximately 17% of the outstanding Focus common stock
immediately following consummation of the merger. Such percentage could change
depending upon whether shares of Focus common stock and Videonics common stock
issuable upon exercise of outstanding Focus and Videonics stock options or other
rights are issued, and whether and to what extent Videonics shareholders
exercise dissenters' rights. If the shares of Focus common stock that Videonics
shareholders would receive in connection with the merger includes a fraction of
a share of Focus common stock, Focus will instead pay them an amount in cash
equal to that fractional interest rather than give them a fractional share of
Focus common stock.
44
<PAGE>
This joint proxy statement/prospectus also constitutes a prospectus of
Focus, which is a part of the Registration Statement on Form S-4 filed by Focus
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, in order to register the shares of Focus common stock to be issued in
connection with the merger.
Background to the Merger
On February 9, 2000, Thomas Massie, then Chief Executive Officer of
Focus and now Chairman, and Michael D'Addio, Chairman and Chief Executive
Officer of Videonics met to discuss possible strategic alliances between the two
companies. During that time, they discussed a variety of topics relating to
their businesses and the synergies between them. Mr. Massie inquired of Mr.
D'Addio as to whether or not he as both a major shareholder of and the CEO of
Videonics would be receptive to a strategic relationship or acquisition of
Videonics by Focus. Mr. D'Addio noted that he would do some research on the
matter in the course of the next few months and after such would discuss the
matter with the Videonics Board of Directors.
The matter was still being researched by Mr. D'Addio when Mr. Massie
placed himself and his Chief Financial Officer on leave from Focus while an
internal audit was conducted of Focus in early 2000. Mr. D'Addio had a telephone
conversation with Messrs. Timothy Mahoney and William Coldrick, both Directors
of Focus, immediately after the internal audit was announced and agreed to hold
the matter in abeyance until the audit was complete and the results were
formally announced. Because Focus was conducting an internal review, the parties
did not consider a merger or any type of combination as feasible or advisable.
On May 5, 2000, at a meeting of the Board of Directors of Videonics,
Mr. D'Addio discussed the possibility of a combination of Videonics. At that
time the Videonics Board of Directors authorized Mr. D'Addio to expand the
discussions with Focus, including the possible acquisition by Focus of
Videonics. Mr. D'Addio made a number of calls to Mr. Massie on the subject.
Furthermore, counsel for Videonics was also asked to outline for management's
consideration the major points of a possible merger.
On May 16 and May 17, 2000, Mr. D'Addio and Mr. Massie, along with
executive staff members from both companies, met in California to present the
senior management with more detailed information regarding the possible merger.
After that, Videonics and Focus sent out due diligence requests for documents
and operational matters relating to each other. During the months of June and
July, the parties reviewed the various documents and other due diligence
materials provided.
On June 7 and 8, 2000, Mr. D'Addio and Gary Williams, Chief Financial
Officer of Videonics conducted on site preliminary due diligence at Focus and
determined that they would like to proceed further in the discussions.
On June 12, 2000, at a meeting of the Board of Directors of Focus, Mr.
Massie presented information on Videonics and informed the board of his meetings
and discussion to date with Videonics. The board then authorized Mr. Massie to
continue conversations with Videonics regarding a possible merger of the two
companies.
On June 13 and 14, 2000, Mr. Massie, Brett Moyer, Chief Operating
Officer, Chris Ricci, In-house Counsel, and members of Union Atlantic L.C. and
Union Atlantic Capital L.C.'s due diligence team conducted on site due diligence
on Videonics at the Videonics office in California.
On June 15, 2000, Focus and Videonics outlined the terms of the merger
in a non-binding letter of intent. At that time the exchange ratio had not been
agreed. The terms of the letter were presented to the Board of Directors of
Videonics at a meeting on June 23, 2000. The Videonics Board of Directors
authorized Mr. D'Addio to continue the due diligence process. Pending successful
completion of the due diligence process and successful negotiation of the terms
of an agreement, the board would proceed to negotiate a definitive agreement
after the release of the June 30, 2000 Quarterly Report on Form 10-QSB of Focus.
45
<PAGE>
On June 26, 2000, Mr. Massie discussed the terms of the draft letter
with the Board of Directors of Focus. The board authorized Mr. Massie to
continue the Focus due diligence and, assuming all due diligence was
successfully completed and the parties could agree to the terms, the board would
proceed to negotiate a definitive agreement.
On July 27, 2000, Mr. Massie and Focus Director William Coldrick met
with Messrs. D'Addio and Williams and Videonics Director Carl Berg to discuss
the status of the proposed merger and its terms. At the conclusion of the
meeting, the parties agreed to attempt to move the process forward.
On August 7, 2000, the Focus Board of Directors met. At that meeting a
detailed review of the business, finance, and management aspects of the
acquisition were presented and the board agreed to move forward on the
negotiation of a final merger agreement. On August 21, 2000, Focus filed its
Form 10-QSB with the Securities and Exchange Commission.
Counsel for the parties, with management, negotiated the final terms of
the merger agreement and drafts of the proposed agreements were then circulated
to each member of the respective Boards of Directors on August 28, 2000. The
Boards of Directors reviewed the merger agreement and a summary prepared by
management and counsel.
On August 29, 2000, Messrs. D'Addio and Massie received unanimous
consent from their respective Boards of Directors that they approve the merger
agreement, declared them advisable and resolved to recommend that their
respective shareholders approve the merger agreement.
After the close of business on August 30, 2000, the parties signed the
merger agreement. On the morning of August 31, 2000, the parties issued press
releases announcing the proposed merger of Focus and Videonics.
Opinion of the Financial Advisors to Focus
In considering the fairness to Focus of the Merger consideration to be
paid by Focus to Videonics Shareholders, the Focus Board of Directors reviewed
and relied, in part, on an analysis of the ranges of potential values of the
shares of Videonics common stock that resulted from the application of several
accepted valuation methodologies. This analysis, including the selection of
valuation methodologies, was prepared by Union Atlantic Capital L.C., financial
advisors to the Focus Board of Directors in connection with the merger.
On February 14, 2000 the Focus Board of Directors retained Union
Atlantic Capital L.C. to act as its financial advisor in analyzing financial and
strategic considerations regarding the proposed merger. A report provided to
Focus by Union Atlantic Capital L.C. did not include an opinion of the merits of
the merger, but described to anticipated impact of the proposed merger upon
Focus and Videonics. The terms of Union Atlantic Capital L.C.'s engagement for
its services include a success fee upon completion of the merger. Timothy
Mahoney, who is a director of Focus, is a partner of Union Atlantic L.C. an
affiliated company of Union Atlantic Capital L.C. and a principal in the parent
company of Union Atlantic Capital L.C.
On October 3, 2000, Union Atlantic Capital L.C. was retained by the
Focus Board of Directors as to the fairness to Focus of the consideration to be
paid in the merger to the Videonics Shareholders. In its opinion, delivered to
the Focus Board of Directors on October 20, 2000 Union Atlantic Capital L.C.
stated that it believes the consideration in the form of shares of Focus common
stock to be paid by Focus in the merger to the Videonics shareholders based on a
ratio of 0.87 shares of Focus common stock for each share of Videonics is fair
to Focus. The details of Union Atlantic Capital L.C.'s analysis are set out
below in "Opinion Of Financial Advisor Retained By Focus."
Focus' Reasons for the Merger
The Focus Board of Directors believes that the merger represents an
attractive strategic fit between two companies with similar business strategies,
as well as complementary operations and geographic presences. The Focus Board of
Directors believes that the combined company will have greater financial
strength, operational efficiencies, earning power and growth potential than
either
46
<PAGE>
Focus or Videonics would have on its own. In particular, the Focus Board of
Directors believes that significant strategic benefit will come from selling
each company's products through the other's distribution channels. In this
regard, the Focus Board of Directors reviewed a number of potential benefits of
the merger which it believed would contribute to the success of the combined
company and thus inure to the benefit of shareholders of both companies,
including the following:
o Synergies of the combined company.
o Creation of a stronger company, from both a business and
technological perspective.
o Selling efficiencies and expanded distribution.
o Combination of the most favorable attributes of the companies.
o Opportunities for more efficient and profitable operations
o Complementary distribution centers and delivery networks.
o Leverage international distribution channels.
o Leverage research and development capabilities for both company's
products.
o Increase Focus pro forma revenues by approximately 70%.
o Consolidate duplicate overhead functions, increasing cash flow.
o Provide qualified and experienced executive leadership.
In reaching its decision to approve the merger, the Focus Board of
Directors also considered the following factors:
o The recent historical performance of Focus common stock and
Videonics common stock. See "Summary--Comparative Market Price
Information."
o Certain historical and prospective financial information
regarding Focus and Videonics; in particular, the impact of
Videonics' operations on the combined company's results of
operations and future cash flow. See "Pro Forma Combined
Condensed Consolidated Financial Information."
o Information concerning Focus' and Videonics' respective
businesses, assets, management, competitive position and
prospects.
o Enhanced ability to expand into foreign markets.
o Current industry, economic and market conditions, including
recent acquisitions and combinations in the industry.
o The long-term growth potential of the combined company.
o The likelihood that the merger could be consummated.
o The structure of the transaction and the terms of the merger
agreement.
o The compatibility of the corporate cultures and operating
philosophies of the companies.
o Prior to taking action on the merger agreement, the Focus Board
received presentations from, and reviewed the terms and
conditions of the merger agreement with, Focus management, Union
Atlantic Capital L.C. and legal counsel. The Focus Board of
Directors also considered a number of potential risks relating to
the merger discussed in "Risk Factors."
o The foregoing discussion of the information and factors
considered and given weight by the Focus Board of Directors is
not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of the merger, the
Focus Board of Directors did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. In
addition, individual members of the Focus Board of Directors may
have given different weights to different factors.
47
<PAGE>
Recommendations of the Focus Board of Directors
The Focus Board of Directors believes that the consummation of the
merger is in the best interests of Focus and its shareholders, and unanimously
recommends that the Focus shareholders vote for approval of the merger proposal
at the Focus meeting and the other matters which are related to the merger.
Videonics' Reasons for the Merger
The Videonics Board of Directors believes that the merger will create a
stronger company from both a business and technology perspective. The combined
company should have greater financial strength, operational efficiencies, and
growth potential than either Focus or Videonics would have on its own. In
particular, the Videonics Board of Directors believes:
o Significant synergies and cost savings will result from the
consolidation of the companies' financial, administrative, and
operations in the Campbell, California office of Videonics and
the streamlining of Focus' sales, marketing and service
activities in Massachusetts.
o Creation of a stronger company, from both a business and
technological perspective.
o Capitalize on chip technology to create digital video solutions
for expanded customer base.
o The combined companies should experience additional cost savings
by combining marketing efforts.
o Focus provides Videonics with an expanded engineering
organization to develop and produce more advanced technology
products.
o The merger should allow Videonics to expand its international
distribution through the increased channels provided by Focus.
In reaching its decision to approve the merger, the Videonics Board of
Directors also considered the following factors:
o The recent historical performance of Focus common stock and
Videonics common stock. See "Summary--Comparative Market Price
Information."
o Certain historical and prospective financial information
regarding Focus and Videonics. See "Pro Forma Combined Condensed
Consolidated Financial Information."
o Information concerning Focus' and Videonics' respective
businesses, assets, management, competitive position and
prospects.
o Enhanced ability to expand into the computer and retail
distribution markets.
o Current industry, economic and market conditions, including
recent acquisitions and combinations in the industry.
o The long-term growth potential of the combined company.
o The likelihood that the merger could be consummated.
o The tax-free nature of the exchange.
o The structure of the transaction and the terms of the merger
agreement.
o The compatibility of the corporate cultures and operating
philosophies of the companies.
o The opportunity for increased liquidity in the Videonics common
stock.
Prior to taking action on the merger agreement, the Videonics Board of
Directors received presentations from Focus management and reviewed the terms
and conditions of the merger agreement with Videonics management. The Videonics
Board of Directors also considered a number of potential risks relating to the
merger discussed in "Risk Factors."
The foregoing discussion of the information and factors considered and
given weight by the Videonics Board of Directors is not intended to be
exhaustive. In view of the variety of factors considered in connection with its
evaluation of the merger, the Videonics Board of Directors did not
48
<PAGE>
find it practicable to, and did not, quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination. In
addition, individual members of the Videonics Board of Directors may have given
different weights to different factors.
Recommendations of the Videonics Board of Directors
The Videonics Board of Directors believes that the consummation of the
merger is in the best interests of Videonics and its shareholders, and
unanimously recommends that the Videonics shareholders vote for approval of the
merger proposal at the Videonics meeting.
Interests of Certain Persons in the Merger
You should be aware of the interests that executive officers, directors
and controlling shareholders of Focus and Videonics have interests in the merger
that are different from and in addition to your and their respective interests
as shareholders. The Boards of Directors of Focus and Videonics were aware of
these agreements and arrangements during their deliberations of the merits of
the merger and in determining to recommend to their respective shareholders that
they vote for the proposal to adopt the merger agreement.
Governance Structure and Management Positions.
Pursuant to the terms of the merger agreement, upon completion of the
merger:
o The Board of Directors of Focus will consist of four (4) current
directors of Focus and three (3) current directors of Videonics.
The parties have not determined which directors will serve on the
new Focus board.
o Upon completion of the merger, Videonics will be a wholly-owned
subsidiary of Focus, and the current board of Videonics will
remain board members of Videonics as a wholly-owned subsidiary of
Focus until they resign.
o Mr. D'Addio will become President and Chief Executive Officer of
Focus.
o Mr. Massie will remain Chairman of the Board of Focus.
Focus
Timothy Mahoney, a director of Focus, is a principle in the parent
company of Union Atlantic Capital L.C. Union Atlantic has acted as financial
advisor to Focus and will be paid in connection with various services provided
in connection with the merger.
Videonics
On October 26, 2000 Focus issued a secured promissory note in the
approximate principal amount of $2.3 million to Carl Berg, a shareholder and
director of Videonics. The promissory note was issued in connection with a loan
made to Focus by Mr. Berg for the purpose of collateralizing the $2.3 million
bond to be posted in connection with the CRA litigation, as described above. The
promissory note has a term of three years and bears interest at a rate of prime
plus 1%. The principal amount of the note will be due at the end of its term,
with interest to be paid quarterly. Under certain circumstances, including at
the election of Mr. Berg and Focus, the promissory note is convertible into
shares of Focus common stock generally equal to the value of the promissory note
and any accrued and unpaid interest. In the event the merger is not completed,
the promissory note can be called and become payable in full upon 90-days notice
from Mr. Berg, at his sole discretion. The promissory note is secured by a
security agreement in favor of Mr. Berg granting him a security interest in
first priory over substantially all of the assets of Focus.
Under key employee agreements between Videonics and Gary Williams,
Chief Financial Officer and Jeffrey Burt, Vice President of Operations, 41,000
and 15,265 options to purchase shares of common stock of Videonics,
respectively, will accelerate because of the merger.
Carl Berg, a principle shareholder and director of Videonics, has
committed to Videonics to support its working capital requirements through
December 31, 2001. This commitment remains in effect until the earlier of
December 31, 2001, a change in control of Videonics, a material adverse change
in the business or financial condition of Videonics, or Videonics' tangible net
worth falls below $1.5 million. Furthermore, Michael D'Addio, the Chief
Executive Officer of Videonics, has made a similar commitment, limited to
$200,000, effective until the earlier of December 31, 2001 or a change in
control of Videonics.
49
<PAGE>
Videonics Stock Options.
Persons holding stock options in Videonics will exchange their options
for options in Focus pursuant to the exchange ratio. In connection with the
merger, Focus has agreed to increase by 2,000,000 the number of shares available
for issuance pursuant to its 2000 stock option plan (from 3,000,000 shares to
5,000,000 shares). Such shares will be available for issuance to employees and
directors of Focus and its subsidiaries upon completion of the merger.
Indemnification and Insurance Agreements.
Videonics has entered into indemnification agreements with key
executive officers pursuant to which Videonics has agreed, among other things,
to indemnify such persons to the maximum extent permitted by the California
General Corporation Law. These agreements will remain unaffected by the merger.
Effective Time of the Merger
As soon as practicable on or after satisfaction or waiver of all of the
conditions to the merger and the closing of the merger, the merger will become
effective upon filing of the Certificates of Merger with States of Delaware and
California or such later date and time as may be specified in the Certificates
of Merger. The time at which the merger becomes effective is referred to in this
document as the "Effective Time."
Structure of the Merger
Subject to the terms and conditions of the merger agreement and subject
to the terms of the Delaware General Corporation Law, at the Effective Time, PC
Video Conversion, will merge with and into Videonics. Videonics will continue
its corporate existence following the merger in accordance with the Delaware
General Corporation Law as a wholly-owned subsidiary of Focus. At the Effective
Time, the separate corporate existence of PC Video Conversion will terminate.
Effects of the Merger
At the Effective Time, as a result of PC Video Conversion's merger into
it, Videonics will become a wholly-owned subsidiary of Focus. The Videonics
common stock will be exchanged for shares of Focus common stock as described
under "The Merger Agreement--Conversion of Securities." Each share of Focus
common stock outstanding immediately prior to the Effective Time will remain
outstanding and unchanged as a result of the merger.
No fractional shares of Focus common stock will be issued in connection
with the merger. In lieu of fractional shares, Focus will make a cash payment
equal to the fractional interest in which a Videonics shareholder would
otherwise receive multiplied by the closing price of the common stock of Focus
on the first trading day immediately following the completion of the merger.
Merger Consideration
At the Effective Time, each share of Videonics common stock, other than
shares held by Focus or PC Video Conversion (all of which will be cancelled) or
any shares with respect to which dissenters' rights have been properly exercised
in accordance with the California General Corporation Law, as described below
under "Dissenters' Rights," will be automatically converted into 0.87 shares of
Focus common stock. Following the merger, there will be no shares of Videonics
common stock outstanding, and Videonics will become a wholly-owned subsidiary of
Focus. As soon as reasonably practicable after the Effective Time, Focus'
exchange agent will send a letter of transmittal and instructions with respect
to the surrender by Videonics shareholders of their Videonics stock certificates
to each former Videonics shareholder.
Videonics shareholders should not send in any stock certificates with
their proxy card. A transmittal letter with instructions for the surrender of
Videonics stock certificates will be mailed to Videonics shareholders as soon as
practicable after completion of the merger.
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<PAGE>
Effect of the Merger on Videonics Stock Options and Warrants
Videonics has, from time to time, issued options to acquire shares of
Videonics common stock pursuant to the Videonics 1987 Stock Option Plan and 1996
Amended Stock Option Plan. Videonics has also issued one warrant to Venture
Banking Group, a division of Cupertino National Bank for 95,000 shares of its
common stock. On the effective date of the merger, each outstanding option or
warrant, whether or not exercisable, will be assumed by Focus. Each stock option
and warrant will continue to have, and be subject to, the same terms and
conditions, including the vesting of shares issuable upon the exercise thereof,
as were applicable to the stock option or warrant immediately prior to the
effective date of the merger, except that:
o Each Videonics stock option and warrant will be exercisable (or
will become exercisable in accordance with its terms) for that
number of whole shares of Focus common stock equal to the product
of the number of shares of Videonics common stock that were
issuable upon exercise of such stock option or warrant
immediately prior to the Effective Time multiplied by 0.87,
rounded down to the nearest whole number of shares of Focus
common stock; and
o The per share exercise price for the shares of Focus common stock
issuable upon exercise of such assumed stock option or warrant
will be equal to the quotient determined by dividing the exercise
price per share of Videonics common stock at which such stock
option or warrant was exercisable immediately prior to the
Effective Time by 0.87, rounded up to the nearest whole cent.
Transfer of Shares
Shares of Videonics common stock will not be transferred on the stock
transfer books at or after the Effective Time. If certificates representing such
shares are presented to Videonics after the Effective Time, the shares will be
cancelled and exchanged for shares of Focus common stock and cash in lieu of
fractional shares.
Conditions to Completion of the Merger
Each party's obligation to effect the merger is subject to the
following conditions:
o Videonics shareholders must approve the merger agreement and
Focus shareholders must approve the merger agreement and the
issuance of additional shares;
o Focus shareholders must amend the Focus Certificate of
Incorporation to increase the number of authorized shares;
o No law shall have been enacted, entered, promulgated or enforced
by any governmental authority which would make the merger illegal
or otherwise prohibiting the consummation of the merger or create
a material adverse effect on Videonics or Focus;
o All authorizations, consents, orders, permits or approvals of, or
declarations or filings with, and all expirations of waiting
periods imposed by, any governmental authority which are
necessary for the consummation of merger must be filed or
obtained;
o The registration statement shall have been declared effective and
shall not be subject to a stop order or proceedings seeking a
stop order; and
o The shares of Focus common stock to be issued in connection with
the merger shall have been approved for listing on the Nasdaq,
subject to official notice of issuance.
The obligation of Focus, PC Video Conversion and Videonics,
respectively, to effect the merger is subject to the satisfaction of the
following additional conditions by the other parties:
o The representations and warranties of Focus, PC Video Conversion
and Videonics shall be true and correct, except (i) for changes
contemplated by the merger agreement and (ii) where the failures
to be true and correct, individually or in the aggregate, have
not had and are not
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reasonably likely to have a material adverse effect on Focus or
Videonics or a material adverse effect upon the consummation of
the transactions contemplated in the merger agreement;
o Each party shall have performed, in all material respects, all
obligations required to be performed by it under the merger
agreement, and each of Focus and Videonics shall have received an
officer's certificate to such effect from the other;
o Each party shall have received a written opinion from counsel to
the effect that the merger will be treated for Federal income tax
purposes as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code; and
o Focus shall have amended its 2000 Stock Option Plan to increase
by 2,000,000 (from 3,000,000 shares to 5,000,000) the number of
shares of Focus common stock reserved for issuance thereunder and
shall have submitted such amended plan to its shareholders for
approval.
Management and Operations of Focus and Videonics
Following the Merger The Board of Directors of Focus following the
merger will consist of seven (7) directors, four of which are currently
directors of Focus and three of which are currently directors of Videonics.
Upon the closing of the merger, the current Board of Directors of
Videonics, until their resignations, will remain board members of Videonics as a
wholly-owned subsidiary of Focus. Mr. Massie will remain Chairman of the Board
of Focus and Mr. D'Addio will become President and Chief Executive Officer of
Focus.
It is currently anticipated that the following additional members of
the senior management of Videonics will join the existing management team of
Focus:
o Jeffrey Burt as Vice President of Operations.
o Gary Williams as Vice President of Finance and Chief Financial
Officer.
The corporate headquarters of the combined company will be located in
Campbell, California, the current headquarters of Videonics. It is expected that
the Massachusetts operations of Focus will move to a smaller facility that is
geared to sales, marketing and service operations to support the Focus product
lines.
Operations of Focus and Videonics if the Merger is not Completed
If the merger is not completed, it is expected that Focus and Videonics
will continue to operate as separate entities, conducting their respective
businesses as currently carried on.
Certain Federal Income Tax Consequences
In the opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
the following are the material United States federal income tax consequences of
the merger. This opinion and the following discussion are based on the Internal
Revenue Code of 1986, the regulations promulgated thereunder, existing
administrative interpretations and court decisions, all of which are subject to
change, possibly with retroactive effect, and assumptions, limitations,
representations and covenants, including those contained in certificates of
officers of Focus, PC Video Conversion and Videonics expected to be executed as
of the completion of the merger. This discussion does not address all aspects of
United States federal income taxation that may be important to you in light of
your particular circumstances or if you are subject to special rules, such as
rules relating to:
o shareholders who are not citizens or residents of the United
States;
o financial institutions;
o tax-exempt organizations;
o insurance companies;
o dealers in securities;
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o shareholders who acquired their common stock of Videonics
pursuant to the exercise of options or similar derivative
securities or otherwise as compensation; and
o shareholders who hold their common stock of Videonics as part of
a straddle or conversion transaction.
This discussion assumes you hold your common stock of Videonics as
capital assets within the meaning of Section 1221 of the Internal Revenue Code.
Tax opinions regarding the merger. Completion of the merger is
conditioned on:
o the delivery of an opinion to Focus and Videonics from Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
This opinion will state that the merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. This opinion will assume the absence of changes in existing facts and will
rely on assumptions, representations and covenants including those contained in
certificates to be executed by officers of Focus, PC Video Conversion and
Videonics dated as of the completion of the merger. This opinion will neither
bind the IRS nor preclude the IRS from adopting a position contrary to that
expressed below, and no assurance can be given that contrary positions will not
be successfully asserted by the IRS or adopted by a court if the issues are
litigated. The opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. is
subject to the limitations and qualifications set forth in the opinion, a copy
of which is filed as Exhibit 8.1 to the registration statement of which this
joint proxy statement/prospectus forms a part, and is based upon factual
assumptions made by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and
representations made by Focus, Videonics and PC Video Conversion. Neither Focus
nor Videonics intends to obtain a ruling from the IRS with respect to the tax
consequences of the merger.
Tax implications to Focus shareholders. Focus shareholders will not
recognize gain or loss for United States federal income tax purposes as a result
of the merger.
Tax implications to Videonics shareholders. Except as discussed below,
you will not recognize gain or loss for United States federal income tax
purposes when you exchange your Videonics common stock for Focus common stock
pursuant to the merger. The aggregate tax basis of the Focus common stock you
receive as a result of the merger will be the same as your aggregate tax basis
in the Videonics stock you surrender in the exchange, reduced by the tax basis
of any Videonics stock for which you receive cash instead of fractional shares
of Focus common stock. The holding period of the Focus common stock you receive
as a result of the exchange will include the period during which you held the
Videonics stock you exchange in the merger.
Fractional shares of Focus common stock will not be issued in the
merger. You will recognize gain or loss for United States federal income tax
purposes with respect to the cash you receive instead of a fractional share
interest in Focus common stock. Your gain or loss will equal the difference
between the amount of cash you receive and the tax basis of your Videonics stock
surrendered in the merger that is allocated to fractional shares. This gain or
loss will be capital gain or loss, and will be a long-term capital gain or loss
if your stock has been held for more than one year at the time the merger is
completed.
Tax implications to Focus, Videonics and PC Video Conversion. Focus,
Videonics and the PC Video Conversion will not recognize gain or loss for United
States federal income tax purposes as a result of the merger.
Backup withholding. Unless an exemption applies under the applicable
law and regulations, the exchange agent may be required to withhold and, if
required, will withhold 31% of any cash payments to a Videonics shareholder in
the merger unless the holder provides the appropriate form. A holder should
complete and sign the substitute Form W-9 enclosed with the letter of
transmittal sent by the exchange agent. Unless an applicable exemption exists
and is proved in a manner satisfactory to the exchange agent, this completed
form provides the information, including the holder's taxpayer identification
number, and certification necessary to avoid backup withholding.
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THIS DISCUSSION IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR DESCRIPTION OF ALL
POTENTIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OR ANY OTHER
CONSEQUENCES OF THE MERGER. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS TAX
CONSEQUENCES WHICH MAY VARY WITH, OR ARE CONTINGENT ON, YOUR INDIVIDUAL
CIRCUMSTANCES. MOREOVER, THIS DISCUSSION DOES NOT ADDRESS ANY NON-INCOME TAX OR
ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE MERGER. ACCORDINGLY, YOU ARE
STRONGLY URGED TO CONSULT WITH YOUR TAX ADVISOR TO DETERMINE THE PARTICULAR
UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES
TO YOU OF THE MERGER
Accounting Treatment
Under generally accepted accounting principles, it is anticipated that
the merger will be accounted for under the purchase method of accounting. The
assets and liabilities of Videonics will be reflected in the consolidated
financial statements of Focus based on their fair values as of the effective
date of the merger. Results of operations of Videonics will be reflected in the
consolidated financial statements of Focus for all periods subsequent to the
effective date of the merger. Under the purchase method of accounting, the
excess purchase price paid over the fair market value of net assets is amortized
as an expense over the period estimated to be beneficial.
Restrictions on Sales of Shares by Affiliates of Videonics and Focus
The shares of Focus common stock to be issued in the merger will be
registered under the Securities Act of 1933, as amended, and will be freely
transferable under the Securities Act, except for shares of Focus common stock
issued to any person who is deemed to be an "affiliate" of either of Focus or
Videonics at the time of the merger. Persons who may be deemed to be affiliates
include individuals or entities that control, are controlled by, or are under
the common control of Focus or Videonics and may include some of Focus' and
Videonics' respective officers and directors, as well as the principal
shareholders of Focus or Videonics. Affiliates may not sell their shares of
Focus common stock acquired in the merger except pursuant to:
o an effective registration statement under the Securities Act
covering the resale of those shares;
o an exemption under paragraph (d) of Rule 145 under the Securities
Act; or
o any other applicable exemption under the Securities Act.
Focus' registration statement on Form S-4, of which this joint proxy
statement/prospectus forms a part, does not cover the resale of shares of Focus
common stock to be received by affiliates in the merger.
Listing on the NASDAQ of Focus Common Stock to be Issued in the Merger
Focus will use its best efforts to cause the shares of its common stock
to be issued in connection with the merger to be approved for listing on the
NASDAQ before the completion of the merger.
Federal Securities Laws Consequences
All shares of Focus common stock received by Videonics shareholders in
the merger will be freely transferable, except that shares of Focus common stock
received by persons who are deemed to be affiliates of Videonics prior to the
merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Securities Act (or Rule 144 in the
case of such persons who become affiliates of Focus) or otherwise in compliance
with (or pursuant to an exemption from) the registration requirements of the
Securities Act. Persons deemed to be affiliates of Focus or Videonics are those
individuals or entities that control, are controlled by, or are under common
control with, such party and generally include executive officers and directors
of such party as well as certain principal shareholders of such party. This
joint proxy statement/prospectus does not cover any resale of Focus common stock
received by affiliates of Videonics in the merger.
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Dissenters' Rights
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER CALIFORNIA LAW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA GENERAL
CORPORATION LAW, THE COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS APPENDIX B.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN CHAPTER 13 OF
THE CALIFORNIA GENERAL CORPORATION LAW MAY RESULT IN THE LOSS, TERMINATION OR
WAIVER OF DISSENTERS' RIGHTS. A VIDEONICS SHAREHOLDER WHO VOTES TO APPROVE THE
MERGER WILL NOT HAVE A RIGHT TO DISSENT FROM THE MERGER.
Videonics shareholders who object to the merger may, under certain
circumstances and by following the precise procedures prescribed by the
California General Corporation Law, exercise dissenters' rights and receive cash
in the amount of the fair market value for their Videonics shares. The fair
market value shall be determined as of the day before the first announcement of
the terms of the proposed merger, excluding any appreciation or depreciation due
to the proposed merger, but adjusted for any stock split, reverse stock split or
share dividend which becomes effective thereafter. The merger agreement was
signed by all its respective parties on August 30, 2000 and the merger was
announced on August 31, 2000. Immediately prior to announcement of the merger,
the closing price of Videonics common stock on August 30, 2000 was $0.875. If
Videonics shareholders exercise dissenters' rights in connection with the merger
(a "Dissenting Shareholder") under Chapter 13 of the California General
Corporation Law, any "Dissenting Shares" (as defined below) will not be
converted into Focus common stock but will instead be converted into the right
to receive such consideration as may be determined to be due with respect to
such Dissenting Shares pursuant to the laws of the State of California.
Any shareholder who wishes to exercise his or her right to have
Videonics purchase some or all of his or her shares for cash in an amount equal
to the shares' fair market value (a "Dissenting Shareholder") must take the
following steps:
1. Such Dissenting Shareholder must not vote some or all of his or
her shares in favor of the merger ("Dissenting Shares");
2. Such Dissenting Shareholder must make written demand on Videonics
to purchase his or her Dissenting Shares, and such demand must be
received by Videonics within thirty (30) days after the date on
which the notice of approval of the merger was mailed to such
Dissenting Shareholder. Such written demand must state the number
and class of his or her Dissenting Shares and must contain a
statement of what such Dissenting Shareholder claims to be the
fair market value of those shares as of the day before the
announcement of the proposed merger. The statement of fair market
value constitutes an offer by the Dissenting Shareholder to sell
the Dissenting Shares at such price; and
3. Within the same thirty (30) day period, such Dissenting
Shareholder must submit the stock certificates representing his
Dissenting Shares to Videonics at its principal executive offices
(1370 Dell Avenue, Campbell California 95008 attn: Secretary) for
endorsement, with a statement that the shares are Dissenting
Shares.
Neither a vote against approval of the merger nor the submission of a
proxy directing a negative vote will be sufficient to constitute the demand
described in clause (2) above.
Dissenters' rights may not be perfected with respect to any shares
unless such shares are not voted in favor of the merger. A Videonics shareholder
may vote part of the shares which the shareholder is entitled to vote in favor
of the merger without jeopardizing dissenters' rights as to shares voted against
or in abstention with respect to the merger; however, if a Videonics shareholder
votes part of the shares he is entitled to vote in favor of the merger and fails
to specify the number of shares he is voting in favor of the merger, it is
conclusively presumed under California law that the Videonics shareholder's
approving vote is with respect to all shares which the shareholder is entitled
to vote.
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Within ten (10) days after the date of the approval of the merger by
the Videonics shareholders, Videonics will mail to each Dissenting Shareholder a
notice of approval of the merger, together with a statement of the price
determined by Videonics to represent the fair market value of Dissenting Shares,
a brief description of the procedure to be followed for the exercise of
dissenters' rights, and a copy of certain sections of the California General
Corporation Law setting forth such procedures. The statement of price will
constitute an offer by Videonics to purchase at the price stated therein any
Dissenting Shares. If Videonics and the Dissenting Shareholder agree that the
shares are Dissenting Shares and agree upon the price of the shares, the
Dissenting Shareholder will be entitled to the agreed price plus interest
thereon at the legal rate on judgments from the date of such agreement. Payment
of the fair market value of the Dissenting Shares will be made within thirty
(30) days after such agreement and upon surrender of the certificates therefor.
If Videonics denies that the shares are Dissenting Shares or Videonics
and the Dissenting Shareholder fail to agree upon the fair market value of the
shares, then the Dissenting Shareholder may file, within six (6) months after
the date on which notice of approval of the merger was mailed to such
shareholder, but not thereafter, a complaint in Superior Court in the proper
California county, requesting the court to determine either or both of (i)
whether the shares are Dissenting Shares and (ii) the fair market value of the
Dissenting Shares. The costs of the action will be assessed or apportioned as
such Court considers equitable but, if the fair market value is determined to
exceed the price offered to the Dissenting Shareholder by Videonics, Videonics
will be required to pay such costs. Under certain circumstances, attorneys' fees
may also be awarded.
The foregoing is a summary of the rights of Dissenting Shareholders,
does not purport to be a complete statement thereof and is qualified in its
entirety by reference to Chapter 13 of the California General Corporation Law, a
copy of which is attached as Appendix B to this joint proxy
statement/prospectus.
OPINION OF FINANCIAL ADVISOR RETAINED BY THE FOCUS BOARD OF DIRECTORS
On October 3, 2000 Focus engaged Union Atlantic Capital L.C. to render
an opinion that the consideration to be given by Focus to the Videonics
shareholders in connection with the merger is fair to Focus from a financial
point of view.
Representatives of the Focus Board of Directors considered retaining
various investment bankers to assist it in its evaluation of the merger
proposal. In selecting a firm, the Focus Board of Directors considered a variety
of factors, including the firm's reputation, experience, expertise in the
relevant industries, cost, and ability to assist Focus in a timely fashion.
Based on the foregoing, the Focus Board of Directors selected Union Atlantic as
its financial advisor.
As compensation to Union Atlantic for its services in connection with
the merger, the Board of Directors agreed to pay Union Atlantic a fee of
$50,000. No portion of Union Atlantic's fees for this engagement are contingent
upon the successful completion of the merger. The Board of Directors and the
Focus Board of Directors have also agreed to indemnify Union Atlantic and
related persons against certain liabilities, including liabilities under federal
securities laws, arising out of the engagement of Union Atlantic, and reimburse
Union Atlantic for certain expenses.
Independent from the rendering of this fairness opinion, Focus had
engaged Union Atlantic on February 14, 2000 to act as its advisor in analyzing
financial and strategic considerations regarding the proposed merger. The report
did not render an opinion on the merit of such a merger, but demonstrated the
impact of such a merger on both parties. The terms of the engagement letter for
that financial advisory service between Union Atlantic and Focus included a
success fee, upon the conclusion of the merger. Union Atlantic has made its
fairness opinion determination independent of this or any other consideration.
Union Atlantic is a nationally recognized investment banking firm that
is continually engaged in providing financial advisory services in connection
with mergers and acquisitions, leveraged buyouts, business valuations for a
variety of regulatory and planning purposes, financial restructurings, and
private placements of debt and equity securities.
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Timothy Mahoney, who is a Focus director, is a principle in the parent
company to Union Atlantic Capital L.C., and a partner of Union Atlantic L.C. In
1999, Focus paid Union Atlantic L.C. $112,226 in consulting fees in connection
with equity financing agreements negotiated by Union Atlantic L.C. Union
Atlantic L.C. will also be paid approximately $280,000 in shares of Focus common
stock for brokerage fees in connection with the merger.
Union Atlantic did not, and was not requested by Focus to make any
recommendations as to the form or amount of consideration to be paid by Focus in
connection with the merger. Focus did not impose any restrictions or limitations
upon Union Atlantic with respect to its investigation or the procedures it
followed in rendering its opinion.
In arriving at its opinion, Union Atlantic took the following actions:
o Reviewed Focus' and Videonics' annual reports to shareholders on
Form 10-KSB/A and 10-K, respectively, for the fiscal year ended
1999 and quarterly reports on Form 10-QSB and 10-Q, respectively,
for the quarter ending June 30, 2000. We also reviewed company
prepared unaudited interim financial statements for the quarter
ended September 30, 2000, which management of the companies
identified as being the most current financial statements
available;
o Reviewed the merger agreement dated August 30, 2000 by and among
the Focus, Videonics and PC Video Conversion;
o Met with certain members of the senior management of Focus and
Videonics to discuss the operations, financial condition, future
prospects and projected operations and performance of Focus and
Videonics;
o Reviewed forecasts and projections prepared by Focus' and
Videonics' management with respect to Focus and Videonics for the
years ending December 31, 2000 through 2004;
o Reviewed the historical market prices and trading volume of
Focus' and Videonics' publicly traded securities;
o Reviewed certain other publicly available financial data for
certain companies that we deem comparable to Focus, and publicly
available prices and premiums paid in other transactions that we
considered similar to the merger; and
o Conducted such other studies, analyses and inquiries as we have
deemed appropriate.
In order to render its opinion, Union Atlantic compared the intrinsic
equity value of Videonics relative to the total consideration offered to
Videonics' shareholders. When determining the value of a business enterprise,
there are three general approaches available to the valuation professional: the
market approach, the income approach and the asset approach. These are also
commonly referred to as the market multiple, discounted cash flow and adjusted
book value approaches, respectively. The choice of which approach to use in a
particular situation will depend upon the specific facts and circumstances
associated with the company, as well as the purpose for which the valuation
analysis is being conducted. Union Atlantic did not utilize the adjusted book
value approach because, in the exercise of its professional judgment, Union
Atlantic concluded that such approach was not appropriate for determining the
value of Focus or Videonics' common stock, since the more appropriate use of the
adjusted book value approach would be for either liquidation valuations or the
valuation of capital intensive going-concerns. The comparable market multiple
analysis estimated the per share value by calculating median market multiples
for the latest twelve month's financial performance of the peer group companies
and then applying a selected multiples to numerous indicators of Videonics'
financial performance. The discounted cash flow analysis estimated the per share
value by discounting to the present, at a risk-adjusted discount rate, the
projected cash flows to be generated by Videonics' business, including a range
of synergies or cost savings attributed Videonics as a result of the merger, as
estimated by Videonics and Focus' management.
The per share value generated by each methodology was higher than the
consideration to be paid in connection with the merger. Accordingly, Union
Atlantic, independent of any other consideration,
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concluded that the payment to the shareholders of Videonics in connection with
the merger was fair to Focus from a financial point of view. No other
conclusions of value were reached by Union Atlantic.
Union Atlantic relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of Focus and Videonics, and that
there has been no material change in the assets, financial condition, business
or prospects of Videonics since the date of the most recent financial statements
made available to Union Atlantic.
Union Atlantic did not independently verify the accuracy and
completeness of the information supplied to it with respect to Focus and
Videonics and did not assume any responsibility with respect to such
information. Union Atlantic has made visits to both Focus and Videonics, but
these visits did not include any physical inspection or independent appraisal of
any of the properties or assets of Focus or Videonics. Union Atlantic's opinion
is necessarily based on business, economic, market and other conditions as they
existed and could be evaluated by it at the date of its letter.
In reaching its conclusions Union Atlantic utilized two primary
valuation methodologies, as described below:
The Market Multiple Approach
The market multiple approach is one of determining a level of earnings
or revenue that is considered to be representative of the future performance of
the business, and multiplying this figure by an appropriate risk-adjusted market
multiple.
The market multiple is an expression of what investors believe to be a
fair and reasonable rate of return for the particular security, given the
inherent risks of ownership. It incorporates expectations of growth and rests on
the implicit assumption that some level of earnings or revenue will be generated
by the enterprise into perpetuity. The market multiple employed was selected
through the market comparison method, whereby companies having their stock
traded in the public market were selected for comparison purposes and used as a
basis for choosing a reasonable market multiple for Videonics.
In employing the market multiple approach, a representative list of
publicly owned companies that are similar to Videonics in those respects
carrying the greatest weight with the investing public were selected for
comparison purposes. Union Atlantic conducted a search for companies which were
comparable to Videonics in terms of its operating and financial characteristics.
Key search criteria included:
o The company's primary business had to be comparable to Videonics.
o The company's common stock had to be outstanding in the hands of
the public.
o The company's trading market had to be relatively active to
obtain true investor sentiment.
The results of this search indicated that the following four companies
met these search criteria and were most comparable to Videonics: Pinnacle
Systems, Inc., Avid Technology, Inc., Chyron Corporation, and Sony Corporation
In some cases, companies may appear to be engaged in somewhat different lines of
business, although they may be similar from an investment standpoint.
Primarily, they offered operational and economic comparability in the
areas of major importance to the investing public. Accordingly, Union Atlantic
relied upon the entire peer group, taken as a whole, for comparison purposes and
used the median values to reach its valuation. Union Atlantic noted that the
selected comparable companies are significantly larger than Videonics, have more
liquidity and are more profitable. Moreover, several of the comparable companies
operate more diversified activities than Videonics.
Earnings before interest, taxes, depreciation and amortization
("EBITDA"), earnings before interest and taxes ("EBIT"), and net income
multiples for the comparable companies were derived from examining publicly
available information for the latest twelve months' revenue. The enterprise
value of the common equity is computed by multiplying those financial
performance measures with
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the multiples obtained from the comparable group. It was Union Atlantic's
opinion that an investor considering an investment in Videonics would select the
median multiple among those identified.
The Discounted Cash Flow Approach
Forecasts for the five-year period ended December 31, 2005 were
provided by Videonics' management. The key determinants to value once the
forecasted cash flows are established is the rate used to discount the cash
flows to present value and the expected annual growth rate or market multiple to
be applied to the last year's cash flow in estimating the terminal value of the
enterprise.
Selecting Discount Rates. Union Atlantic utilized a market-based
approach in selecting the discount rate. This approach consists of Union
Atlantic's estimate of Videonics' risk-adjusted cost of capital. Depending upon
whether the cash flows being discounted are before the payment of interest
expense or after, the appropriate discount rate is either the cost of equity
("K(e)") or a weighted average cost of capital ("WACC"). The cash flows
throughout this analysis do not consider the payment of interest, they are
debt-free cash flows, and therefore WACC was selected as the appropriate
discount rate. The WACC represents the combined average cost of debt and equity.
The cost of debt is determined, in this analysis, from Videonics' own cost of
debt, including tax consequences. The Capital Asset Pricing Model ("CAPM"),
which states that the return on any risky asset must be greater than the
risk-free rate, is used to calculate the cost of equity K(e), as indicted as
follows:
K(e) = R(F)(R(M)-R(F))(B(L))
R(F) = Risk-free rate of return
Where R(M) = Return on market portfolio
B = beta*
* Beta is a standardized measure of the nondiversifiable risk and is defined as
the covariance of the subject company return with the market divided by the
variance of the market returns.
Union Atlantic's application of the CAPM to compute a reasonable cost
of equity for Videonics, and selection of the additional variables used in the
WACC equation were based on the comparative analysis summarized in the "Market
Multiple" section, above. In addition, Union Atlantic's selection of an
appropriate discount rate incorporated Union Atlantic's assessment of Videonics'
ability to achieve the results projected by its management. In summary, Union
Atlantic's analysis yielded an estimated WACC of approximately ten percent.
Determination of Terminal Value. The terminal value used in the
discounted cash flow approach is essentially an estimate of the value of the
enterprise as of the end of the final period for which cash flow projections
have been made. It is necessary to compute this value because, although the
expectation is that the company will remain a viable going-concern beyond the
final period, one cannot project with enough certainty the cash flows to be
generated in any given period.
The primary method of computing the terminal value for a going-concern
is the "multiple method," which uses a projected market multiple as in the
market multiple approach. Typically, the EBITDA for the final projection period
is adjusted to arrive at a "normalized" EBITDA level, and then multiplied by a
reasonable EBITDA multiple to yield an indication of value for the company.
The terminal value is then discounted back to the present using the
previously selected discount rate. In Union Atlantic's analysis of Videonics,
Union Atlantic concluded that a EBITDA multiple ranging from 14 to 18 is
reasonable for determining the terminal value of Videonics, in light of
comparables.
In its analysis, Union Atlantic also took into account the average of
the average daily closing bid and asked prices of one share of Videonics' Common
Stock for a period of 21 consecutive trading days ending on Thursday October 12,
2000 as reported on NASDAQ Small Cap Market. Union Atlantic also considered a
21-day average in reviewing comparable companies for the market multiple
approach.
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Valuations derived from the methodologies above resulted in indications
of the value for Videonics' operations that exceed the merger price. Union
Atlantic concluded that the Market Multiple Approach provided the best valuation
indicator of the two methodologies. Based on Videonics' projections, the DCF
method resulted in a significantly higher valuation. However, uncertainty of
future cash flows for the company and the predominant weight of the terminal
value in the valuation may not make it an accurate indicator of value, from a
market perspective.
The Market Multiple approach resulted in a value of approximately $9.2
million, versus an aggregate purchase price of $9.1 million. The Market Multiple
approach does not take into consideration any synergies which may be of value to
Focus Enhancements.
Because the value of the consideration in the merger was lower than the
implied value of Videonics' stock price generated by both methodologies in the
above analysis, Union Atlantic concluded that the consideration to be given by
Focus in connection with the merger was fair to Focus from a financial point of
view.
The aforementioned analyses required studies of the overall market,
economic and industry conditions in which Videonics operates, and the Focus '
operating results. Research into, and consideration of, these conditions were
incorporated into the analyses.
Union Atlantic's opinion is based on the business, economic, market and
other conditions as they existed as of October 13, 2000. In rendering its
opinion, Union Atlantic has relied upon and assumed, without independent
verification, that the financial results provided to Union Atlantic by
Videonics' management have been reasonably prepared and reflect the best current
available estimates of the financial results and condition of the Focus. Union
Atlantic did not independently verify the accuracy or completeness of the
information supplied to it with respect to Videonics and does not assume
responsibility for it. Except as set forth above, Union Atlantic did not make
any physical inspection or independent appraisal of the specific properties or
assets of Videonics.
The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Union Atlantic did not attribute any
particular weight to any analysis or factor considered by it, but rather made
the qualitative judgments as to the significance and relevance of each analysis
and factor. Accordingly, Union Atlantic believes that its analyses and the
summary set forth herein must be considered as a whole and that selecting
portions of its analyses without considering all factors and analyses could
create an incomplete view of the processes underlying the analyses set forth in
the Union Atlantic opinion. In its analysis, Union Atlantic made numerous
assumptions with respect to Videonics and Focus, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of the Focus. The estimates contained in such
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be more or less favorable than suggested by such
analyses.
Additionally, analyses relating to the value of businesses or
securities are not appraisals. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this joint proxy
statement/prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the merger agreement. Shareholders of
Focus and Videonics are urged to read the merger agreement in its entirety for a
more complete description of the terms and conditions of the merger.
General
The merger agreement provides that following the approval of the merger
by Focus shareholders and Videonics shareholders, and the satisfaction and
waiver of the other conditions to the merger, PC Video Conversion will merge
with and into Videonics, with Videonics continuing as the surviving corporation
and becoming a wholly-owned subsidiary of Focus after the merger.
If all conditions to the merger are satisfied or waived, the merger
will become effective at the Effective Time. See "The Merger--Effective Time of
the Merger."
Conversion of Shares
At the time of the merger, each issued and outstanding share of
Videonics common stock (other than shares, if any, as to which dissenters'
rights are exercised and shares of Videonics common stock owned by PC Video
Conversion or Focus, all of which will be cancelled) will be converted into the
right, without interest, to receive 0.87 shares (the "Exchange Ratio") of Focus
common stock. Each share of the common stock of PC Video Conversion issued and
outstanding immediately prior to the effective time of the merger will be
converted into one share of common stock of Focus.
The Exchange Ratio may be subject to adjustment to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Focus common stock or Videonics
common stock), reorganization, recapitalization, reclassification, conversion,
consolidation, contribution or exchange of shares or other like change with
respect to Focus common stock or Videonics common stock occurring after the date
hereof and prior to the effective date of merger.
Shares of Videonics common stock as to which dissenters' rights are
perfected, if any, will not be converted into or represent a right to receive
shares of Focus common stock, but will represent only the right to obtain
payment of the fair value of such shares. See "The Merger-- Dissenters' Rights."
As soon as reasonably practicable after the Effective Time, the
exchange agent, will send a letter of transmittal and instructions with respect
to the surrender by Videonics shareholders of their Videonics stock certificates
to each former Videonics shareholder. Upon surrender by the Videonics
shareholders of their stock certificates representing shares of Videonics stock,
together with a duly executed letter of transmittal and other documents, the
Videonics shareholders will be entitled to receive stock certificates
representing whole shares of Focus common stock which such holder has the right
to receive pursuant to the merger agreement in respect of shares of Videonics
stock formerly evidenced by such Videonics certificate, together with a cash
payment in lieu of fractional shares, if any.
After the merger, until so surrendered to the exchange agent, each
certificate that previously represented shares of Videonics stock will represent
only the right to receive upon surrender a certificate evidencing whole shares
of Focus common stock into which such shares of Videonics stock were converted
in the merger and cash in lieu of fractional shares of Focus common stock, if
any, as described below. The holder of such unexchanged certificate will not be
entitled to receive any dividends or other distributions payable by Focus until
the certificate has been exchanged. When their certificates are surrendered, any
unpaid dividends with a record date after the Effective Time but prior to such
surrender with respect to whole shares of Focus common stock and any cash in
lieu of fractional shares of Focus common stock payable as described below will
be paid without interest.
Focus will not issue fractional shares of common stock in the merger.
Instead of fractional shares, the exchange agent will pay to each of those
shareholders an amount in cash determined by
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multiplying the fractional share interest to which the holder would otherwise be
entitled by the closing sale price of a share of Focus Common Stock on the
NASDAQ Composite Transaction Tape on the first day of trading immediately
following the Effective Time.
Representations and Warranties
The merger agreement contains various customary representations and
warranties relating to, among other things:
o due organization, valid existence and good standing of Focus,
Videonics, PC Video Conversion and each of their respective
subsidiaries and certain similar corporate matters;
o the capital structure of each of Focus and Videonics;
o the authorization, execution, delivery, and enforceability of the
merger agreement and related matters;
o conflicts under articles of incorporation or by-laws, required
consents, approvals, orders and authorizations of governmental
authorities relating to, and non-contravention of certain
agreements as a result of, the merger agreement;
o documents and financial statements filed by each of Focus and
Videonics with the SEC and the accuracy of the information
contained in such documents;
o the absence of certain material adverse events or changes;
o litigation;
o compliance with applicable laws, permits and licensing
requirements;
o the accuracy of information supplied by each of Focus and
Videonics in connection with the Registration Statement on Form
S-4 and this joint proxy statement/prospectus;
o employee benefit plans;
o labor matters;
o environmental matters and hazardous materials;
o the absence of restrictions on business activities of each of
Focus and Videonics;
o title to assets;
o engagement of and payment of fees to brokers, investment bankers,
finders and financial advisors in connection with the merger
agreement;
o accounting and tax matters relating to the merger;
o intellectual property;
o insurance;
o ownership of securities;
o agreements, contracts and commitments;
o the absence of unlawful business practices of each of Focus and
Videonics; and
o interested party transactions.
Conduct of Business Before the Merger
Each of Videonics and Focus has agreed in the merger agreement that
during the period from the date of the merger agreement and continuing until the
Effective Time or the termination of the merger agreement, Videonics and Focus
will, and will cause its respective subsidiaries to:
o carry on their respective businesses in the ordinary course
consistent with past practice;
o use all reasonable efforts to preserve intact their current
business organizations;
o keep available the services of their current officers and
employees;
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o preserve their relationships with customers, suppliers and others
having business dealings with them;
o not issue, sell, pledge, dispose of, encumber, authorize, or
propose the issuance, sale, pledge, disposition, encumbrance or
authorization of any shares of capital stock of any class, or any
options, warrants, convertible securities or other rights of any
kind to acquire any shares of capital stock of, or any other
ownership interest, subject to certain exceptions (including, (i)
in the case of Videonics Plans and Focus Plans in effect on the
date of the merger, (ii) existing dividend reinvestment plans,
(iii) the issuance of up to 2,500,000 shares of Focus common
stock pursuant to a shelf registration on Form S-1, (iv) the
posting of Focus common stock held in treasury as collateral for
a judgment adverse to Focus in the matter of CRA Systems, Inc. v.
Focus Enhancements, Inc., and (v) payment of Union Atlantic
L.C.'s fee for providing investment banking services to Focus in
connection with this transaction by the issuance to Union
Atlantic Capital L.C. of shares of Focus common stock);
o not amend or propose to amend its certificate or articles of
incorporation or bylaws, except as contemplated in the merger
agreement;
o not split, combine or reclassify any outstanding shares, or
declare, set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise, except those declared in
accordance with existing dividend policy payable to shareholders
of record on the record dates consistently used in prior periods;
o not redeem, purchase or otherwise acquire shares of its stock or
offer to do the same;
o not engage in any merger, consolidation or acquisition of assets
(other than an entity which is a wholly-owned subsidiary as of
the date of the merger and other than the incorporation of a
wholly-owned Subsidiary);
o except for transactions which do not exceed $100,000 in the
aggregate in any 12 month period, not sell, pledge, dispose of,
or encumber or authorize or propose the sale, pledge, disposition
or encumbrance any of its assets or assets of its subsidiaries,
subject to certain exceptions (including (i) those in the
ordinary course of business consistent with past practice, and
(ii) the sub-lease by Focus of its Wilmington, Massachusetts
facility);
o not sell, transfer, lease, license, sublicense, mortgage, pledge,
dispose of, encumber, grant, or otherwise dispose of any
intellectual property rights, or amend or modify in any material
way any existing agreement regarding such intellectual property
rights;
o not incur indebtedness other, than in the normal course of
business;
o not authorize or propose or enter into any contract, agreement,
commitment or arrangement with respect to any of above noted
matters;
o not hire or terminate any employee or consultant, except in the
ordinary course of business consistent with past practice, or
increase compensation payable to its officers or employees,
except for retention agreements entered into in anticipation of
the merger, or grant any severance or termination pay or stock
options to, or enter into any employment or severance agreement
with any director, officer or other employee of it or in the case
of Focus, any of its subsidiaries, or establish, adopt, enter
into or amend any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination,
severance, or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any current or former directors,
officers or employees;
o not change any accounting policies or procedures unless required
by statute or GAAP;
* not create, incur suffer to exist or assume any Encumbrance on
any material asset of it or, in the case of Focus, its
subsidiary;
o not enter, modify, amend, transfer, terminate any material
agreement or assign any material rights thereunder or enter into
or extend any lease with respect to real property with any third
party;
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o not make any tax election or settle or compromise any federal,
state, local or foreign income tax liability or agree to an
extension of a statute of limitations;
o not settle any material litigation or waive, assign or release
any material rights or claims with certain exceptions as outlined
in the merger agreement;
o not directly engage in any transaction, agreement, arrangement or
understanding, either directly or indirectly, with any party not
listed on the disclosure schedule;
o maintain insurance currently in effect;
o not take any action which it believes when taken could reasonably
be expected to adversely delay in any material respect the
ability to obtain governmental approval for any transaction
related to the merger;
o not take any action to cause shares of their respective common
stock to cease to be quoted on any stock exchange; and
o not cause its representations and warranties contained in the
merger agreement to become inaccurate.
No Solicitation
The merger agreement provides that Videonics and Focus each will not
permit any of its affiliates to, nor shall it authorize any of its or their
officers, directors, employees, financial advisors, representatives or agents
to:
o solicit, facilitate, initiate or encourage, or take any action to
solicit, facilitate, initiate or encourage, any inquiries or the
making of any proposal or offer that constitutes an acquisition
proposal by a third party; or
o participate or engage in discussions or negotiations with any
person relating to any acquisition proposal by a third party or
which might reasonably be expected to result in an acquisition
proposal or provide information concerning same to any third
party.
However, nothing contained in the merger agreement prevents Videonics
or Focus, or their respective Boards of Directors, from furnishing non-public
information to, or entering into discussions or negotiations with, any person or
entity in connection with an unsolicited, bona fide written acquisition proposal
to the shareholders of such party, if and only to the extent that:
o the board of directors of such party believes in good faith
(after consultation with its financial advisor) that such
acquisition proposal would result in a more favorable transaction
than that contemplated by the merger agreement;
o the board of directors of such party receives written opinion of
outside counsel that the action is required to comply with its
fiduciary duties to shareholders under applicable law; and
o provides written notice to the other parties of its decision to
so participate or furnish.
In addition, the merger agreement provides that, except in the
situation where prior to receiving shareholder approval of the merger, the Board
of Directors of a party receives an acquisition proposal that would result on a
more favorable transaction than that contemplated by the merger agreement,
neither the Board of Directors of Videonics or Focus nor any committee thereof
shall:
o approve or recommend, or propose to approve or recommend, any
acquisition proposal other than the merger;
o adversely withdraw or modify its approval or recommendation of
the merger, the merger agreement or any of the underlying
transactions;
o fail to reaffirm its approval or recommendation of the merger or
the merger agreement within two (2) business days after such a
request is made by either party;
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o enter, or cause such party or any subsidiary of such party to
enter, into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any
acquisition proposal; or
o resolve or announce its intention to do any of the foregoing.
In addition to the above mentioned obligations, each of Videonics and
Focus shall: (i) immediately advise the other orally and in writing of any
request for information (including the material terms, conditions and identity
of the requester) with respect to any acquisition proposal; (ii) inform the
other party on a prompt and current basis of the status and content of any
discussions regarding any acquisition proposal including any change in price,
structure or form of consideration, and material terms or conditions regarding
the proposal.
Conditions
The respective obligations of Focus and Videonics to effect the merger
are subject to the satisfaction (or waiver) of the following conditions:
o the merger is approved by the Focus shareholders, Videonics
shareholders and by Focus in its capacity as the sole shareholder
of PC Video Conversion;
o the issuance of shares of Focus common stock in connection with
the merger is approved by the Focus shareholders;
o no order, injunction, or judgment, or statute, rule or
regulation, is in effect that makes the merger illegal or
otherwise prohibits the completion of the merger or which would
result in the merger having a material adverse effect on Focus or
Videonics;
o all governmental authorizations, consents, orders or approvals
have been obtained and all waiting periods imposed by any
Governmental Entity have expired, unless the failure to file or
obtain approval of any of the foregoing is not reasonably likely
to have a material adverse effect;
o the registration statement applicable to the merger has become
effective and is not the subject of a stop order or proceeding
seeking a stop order;
o all state securities and blue sky permits or approvals required
have been received;
o the shares of Focus common stock to be issued in the merger have
been approved for listing on the NASDAQ;
o all material consents or approvals of any person whose consent is
required under any agreement or instrument in order to permit the
completion of the merger, unless the failure to obtain approval
or consent would not have a material adverse effect;
o no event or circumstance constituting a material adverse effect
for Focus or Videonics shall have occurred; and
o Focus and Videonics shall have obtained a written legal opinion
to the effect that the merger will be treated for federal income
tax purposes as a tax-free reorganization under the Internal
Revenue Code.
In addition, the merger agreement provides that the obligations of
Videonics to effect the merger are subject to the satisfaction (or waiver) of
the following conditions:
o the representations and warranties of Focus in the merger
agreement are true and correct as of the date of the merger
agreement and also, except to the extent such representations and
warranties speak as of an earlier date, as of the closing date of
the merger, except for such failures to be true that would not
reasonably be expected to have a material adverse effect on
Focus, either with or without including its ownership of
Videonics and its subsidiaries after the merger. Videonics must
receive a certificate of an executive officer of Focus confirming
the satisfaction of such representations and warranties;
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o Focus and PC Video Conversion have performed in all material
respects all obligations required to be performed by them under
the merger agreement at or prior to the closing date of the
merger, except for such failures to perform or comply which
individually or in the aggregate would not reasonably be expected
to result in a material adverse effect on Focus either with or
without including its ownership of Videonics and its subsidiaries
after the merger. Videonics must receive a certificate of an
executive officer of Focus confirming such obligations have been
satisfied; and
o Focus shall have amended its 2000 Stock Option Plan to increase
by 2,000,000 (from 3,000,000 shares to 5,000,000 shares) the
number of shares of Focus common stock reserved for issuance
thereunder and shall have submitted such amended plan to its
shareholders for approval.
In addition, the merger agreement provides that the obligations of
Focus to effect the merger are subject to the satisfaction (or waiver) of the
following conditions:
o the representations and warranties of Videonics in the merger
agreement are true and correct as of the date of the merger
agreement and also, except to the extent such representations and
warranties speak as of an earlier date, as of the closing date of
the merger, except for such failures to be true that would not
reasonably be expected to have a material adverse effect on
Focus, either with or without including its ownership of
Videonics and its subsidiaries after the merger. Focus must
receive a certificate of an executive officer of Videonics
confirming such representations and warranties; and
o Videonics has performed in all material respects all obligations
required to be performed by it under the merger agreement at or
prior to the closing date of the merger, except for such failures
to perform or comply which individually or in the aggregate would
not reasonably be expected to result in a material adverse effect
on Videonics after the merger. Focus must receive a certificate
of an executive officer of Videonics confirming such obligations
have been satisfied.
Termination; Termination Fees
The merger agreement may be terminated at any time prior to the
Effective Time, whether before or after the approval by the shareholders of
Focus and Videonics, as follows:
o by mutual written consent of Focus and Videonics;
o by either Focus or Videonics if the merger is not consummated on
or before December 31, 2000, provided that if certain of the
joint conditions to closing have not yet been fulfilled, either
of Focus or Videonics may extend such date to March 30, 2001; and
if such certain joint conditions remain unfilled on March 30,
2001, such date may be further extended to June 30, 2001, unless
within five days prior to March 30, 2001 Focus or Videonics
reasonably determines that it is substantially unlikely that any
of such certain joint conditions will be fulfilled by June 30,
2001 and delivers a notice to the other stating this;
o by either Focus or Videonics if a court of competent jurisdiction
or other governmental entity issues a final, non-appealable
order, decree or ruling or has taken any other action permanently
restraining, enjoining, or otherwise prohibiting the merger;
o by Videonics if: (i) Focus has breached or failed to perform in
any material respect any of its representations, warranties,
covenants or agreements contained in the merger agreement, which
breach (a) is incapable of being cured by Focus prior to December
31, 2000 and (b) renders any of the joint conditions or
conditions to be satisfied by Focus incapable of being satisfied
prior to December 31, 2000, or (ii) if any of the joint
conditions or conditions to be satisfied by Focus cannot be
satisfied prior to December 31, 2000;
o by Focus if: (i)Videonics has breached or failed to perform in
any material respect any of its representations, warranties,
covenants or agreements contained in the merger agreement, which
breach (a) is incapable of being cured by Videonics prior to
December 31, 2000 and (b) renders any of the joint conditions or
conditions to be satisfied by Videonics incapable of
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being satisfied prior to December 31, 2000, or (ii) if any of the
joint conditions or conditions to be satisfied by Videonics
cannot be satisfied prior to the Termination date;
o by either Focus or Videonics if the Board of Directors of the
other, or any committee of the Board of Directors of the other,
(i) fails to include in the joint proxy statement/prospectus its
recommendation without modification or qualification that
shareholders approve the merger agreement and the merger, (ii)
modifies or withdraws in an adverse manner its approval or
recommendation of the merger agreement or the merger, (iii) fails
to reaffirm such approval or recommendation upon the request of
the other, (iv) approves or recommends any other third party
Acquisition Proposal, or (v) resolves to take any of the actions
described in (i) -- (iv); or
o by either Focus or Videonics if any of the required approvals of
the shareholders of Videonics or Focus shall fail to have been
obtained at duly held shareholders' meetings of such companies,
including any adjournments thereof.
Focus has agreed to pay Videonics a termination fee of three hundred
thousand dollars ($300,000) upon the earliest to occur of the following events:
o the termination of the merger agreement by Videonics if the Focus
Board of Directors or any Committee of the Focus Board of
Directors (i) fails to include in the joint proxy
statement/prospectus its recommendation without modification or
qualification that shareholders approve the merger agreement and
the merger, (ii) modifies or withdraws in an adverse manner its
approval or recommendation of the merger agreement or the merger,
(iii) fails to reaffirm such approval or recommendation upon the
request of the other, (iv) approves or recommends any other third
party Acquisition Proposal, or (v) resolves to take any of the
actions described in (i)--(iv); or by Focus or Videonics if any
of the required shareholder approvals of Focus or Videonics are
not obtained under circumstances in which Videonics could have
(but did not) terminated the merger agreement pursuant to any of
the foregoing items (i)--(v);
o prior to the Focus shareholder meeting there shall have an third
party acquisition proposal or an announcement or agreement with
respect to such a proposal, Videonics terminates the merger
agreement because any of the required Focus shareholder approvals
are not obtained and Focus enters into a definitive third party
acquisition proposal within 12 months after the termination of
the merger agreement; or
o there is a material breach relating to approval of the joint
proxy statement/prospectus which is not cured (or is incapable of
being cured) by Focus within 30 days after notice of the breach.
In addition Videonics has agreed to pay Focus a termination fee of
three hundred thousand dollars ($300,000) upon the earliest to occur of the
following events:
o the termination of the merger agreement by Focus if the Videonics
Board of Directors or any Committee of the Videonics Board of
Directors (i) fails to include in the joint proxy
statement/prospectus its recommendation without modification or
qualification that shareholders approve the merger agreement and
the merger, (ii) modifies or withdraws in an adverse manner its
approval or recommendation of the merger agreement or the merger,
(iii) fails to reaffirm such approval or recommendation upon the
request of the other, (iv) approves or recommends any other third
party Acquisition Proposal, or (v) resolves to take any of the
actions described in (i)--(iv) or by Focus or Videonics if any of
the required shareholder approvals of Focus or Videonics are not
obtained under circumstances in which Focus could have (but did
not) terminated the merger agreement pursuant to any of the
foregoing items (i)--(v);
o prior to the Videonics shareholder meeting there shall have a
third party acquisition proposal or an announcement or agreement
with respect to such a proposal, Focus terminates the merger
agreement because any of the required Videonics shareholder
approvals are not obtained and Videonics enters into a definitive
third party Acquisition Proposal within 12 months after the
termination of the merger agreement; or
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o there is a material breach relating to approval of the joint
proxy statement/prospectus which is not cured (or is incapable of
being cured) by Videonics within 30 days after notice of the
breach.
Amendment and Waiver
The parties to the merger agreement may amend the merger agreement,
provided that any amendment that by law or in accordance with the rules of any
relevant stock exchange requires further approval by the Focus and Videonics
shareholders will not be made without the further approval of those
shareholders. Any amendment will be in writing.
The merger agreement permits Videonics and Focus to extend the time for
performance of any of the obligations of the other party, to waive any
inaccuracies in the representations of the other party and, subject to certain
limitations, waive compliance with any of the agreements or conditions contained
in the merger agreement.
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PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
On August 30, 2000, Focus Enhancements, Inc., reached a definitive
agreement to merge with Videonics, Inc., in a transaction to be accounted for
using the purchase method of accounting. Focus will issue 0.87 shares of Focus
common stock for each issued and outstanding share of Videonics common stock on
the closing date. Focus also anticipates incurring approximately $695,000 in
acquisition expenses, including financial advisory and legal fees and other
direct transaction costs, which will also be included as a component of the
purchase price. The allocation of the aggregate purchase price of approximately
$9.1 million will be finalized following receipt of the closing balance sheet of
Videonics and a final independent appraisal of certain intangible assets of
Videonics.
The accompanying unaudited pro forma combined condensed consolidated
balance sheet gives effect to the merger of Focus and Videonics as if such
transaction occurred on September 30, 2000. The unaudited pro forma combined
condensed balance sheet combines the unaudited consolidated balance sheet of
Focus as of September 30, 2000, and the consolidated balance sheet of Videonics
as of September 30, 2000.
The accompanying unaudited pro forma combined condensed consolidated
statements of operations present the results of operations of Focus for the year
ended December 31, 1999 and the nine-month period ended September 30, 2000,
combined with the statement of operations of Videonics for the year ended
December 31, 1999 and the nine-month period ended September 30, 2000. The
unaudited pro forma combined condensed unaudited consolidated statements of
operations give effect to this acquisition as if it had occurred as of January
1, 1999. The pro forma combined financial statements are based on the respective
historical consolidated financial statements and the notes thereto of Focus and
Videonics which are included or incorporated herein by reference. The pro forma
adjustments are preliminary and based on management's estimates and a
preliminary valuation of the intangible assets acquired.
In addition, management is in the process of assessing and formulating
its integration plans. Management anticipates restructuring costs associated
with integration of the two companies primarily related to severance, lease
abandonment and equipment disposal. These costs are direct and incidental to the
merger. In accordance with generally accepted accounting principals, the
acquirer (Focus) must expense these costs and not include them as part of the
purchase price. These costs represent Focus' best estimates to date based on
information currently available. For purposes of the pro forma financials,
management has estimated that restructuring costs are not expected to exceed
$1.2 million. This amount is subject to change based on actual results. A
significant component of the restructuring cost is related to the full value of
the remaining lease amounts due on the Focus' Wilmington, Massachusetts
facility. Focus expects to mitigate this amount through negotiations with the
landlord and or sub-leasing the facility.
The unaudited pro forma combined condensed consolidated balance sheet
and statements of operations are not necessarily indicative of the financial
position and operating results that would have been achieved had the transaction
been in effect as of the dates indicated and should not be construed as being a
representation of financial position or future operating results of the combined
companies.
The unaudited pro forma combined condensed consolidated financial
information should be read in conjunction with the audited consolidated
financial statements and related notes of Focus and Videonics, which are
incorporated in this joint proxy statement/prospectus by reference.
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<TABLE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 2000
(in thousands)
<CAPTION>
Focus Videonics Pro Forma Pro Forma
Actual Actual Adjustments Combined
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash Equivalents ............................... $ 1,286 $ 474 -- $ 1,760
Certificate of deposit .................................. 1,280 -- -- 1,280
Accounts receivable, net ................................ 2,802 975 -- 3,777
Inventories ............................................. 1,984 3,506 -- 5,490
Prepaid expenses and other current assets ............... 340 176 -- 516
Total current assets .................................... 7,692 5,131 12,823
-------- -------- -------- --------
Property and equipment, net ............................. 781 299 -- 1,080
Capitalized software development costs .................. 3,148 -- $ 3,495 (A,F) 6,643
Intangible and other assets ............................. 294 42 1,318 (A) 1,654
Goodwill ................................................ 484 -- 1,715 (A) 2,199
-------- -------- -------- --------
Total assets ............................................ $ 12,399 $ 5,472 $ 6,528 $ 24,399
======== ======== ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable ........................................... -- $ 400 -- $ 400
Obligations under capital lease ......................... $ 46 -- -- 46
Current portion of long-term debt ....................... 317 -- -- 317
Accounts payable ........................................ 2,768 1,177 -- 3,945
Accrued liabilities ..................................... 463 683 $ 1,895 (B,J) 3,041
Accrued legal judgement expense ......................... 2,148 -- -- 2,148
-------- -------- -------- --------
Total current liabilities ............................... 5,742 2,260 1,895 9,897
-------- -------- -------- --------
Obligations under capital lease ......................... 190 -- -- 190
Long-term debt .......................................... 64 1,035 -- 1,099
-------- -------- -------- --------
Total Liabilities ....................................... 5,996 3,295 1,895 11,186
-------- -------- -------- --------
Shareholders' equity:
Preferred stock ......................................... -- -- -- --
Common stock ............................................ 263 20,725 (20,674)(C) 314
Additional paid-in capital .............................. 48,727 -- 8,529 (D) 57,256
Accumulated deficit ..................................... (41,887) (18,548) 16,961 (E,F,J) (43,474)
Deferred compensation ................................... -- -- (183)(G) (183)
Treasury stock .......................................... (700) -- -- (700)
-------- -------- -------- --------
Total shareholders' equity .............................. 6,403 2,177 4,633 13,213
-------- -------- -------- --------
Total liabilities and shareholders' equity .............. $ 12,399 $ 5,472 $ 6,528 $ 24,399
======== ======== ======== ========
<FN>
See accompanying notes to unaudited pro forma combined
condensed consolidated financial information.
</FN>
</TABLE>
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<PAGE>
<TABLE>
Unaudited Pro Forma Condensed Consolidated
Statement of Operations
For the Nine Months Ended September 30, 2000
(in thousands, except per share data)
<CAPTION>
Focus Videonics Pro forma Pro forma
Actual Actual Adjustments Combined
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Net revenues .......................................... $ 12,130 $ 9,087 -- $ 21,217
Cost of goods sold .................................... 8,379 5,538 $ (167)(I,K) 13,750
-------- -------- -------- --------
Gross profit .......................................... 3,751 3,549 167 7,467
-------- -------- -------- --------
Operating expenses:
Sales, marketing and support .......................... 2,748 2,275 (58)(I,K) 4,965
General and administrative ............................ 2,377 758 9 (I,K) 3,144
Research and development .............................. 758 1,619 (97)(I,K) 2,280
Depreciation and amortization ......................... 733 -- 1,604 (H,I) 2,337
Restructuring expense ................................. 202 -- -- 202
-------- -------- -------- --------
Total operating expenses .............................. 6,818 4,652 1,458 12,928
-------- -------- -------- --------
Loss from operations .................................. (3,067) (1,103) (1,291) (5,461)
Interest expense, net ................................. (58) (91) -- (149)
Other income, net ..................................... 67 -- -- 67
CRA judgement expense ................................. (2,148) -- -- (2,148)
-------- -------- -------- --------
Loss before income taxes .............................. (5,206) (1,194) (1,291) (7,691)
Income tax expense .................................... (2) -- -- (2)
-------- -------- -------- --------
Net Loss .............................................. $ (5,208) $ (1,194) $ (1,291) $ (7,693)
======== ======== ======== ========
Basic and diluted net loss per share .................. $ (0.21) $ (0.20) $ (0.26)
======== ======== ========
Number of shares used in basic and
diluted computation .................................. 25,003 5,896 30,135
======== ======== ========
<FN>
See accompanying notes to unaudited pro forma combined
condensed consolidated financial information.
</FN>
</TABLE>
71
<PAGE>
<TABLE>
Unaudited Pro Forma Condensed Consolidated
Statement of Operations
For the Year Ended December 31, 1999
(in thousands, except per share data)
<CAPTION>
Focus Videonics Pro forma Pro forma
Actual Actual Adjustment Combined
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues .......................................... $ 17,183 $ 14,226 -- $ 31,409
Cost of goods sold .................................... 10,544 8,815 $ (403)(I,K) 18,956
-------- -------- -------- --------
Gross profit .......................................... 6,639 5,411 403 12,453
-------- -------- -------- --------
Operating expenses:
Sales, marketing and support .......................... 3,970 3,875 (185)(I,K) 7,660
General and administrative ............................ 1,878 1,219 6 (I,K) 3,103
Research and development .............................. 1,401 2,879 (351)(I,K) 3,929
Depreciation and amortization ......................... 557 -- 2,655 (H,I) 3,212
-------- -------- -------- --------
Total operating expenses .............................. 7,806 7,973 2,125 17,904
-------- -------- -------- --------
Loss from operations .................................. (1,167) (2,562) (1,722) (5,451)
Interest expense, net ................................. (531) (72) -- (603)
Other income, net ..................................... 218 -- -- 218
-------- -------- -------- --------
Loss before income taxes .............................. (1,480) (2,634) (1,722) (5,836)
Income tax expense .................................... -- -- -- --
-------- -------- -------- --------
Net Loss .............................................. $ (1,480) $ (2,634) $ (1,722) $ (5,836)
======== ======== ======== ========
Basic and diluted net loss per share .................. $ (0.08) $ (0.45) $ (0.24)
======== ======== ========
Number of shares used in basic and
diluted computation .................................. 18,744 5,866 23,876
======== ======== ========
<FN>
See accompanying notes to unaudited pro forma combined
condensed consolidated financial information.
</FN>
</TABLE>
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<PAGE>
Notes To Unaudited Pro Forma Combined Condensed Financial
Statements of Focus and Videonics
1. Basis of Pro Forma Presentation
On August 30, 2000, Videonics agreed to merge with Focus, in a
transaction accounted for as a purchase. The total purchase price of $9.1
million included consideration of 5.1 million shares of Focus common stock, the
issuance of 689,000 of Focus stock options valued at $423,000 in exchange for
Videonics options and estimated direct transaction costs of $695,000.
The Focus Pro Forma Combined Condensed Consolidated Financial
Statements provide for the exchange of 0.87 shares of Focus common stock for
each outstanding share of Videonics common stock. The actual number of shares of
Focus common stock to be issued will depend on the actual number of shares of
Videonics common stock outstanding on the date the merger closes. The average
market price per share of Focus common stock of $1.55 is based on the average
closing price for a range of trading days (August 28, 2000 through September 5,
2000) around the announcement date (August 31, 2000) of the merger. Based on the
total number of Videonics options outstanding at August 31, 2000 Focus would
issue options to purchase 689,000 shares of Focus common stock at a weighted
average exercise price of $1.34. The actual number of options granted depends on
the actual number of Videonics options outstanding on the date the merger
closes. The estimated fair value of vested options, as well as estimated direct
transaction expenses of $695,000, have been included as a part of the total
estimated purchase cost.
The total purchase cost of the Videonics merger is estimated as follows
(in thousands):
Value of common shares issued .............................. $7,974
Assumption of Videonics options ............................ 423
Estimated transaction costs and expenses ................... 695
------
Total purchase cost ........................................ $9,092
======
<TABLE>
The purchase price allocation, which is preliminary and therefore
subject to change based on Videonics' final analysis, is as follows (in
thousands):
<CAPTION>
Annual Useful
Amount Amortization lives
---------- ---------------- --------
<S> <C> <C> <C>
Purchase Price Allocation:
Tangible Assets ................................. $ 5,472 n/a n/a
Intangible assets acquired:
Existing technology .......................... 3,495 $ 874 4 years
Assembled workforce .......................... 1,001 334 3 years
Tradename .................................... 317 79 4 years
Goodwill ..................................... 1,715 343 5 years
In-process research and development .......... 387 n/a n/a
Long-term debt .................................. (1,035) n/a n/a
Other liabilities ............................... (2,260) n/a n/a
-------- -------
Net estimated purchase price allocation ......... $ 9,092 $ 1,630
======== =======
</TABLE>
The tangible net assets acquired represent the historical net assets of
Videonics business as of September 30, 2000. As required under purchase
accounting, the assets and liabilities of Videonics have been adjusted to fair
value.
Focus performed an allocation of the total purchase price of Videonics
to its individual assets acquired and liabilities assumed. Of the total purchase
price, $387,000 has been allocated to in-process research and development and
will be charged to expense in the period the transaction closes. Due to its
non-recurring nature, the in-process research and development attributed to the
Videonics transaction has been excluded from the pro forma statements of
operations. However, it is reflected in the pro forma balance sheet.
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<PAGE>
Notes To Unaudited Pro Forma Combined Condensed Financial
Statements of Focus and Videonics
In addition to the value assigned to the in-process research and
development projects, Videonics' tangible assets and specific intangible assets
were identified and valued. The related amortization of the identifiable
intangible assets is reflected as a pro forma adjustment to the Unaudited Pro
Forma Condensed Combined Statements of Operations. The identifiable intangible
assets include existing technology, deferred compensation, tradename, and
assembled workforce.
A portion of the purchase price has been allocated to developed
technology and in-process research and development ("IPRD"). Developed
technology and IPRD were identified and valued through extensive interviews,
analysis of data provided by the Videonics business concerning development
projects, their stage of development, the time and resources needed to complete
them, if applicable, their expected income generating ability and associated
risks. The income approach, which includes an analysis of the cash flows, and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing the developed technology and IPRD.
Where development projects had reached technological feasibility, they
were classified as developed technology and the value assigned to developed
technology was capitalized. The developed technology is being amortized on a
straight-line basis over its estimated useful life of four years.
Where the development projects had not reached technological
feasibility and had no future alternative uses, they were classified as IPRD,
which will be expensed upon the consummation of the merger. The value was
determined by estimating the expected cash flows from the projects once
commercially viable, discounting the net cash flows back to their present value
and then applying a percentage of completion to the calculated value as defined
below.
o Net cash flows. The net cash flows from the identified projects
are based on estimates of revenue, cost of sales, research and
development costs, selling, general and administrative costs and
income taxes from those projects. These estimates are based on
the assumptions mentioned below. The research and development
costs included in the model reflect costs to sustain projects,
but exclude costs to bring in-process projects to technological
feasibility.
The estimated revenue is based on projections of Videonics business for
each in-process project. These projections are based on its estimates of market
size and growth, expected trends in technology and the nature and expected
timing of new product introductions by the Videonics business and its
competitors.
Projected gross margins and operating expenses approximate the
Videonics business' recent historical levels.
o Discount rate. The discount rate employed in valuing the
developed, core and in process technologies range from 15% to 25%
and are consistent with the implied transaction discount rate. A
higher discount rate was used in valuing the IPRD, due to
inherent uncertainties surrounding the successful development of
the IPRD, market acceptance of the technology, the useful life of
such technology and the uncertainty of technological advances
which could potentially impact the estimates described above.
o Percentage of completion. The percentage of completion for each
project was determined using costs incurred to date on each
project as compared to the remaining research and development to
be completed to bring each project to technological feasibility.
The percentage of completion varied by individual project ranging
from 10% to 75%.
If the projects discussed above are not successfully developed, the
sales and profitability of the combined company may be adversely affected in
future periods.
The acquired assembled workforce is comprised of manufacturing,
research and development and sales, general and administrative employees. The
value of the assembled workforce was derived by estimating the costs to replace
the existing employees, including recruiting, hiring and training costs for each
category of employee. The value of the assembled workforce is being amortized on
a straight-line basis over its estimated useful life of three years.
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<PAGE>
Notes To Unaudited Pro Forma Combined Condensed Financial
Statements of Focus and Videonics
The Videonics tradename has been in use for over 13 years. Following
the merger, certain of Focus' products will continue to sold under the Videonics
tradename Videonics is known as a leading provider of digital video products
throughout the world. In estimating the value of the tradename, the relief from
royalty method was employed. The relief from royalty method is based on the
assumption that in lieu of ownership, a firm would be willing to pay a royalty
in order to exploit the related benefits of the assets. Therefore, a portion of
Focus' earnings, equal to the after-tax royalty that would have been paid for
the use of the trademark and tradename, can be attributed to Focus' possession
of the trademark and tradename. The trademark and tradename are each being
amortized on a straight-line basis over its estimated useful life of four years.
Goodwill represents the excess of the purchase price over the fair value of the
underlying net identifiable assets.
2. Pro Forma Adjustments
The Focus Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements give effect to the allocation of the total purchase cost to the
assets and liabilities of Videonics based on their respective fair values and to
amortization of the fair value over the respective useful lives. The pro forma
combined provision (benefit) for income taxes does not represent the amounts
that would have resulted had Focus and Videonics filed consolidated income tax
returns during the periods presented. The following pro forma adjustments have
been made to the unaudited pro forma combined condensed consolidated financial
statements:
(A) To record the estimated fair value of intangible assets as
described in Note 1. Includes the following:
Existing technology ................................... $3,495,000
Assembled workforce ................................... 1,001,000
Tradename ............................................. 317,000
Goodwill .............................................. 1,715,000
----------
$6,528,000
==========
(B) To reflect estimated direct transaction expenses of $695,000.
(C) To eliminate the historical common stock account of Videonics and
to record the par value of common stock of $51,000 to be issued
upon the closing of the merger.
(D) To record the anticipated value of 5.1 million shares of Focus's
common stock valued at approximately $7,974,000 (reduced by the
par value of such stock of $51,000 and the assumption of the
outstanding Videonics options valued at approximately $606,000.
(E) To eliminate the historical accumulated deficit account of
Videonics.
(F) To record the in-process research and development of $387,000,
which is, treated as an expense and therefore increases the
accumulated deficit.
(G) To record deferred compensation of $183,000 related to the
unvested options assumed in the merger.
(H) To record the amortization of identifiable intangible assets and
goodwill related to the acquisition of Videonics as if the
transaction occurred January 1, 1999.
(I) To reclassify depreciation expense to conform to Focus
presentation.
(J) To record $1,200,000 of estimated restructuring costs to be
incurred to integrate the two companies. These costs are
primarily related to severance, lease abandonment and asset
disposal.
75
<PAGE>
Notes To Unaudited Pro Forma Combined Condensed Financial
Statements of Focus and Videonics
(K) To record the amortization expense associated with the deferred
compensation related to unvested options totaling $91,500 and
$68,625 for the twelve month and nine month period, respectively.
Deferred tax assets totaling $1.9 million associated with non-goodwill
intangibles was recorded but was offset completely by a $1.9 million increase in
the valuation allowance against deferred tax assets.
The pro forma combined consolidated financial statements include a
non-recurring expense arising from a $2.1 million judgement rendered on October
10, 2000 against Focus and in favor of CRA Systems Inc.
3. Pro Forma Net Loss Per Share
The pro forma basic and dilutive net loss per share are based on the
weighted average number of shares of pro forma Focus common stock outstanding
during each period plus the shares assumed to be issued in exchange for the
outstanding shares of Videonics. Dilutive securities including the replacement
Videonics options are not included in the computation of pro forma dilutive net
loss per share as their effect would be anti-dilutive.
4. Subsequent Event
On October 26, 2000 Focus issued a secured promissory note in the
approximate principal amount of $2.3 million to Carl Berg, a shareholder and
director of Videonics. The promissory note was issued in connection with a loan
made to Focus by Mr. Berg for the purpose of collateralizing the $2.3 million
bond to be posted in connection with the CRA litigation, as described above. The
promissory note has a term of three years and bears interest at a rate of prime
plus 1%. The principal amount of the note will be due at the end of its term,
with interest to be paid quarterly. Under certain circumstances, including at
the election of Mr. Berg and Focus, the promissory note is convertible into
shares of Focus common stock generally equal to the value of the promissory note
and any accrued and unpaid interest. In the event the merger is not completed,
the promissory note can be called and become payable in full upon 90-days notice
from Mr. Berg, at his sole discretion. The promissory note is secured by a
security agreement in favor of Mr. Berg granting him a security interest in
first priory over substantially all of the assets of Focus.
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<PAGE>
COMPARISON OF SHAREHOLDER RIGHTS OF FOCUS AND VIDEONICS
This section of the joint proxy statement/prospectus describes certain
differences between the rights of holders of Focus common stock and Videonics
common stock. While we believe that the description covers the material
differences between the two, this summary may not contain all of the information
that is important to you. You should carefully read this entire document and the
other documents we refer to for a more complete understanding of the differences
between being a shareholder of Focus and being a shareholder of Videonics.
Applicable State Corporate Law
Videonics is incorporated under the laws of the State of California and
is governed by the California General Corporation Law. Focus is incorporated
under the laws of the State of Delaware and is governed by the General
Corporation Law of the State of Delaware. As a result of this difference in
governing law, shareholders of Videonics receiving shares of Focus common stock
may have statutory rights different than those associated with shares of
Videonics common stock.
Important differences between the General Corporation Law of the State
of California and the General Corporation Law of the State of Delaware include,
but are not limited to, the following:
o Delaware law allows a corporation to limit directors' liability
and indemnify directors against claims to a greater extent than
is permitted under California law.
o Delaware law allows a corporation to take more extensive
anti-takeover measures than are permitted under California law,
including allowing a Delaware corporation to eliminate special
shareholder meetings and to elect a classified board of
directors.
o Delaware law includes a specific anti-takeover statute that
prevents certain business combinations not approved by the
incumbent board. California law has no analogous statute.
In addition, Delaware law and California law differ in their treatment
of appraisal or dissenters rights, the payment of dividends, and shareholder
voting related to business combinations and combinations.
As a Delaware corporation, Focus is subject to the provisions of
Section 203 of the General Corporation Law of the State of Delaware. Under
certain circumstances, the provisions of Section 203 may make the consummation
of various business transactions by "interested shareholders," as defined in
Section 203, with Focus more difficult for a three-year period following the
time that a shareholder becomes an "interested shareholder." A corporation may
waive the protective provisions of Section 203 in its certificate of
incorporation or bylaws, but Focus has not currently done so.
Authorized and Outstanding Capital Stock
Videonics has two classes of authorized capital stock, designated
"common stock" and "preferred stock." Videonics is authorized to issue
30,000,000 shares of common stock and, as of November 10, 2000, there were
5,902,550 shares of common stock outstanding. Videonics is also authorized to
issue 10,000,000 shares of preferred stock, with such rights, preferences and
designations that the board of directors of Videonics may determine. Currently
there are no outstanding shares of Videonics preferred stock.
Focus has two classes of authorized capital stock, designated "common
stock" and "preferred stock," each with a par value of $0.01 per share. Focus is
authorized to issue 30,000,000 shares of common stock. Focus is also authorized
to issue 3,000,000 shares of preferred stock, with such rights, preferences and
designations that the board of directors of Focus may determine. The rights of
the holders of Focus' common stock will be subject to, and may be adversely
affected by, the rights of holders of any preferred stock that may be issued in
the future. Also, any issuance of preferred stock could make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the outstanding voting stock of Focus. There are currently no
outstanding shares of Focus preferred stock.
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<PAGE>
Voting Rights
Holders of Focus common stock are also entitled to one vote on all
matters submitted to Focus shareholders for their approval for each share held.
However, holders of Focus common stock are not entitled to cumulate votes for
the election of directors. Pursuant to Focus's bylaws, all matters submitted to
the shareholders (including the election of directors) must be approved by a
majority of the votes cast in a meeting where a quorum is present.
Except with respect to the election of directors, holders of Videonics
common stock are entitled to one vote on all matters submitted to Videonics
shareholders for their approval for each share of common stock held. Under
certain circumstances, holders of Videonics common stock are entitled to
cumulate votes for the election of directors. Where votes are cumulated for the
election of directors, each holder of Videonics common stock is entitled to that
number of votes which is equal to the total number of shares of Videonics common
stock held, multiplied by the number of directors being elected. The cumulative
number of votes allotted to each Videonics shareholder using this formula may be
allocated by such shareholder in any manner, including for a single director, or
for two or more directors, at the discretion of such Videonics shareholder.
Under Videonics' bylaws, all matters submitted to the shareholders (including
the election of directors) must be approved by a majority of the votes cast in a
meeting where a quorum is present.
Directors
Number of Directors
Focus' Board of Directors currently consists of five (5) directors. The
number of directors is determined by resolution of the Board of Directors, but
cannot be less than three.
Videonics' Board of Directors currently consists of five (5) directors.
The bylaws of Videonics provides that the number of directors cannot be less
than three (3) nor more than five (5). The exact number of directors is fixed
from time to time by the Board of Directors or by the shareholders at the annual
meeting of shareholders.
Classified Board of Directors
Delaware law provides that a corporation's board of directors may be
divided into various classes with staggered terms of office. Focus' Board of
Directors is divided into three classes, as nearly equal in size as possible,
with one class elected annually. Focus directors are elected for a term of three
years. The term of each director is subject to the election and qualification of
the director's successor and to the director's earlier death, resignation or
removal. Focus' classified Board of Directors may make it more difficult for a
third party to gain control of Focus.
The classified structure of Focus' Board of Directors serves to ensure
continuity and stability in a corporation's leadership in part because, at any
time, at least two-thirds of the board has had prior experience on the board.
The structure also would moderate the pace of any change in control of Focus
because all directors' terms do not expire at the same time, which extends the
time required to elect a majority of the board.
Videonics' Board of Directors is not divided into different classes.
Members of Videonics' Board of Directors are elected by a majority of the votes
cast at the annual meeting of shareholders. Videonics directors are elected
until the next annual meeting of shareholders and until their successors are
elected and qualified or their earlier resignation or removal.
Removal of Directors
Focus directors, or the entire Focus Board of Directors, may be removed
with or without cause. A director can be removed with cause by the holders of a
majority of the shares of Focus common stock then entitled to vote at the
election of directors. A director may be removed without cause by the holders of
at least seventy-five percent (75%) of the shares of Focus common stock then
entitled to vote at an election of directors.
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<PAGE>
Videonics directors, or the entire Videonics Board of Directors, may be
removed with or without cause by the affirmative vote of the holders of a
majority of the shares of Videonics common stock then entitled to vote at an
election of directors.
Filling Vacancies on the Board of Directors
Except as otherwise required by the Certificate of Incorporation or the
Delaware General Corporation Law, any vacancies in Focus' Board of Directors,
however occurring, or any newly-created directorship resulting from an increase
in the number of seats on the Focus Board of Directors, will be filled by vote
of a majority of the directors then in office, even if less than a quorum, or by
the sole remaining director. Vacancies in Focus' Board of Directors will not be
filled by shareholders. Newly created directorships or decreases in
directorships in Focus' Board of Directors will be apportioned among the classes
of directors so as to make all classes as nearly equal in number as practicable.
To the extent reasonably possible, any newly created Focus directorship
will be added to the class of directors whose term of office is to expire at the
latest date following the creation of that directorship, unless otherwise
provided for by resolution of the majority of the directors then in office. Any
eliminated Focus directorship will be subtracted from the class whose office is
to expire at the earliest date following the elimination of the directorship,
unless otherwise provided for by resolution of the majority of the directors
then in office.
A vacancy or vacancies in Videonics' Board of Directors shall be deemed
to exist in the case of the death, resignation or removal of any director, or if
the Board of Directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors be increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting. Videonics' bylaws provide that any vacancy on
Videonics' board of directors may be filled by the remaining members of the
board of directors (even if less than a quorum), or the sole remaining director,
except that any vacancies created by removal of a director by vote of the
shareholders or court order may only be filled by a vote of the shareholders. In
addition, the shareholders may fill any vacancies not filled by the directors.
Shareholder Action by Written Consent
Focus shareholders may take action at annual or special meetings of
shareholders, or by the written consent of shareholders having no less than the
minimum number of votes that would be necessary to take such action at a meeting
at which all shares entitled to vote on the matter were present and voted.
Videonics shareholders must take action at annual or special meetings
of shareholders. No action can be taken by the written consent of shareholders.
Ability to Call Special Meetings
Special meetings of Focus shareholders may be called only by Focus'
Board of Directors, the chairman of the Focus Board of Directors, the President,
or by the affirmative vote of a majority of the Focus Board of Directors or by
shareholders entitled to cast not less than 10% of the vote at such meetings.
Special meetings of Videonics shareholders may be called only by the
Videonics' Board of Directors, the chairman of the Videonics Board of Directors,
its president, or any holders of not less than 10% of the capital stock of
Videonics.
Advance Notice Provisions for Shareholder Nominations and Proposals
Focus' bylaws allow shareholders to nominate candidates for election to
Focus' Board of Directors or to propose business to be transacted at an annual
shareholder meeting. However, such
79
<PAGE>
nominations and proposals may only be made by a shareholder who has given timely
written notice to the secretary of Focus before the annual shareholder meeting
in the manner described below.
Under Focus' bylaws, to be timely, notice of shareholder nominations or
proposals to be made at an annual shareholder meeting must be delivered to the
secretary of Focus not less than 60 days nor more than 90 days before the first
anniversary of the preceding year's annual shareholder meeting. However, if the
date of the annual meeting is moved ahead more than 30 days before or delayed by
more than 60 days after the anniversary of the preceding year's annual
shareholder meeting, notice to be timely must be delivered not earlier than the
close of business on (i) the 90th day prior to such annual meeting and not later
than the close of business on the later of the (ii) the 60th day prior to such
annual meeting; or (iii) the 10th day following the day on which public
announcement of the date of such meeting is first made.
Shareholder nominations and proposals will not be brought before any
Focus shareholder meeting unless the nomination or proposal was brought before
the meeting in accordance with Focus' shareholder advance notice procedure, as
set forth in the Bylaws.
Videonics' bylaws allow shareholders to nominate candidates for
election to Videonics' Board of Directors or to propose business to be
transacted at an annual shareholder meeting. However, such nominations and
proposals may only be made by a shareholder who has given timely written notice
to the secretary of Videonics before the annual shareholder meeting in the
manner described below.
Under Videonics' bylaws, to be timely, notice of shareholder
nominations or proposals to be made at an annual shareholder meeting must be
delivered to the secretary of Videonics not less than 120 days in advance of the
date specified in the proxy materials.
Videonics does not have a provision in its Articles of Incorporation or
bylaws requiring advance notice or a specific procedural process for shareholder
nominations of candidates for election to the Videonics Board of Directors or
for shareholder proposals before Videonics' annual shareholder meeting. However,
certain procedures must be met for nominations.
Amendment of Articles/Certificate of Incorporation
Under Delaware law, a certificate of incorporation of a Delaware
corporation may be amended by approval of the board of directors of the
corporation and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote for the amendment, unless a higher vote is
required by the corporation's certificate of incorporation. In addition, the
Certificate of Incorporation of Focus requires, for certain amendments to the
Certificate, the affirmative vote of the holders of shares of voting stock of
Focus representing at least seventy-five percent (75%) of voting power of all of
the then outstanding shares of the capital stock entitled to vote generally in
the election of directors, voting together in a single class.
Under California law, the approval of the board of directors of a
California corporation and the affirmative vote of the holders of a majority of
the outstanding shares entitled to vote generally is required for amendment of
the articles of incorporation unless a higher vote is required by the
corporation's articles of incorporation. Videonics does not currently have a
higher vote required by its Articles of Incorporation in order to amend such
documents.
Amendment of Bylaws
Under Delaware law, shareholders entitled to vote have the power to
adopt, amend or repeal bylaws. In addition, a corporation may, in its
certificate of incorporation, confer that power upon the board of directors. The
shareholders always have the power to adopt, amend or repeal bylaws, even though
the board may also be delegated that power.
Focus' by-laws may be amended or repealed by the affirmative vote of a
majority of the Focus Board of Directors at any meeting or by the affirmative
vote of the holders of eighty percent (80%) of the outstanding voting power of
the then outstanding shares of capital stock of Focus at any meeting at which a
proposal to amend or repeal the by-laws is properly presented.
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Videonics' bylaws may be amended or replaced by the vote of a majority
of the outstanding shares entitled to vote. Additionally, Videonics' Board of
Directors is authorized to alter, amend and repeal Videonics' bylaws at any
meeting of the board. Its bylaws do not contain any supermajority voting
requirements for amendments. Holders of a majority of the outstanding shares of
Videonics common stock can also amend the by-laws by vote. This means that a
lower vote is required to change Videonics' bylaws than is required to change
Focus' bylaws.
Limitation of Liability of Directors
Focus's certificate of incorporation provides that the personal
liability of Focus's directors to Focus and its shareholders for monetary
damages arising out of a breach of the directors' fiduciary duties has been
expressly eliminated to the fullest extent permitted by the General Corporation
Law of the State of Delaware. In addition, Focus's certificate of incorporation
provides that if the General Corporation Law of the State of Delaware is amended
to authorize the further elimination or limitation of the liability of a
director, then the liability of Focus's directors will be eliminated or limited
to the fullest extent permitted by the General Corporation Law of the State of
Delaware as so amended. Currently, the General Corporation Law of the State of
Delaware permits a corporation to include a provision in its certificate of
incorporation or bylaws enabling the corporation to limit or eliminate the
personal liability of its directors to the corporation or its shareholders for
damages arising out of a breach of the directors' fiduciary duties, subject to
certain limitations.
Videonics' articles of incorporation provide that the personal
liability of Videonics' directors to Videonics and its shareholders for monetary
damages arising out of a breach of the directors' fiduciary duties has been
expressly eliminated to the fullest extent permitted by the Corporation Law of
the State of California. Currently, the Corporation Law of the State of
California permits a corporation to include a provision in its articles of
incorporation or bylaws enabling the corporation to limit or eliminate the
personal liability of its directors to the corporation for damages arising out
of a breach of the directors' fiduciary duties, subject to certain limitations.
The limitation of liability permitted by California law does not apply to
actions brought directly by shareholders (such as a shareholder class action
lawsuit) or to liabilities resulting from "acts or omissions that show a
reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders" or "acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders."
While these provisions provide the directors of Videonics and Focus
with protection against awards for monetary damages arising out of a breach of
fiduciary duties, they do not eliminate the duty itself. Accordingly, these
provisions will have no effect on the availability of equitable remedies such as
an injunction or rescission based upon a director's breach of his or her
fiduciary duties.
Indemnification of Directors and Officers
The General Corporation Law of the State of Delaware permits a
corporation to indemnify its directors, officers, employees and agents for any
liability arising out of an action or threatened action, other than an action by
or in the right of the corporation, to which such person is a party due to his
or her service as a director, officer, employee or agent, provided that such
person acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation, and with respect
to any criminal action, which he or she had no reason to believe was unlawful.
Focus' Certificate of Incorporation provides for the indemnification of
its directors and officers. The indemnification provisions state that any person
who was or is a party or is threatened to be made a party to any action, suit,
or proceeding, whether civil, criminal, administrative or investigative, other
than an action or suit brought by Focus, because that person either:
o is or was a director or officer of Focus; or
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o is or was serving at the request of Focus, as a director, officer
or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan), will be
indemnified against expenses, including attorney's fees,
judgements, fines, and amounts paid in settlement actually and
reasonably incurred by him or her in connection with the action,
suit or proceeding, and any appeal therefrom, to the fullest
extent permitted by Delaware law. These indemnification rights
are not exclusive of any other right to which persons seeking
indemnification may be entitled under any law (common or
statutory), agreement, vote of shareholders or disinterested
directors or otherwise.
In the case of any action or suit by Focus to procure a judgment in its
favor, no indemnification will be made (i) except for expenses, including
attorneys' fees, or (ii) relating to any claim, issue or matter as to which the
director or officer has been judged to be liable to Focus, unless and only to
the extent that the Court of Chancery of Delaware determines that, despite the
adjudication of liability but in view of all of the circumstances of the case,
the director, officer or trustee is entitled to indemnity for such expenses
which the court finds proper.
Additionally, Focus may pay expenses incurred by its directors,
officers or trustees in defending a civil or criminal action, suit or proceeding
in advance of the final disposition of that action, suit or proceeding. However,
those payments will be made only if Focus receives an undertaking by or on
behalf of the director, officer or trustee, to repay all amounts advanced if it
is ultimately determined that he or she is not entitled to be indemnified by
Focus.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Videonics' articles of incorporation limit the liability of directors
to the full extent permitted by California law. California law provides that a
corporation's articles of incorporation may eliminate or limit the personal
liability of directors for monetary damages for breach of their fiduciary duties
as directors, except liability for:
o acts of omissions that involve intentional misconduct or a
knowing and culpable violation of law;
o acts or omissions that a director believes to be contrary to the
best interest of Videonics or its shareholders or that involve
the absence of good faith on the part of the director;
o any transaction from which a director derived an improper
personal benefit;
o acts or omissions that show a reckless disregard for the
director's duty to Videonics or Videonics' shareholders in
circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to Videonics or its
shareholders;
o acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty
to Videonics or its shareholders;
o unlawful payments of dividends or unlawful stock repurchases or
redemptions, unlawful distribution of assets to shareholders or
unlawful loans or guarantees to directors, officers and others;
or
o any transaction between a director and Videonics.
Videonics' bylaws provide that it will indemnify its directors,
officers, employees or other agents to the fullest extent permitted by
California law, including circumstances in which indemnification is
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otherwise discretionary under California law. Videonics has entered into
indemnification agreements with our directors and officers containing provisions
that are in some respects broader than the specific indemnification provisions
contained in the California Corporations Code. The indemnification agreements
may require Videonics:
o to indemnify its directors and officers against liabilities that
may arise by reason of their status or service as directors or
officers, other than liabilities arising from willful misconduct
of a culpable nature;
o to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified; and
o to obtain directors' and officers' insurance if available on
reasonable terms.
The Securities and Exchange Commission has advised that, in its
opinion, any indemnification of the directors and officers of Focus or Videonics
for liabilities arising under the Securities Act of 1933, as amended is against
public policy as expressed in the Act and is therefore unenforceable.
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EXPERTS
The consolidated financial statements of Focus as of December 31, 1999
and for the year ended have been incorporated in this joint proxy
statement/prospectus and in the Registration Statement by reference to our
Annual Report on Form 10-KSB/A for the year ended December 31, 1999, in reliance
on the report of Wolf & Company, P.C., independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Videonics as of December 31
1999 and 1998 and for each of the three years in the period ended December 31,
1999 incorporated in this Joint Proxy Statement/Prospectus by reference to the
Annual Report on Form 10-K for the year ended December 31, 1999 have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of Focus common stock to be issued to Videonics
shareholders pursuant to the merger and certain other legal matters in
connection with the merger will be passed upon for Focus by Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, PC, Boston, Massachusetts.
OTHER MATTERS
As of the date of this joint proxy statement/prospectus, management of
Focus and Videonics know of no other business that will come before their
respective annual meetings. Should any other matters properly come before the
annual meetings, the proxy in the enclosed form confers upon the person or
persons designated to vote the shares discretionary authority to vote the same
with respect to any other matter in accordance with the discretion of the Focus
and Videonics Boards of Directors.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Copies of
these materials can be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Our SEC filings are also available to the public from
the SEC's Website at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this joint proxy statement/prospectus, and information
that we file later with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings we will make with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934:
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Focus
The following documents filed by Focus with the SEC, are hereby
incorporated by reference into this joint proxy statement/prospectus:
o Notification of late filing of Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1999 on Form NT 10-K filed
with the Commission on March 30, 2000.
o Annual Report on Form 10-KSB for the fiscal year ended December
31, 1999, filed with the Commission on April 14, 2000.
o Annual Report on form 10-KSB/A for the fiscal year ending
December 31, 1999, filed with the Commission on May 1, 2000.
o Notification of late filing on Form 10-QSB for quarterly period
ended March 31, 2000 on Form NT-10Q, filed with the Commission on
May 15, 2000.
o Quarterly Report on Form 10-QSB for the quarterly period ended
March 31, 2000, filed with the Commission on May 22, 2000.
o Report on Form 8-K filed with the Commission on March 2, 2000
containing a press release announcing that the Focus board of
directors have formed a committee to review certain financial
control issues and determine the possible effects of such issues
on the financial statements of Focus for the year ended December
31, 1999 and prior periods.
o Notification of late filing of Form 10-QSB for quarterly period
ended June 30, 2000 on Form NT 10-Q, filed with the Commission on
August 15, 2000.
o Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 2000, filed with the Commission on August 21, 2000.
o Current report on Form 8-K filed with the Commission on September
8, 2000 containing a press release announcing the execution of
the merger agreement and a copy of the merger agreement.
o Current report on Form 8-K filed with the Commission on October
31, 2000 to announce the issuance of a secured promissory note in
the principal amount of $2.3 million in order to collateralize a
$2.3 million bond to be posted in connection with Focus'
litigation with CRA Systems, Inc. Focus also announced that it
had submitted a supersedeas bond in the Federal District Court of
Waco, Texas to suspend the enforcement of a $1.8 million
judgement in favor of CRA Systems, Inc.
o Current report on Form 8-K/A filed with the Commission on
November 2, 2000 to attach additional exhibits to the previously
filed Form 8-K, filed on October 31, 2000.
o Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000, filed with the Commission on November 14,
2000.
You may request a copy of these filings, at no cost, by writing or
telephoning Focus at the following address:
Focus Enhancements, Inc.
Attention: Investor Relations
600 Research Drive
Wilmington, Massachusetts 01887
(978) 988-5888.
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Videonics
The following documents filed by Videonics with the SEC, are hereby
incorporated by reference into this joint proxy statement/prospectus:
o Annual report on Form 10-K for the fiscal year ended December 31,
1999, filed with the Commission on March 29, 2000.
o Annual report on Form 10-K/A for the fiscal year ended December
31, 1999, filed with the Commission on April 28, 2000.
o Quarterly report on Form 10-Q for the quarter ended March 31,
2000, filed with the Commission on May 11, 2000.
o Quarterly report on Form 10-Q for the quarter ended June 30,
2000, filed with the Commission on August 14, 2000.
o Report on Form 8-K filed with the Commission on September 8, 2000
containing a press release announcing the execution of the merger
agreement and a copy of the merger agreement.
o Quarterly report on Form 10-Q for the quarter ended September 30,
2000, filed with the Commission on November 14, 2000.
You may request a copy of these filings at no cost, by writing or
telephoning Videonics at the following address:
Videonics, Inc.
Attention: Investor Relations
1370 Dell Avenue
Campbell, California 95008
(408) 866-8300.
This joint proxy statement/prospectus is part of a registration
statement we have filed with the Securities and Exchange Commission. You should
rely only on the information or representations provided in this joint proxy
statement/prospectus. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
ACCOMPANYING DOCUMENTS
This joint proxy statement/prospectus includes copies of Focus' and
Videonics' Annual Reports on Form 10-KSB/A and 10-K, respectively, for the year
ended December 31, 1999 and Focus' and Videonics' Quarterly Reports on Form
10-Q, for the quarter ended September 30, 2000. See Appendices F, G, H, and I.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER DATED AS OF AUGUST 30, 2000
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of August
30, 2000, is entered into by and among Focus Enhancements, Inc., a Delaware
corporation ("Focus"), PC Video Conversion, Inc., a Delaware corporation and a
wholly owned subsidiary of Focus ("Merger Subsidiary"), and Videonics, Inc., a
California corporation ("Videonics").
Whereas, the Board of Directors of each of Focus, Merger Subsidiary and
Videonics has determined that it is in the best interests of its shareholders
that Focus and Videonics enter into a business combination under which a
subsidiary of Focus will merge with and into Videonics pursuant to the Merger
(as defined in Section 1.1 hereof);
Whereas, upon completion of the Merger, vacancies on the Board of Directors
of Focus shall be filled by persons appointed by the Board of Directors of Focus
such that the Board of Directors of Focus consists of seven persons, four of
whom shall be nominated by Focus and three of whom shall be nominated by
Videonics;
Whereas, upon completion of the Merger, Michael D'Addio, the Chief
Executive Officer of Videonics, shall be appointed as the President and Chief
Executive Officer of Focus;
Whereas, the Board of Directors of each of Focus, Merger Subsidiary and
Videonics has determined that the Merger and the other transactions contemplated
hereby are consistent with, and in furtherance of, its respective business
strategies and goals and has approved the Merger upon the terms and conditions
set forth herein; and
Whereas, for federal income tax purposes, it is intended that the Merger
shall constitute a tax-free reorganization.
Now, therefore, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. At the Effective Time (as defined in Section 1.2
hereof) and subject to and upon the terms and conditions of this Agreement, the
Delaware Corporation Law ("DCL") and the California Corporate Law ("CCL"),
Merger Subsidiary will be merged with and into Videonics (the "Merger"), whereby
the separate corporate existence of Merger Subsidiary shall cease and Videonics
shall continue as the surviving corporation which shall be a subsidiary of
Focus. Videonics as the surviving corporation after the Merger is herein
sometimes referred to as the "Surviving Corporation" and Merger Subsidiary as
the non-surviving corporation after the Merger is herein sometimes referred to
as the "Merged Corporation." Videonics, Focus and Merger Subsidiary are herein
referred to collectively as the "Parties" and each individually as a "Party."
Section 1.2 Effective Time. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VII hereof and the
consummation of the Closing referred to in Section 2.9 hereof, the Parties shall
cause the Merger to be consummated by filing a Certificate of Merger with the
Secretary of State of the State of Delaware with respect to the Merger, in such
form as required by, and executed in accordance with, the relevant provisions of
the DCL and CCL (the time of such filing being the "Effective Time").
Section 1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the DCL and CCL.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
Videonics and Merger Subsidiary shall continue with, or vest in, as the case may
be, Videonics as the Surviving Corporation, and all debts, liabilities and
duties of Videonics and Merger Subsidiary shall continue to be, or become, as
the case may be, the debts, liabilities and duties of Videonics as the Surviving
Corporation. As of the Effective Time, the Surviving Corporation shall be a
direct subsidiary of Focus.
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Section 1.4 Subsequent Actions. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to continue in, vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties, privileges, franchises or assets of either of its
constituent corporations acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger or otherwise to carry out this
Agreement, the officers and directors of the Surviving Corporation shall be
directed and authorized to execute and deliver, in the name and on behalf of
either of such constituent corporations, all such deeds, bills of sale,
assignments and assurances and to take and do, in the name and on behalf of each
of such corporations or otherwise, all such other actions and things as may be
necessary or desirable to vest, perfect or confirm any and all right, title and
interest in, to and under such rights, properties, privileges, franchises or
assets in the Surviving Corporation or otherwise to carry out this Agreement.
Section 1.5 Certificate of Incorporation; Bylaws; Directors and Officers of
Surviving Corporation. Unless otherwise agreed by Videonics and Focus before the
Effective Time, at the Effective Time:
(a) the Certificate of Incorporation of Videonics as the Surviving
Corporation shall be the Articles of Incorporation of Videonics as in effect
immediately prior to the Effective Time, until thereafter amended as provided
by Law and such Certificate of Incorporation;
(b) the bylaws of Videonics as the Surviving Corporation shall be the
bylaws of Videonics immediately prior to the Effective Time, until thereafter
amended as provided by Law and the Certificate of Incorporation and the
bylaws of such Surviving Corporation; and
(c) the directors and officers of Videonics immediately prior to the
Effective Time shall continue to serve in their respective offices of the
Surviving Corporation from and after the Effective Time, in each case until
their successors are elected or appointed and qualified or until their
resignation or removal. If at the Effective Time a vacancy shall exist on the
Board of Directors or in any office of the Surviving Corporation, such
vacancy may thereafter be filled in the manner provided by Law and the bylaws
of the Surviving Corporation.
ARTICLE II
EFFECT ON STOCK OF THE SURVIVING CORPORATION AND
THE MERGED CORPORATION
Section 2.1 Conversion of Securities. The manner and basis of converting
the shares of common stock of the Surviving Corporation and of the Merged
Corporation at the Effective Time, by virtue of the Merger and without any
action on the part of any of the Parties or the holder of any of such
securities, shall be as hereinafter set forth in this Article II.
Section 2.2 Conversion of Shares.
(a) Subject to Section 2.7, each share of common stock, no par value, of
Videonics ("Videonics Common Stock") issued and outstanding immediately
before the Effective Time (excluding those canceled pursuant to Section 2.3)
and all rights in respect thereof, shall at the Effective Time, without any
action on the part of any holder thereof, be converted into and become 0.87
shares of common stock, par value $0.01 per share, of Focus ("Focus Common
Stock"), provided that any Dissenting Shares (as defined in Section 2.13)
shall dealt with as provided in Section 2.13. Such ratio of Videonics Common
Stock to Focus Common Stock is herein referred to as the "Exchange Ratio."
(b) As of the Effective Time, all shares of Videonics Common Stock
converted pursuant to Section 2.2(a) shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate (each, an "Old Certificate") representing any such
shares of Videonics Common Stock shall cease to have any rights with respect
thereto, except the right to receive shares of Focus Common Stock, in
accordance with Section 2.2(a), certain dividends or other distributions in
accordance with Section 2.7(d) and any cash in lieu of fractional shares of
Focus Common Stock to be issued or paid in consideration therefor upon
surrender of such certificate in accordance with Section 2.6, without
interest.
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Section 2.3 Cancellation of Treasury Shares and Shares Owned by Focus and
Merger Subsidiary. At the Effective Time, each share of Videonics Common Stock
held in the treasury of Videonics or owned by Merger Subsidiary or Focus
immediately prior to the Effective Time shall be canceled and retired and no
shares of stock or other securities of Focus or the Surviving Corporation shall
be issuable, and no payment or other consideration shall be made, with respect
thereto.
Section 2.4 Conversion of Common Stock of the Merged Corporation into
Common Stock of the Surviving Corporation. At the Effective Time, each share of
common stock of Merger Subsidiary issued and outstanding immediately prior to
the Effective Time, and all rights in respect thereof, shall, without any action
on the part of Focus, forthwith cease to exist and be converted into one validly
issued, fully paid and nonassessable share of common stock, of the Surviving
Corporation (the "Surviving Corporation Common Stock"). Immediately after the
Effective Time and upon surrender by Focus of the certificates representing the
shares of the common stock of Merger Subsidiary, Videonics as the Surviving
Corporation shall deliver to Focus an appropriate certificate or certificates
representing the Surviving Corporation Common Stock created by conversion of the
common stock of Merger Subsidiary owned by Focus.
Section 2.5 Adjustments to Exchange Ratio. Without limiting any other
provision of this Agreement, the Exchange Ratio shall be correspondingly
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Focus Common Stock or Videonics Common Stock), reorganization, recapitalization,
reclassification, conversion, consolidation, contribution or exchange of shares,
any shelf-registration or other like change with respect to Focus Common Stock
or Videonics Common Stock occurring after the date hereof and prior to the
Effective Time.
Section 2.6 Fractional Shares. No fraction of a share of Focus Common Stock
will be issued hereunder, but in lieu thereof each holder of Videonics Common
Stock who would otherwise be entitled to a fraction of a share of Focus Common
Stock (after aggregating all fractional shares of Focus Common Stock to be
received by such holder) shall receive from Focus an amount of cash (rounded to
the nearest whole cent) equal to the product of such fraction multiplied by the
closing price for a share of Focus Common Stock on the NASDAQ Composite
Transaction Tape on the first trading day immediately following the Effective
Time.
Section 2.7 Surrender of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Focus shall designate a
bank or trust company to act as Exchange Agent in the Merger.
(b) Focus to Provide Common Stock. On or prior to the Effective Time,
Focus shall make available to the Exchange Agent for exchange in accordance
with this Article II, the shares of Focus Common Stock issuable pursuant to
Section 2.2 in exchange for outstanding Videonics Common Stock, together with
an estimated amount of cash to be paid pursuant to Section 2.6 in lieu of
fractional shares.
(c) Exchange Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to
the Effective Time represented outstanding shares of Videonics Common Stock
whose shares were converted into the right to receive shares of Focus Common
Stock pursuant to Section 2.2, a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Focus may reasonably specify) and instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing
shares of Focus Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions
thereto, the holder of such Certificate shall be entitled to receive in
exchange therefor, and Focus shall cause to be distributed, a certificate
representing the number of whole shares of Focus Common Stock and payment in
lieu of fractional shares which such holder has the right to receive pursuant
to Section 2.6, and the Certificate so surrendered shall forthwith be
canceled. Until so surrendered, each outstanding Certificate that, prior to
the Effective Time, represented shares of Videonics Common Stock will be
deemed from and after the Effective Time, for all corporate purposes, other
than the payment of dividends, to evidence the ownership of the number of
full shares of Focus Common Stock into which such Videonics Common Stock
shall have been so converted and the right to receive an amount in cash in
lieu of the issuance of any fractional shares in accordance with Section 2.6.
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Any portion of the shares of Focus Common Stock deposited with the Exchange
Agent pursuant to Section 2.7(b) which remains undistributed to the holders
of the Certificates representing Videonics Common Stock for twelve (12)
months after the Effective Time shall be delivered to Focus, upon demand, and
any holders of Videonics Common Stock who have not theretofore complied with
this Article II shall thereafter look only to Focus for Focus Common Stock,
any cash in lieu of fractional shares of Focus Common Stock and any dividends
or distributions with respect to Focus Common Stock to which such holders may
be entitled.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Focus Common Stock with a record date after the Effective Time will be paid
to the holder of any unsurrendered Certificate with respect to the shares of
Videonics Common Stock represented thereby until the holder of record of such
Certificate shall surrender such Certificate. Subject to applicable escheat
Law, following surrender of any such Certificate, there shall be paid to the
record holder of the certificates representing whole shares of Focus Common
Stock issued in exchange therefor, without interest, at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares
of Focus Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Focus Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly
endorsed and otherwise in proper form for transfer and that the Person
requesting such exchange will have paid to Focus, or any agent designated by
it, any transfer or other taxes required by reason of the issuance of a
certificate for shares of Focus Common Stock in any name other than that of
the registered holder of the certificate surrendered, or established to the
satisfaction of Focus or any agent designated by it that such tax has been
paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Agreement, none of the Exchange Agent, Focus, Merger Subsidiary or the
Surviving Corporation shall be liable to a holder of Videonics Common Stock
for any Focus Common Stock or any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar Law.
(g) Withholding of Tax. Focus or the Exchange Agent will be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Videonics Common Stock such amounts as Focus (or
any affiliate thereof) or the Exchange Agent shall determine in good faith
they are required to deduct and withhold with respect to the making of such
payment under the Internal Revenue Code of 1986, as amended (the "Code"), or
any provision of federal, state, local or foreign tax Law. To the extent that
amounts are so withheld by Focus or the Exchange Agent, such withheld amounts
will be treated for all purposes of this Agreement as having been paid to the
holder of the Videonics Common Stock in respect of whom such deduction and
withholding were made by Focus.
Section 2.8 Further Ownership Rights in Videonics Common Stock. All shares
of Focus Common Stock issued upon the surrender for exchange of Videonics Common
Stock in accordance with the terms of this Article II (including any cash paid
in respect thereof) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such Videonics Common Stock under this Article II, and
there shall be no further registration of transfers on the records of the
Surviving Corporation of Videonics Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article II.
Section 2.9 Closing. Unless this Agreement shall have been terminated and
the transactions contemplated by this Agreement abandoned pursuant to the
provisions of Article VIII, and subject to the provisions of Article VII, the
closing of the Merger (the "Closing") will take place at 10:00 a.m. (Eastern
time) on a date (the "Closing Date") to be mutually agreed upon by the parties,
which date shall be not later than the third Business Day after all the
conditions set forth in Article VII shall have been satisfied (or waived in
accordance with Section 8.4, to the extent the same may be waived), unless
another time and/or date is agreed to in writing by the parties. The Closing
shall take place at the offices of Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, PC, unless another place is agreed to in writing by the parties.
Section 2.10 Lost, Stolen or Destroyed Certificates. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
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making of an affidavit of that fact by the holder thereof, such shares of Focus
Common Stock and cash for fractional shares, if any, as may be required pursuant
to Section 2.6; provided, however, that Focus may, as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Focus or the Exchange Agent
with respect to the Certificates alleged to have been lost, stolen or destroyed.
Section 2.11 Tax Consequences. For federal income tax purposes, the parties
intend that the Merger be treated as a tax free reorganization under the Code
and the parties agree to take whatever steps are required to give effect to the
Merger on such a basis.
Section 2.12 Options to Purchase Videonics Common Stock. (a) At the
Effective Time, each option or warrant granted by Videonics to purchase shares
of Videonics Common Stock (collectively, the "Videonics Options", and each a
"Videonics Option) which is outstanding and unexercised immediately prior to the
Effective Time shall be assumed by Focus and converted into an option or warrant
to purchase shares of Focus Common Stock in such amount and at such exercise
price as provided below and otherwise having the same terms and conditions as
are in effect immediately prior to the Effective Time (except to the extent that
such terms, conditions and restrictions may be altered in accordance with their
terms as a result of the transactions contemplated hereby):
(i) the number of shares of Focus Common Stock to be subject to the new
option or warrant shall be equal to the product of (x) the number of shares
of Videonics Common Stock subject to the Videonics Option and (y) the
Exchange Ratio;
(ii) the exercise price per share of Focus Common Stock under the new
option or warrant shall be equal to (x) the exercise price per share of the
Videonics Common Stock under the Videonics Option divided by (y) the Exchange
Ratio; and
(iii) upon each exercise of a Videonics Option by a holder thereof, the
aggregate number of shares of Focus Common Stock deliverable upon such
exercise shall be rounded down, if necessary, to the nearest whole share and
the aggregate exercise price shall be rounded up, if necessary, to the
nearest cent.
The adjustments provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be
effected in a manner consistent with Section 424(a) of the Code.
(b) Focus shall reserve for issuance a sufficient number of shares of
Focus Common Stock for delivery upon exercise of Videonics Options assumed by
Focus under this Agreement. Focus shall file as soon as practicable after the
Effective Date a registration statement under the Securities Act covering the
shares of Focus Common Stock issuable upon the exercise of the Videonics
Options assumed by Focus pursuant to Section 2.12(a), and shall use its
reasonable efforts to cause such registration statement to become effective
as soon thereafter as practicable and to maintain such registration in effect
until the exercise or expiration of such assumed Videonics Options.
Section 2.13 Dissenting Shareholders. Notwithstanding anything in this
Agreement to the contrary, shares of Videonics Common Stock which are issued and
outstanding immediately prior to the Effective Time and which are held by a
shareholder who has the right (to the extent such right is available by Law) to
demand and receive payment of the fair value of the shares of Videonics Common
Stock owned by such shareholder (the "Dissenting Shares") pursuant to the CCL,
shall not be converted into or be exchangeable for the right to receive the
consideration provided in Section 2.2 unless and until such shareholder shall
fail to perfect his or her right to an appraisal or shall have effectively
withdrawn or lost such right under the CCL, as the case may be. Such Dissenting
Shares shall be cancelled at the Effective Time and, thereafter, shall represent
only the right to exercise statutory dissent right under the CCL or receive the
consideration provided for in Section 2.2.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VIDEONICS
Except as expressly disclosed in the Videonics Filed SEC Reports (as
defined below) (including all exhibits referred to therein) or as set forth in
the disclosure schedule delivered by Videonics to Focus as provided for herein
(the "Videonics Disclosure Schedule") (each section of which qualifies the
correspondingly numbered representation and warranty or covenant as specified
therein), Videonics hereby represents and warrants to Focus as follows:
Section 3.1 Organization and Qualification. Videonics is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization. Videonics has the requisite
corporate power and authority and any necessary Governmental Authority,
franchise, license, certificate or permit to own, operate or lease the
properties that it purports to own, operate or lease and to carry on its
business as it is now being conducted, and is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned, operated or leased or the nature of its
activities makes such qualification necessary.
Section 3.2 Articles of Incorporation and Bylaws. Videonics has heretofore
furnished, or otherwise made available, to Focus a complete and correct copy of
the Articles of Incorporation and the bylaws, each as amended to the date
hereof, of Videonics. Such Articles of Incorporation and bylaws are in full
force and effect. Videonics is not in violation of any of the provisions of its
Articles of Incorporation.
Section 3.3 Capitalization.
(a) The authorized capital stock of Videonics consists of (i) 10,000,000
shares of preferred stock, no par value, none of which is outstanding or
reserved for issuance, and (ii) 30,000,000 shares of Videonics Common Stock,
no par value, of which, as of July 31, 2000, (A) 5,899,299 shares were
validly issued and outstanding as fully paid and non-assesable, (B) no shares
were held in the treasury of Videonics, (C) 858,239 shares were issuable upon
the exercise of options outstanding under the Videonics employee and director
stock option plans or agreements, and (D) 95,000 shares were issuable
pursuant to outstanding warrants. Since July 31, 2000, no shares of Videonics
Common Stock have been issued, except upon the exercise of options described
in the immediately preceding sentence. There are no outstanding Videonics
Equity Rights except for Videonics Equity Rights issued to Videonics
employees in the ordinary course of business. Section 3.3 of the Videonics
Disclosure Schedule sets forth a complete and accurate list of all
outstanding Videonics Equity Rights as of July 31, 2000, including the terms
and the holder thereof. There are no outstanding obligations of Videonics to
repurchase, redeem or otherwise acquire any shares of capital stock of
Videonics.
(b) Videonics does not have any subsidiaries.
(c) There are no voting trusts, proxies or other agreements, commitments
or understandings of any character to which Videonics is a party or by which
Videonics is bound with respect to the voting of any shares of capital stock
of Videonics.
Section 3.4 Authority Relative to this Agreement.
(a) Videonics has the necessary corporate power and authority to enter
into this Agreement and, subject to obtaining the requisite approval of this
Agreement by Videonics' shareholders required by the CCL (the "Videonics
Shareholder Approval"), to perform its obligations hereunder. The execution
and delivery of this Agreement by Videonics, and the consummation by
Videonics of the transactions contemplated hereby, have been duly authorized
by all necessary corporate action on the part of Videonics, subject to
obtaining the Videonics Shareholder Approval. This Agreement has been duly
executed and delivered by Videonics and, assuming the due authorization,
execution and delivery thereof by each of Focus and Merger Subsidiary,
constitutes a legal, valid and binding obligation of Videonics, enforceable
against it in accordance with its terms.
(b) The Board of Directors of Videonics has directed that this Agreement
be submitted to the shareholders of Videonics for their approval and
authorization. The affirmative vote of a majority (50% plus one vote) of the
votes cast, in person or by proxy, by holders of the outstanding Videonics
Common Stock at
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a special meeting of the shareholders of Videonics (the "Videonics
Shareholders' Meeting") is the only vote of the holders of any class or
series of capital stock of Videonics necessary to approve and authorize this
Agreement, the Merger and the other transactions contemplated hereby and
thereby.
Section 3.5 No Conflict; Required Filings and Consents.
(a) Except as described in subsection (b) below, the execution and
delivery of this Agreement by Videonics does not, and the performance of this
Agreement by Videonics will not, (i) violate or conflict with the Articles of
Incorporation or bylaws of Videonics, (ii) conflict with or violate any Law
applicable to Videonics or by which any of its property or assets (including
investments) is bound or affected, or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination or
cancellation of, or result in the creation of an Encumbrance on any of the
properties or assets (including investments) of Videonics pursuant to, result
in the loss of any material benefit under, or result in any modification or
alteration of, or require the consent of any other party to, any contract,
instrument, permit, license or franchise to which Videonics is a party or by
which Videonics or any of its property or assets (including investments) is
bound or affected, except, in the case of clauses (ii) and (iii) above, for
conflicts, violations, breaches, defaults, results or consents which,
individually or in the aggregate, would not have a Material Adverse Effect on
Videonics.
(b) Except for applicable requirements, if any, of the Securities Act, the
Exchange Act, the Blue Sky Laws, the HSR Act or any Foreign Competition Laws
and the filing and recordation of appropriate merger or other documents under
the DCL and CCL, (i) Videonics is not required to submit any notice, report
or other filing with any Governmental Authority in connection with the
execution, delivery or performance of this Agreement and (ii) no waiver,
consent, approval or authorization of any Governmental Authority is required
to be obtained by Videonics in connection with its execution, delivery or
performance of this Agreement.
Section 3.6 SEC Filings; Financial Statements.
(a) Videonics has filed all forms, reports and documents required to be
filed with the SEC since December 15, 1994 (collectively, the "Videonics SEC
Reports", with such Videonics SEC Reports filed with the SEC prior to the
date hereof being referred to as "Videonics Filed SEC Reports"). The
Videonics SEC Reports (i) were prepared in accordance and complied as of
their respective dates with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations promulgated
under each of such respective Acts, and (ii) did not at the time they were
filed (or if amended by a filing prior to the date hereof as of the date of
such amendment) contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(b) The financial statements, including all related notes and schedules,
contained in the Videonics SEC Reports (or incorporated by reference therein)
(i) fairly present the consolidated financial position of Videonics as at the
respective dates thereof and the consolidated results of operations and cash
flows of Videonics for the periods indicated in accordance with GAAP applied
on a consistent basis throughout the periods involved (except for changes in
accounting principles disclosed in the notes thereto) and subject in the case
of interim financial statements to normal year-end adjustments and (ii) in
the case of financial statements included in Videonics SEC Reports, complied
in all material respects with applicable accounting requirements of the SEC.
Section 3.7 Absence of Certain Changes or Events. Except as disclosed in
the Videonics Filed SEC Reports and in Section 3.7 of the Videonics Disclosure
Schedule, since December 31, 1999, (i) Videonics has not incurred any liability
except in the ordinary course of its business consistent with its past practices
and which will not, either individually or in the aggregate, have a Material
Adverse Effect on Videonics, (ii) there has not been any change, or any event
involving a prospective change, in the business, financial condition or results
of operations of Videonics which has had, or is reasonably likely to have, a
Material Adverse Effect on Videonics, and (iii) Videonics has conducted its
business in the ordinary course consistent with its past practices.
Section 3.8 Litigation. There are no Actions pending or, to Videonics'
knowledge, threatened against Videonics, or any properties or rights of
Videonics, by or before any Governmental Authority, except for those
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that are not, individually or in the aggregate, reasonably likely to have a
Material Adverse Effect on Videonics or prevent, materially delay or
intentionally delay the ability of Videonics to consummate transactions
contemplated hereby. Videonics is not subject to any Actions or claims which,
individually or in the aggregate, has or might have a Material Adverse Effect on
Videonics.
Section 3.9 Permits; No Violation of Law. The business of Videonics is not
being conducted in violation of any Law, or in violation of any Permits, except
for possible violations none of which, individually or in the aggregate, may
have a Material Adverse Effect on Videonics. No investigation or review by any
Governmental Authority (including any stock exchange or other self- regulatory
body) with respect to Videonics, in relation to any alleged violation of Law is
pending or, to Videonics' knowledge, threatened, nor has any Governmental
Authority (including any stock exchange or other self-regulatory body) indicated
an intention to conduct the same, except for such investigations which, if they
resulted in adverse findings, would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Videonics.
Videonics is not subject to any cease and desist or other order, judgment,
injunction or decree issued by, or a party to any written agreement, consent
agreement or memorandum of understanding with, or a party to any commitment
letter or similar undertaking to, or subject to any order or directive by, or
adopted any board resolutions at the request of, any Governmental Authority that
materially restricts the conduct of its business or which may reasonably be
expected to have a Material Adverse Effect on Videonics, nor has Videonics been
advised that any Governmental Authority is considering issuing or requesting any
of the foregoing.
Section 3.10 Joint Proxy Statement. None of the information supplied or to
be supplied by or on behalf of Videonics for inclusion or incorporation by
reference in the registration statement to be filed with the SEC by Focus in
connection with the issuance of shares of Focus Common Stock in the Merger (the
"Registration Statement") will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. None of the information supplied or
to be supplied by or on behalf of Videonics for inclusion or incorporation by
reference in the joint proxy statement, in definitive form, relating to the
meetings of Videonics and Focus shareholders to be held in connection with the
Merger, or in the related proxy and notice of meeting, or soliciting material
used in connection therewith (referred to herein collectively as the "Joint
Proxy Statement") will, at the dates mailed to shareholders and at the times of
the Videonics shareholders' meeting and the Focus shareholders' meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Registration Statement and the Joint Proxy Statement (except for
information relating solely to Focus) will comply as to form in all material
respects with the provisions of the Securities Act and the Exchange Act and the
rules and regulations promulgated thereunder.
Section 3.11 Employee Matters; ERISA.
(a) Section 3.11(a) of the Videonics Disclosure Schedule contains a true
and complete list of each deferred compensation, incentive compensation,
stock purchase, stock option and other equity compensation plan; each
"welfare" plan, fund or program (within the meaning of Section 3(1) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")); each
"pension" plan, fund or program (within the meaning of Section 3(2) of
ERISA); and each other material employee benefit plan, fund, program,
agreement or arrangement, in each case, that is sponsored, maintained or
contributed to or required to be contributed to by Videonics or any entity,
any trade or business (whether or not incorporated) which is a member of a
controlled group or which is under common control with Videonics within the
meaning of Section 414 of the Code or which could be deemed a of ERISA (a
"Videonics ERISA Affiliate"), or to which Videonics or a Videonics ERISA
Affiliate is a party, whether written or oral, for the benefit of any
director, employee or former employee of Videonics or any Videonics ERISA
Affiliates, whether or not such plan has been terminated (the "Videonics
Plans"). There are no restrictions on the ability of Videonics or any
Videonics ERISA Affiliates to amend, modify or terminate any Videonics Plan
and each Videonics Plan is fully and readily assignable and transferable by
its sponsor to either the Focus or the Merger Subsidiary.
(b) Videonics has heretofore made available to Focus true and complete
copies of the Videonics Plans and any amendments thereto (or if the Videonics
Plan is not a written Videonics Plan, a description
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thereof), any related trust or other funding vehicle, the three (3) most
recent reports or summaries required under ERISA or the Code, the most recent
audited financial statements and most recent determination letter received
from the Internal Revenue Service with respect to each Videonics Plan
intended to qualify under Section 401 of the Code.
(c) No Videonics Plan is subject to Title IV of ERISA or Section 412 of
the Code, nor is any Videonics Plan a "multiemployer pension plan", as
defined in Section 3(37) of ERISA, or subject to Section 302 of ERISA. No
Videonics Plan is a "single-employer plan under multiple controlled groups"
as described in Section 4063 of ERISA.
(d) Except as would not be materially adverse to Videonics, each Videonics
Plan has been operated and administered in all respects in accordance with
its terms and applicable Law, including ERISA and the Code. There has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any Videonics Plan; there are no
claims pending (other than routine claims for benefits) or threatened against
any Videonics Plan or against the assets of any Videonics Plan, nor are there
any current or threatened Encumbrance on the assets of any Videonics Plan.
Videonics and all Videonics ERISA Affiliates have performed all obligations
required to be performed by them under, are not in default under or violation
of, and have no knowledge of any default or violation by any other party with
respect to, any of the Videonics Plans. All contributions required to be made
to any Videonics Plan under applicable Law or the terms of the respective
Videonics Plan have been made on or before their due dates and a reasonable
amount has been accrued for contributions to each Videonics Plan for the
current plan years; except as disclosed on Section 3.11(d) of the Videonics
Disclosure Schedule, the transaction contemplated herein will not directly or
indirectly result in an increase of benefits, acceleration of vesting or
acceleration of timing for payment of any benefit to any participant or
beneficiary under any Videonics Plan.
(e) Each Videonics Plan intended to be "qualified" within the meaning of
Section 401(a) of the Code and the trusts maintained thereunder that are
intended to be exempt from taxation under Section 501(a) of the Code have
received a favorable determination or other letter indicating that they are
so qualified, and no event has occurred since the date of said letter(s) that
could reasonably be expected to materially adversely affect the qualification
of such Videonics Plan.
(f) No Videonics Plan or written or oral agreement provides medical,
surgical, hospitalization, death or similar benefits (whether or not insured)
for directors, employees or former employees of Videonics or Videonics ERISA
Affiliates for periods extending beyond their retirement or other termination
of service, other than (i) coverage mandated by applicable Law, (ii) death
benefits under any "pension plan" or (iii) benefits the full cost of which is
borne by the current or former employee (or his beneficiary).
(g) No amounts payable under the Videonics Plans will fail to be
deductible for federal income Tax purposes by virtue of Section 280G of the
Code.
(h) Except as set forth in section 3.11 of the Videonics Disclosure
Schedule, the execution, delivery and performance of, and consummation of the
transactions contemplated by this Agreement will not (i) entitle any current
or former employee or officer of Videonics or any Videonics ERISA Affiliate
to severance pay, unemployment compensation or any other payment, except as
expressly provided in this Agreement, (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due any such employee or
officer, or (iii) assuming Focus takes the action specified in Section 2.12,
accelerate the vesting of any stock option or of any shares of restricted
stock.
Section 3.12 Employment and Labor Matters.
(a) Except as identified in Section 3.12(a) of the Videonics Disclosure
Schedule, as of the date hereof, there are no material employment,
consulting, severance pay, continuation pay, termination or indemnification
agreement or other similar agreements of any nature (whether in writing or
not) between Videonics and any current or former shareholder, officer,
director, employee, or any consultant. Except as set forth in Section 3.12(a)
of the Videonics Disclosure Schedule, no individual will accrue or receive
additional benefits, service or accelerated rights to payments under any
Videonics Agreement or any of the agreements set forth in Section 3.12(a) of
the Videonics Disclosure Schedule, including the right to receive any
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parachute payment, as defined in Section 280G of the Code, or become entitled
to severance, termination allowance or similar payments as a result of the
transaction contemplated herein that could result in the payment of any such
benefits or payments. Videonics is not delinquent in payments to any of its
employees or consultants for any wages, salaries, commissions, bonuses or
other compensation for any services. None of Videonics' employment policies
or practices is currently being audited or investigated by any Governmental
Authority. There are no threatened or pending Actions alleging claims against
Videonics brought by or on behalf of any employee or other individual or any
Governmental Authority with respect to employment practices.
(b) Except as set forth in Section 3.12(b) of the Videonics Disclosure
Schedule, there are no controversies, pending or threatened, between
Videonics and any of its employees and employee relations are, in general,
considered to be good; Videonics is not a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by
Videonics, nor are there any activities or proceedings of any labor union to
organize any such employees of Videonics; during the past five years there
have been no strikes, slowdowns, work stoppages, lockouts, or threats
thereof, by or with respect to any employees of Videonics. Videonics does not
have nor at the Closing will it have any obligation under the Worker
Adjustment and Retraining Notification Act (the "WARN Act"). Videonics is in
material compliance with all applicable state, local, federal and foreign
employment, wage and hour, labor and other employee applicable laws.
Section 3.13 Environmental Matters. Except for such matters that,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect on Videonics: (i) Videonics has complied with all applicable
Environmental Laws; (ii) the properties currently owned or operated by it
(including soils, groundwater, surface water, buildings or other structures) are
not contaminated with any Hazardous Substances; (iii) the properties formerly
owned or operated by it were not contaminated with Hazardous Substances during
the period of ownership or operation by it; (iv) it is not subject to liability
for any Hazardous Substance disposal or contamination on any third party
property; (v) it has not been associated with any release or threat of release
of any Hazardous Substance; (vi) it has not received any notice, demand, letter,
claim or request for information alleging that it may be in violation of or
liable under any Environmental Law; (vii) it is not subject to any orders,
decrees, injunctions or other arrangements with any Governmental Authority or
any indemnity or other agreement with any third party relating to liability
under any Environmental Law or relating to Hazardous Substances; and (viii) it
knows of no circumstances or conditions involving it that could result in any
claims, liability, investigations, costs or restrictions on the ownership, use,
or transfer of any of its properties pursuant to any Environmental Law.
Section 3.14 Absence of Restrictions on Business Activities. Except as set
forth in Section 3.14 of Videonics Disclosure Schedule, there is no agreement or
order binding upon Videonics or any of its properties which has had or could
reasonably be expected to have the effect of prohibiting or materially impairing
any business practice of Videonics or the conduct of business by Videonics as
currently conducted. Except as set forth in Section 3.14 of Videonics Disclosure
Schedule, Videonics is not subject to any non-competition or similar restriction
on its business. Videonics has not at any time entered into, or agreed to enter
into, any interest rate swaps, caps, floors or option agreements or any other
interest rate risk management arrangement or foreign exchange contracts.
Section 3.15 Title to Assets; Leases. Videonics owns no real property.
Section 3.15 of Videonics Disclosure Statement sets forth a true and complete
list of all real property leased by Videonics, and the aggregate monthly rental
or other fee payable under such lease. Except as described in Section 3.15 of
the Videonics Disclosure Schedule, Videonics has good and marketable title to
all of its properties and assets, free and clear of all Encumbrances, charges
and encumbrances, except Encumbrances for Taxes not yet due and payable and such
Encumbrances or other imperfections of title, if any, as do not materially
detract from the value of or interfere with the present use of the property
affected thereby. All leases pursuant to which Videonics leases real or personal
property from others are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing material default
or event of material default (or event which with notice or lapse of time, or
both, would constitute a material default and in respect of which Videonics has
not taken adequate steps to prevent such a default from occurring).
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Section 3.16 Brokers. Except as disclosed in Schedule 3.16 of the Videonics
Disclosure Schedule, the arrangements which have been disclosed to Focus prior
to the date hereof, no broker, finder or investment banker is entitled to any
brokerage, finder's, investment banking or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Videonics.
Section 3.17 Tax Matters. Except as set forth in Section 3.17 of the
Videonics Disclosure Schedule:
(a) All federal, state, local and foreign Tax Returns required to have
been filed by Videonics have been filed with the appropriate governmental
authorities by the due date thereof, including extensions, and correctly and
completely reflect all material Tax liabilities of Videonics required to be
shown thereon;
(b) All Taxes payable by or with respect to Videonics, have been fully
paid or adequately reflected as a liability on Videonics' financial
statements included in the Videonics SEC Reports;
(c) With respect to any period for which Tax Returns have not yet been
filed, or for which Taxes are not yet due or owing, Videonics has made due
and sufficient accruals for such Taxes in its books and records and financial
statements;
(d) Neither Videonics nor any of its affiliates has taken, agreed to take
or omitted to take any action that would prevent or impede the Merger from
qualifying as a tax-free reorganization under Section 368 of the Code;
(e) No deficiencies for any Taxes have been proposed, asserted or assessed
against Videonics that are not adequately reserved for under GAAP, except for
deficiencies that individually or in the aggregate would not have a Material
Adverse Effect on Videonics. All assessments for Taxes due and owing by or
with respect to Videonics with respect to completed and settled examinations
or concluded litigation have been paid. Videonics has not incurred a Tax
liability since December 31, 1999, other than those incurred in the ordinary
course of business.
(f) Videonics is not aware of any material Encumbrances for Taxes upon any
assets of Videonics apart from Encumbrances for Taxes not yet due and
payable; and
(g) Videonics has not requested, or been granted any waiver of any
federal, state, local or foreign statute of limitations with respect to, or
any extension of a period for the assessment of, any Tax. No extension or
waiver of time within which to file any Tax Return of, or applicable to,
Videonics has been granted or requested which has not since expired.
(h) Videonics is not and has never been (nor does Videonics have any
liability for unpaid Taxes because it once was) a member of an affiliated,
consolidated, combined or unitary group, and Videonics is not a party to any
Tax allocation or sharing agreement or liable for the Taxes of any other
party, as transferee or successor, by contract, or otherwise.
(i) Videonics is not presently and has not been a "foreign investment
company" as such term is defined in Section 1246(b) of the Code.
(j) Videonics is not presently and has not been a "passive foreign
investment company" as such term is defined in Section 1297(a) of the Code.
(k) Videonics is not presently and has not been at any time during the
last five years a "controlled foreign corporation" as such term is defined in
Section 957(a) of the Code.
(l) Videonics has not made any payments, is not obligated to make any
payments, and is not a party to any agreement that under any circumstances
could obligate it to make any payments that will not be deductible under
Section 280G of the Code.
(m) No unsatisfied deficiency, delinquency or default for any Tax has been
ordered, proposed or assessed against or with respect to Videonics, nor has
Videonics received notice of any such deficiency, delinquency or default
which, in any such case, may have a Material Adverse Effect.
(n) Videonics has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(o) Videonics has complied with all applicable Laws relating to the
payment and withholding of Taxes (including, without limitation, withholding
of Taxes pursuant to Sections 1441, 1442 and 3406 of the Code or
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similar provisions under any foreign Laws) and has, within the time and in
the manner required by Law, withheld from employee wages and paid over to the
proper Governmental Authorities all amounts required to be so withheld and
paid over under all applicable Laws.
(p) No property of Videonics is "tax-exempt use property" as such term is
defined in Section 168 of the Code.
(q) Videonics has not made an election under Section 341(f) of the Code.
Section 3.18 Intellectual Property.
(a) Section 3.18(a) of Videonics Disclosure Schedule sets forth, for the
Intellectual Property owned by Videonics, a complete and accurate list of all
United States and foreign (a) patents; (b) trademarks, registrations
(including material Internet domain registrations) and applications and
material unregistered trademarks; and (c) copyright registrations and
applications, indicating for each, the applicable jurisdiction, registration
number (or application number), and date issued (or date filed).
(b) All trademarks, patents and copyrights are currently in compliance
with all Laws (including the timely post-registration filing of affidavits of
use and incontestability and renewal applications with respect to trademarks,
and the payment of filing, examination and maintenance fees and proof of
working or use with respect to patents), are valid and enforceable, and are
not subject to any maintenance fees or actions falling due within ninety (90)
days after the Effective Time. No issued trademark has been or is now
involved in any cancellation and, to the knowledge of Videonics, no such
action is threatened with respect to any of the trademarks that would have
Material Adverse Effect. No patent has been or is now involved in any
interference, reissue, re-examination or opposing proceeding. To the
knowledge of Videonics, there are no potentially conflicting trademarks or
potentially interfering patents of any third party.
(c) Section 3.18(c) of Videonics Disclosure Schedule sets forth a complete
and accurate list of all material license agreements granting to Videonics
any material right to use or practice any rights under any Intellectual
Property other than Intellectual Property which is used for infrastructural
purposes and is commercially available on reasonable terms (collectively, the
"Videonics License Agreements"), indicating for each the title and the
parties thereto.
(d) Except as set forth in Schedule 3.18(d) of the Videonics Disclosure
Schedule or as would not be materially adverse to Videonics:
(i) Videonics owns free and clear of all Encumbrances, all owned
Intellectual Property used in Videonics' business, and has a valid and
enforceable right to use all of the Intellectual Property licensed to
Videonics and used in Videonics' business;
(ii) Videonics has taken reasonable steps to protect the Intellectual
Property which Videonics owns;
(iii) The conduct of Videonics' business as currently conducted or
contemplated does not infringe upon any Intellectual Property rights
owned or controlled by any third party;
(iv) There is no litigation pending or, to the knowledge of Videonics,
threatened or any written claim from any Person (a) alleging that
Videonics' activities or the conduct of its business infringes upon,
violates, or constitutes the unauthorized use of the Intellectual
Property rights of any third party or (b) challenging the ownership, use,
validity or enforceability of any Intellectual Property of Videonics;
(v) To the knowledge of Videonics, no third party is misappropriating,
infringing, diluting, or violating any Intellectual Property owned by
Videonics and no such Actions have been brought against any third party
by Videonics;
(vi) The execution, delivery and performance by Videonics of this
Agreement and the consummation of the transactions contemplated hereby
will not result in the loss or impairment of or give rise to any right of
any third party to terminate any of Videonics' right to own any of the
Intellectual Property owned by Videonics or to use any Intellectual
Property licensed to Videonics pursuant to the Videonics License
Agreements, nor require the consent of any Governmental Authority or
third party in respect of any such Intellectual Property; and
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(vii) The Software owned or purported to be owned by Videonics was
either (i) developed by employees of Videonics within the scope of their
employment, (ii) developed by independent contractors who have assigned
their rights to Videonics pursuant to written agreements or (iii)
otherwise acquired by Videonics from a third party.
(e) Except as would not have a Material Adverse Effect on Videonics, all
trademarks of Videonics have been in continuous use by Videonics. To the
knowledge of Videonics (i) there has been no prior use of such trademarks by
any third party which would confer upon said third party superior rights in
such trademarks, (ii) Videonics have adequately policed all trademarks
against third party infringement and (iii) the registered trademarks have
been continuously used in the form appearing in, and in connection with the
goods and services listed in, their respective registration certificates.
(f) Except as would not be materially adverse to Videonics, Videonics has
taken all reasonable steps in accordance with normal industry practice to
protect Videonics' rights in confidential information and trade secrets of
Videonics. Without limiting the foregoing and except as would not be
materially adverse to Videonics, Videonics has and enforces a policy of
requiring each employee, consultant and contractor to execute proprietary
information, confidentiality and assignment agreements substantially
consistent with Videonics' standard forms thereof. Except under
confidentiality obligations, to the knowledge of Videonics, there has been no
material disclosure by Videonics of material confidential information or
trade secrets.
Section 3.19 Insurance. Section 3.19 of Videonics Disclosure Schedule sets
forth a true and complete list of all material insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of Videonics. There is no claims by Videonics
pending under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or bonds.
All premiums payable under all such policies and bonds have been paid and
Videonics is otherwise in full compliance with the terms of such policies and
bonds (or other policies and bonds providing substantially similar insurance
coverage), and Videonics shall maintain in full force and effect all such
insurance during the period from the date hereof through the Closing Date. Such
policies of insurance and bonds are of the type and in amounts customarily
carried by Persons conducting businesses similar to those of Videonics and
reasonable in light of the assets of Videonics. To the knowledge of Videonics as
of the date hereof, there is not any threatened termination of or material
premium increase with respect to any of such policies or bonds.
Section 3.20 Ownership of Securities. As of the date hereof, neither
Videonics nor, to Videonics' knowledge, any of its affiliates or associates (as
such terms are defined under the Exchange Act), (i) beneficially owns, directly
or indirectly, or (ii) is party to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of, in each case,
shares of capital stock of Focus, which in the aggregate represent 10% or more
of the outstanding shares of Focus Common Stock.
Section 3.21 Certain Contracts. All contracts described in Item 601(b)(10)
of Regulation S-K to which Videonics is a party or may be bound ("Videonics
Contracts") have been filed as exhibits to, or incorporated by reference in,
Videonics' Annual Report on Form 10-K for the year ended December 31, 1999. All
Videonics Contracts are valid and in full force and effect on the date hereof.
Each such Videonics Contract is in full force and effect, is a valid and binding
obligation of Videonics and, to the knowledge of Videonics, of each other party
thereto and is enforceable against Videonics in accordance with its terms, and,
to the knowledge of Videonics, enforceable against each other party thereto, in
each case except to the extent the enforcement thereof may be limited by (A)
bankruptcy, insolvency, reorganization, moratorium or other similar Law now or
hereafter in effect relating to creditors' rights generally and (B) general
principles of equity (regardless of whether enforceability is considered in a
proceeding in equity or at Law), and there has not occurred any material default
by any party thereto which remains unremedied as of the date hereof. No
condition exists or event has occurred which (whether with or without notice or
lapse of time or both, or the happening or occurrence of any other event) would
constitute a default by Videonics or, to the knowledge of Videonics, any other
party thereto under, or result in a right in termination of, any Videonics
Contract.
Section 3.22 Certain Business Practices. As of the date hereof, neither
Videonics nor any director, officer, employee or agent of Videonics has (i) used
any funds for unlawful contributions, gifts, entertainment or other unlawful
payments relating to political activity, (ii) made any unlawful payment to any
foreign or domestic government official or employee or to any foreign or
domestic political party or campaign or violated any
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provision of the Foreign Corrupt Practices Act of 1977, as amended, (iii)
consummated any transaction, made any payment, entered into any agreement or
arrangement or taken any other action in violation of Section 1128B(b) of the
Social Security Act, as amended, or (iv) made any other unlawful payment.
Section 3.23 Interested Party Transactions. Except as disclosed in
Videonics SEC Reports, Videonics is not indebted to any director, officer,
employee or agent of Videonics (except for amounts due as normal salaries and
bonuses and in reimbursement of ordinary expenses), and no such Person is
indebted to Videonics, and there have been no other transactions of the type
required to be disclosed pursuant to Items 402 and 404 of Regulation S-K under
the Securities Act and the Exchange Act.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FOCUS
Except as expressly disclosed in the Focus Filed SEC Reports (as defined
below) (including all exhibits referred to therein) or as set forth in the
disclosure schedule delivered by Focus to Videonics as provided for herein (the
"Focus Disclosure Schedule") (each section of which qualifies the
correspondingly numbered representation and warranty or covenant as specified
therein), Focus hereby represents and warrants to Videonics as follows:
Section 4.1 Organization and Qualification; Subsidiaries. Focus and each of
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization.
Focus and each of its Subsidiaries has the requisite corporate power and
authority and any necessary Governmental Authority, franchise, license,
certificate or permit to own, operate or lease the properties that it purports
to own, operate or lease and to carry on its business as it is now being
conducted, and is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned, operated or leased or the nature of its activities makes such
qualification necessary.
Section 4.2 Certificate of Incorporation and Bylaws. Focus has heretofore
furnished, or otherwise made available, to Videonics a complete and correct copy
of the Certificate of Incorporation and the bylaws, each as amended to the date
hereof, of Focus and each of its Subsidiaries. Such Certificate of Incorporation
and bylaws are in full force and effect. Neither Focus nor any of its
Subsidiaries is in violation of any of the provisions of its respective
Certificate of Incorporation.
Section 4.3 Capitalization.
(a) The authorized capital stock of Focus consists of (i) 3,000,000 shares
of preferred stock, par value $0.01 per share, none of which are outstanding
or reserved for issuance, and (ii) 30,000,000 shares of Focus Common Stock,
of which, as of July 31, 2000, (A) 25,857,871shares were validly issued and
outstanding as fully paid and non-assessable, (B) 450,000 shares were held in
the treasury of Focus, (C) 2,977,451 shares were issuable upon the exercise
of options outstanding under the Focus employee stock option plans, and (D)
632,429 shares were reserved for issuance in connection with outstanding
warrants. In addition to the foregoing, 2,500,000, 390,000 and 3,000,000
shares of Focus Common Stock have been reserved for issuance by the Board of
Directors of Focus, in connection with, respectively, a shelf offering to be
filed on Form S-1, warrants granted but not yet issued and employee stock
options to be issued by Focus, which reservations shall become effective upon
ratification by the shareholders of Focus. Since July 31, 2000, no shares of
Focus Common Stock have been issued, except upon the exercise of options
described in the immediately preceding sentence. There are no outstanding
Focus Equity Rights except for Focus Equity Rights issued to Focus employees
in the ordinary course of business. Section 4.3 of the Focus Disclosure
Schedule sets forth a complete and accurate list of all outstanding Focus
Equity Rights as of July 31, 2000, including the terms and the holder
thereof. There are no outstanding obligations of Focus or any of the Focus'
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of Focus.
(b) All of the outstanding capital stock of each of Focus' Subsidiaries is
duly authorized and validly issued as fully paid and nonassessable. All of
the issued and outstanding capital stock of each of Focus' Subsidiaries is
owned by Focus free and clear of any Encumbrances. There are no
subscriptions, options, warrants, calls, commitments, agreements, conversion
rights or other rights of any character (contingent or otherwise) to purchase
or otherwise acquire any shares of the capital stock of any Focus Subsidiary,
whether or not presently issued or outstanding and there are no outstanding
obligations of Focus or any of Focus' Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of any of Focus' Subsidiaries.
(c) There are no voting trusts, proxies or other agreements, commitments
or understandings of any character to which Focus or any of its Subsidiaries
is a party or by which Focus or any of its Subsidiaries is bound with respect
to the voting of any shares of capital stock of Focus or any of its
Subsidiaries.
Section 4.4 Authority Relative to this Agreement.
(a) Focus has the necessary corporate power and authority to enter into
this Agreement and, subject to obtaining the requisite approval of this
Agreement and the related increase in the authorized capital of Focus by
Focus' shareholders required by the DCL (the "Focus Shareholder Approval"),
to perform its obligations hereunder. The execution and delivery of this
Agreement by Focus, and the consummation by Focus of the
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transactions contemplated hereby, have been duly authorized by all necessary
corporate action on the part of Focus, subject to obtaining the Focus
Shareholder Approval. This Agreement has been duly executed and delivered by
Focus and, assuming the due authorization, execution and delivery thereof by
Videonics, constitutes a legal, valid and binding obligation of Focus,
enforceable against it in accordance with its terms.
(b) The Board of Directors of Focus has directed that this Agreement and
the proposed increase in the authorized capital of Focus required to complete
the Merger be submitted to the shareholders of Focus for their approval and
authorization. An affirmative vote of the majority (50% plus one) of the
votes cast, in person or by proxy, by holders of the outstanding Focus Common
Stock at a special meeting of the shareholders of Focus (the "Focus
Shareholders' Meeting") is the only vote of the holders of any class or
series of capital stock of Focus necessary to approve and authorize this
Agreement, the Merger and the other transactions contemplated hereby and
thereby.
Section 4.5 No Conflict; Required Filings and Consents.
(a) Except as described in subsection (b) below, the execution and
delivery of this Agreement by Focus does not, and the performance of this
Agreement by Focus will not, (i) violate or conflict with the Certificate of
Incorporation or bylaws of Focus, (ii) conflict with or violate any Law
applicable to Focus or any of its Subsidiaries or by which any of their
respective property or assets (including investments) is bound or affected,
(iii) violate or conflict with the Certificate of Incorporation or bylaws of
any of Focus' Subsidiaries, (iv) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become
a default) under, or give to others any rights of termination or cancellation
of, or result in the creation of an Encumbrance on any of the properties or
assets (including investments) of Focus or any of its Subsidiaries pursuant
to, result in the loss of any material benefit under, or result in any
modification or alteration of, or require the consent of any other party to,
any contract, instrument, permit, license or franchise to which Focus or any
of its Subsidiaries is a party or by which Focus, any of such Subsidiaries or
any of their respective property or assets (including investments) is bound
or affected, except, in the case of clauses (ii) and (iv) above, for
conflicts, violations, breaches, defaults, results or consents which,
individually or in the aggregate, would not have a Material Adverse Effect on
Focus.
(b) Except for applicable requirements, if any, of the Securities Act
Exchange Act Blue Sky Laws, the pre-Merger notification requirements of the
HSR Act or Foreign Competition Laws and the filing and recordation of
appropriate merger or other documents under the DCL, (i) neither Focus nor
any of its Subsidiaries is required to submit any notice, report or other
filing with any Governmental Authority in connection with the execution,
delivery or performance of this Agreement and (ii) no waiver, consent,
approval or authorization of any Governmental Authority is required to be
obtained by Focus or any of its Subsidiaries in connection with its
execution, delivery or performance of this Agreement.
Section 4.6 SEC Filings; Financial Statements.
(a) Focus has filed all forms, reports and documents required to be filed
with the SEC since May 25, 1993, (collectively, the "Focus SEC Reports", with
such Focus SEC Reports filed with the SEC prior to the date hereof being
referred to as "Focus Filed SEC Reports"). The Focus SEC Reports (i) were
prepared in accordance and complied as of their respective dates with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations promulgated under each of such respective acts,
and (ii) did not at the time they were filed (or if amended by a filing prior
to the date hereof as of the date of such amendment) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) The financial statements, including all related notes and schedules,
contained in the Focus SEC Reports (or incorporated by reference therein) (i)
fairly present the consolidated financial position of Focus and its
Subsidiaries as at the respective dates thereof and the consolidated results
of operations and cash flows of Focus and its Subsidiaries for the periods
indicated in accordance with GAAP applied on a consistent basis throughout
the periods involved (except for changes in accounting principles disclosed
in the notes thereto) and subject in the case of interim financial statements
to normal year-end adjustments and (ii) in the case of financial statements
included in Focus SEC Reports, complied in all material respects with
applicable accounting requirements of the SEC.
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Section 4.7 Absence of Certain Changes or Events. Except as disclosed in
the Focus Filed SEC Reports and in Section 4.7 of the Focus Disclosure Schedule,
since December 31, 1999, (i) Focus and its Subsidiaries have not incurred any
liability except in the ordinary course of their businesses consistent with
their past practices and which will not, either individually or in the
aggregate, have a Material Adverse Effect on Focus or any of its Subsidiaries,
(ii) there has not been any change, or any event involving a prospective change,
in the business, financial condition or results of operations of Focus or any of
its Subsidiaries which has had, or is reasonably likely to have, a Material
Adverse Effect on Focus or any of its Subsidiaries, and (iii) Focus and its
Subsidiaries have conducted their respective businesses in the ordinary course
consistent with their past practices.
Section 4.8 Litigation. Except for the matter of CRA Systems, Inc. v. Focus
Enhancements, Inc. and other matters previously disclosed in the Focus SEC
Reports, there are no Actions pending or, to Focus' knowledge, threatened
against Focus or any of its Subsidiaries, or any properties or rights of Focus
or any of its Subsidiaries, by or before any Governmental Authority, except for
those that are not, individually or in the aggregate, reasonably likely to have
a Material Adverse Effect on Focus or any of its Subsidiaries or prevent,
materially delay or intentionally delay the ability of Focus to consummate
transactions contemplated hereby. Neither Focus nor any of its Subsidiaries is
subject to any claim or order which, individually or in the aggregate, has or
might have a Material Adverse Effect on Focus or its Subsidiaries.
Section 4.9 Permits; No Violation of Law. The businesses of Focus and its
Subsidiaries are not being conducted in violation of any Law, or in violation of
any Permits, except for possible violations none of which, individually or in
the aggregate, may have a Material Adverse Effect on Focus or any of its
Subsidiaries. No investigation or review by any Governmental Authority
(including any stock exchange or other self- regulatory body) with respect to
Focus or its Subsidiaries in relation to any alleged violation of Law is pending
or, to Focus' knowledge, threatened, nor has any Governmental Authority
(including any stock exchange or other self-regulatory body) indicated an
intention to conduct the same, except for such investigations which, if they
resulted in adverse findings, would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Focus. Neither
Focus nor any of its Subsidiaries is subject to any cease and desist or other
order, judgment, injunction or decree issued by, or is a party to any written
agreement, consent agreement or memorandum of understanding with, or is a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or has adopted any board resolutions at the request of, any
Governmental Authority that materially restricts the conduct of its business or
which may reasonably be expected to have a Material Adverse Effect on Focus, nor
has Focus or any of its Subsidiaries been advised that any Governmental
Authority is considering issuing or requesting any of the foregoing.
Section 4.10 Proxy Statement. None of the information supplied or to be
supplied by or on behalf of Focus for inclusion or incorporation by reference in
the Registration Statement will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. None of the information supplied or
to be supplied by or on behalf of Focus for inclusion or incorporation by
reference in the Proxy Statement, in definitive form, relating to the meetings
of Videonics and Focus shareholders to be held in connection with the Merger, or
in the Joint Proxy Statement will, at the dates mailed to shareholders and at
the times of the Videonics shareholders' meeting and the Focus shareholders'
meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The Registration Statement and the Joint Proxy Statement
(except for information relating solely to Videonics) will comply as to form in
all material respects with the provisions of the Securities Act and the Exchange
Act and the rules and regulations promulgated thereunder.
Section 4.11 Employee Matters; ERISA.
(a) Section 4.11(a) of the Focus Disclosure Schedule contains a true and
complete list of each deferred compensation, incentive compensation, stock
purchase, stock option and other equity compensation plan; each "welfare"
plan, fund or program (within the meaning of Section 3(1) of ERISA; each
"pension" plan, fund or program (within the meaning of Section 3(2) of
ERISA); and each other material employee benefit plan, fund, program,
agreement or arrangement, in each case, that is sponsored, maintained or
contributed to or required to
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be contributed to by Focus or any entity, or any of its Subsidiaries, any
trade or business (whether or not incorporated) which is a member of a
controlled group or which is under common control with Focus within the
meaning of Section 414 of the Code or which could be deemed a "single
employer" within the meaning of Section 4001(b) of ERISA (a "Focus ERISA
Affiliate"), or to which Focus or a Focus ERISA Affiliate is a party, whether
written or oral, for the benefit of any director, employee or former employee
of Focus or Focus ERISA Affiliate, whether or not such plan has been
terminated (the "Focus Plans"). There are no restrictions on the ability of
Focus, its Subsidiaries or any Focus ERISA Affiliates to amend, modify or
terminate any Focus Plan.
(b) With respect to each Focus Plan, Focus has heretofore made available
to Focus true and complete copies of the Focus Plan and any amendments
thereto (or if the Focus Plan is not a written Focus Plan, a description
thereof), any related trust or other funding vehicle, the three (3) most
recent reports or summaries required under ERISA or the Code, the most recent
audited financial statements and most recent determination letter received
from the Internal Revenue Service with respect to each Focus Plan intended to
qualify under Section 401 of the Code.
(c) No Focus Plan is subject to Title IV of ERISA or Section 412 of the
Code, nor is any Focus Plan a "multiemployer pension plan", as defined in
Section 3(37) of ERISA, or subject to Section 302 of ERISA. No Focus Plan is
a "single-employer plan under multiple controlled groups" as described in
Section 4063 of ERISA.
(d) Except as would not be materially adverse to Focus, each Focus Plan
has been operated and administered in all respects in accordance with its
terms and applicable Law, including ERISA and the Code. There has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any Focus Plan; there are no claims
pending (other than routine claims for benefits) or threatened against any
Focus Plan or against the assets of any Focus Plan, nor are there any current
or threatened Encumbrances on the assets of any Focus Plan. Focus and the
Focus ERISA Affiliates have performed all obligations required to be
performed by them under, are not in default under or violation of, and have
no knowledge of any default or violation by any other party with respect to,
any of the Focus Plans. All contributions required to be made to any Focus
Plan under applicable Law or the terms of the respective Focus Plan have been
made on or before their due dates and a reasonable amount has been accrued
for contributions to each Focus Plan for the current plan years; except as
disclosed on Section 4.11(d) of the Focus Disclosure Schedule, the
transaction contemplated herein will not directly or indirectly result in an
increase of benefits, acceleration of vesting or acceleration of timing for
payment of any benefit to any participant or beneficiary under any Focus
Plan.
(e) Each Focus Plan intended to be "qualified" within the meaning of
Section 401(a) of the Code and the trusts maintained thereunder that are
intended to be exempt from taxation under Section 501(a) of the Code have
received a favorable determination or other letter indicating that they are
so qualified, and no event has occurred since the date of said letter(s) that
could reasonable be expected to materially adversely affect the qualification
of such Focus Plan.
(f) No Focus Plan or written or oral agreement provides medical, surgical,
hospitalization, death or similar benefits (whether or not insured) for
directors, employees or former employees of Focus or any of its Subsidiaries
or Focus ERISA Affiliates for periods extending beyond their retirement or
other termination of service, other than (i) coverage mandated by applicable
Law, (ii) death benefits under any "pension plan" or (iii) benefits the full
cost of which is borne by the current or former employee (or his
beneficiary).
(g) No amounts payable under the Focus Plans will fail to be deductible
for federal income Tax purposes by virtue of Section 280G of the Code.
(h) The execution, delivery and performance of, and consummation of the
transactions contemplated by this Agreement will not (i) entitle any current
or former employee or officer of Focus or any Focus ERISA Affiliate to
severance pay, unemployment compensation or any other payment, except as
expressly provided in this Agreement, (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due any such employee or
officer, or (iii) accelerate the vesting of any stock option or of any shares
of restricted stock.
Section 4.12 Employment and Labor Matters.
(a) Except as set forth in Section 4.12(a) of the Focus Disclosure
Schedule, as of the date hereof, there are no material employment,
consulting, severance pay, continuation pay, termination or indemnification
agreement
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or other similar agreements of any nature (whether in writing or not) between
Focus or any Subsidiary and any current or former shareholder, officer,
director, employee, or any consultant. Except as set forth in Section 4.12(a)
of the Focus Disclosure Schedule, no individual will accrue or receive
additional benefits, service or accelerated rights to payments under any
Focus Agreement or any of the agreements set forth in Section 4.12(a) of the
Focus Disclosure Schedule, including the right to receive any parachute
payment, as defined in Section 280G of the Code, or become entitled to
severance, termination allowance or similar payments as a result of the
transaction contemplated herein that could result in the payment of any such
benefits or payments. Neither Focus nor any Subsidiary is delinquent in
payments to any of its employees or consultants for any wages, salaries,
commissions, bonuses or other compensation for any services. None of Focus'
or any Subsidiary's employment policies or practices is currently being
audited or investigated by any Governmental Authority. There are no
threatened or pending Actions alleging claims against Focus or any Subsidiary
brought by or on behalf of any employee or other individual or any
Governmental Authority with respect to employment practices.
(b) Except as set forth in Section 4.12(b) of the Focus Disclosure
Schedule, there are no controversies pending or threatened, between Focus or
any of its Subsidiaries and any of their respective employees and employee
relations are, in general, considered to be good; neither Focus nor any of
its Subsidiaries is a party to any collective bargaining agreement or other
labor union contract applicable to persons employed by Focus or its
Subsidiaries nor are there any activities or proceedings of any labor union
to organize any such employees of Focus or any of its Subsidiaries; during
the past five years there have been no strikes, slowdowns, work stoppages,
lockouts, or threats thereof, by or with respect to any employees of Focus or
any of its Subsidiaries. Focus does not have nor at the Closing will the
company have any obligation under the Worker Adjustment and Retraining
Notification Act (the "WARN Act"). Focus and each of its Subsidiaries is in
material compliance with all applicable state, local, federal and foreign
employment, wage and hour, labor and other applicable laws.
Section 4.13 Environmental Matters. Except for such matters that,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect on Focus or any of its Subsidiaries: (i) each of Focus and its
Subsidiaries has complied with all applicable Environmental Laws; (ii) the
properties currently owned or operated by it or any of its Subsidiaries
(including soils, groundwater, surface water, buildings or other structures) are
not contaminated with any Hazardous Substances; (iii) the properties formerly
owned or operated by it or any of its Subsidiaries were not contaminated with
Hazardous Substances during the period of ownership or operation by it or any of
its Subsidiaries; (iv) neither it nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any third
party property; (v) neither it nor any Subsidiary has been associated with any
release or threat of release of any Hazardous Substance; (vi) neither it nor any
Subsidiary has received any notice, demand, letter, claim or request for
information alleging that it or any of its Subsidiaries may be in violation of
or liable under any Environmental Law; (vii) neither it nor any of its
Subsidiaries is subject to any orders, decrees, injunctions or other
arrangements with any Governmental Authority or is subject to any indemnity or
other agreement with any third party relating to liability under any
Environmental Law or relating to Hazardous Substances; and (viii) there are not
circumstances or conditions involving it or any of its Subsidiaries that could
to result in any claim, liability, investigations, costs or restrictions on the
ownership, use, or transfer of any of its properties pursuant to any
Environmental Law.
Section 4.14 Absence of Restrictions on Business Activities. Except as set
forth in Section 4.14 of Focus Disclosure Schedule, there is no agreement or
order binding upon Focus or any of its Subsidiaries or any of their properties
which has had or could reasonably be expected to have the effect of prohibiting
or materially impairing any business practice of Focus or any of its
Subsidiaries or the conduct of business by Focus or any of its Subsidiaries as
currently conducted. Neither Focus nor any of its Subsidiaries is subject to any
non-competition or similar restriction on their respective businesses. Neither
Focus nor any of its Subsidiaries has at any time entered into, or agreed to
enter into, any interest rate swaps, caps, floors or option agreements or any
other interest rate risk management arrangement or foreign exchange contracts.
Section 4.15 Title to Assets; Leases. Except as described in Section 4.15
of Focus Disclosure Schedule, Focus owns no real property. Section 4.15 of Focus
Disclosure Statement sets forth a true and complete list of all real property
leased by Focus or any of its Subsidiaries, and the aggregate monthly rental or
other fee payable under such lease. Except as described in Section 4.15 of the
Focus Disclosure Schedule, Focus and each of its Subsidiaries has good and
marketable title to all of their properties and assets, free and clear of all
Encumbrances, charges and encumbrances, except Encumbrances for Taxes (as
defined below) not yet due and
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payable and such Encumbrances or other imperfections of title, if any, as do not
materially detract from the value of or interfere with the present use of the
property affected thereby. All leases pursuant to which Focus or any of its
Subsidiaries lease real or personal property from others are valid and effective
in accordance with their respective terms, and there is not, under any of such
leases, any existing material default or event of material default (or event
which with notice or lapse of time, or both, would constitute a material default
and in respect of which Focus or such Subsidiary has not taken adequate steps to
prevent such a default from occurring).
Section 4.16 Brokers. Except as disclosed in Schedule 4.16 of the Focus
Disclosure Schedule, the arrangements which have been disclosed to Videonics
prior to the date hereof, no broker, finder or investment banker is entitled to
any brokerage, finder's, investment banking or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Focus or any of its Subsidiaries.
Section 4.17 Tax Matters. Except as set forth in Section 4.17 of the Focus
Disclosure Schedule:
(a) All federal, state, local and foreign Tax Returns required to have
been filed by Focus or its Subsidiaries have been filed with the appropriate
governmental authorities by the due date thereof including extensions; and
correctly and completely reflect all material Tax liabilities of Focus and
its Subsidiaries required to be shown thereon;
(b) All Taxes payable by or with respect to Focus or any of its
Subsidiaries, have been fully paid or adequately reflected as a liability on
Focus' financial statements included in the Focus SEC Reports;
(c) With respect to any period for which Tax Returns have not yet been
filed, or for which Taxes are not yet due or owing, Focus and its
Subsidiaries have made due and sufficient accruals for such Taxes in their
respective books and records and financial statements;
(d) Neither Focus nor any of its affiliates has taken, agreed to take or
omitted to take any action that would prevent or impede the Merger from
qualifying as a tax-free reorganization under Section 368 of the Code;
(e) No deficiencies for any Taxes have been proposed, asserted or assessed
against Focus or any of its Subsidiaries that are not adequately reserved for
under GAAP, except for deficiencies that individually or in the aggregate
would not have a Material Adverse Effect on Focus. All assessments for Taxes
due and owing by or with respect to Focus and each of its Subsidiaries with
respect to completed and settled examinations or concluded litigation have
been paid. Neither Focus or any of its Subsidiaries has incurred a Tax
liability since December 31, 1999 other than those incurred in the ordinary
course of business.
(f) Focus is not aware of any material Encumbrances for Taxes upon any
assets of Focus or any of its Subsidiaries apart from for Encumbrances not
yet due and payable; and
(g) Neither Focus nor any of its Subsidiaries has requested, or been
granted any waiver of any federal, state, local or foreign statute of
limitations with respect to, or any extension of a period for the assessment
of, any Tax. No extension or waiver of time within which to file any Tax
Return of, or applicable to, Focus or any of its Subsidiaries has been
granted or requested which has not since expired.
(h) Other than with respect to its Subsidiaries, Focus is not and has
never been (nor does Focus have any liability for unpaid Taxes because it
once was) a member of an affiliated, consolidated, combined or unitary group,
and neither Focus nor any of its Subsidiaries is a party to any Tax
allocation or sharing agreement or is liable for the Taxes of any other
party, as transferee or successor, by contract, or otherwise.
(i) Focus is not presently and has not been a "foreign investment company"
as such term is defined in Section 1246(b) of the Code.
(j) Focus is not presently and has not been a "passive foreign investment
company" as such term is defined in Section 1297(a) of the Code.
(k) Focus is not presently and has not been at any time during the last
five years a "controlled foreign corporation" as such term is defined in
Section 957(a) of the Code.
(l) Focus and its Subsidiaries have not made any payments, are not
obligated to make any payments, and are not a party to any agreements that
under any circumstances could obligate any of them to make any payments that
will not be deductible under Section 280G of the Code.
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(m) No unsatisfied deficiency, delinquency or default for any Tax has been
ordered, proposed or assessed against or with respect to Focus or any
Subsidiary, nor has Focus or any Subsidiary received notice of any such
deficiency, delinquency or default which, in any such case, may have a
Material Adverse Effect.
(n) Focus has not been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code.
(o) Focus and each of its Subsidiaries have complied with all applicable
Laws relating to the payment and withholding of Taxes (including, without
limitation, withholding of Taxes pursuant to Sections 1441, 1442 and 3406 of
the Code or similar provisions under any foreign Laws) and have, within the
time and in the manner required by Law, withheld from employee wages and paid
over to the proper Governmental Authorities all amounts required to be so
withheld and paid over under all applicable Laws.
(p) No property of Focus or any of its Subsidiaries is "tax-exempt use
property" as such term is defined in Section 168 of the Code.
(q) Neither Focus nor any of its Subsidiaries has made an election under
Section 341(f) of the Code.
Section 4.18 Intellectual Property.
(a) Section 4.18(a) of Focus Disclosure Schedule sets forth, for the
Intellectual Property owned by Focus and its Subsidiaries, a complete and
accurate list of all United States and foreign (a) patents; (b) trademarks,
registrations (including material Internet domain registrations) and
applications and material unregistered trademarks; and (c) copyright
registrations and applications, indicating for each, the applicable
jurisdiction, registration number (or application number), and date issued
(or date filed).
(b) All trademarks, patents and copyrights are currently in compliance
with all Laws (including the timely post-registration filing of affidavits of
use and incontestability and renewal applications with respect to trademarks,
and the payment of filing, examination and maintenance fees and proof of
working or use with respect to patents), are valid and enforceable, and are
not subject to any maintenance fees or actions falling due within ninety (90)
days after the Effective Time. No trademark has been or is now involved in
any cancellation and, to the knowledge of Focus and its Subsidiaries, no such
action is threatened with respect to any of the trademarks. No patent has
been or is now involved in any interference, reissue, re-examination or
opposing proceeding. To the knowledge of Focus and its Subsidiaries, there
are no potentially conflicting trademarks or potentially interfering patents
of any third party.
(c) Section 4.18(c) of Focus Disclosure Schedule sets forth a complete and
accurate list of all material license agreements granting to Focus or any of
its Subsidiaries any material right to use or practice any rights under any
Intellectual Property other than Intellectual Property which is used for
infrastructural purposes and is commercially available on reasonable terms
(collectively, the "Focus License Agreements"), indicating for each the title
and the parties thereto.
(d) Except as would not be materially adverse to Focus and each of its
Subsidiaries:
(i) Focus or a Subsidiary of Focus owns free and clear of all
Encumbrances, all owned Intellectual Property used in Focus' business, and
has a valid and enforceable right to use all of the Intellectual Property
licensed to Focus and used in Focus' business;
(ii) Focus and each of its Subsidiaries have taken reasonable steps to
protect the Intellectual Property which Focus or such Subsidiary owns;
(iii) The conduct of Focus' and its Subsidiaries' businesses as
currently conducted or contemplated does not infringe upon any
Intellectual Property rights owned or controlled by any third party;
(iv) There is no Litigation pending or, to the knowledge of Focus,
threatened or any written claim from any Person (a) alleging that Focus'
activities or the conduct of its businesses or that of any of its
Subsidiaries infringes upon, violates, or constitutes the unauthorized use
of the Intellectual Property rights of any third party or (b) challenging
the ownership, use, validity or enforceability of any Intellectual
Property of Focus or any of its Subsidiaries;
(v) To the knowledge of Focus and its Subsidiaries, no third party is
misappropriating, infringing, diluting, or violating any Intellectual
Property owned by Focus or any of its Subsidiaries and no such Actions
have been brought against any third party by Focus or any of its
Subsidiaries;
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(vi) The execution, delivery and performance by Focus of this Agreement
and the consummation of the transactions contemplated hereby will not
result in the loss or impairment of or give rise to any right of any third
party to terminate any of Focus' or any of its Subsidiaries' right to own
any of the Intellectual Property owned by Focus or any of its Subsidiaries
or to use any Intellectual Property licensed to Focus or any of its
Subsidiaries pursuant to the Focus License Agreements, nor require the
consent of any Governmental Authority or third party in respect of any
such Intellectual Property; and
(vii) The Software owned or purported to be owned by Focus or any of
its Subsidiaries was either (i) developed by employees of Focus or a
Subsidiary of Focus within the scope of their employment, (ii) developed
by independent contractors who have assigned their rights to Focus or a
Subsidiary of Focus pursuant to written agreements or (iii) otherwise
acquired by Focus or a Subsidiary of Focus from a third party.
(e) All trademarks of Focus and its Subsidiaries have been in continuous
use by Focus or its Subsidiaries. To the knowledge of Focus (i) there has
been no prior use of such trademarks by any third party which would confer
upon said third party superior rights in such trademarks, (ii) Focus and its
Subsidiaries have adequately policed all trademarks against third party
infringement and (iii) the registered trademarks have been continuously used
in the form appearing in, and in connection with the goods and services
listed in, their respective registration certificates.
(f) Except as would not be materially adverse to Focus, Focus and/or its
Subsidiaries have taken all reasonable steps in accordance with normal
industry practice to protect Focus' and its Subsidiaries' rights in
confidential information and trade secrets of Focus and/or its Subsidiaries.
Without limiting the foregoing and except as would not be materially adverse
to Focus, Focus and its Subsidiaries have and enforce a policy of requiring
each employee, consultant and contractor to execute proprietary information,
confidentiality and assignment agreements substantially consistent with
Focus' standard forms thereof. Except under confidentiality obligations, to
the knowledge of Focus, there has been no material disclosure by Focus or any
Subsidiary of Focus of material confidential information or trade secrets.
Section 4.19 Insurance. Section 4.19 of Focus Disclosure Schedule sets
forth a true and complete list of all material insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of Focus and its Subsidiaries. There is no
claim by Focus or any of its Subsidiaries pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums payable under all such
policies and bonds have been paid and Focus and its Subsidiaries are otherwise
in full compliance with the terms of such policies and bonds (or other policies
and bonds providing substantially similar insurance coverage), and Focus shall,
and shall cause its Subsidiaries to, maintain in full force and effect all such
insurance during the period from the date hereof through the Closing Date. Such
policies of insurance and bonds are of the type and in amounts customarily
carried by Persons conducting businesses similar to those of Focus and its
Subsidiaries and reasonable in light of the assets of Focus and its
Subsidiaries. Except for any increase in the premium for the directors' and
officers' insurance policy of Focus and any bond posted in connection with a
judgment adverse to Focus in the matter of CRA Systems, Inc v. Focus
Enhancements, Inc,. to the knowledge of Focus as of the date hereof, there is
not any threatened termination of or material premium increase with respect to
any of such policies or bonds.
Section 4.20 Ownership of Securities. As of the date hereof, neither Focus
nor, to Focus' knowledge, any of its affiliates or associates (as such terms are
defined under the Exchange Act), (i) beneficially owns, directly or indirectly,
or (ii) is party to any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of, in each case, shares of capital
stock of Videonics, which in the aggregate represent 10% or more of the
outstanding shares of Videonics Common Stock.
Section 4.21 Certain Contracts. All contracts described in Item 601(b)(10)
of Regulation S-K to which Focus or its Subsidiaries is a party or may be bound
("Focus Contracts") have been filed as exhibits to, or incorporated by reference
in, Focus' Annual Report on Form 10-KSB for the year ended December 31, 1999.
All Focus Contracts are valid and in full force and effect on the date hereof.
Each such Focus Contract is in full force and effect, is a valid and binding
obligation of Focus or such Subsidiary and, to the knowledge of Focus, of each
other party thereto and is enforceable against Focus or such Subsidiary in
accordance with its terms, and, to the knowledge of Focus, enforceable against
each other party thereto, in each case except to the extent the
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enforcement thereof may be limited by (A) bankruptcy, insolvency,
reorganization, moratorium or other similar Law now or hereafter in effect
relating to creditors' rights generally and (B) general principles of equity
(regardless of whether enforceability is considered in a proceeding in equity or
at Law), and there has not occurred any material default by any party thereto
which remains unremedied as of the date hereof. No condition exists or event has
occurred which (whether with or without notice or lapse of time or both, or the
happening or occurrence of any other event) would constitute a default by Focus
or any of its Subsidiaries or, to the knowledge of Focus, any other party
thereto under, or result in a right in termination of, any Focus Contract.
Section 4.22 Certain Business Practices. As of the date hereof, neither
Focus nor any of its Subsidiaries nor any director, officer, employee or agent
of Focus or any of its Subsidiaries has (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful payments relating to
political activity, (ii) made any unlawful payment to any foreign or domestic
government official or employee or to any foreign or domestic political party or
campaign or violated any provision of the Foreign Corrupt Practices Act of 1977,
as amended, (iii) consummated any transaction, made any payment, entered into
any agreement or arrangement or taken any other action in violation of Section
1128B(b) of the Social Security Act, as amended, or (iv) made any other unlawful
payment.
Section 4.23 Interested Party Transactions. Except as disclosed in Focus
SEC Reports, neither Focus nor any of its Subsidiaries is indebted to any
director, officer, employee or agent of Focus or any of its Subsidiaries (except
for amounts due as normal salaries and bonuses and in reimbursement of ordinary
expenses), and no such Person is indebted to Focus or any of its Subsidiaries,
and there have been no other transactions of the type required to be disclosed
pursuant to Items 402 and 404 of Regulation S-K under the Securities Act and the
Exchange Act.
Section 4.24 Merger Subsidiary. Focus and Merger Subsidiary represent and
warrant to Videonics as follows:
(a) Organization and Corporate Power. Merger Subsidiary is a corporation
duly incorporated, validly existing and in good standing under the laws of
the State of Delaware. Merger Subsidiary is a direct, wholly-owned subsidiary
of Focus.
(b) Corporate Authorization. Merger Subsidiary has all requisite corporate
power and authority to enter into this Agreement and, subject to obtaining
the requisite approval of this Agreement by Merger Subsidiary's shareholder
as required by DCL (the "Merger Subsidiary Shareholder Approval"), to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by Merger Subsidiary, and the consummation by Merger
Subsidiary of the transactions contemplated hereby, have been duly authorized
by all necessary corporate action on the part of Merger Subsidiary, subject
to obtaining the Merger Subsidiary Shareholder Approval. This Agreement has
been duly executed and delivered by Merger Subsidiary and constitutes a valid
and binding agreement of Merger Subsidiary, enforceable against it in
accordance with its terms.
(c) Non Contravention. The execution, delivery and performance by Merger
Subsidiary of this Agreement and the consummation by Merger Subsidiary of the
transactions contemplated hereby do not and will not contravene or conflict
with the certificate of incorporation or by-laws of Merger Subsidiary.
(d) No Business Activities. Merger Subsidiary has not conducted any
activities other than in connection with the organization of Merger
Subsidiary, the negotiation and execution of this Agreement and the
consummation of the transactions contemplated hereby. Merger Subsidiary has
no Subsidiaries.
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ARTICLE V CONDUCT OF BUSINESSES
PENDING THE MERGER
Section 5.1 Conduct of Business in the Ordinary Course. Each of Videonics
and Focus covenants and agrees that, except as otherwise provided for herein,
between the date hereof and the Effective Time, unless the Chairman of the Board
of Directors of the other shall otherwise consent in writing, the business of
such Party and its Subsidiaries shall be conducted only in, and such entities
shall not take any action except in, the ordinary course of business and in a
manner consistent with past practice; and each of Videonics and Focus and its
Subsidiaries will use their commercially reasonable efforts to preserve
substantially intact their business organizations, to keep available the
services of those of their present officers, employees and consultants who are
integral to the operation of their businesses as presently conducted, to
maintain in effect all Material Agreements and to preserve their present
relationships with significant customers and suppliers and with other persons
with whom they have significant business relations. By way of amplification and
not limitation, except as expressly contemplated by this Agreement, each of
Videonics and Focus agrees on behalf of itself and, in the case of Focus, its
Subsidiaries, that they will not, between the date hereof and the Effective
Time, directly or indirectly, do any of the following without the prior written
consent of the other, as set forth in the first sentence of this Section 5.1:
(a) (i) except for (A) the issuance of shares of Videonics Common Stock
and Focus Common Stock in order to satisfy obligations under the Videonics
Plans and Focus Plans in effect on the date hereof and Focus Equity Rights or
Videonics Equity Rights issued thereunder and under existing dividend
reinvestment plans, which issuances shall be consistent with its existing
policy and past practice; (B) grants of stock options with respect to
Videonics Common Stock or Focus Common Stock to employees in the ordinary
course of business and in amounts and in a manner consistent with past
practice; and (C), in the case of Focus, (1) the issuance of up to 2,500,000
shares of Focus Common Stock pursuant to a shelf registration on Form S-1,
(2) the posting of Focus Common Stock held in treasury as collateral for the
a judgment adverse to Focus in the matter of CRA Systems, Inc. v. Focus
Enhancements, Inc. or (3) payment of some or all of Union Atlantic LC's fee
for providing investment banking services to Focus in connection with this
transaction by the issuance to Union Atlantic of shares of Focus Common Stock
in accordance with the agreement attached as Schedule A hereto, issue, sell,
pledge, dispose of, encumber, authorize, or propose the issuance, sale,
pledge, disposition, encumbrance or authorization of any shares of capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock of, or any other
ownership interest in, such Party or any of its Subsidiaries; (ii) amend or
propose to amend the Certificate or Articles of Incorporation, as the case
may be, or bylaws of such Party (other than the increase in the authorized
capital of Focus contemplated herein) or any of its Subsidiaries or adopt,
amend or propose to amend any shareholder rights plan or related rights
agreement; (iii) split, combine or reclassify any outstanding shares of
Videonics Common Stock or Focus Common Stock, or declare, set aside or pay
any dividend or distribution payable in cash, stock, property or otherwise
with respect to shares of Videonics Common Stock or Focus Common Stock,
except for cash dividends to shareholders of Videonics and Focus declared in
accordance with existing dividend policy payable to shareholders of record on
the record dates consistently used in prior periods; (iv) redeem, purchase or
otherwise acquire or offer to redeem, purchase or otherwise acquire any
shares of its capital stock, or (v) authorize or propose or enter into any
contract, agreement, commitment or arrangement with respect to any of the
matters prohibited by this Section 5.1(a).
(b) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof or make any investment in another entity (other than an
entity which is a wholly owned Subsidiary of such Party as of the date hereof
and other than incorporation of a wholly owned Subsidiary); (ii) except in
the ordinary course of business and in a manner consistent with past practice
and except for the sub-lease by Focus of its Wilmington facility, sell,
pledge, dispose of, or encumber or authorize or propose the sale, pledge,
disposition or encumbrance of any assets of such Party or any of its
Subsidiaries, except for transactions which do not exceed $100,000 in the
aggregate in any 12-month period, no Party shall make any dispositions in
excess of an aggregate of $100,000; or (iii) authorize, enter into or amend
any contract, agreement, commitment or arrangement with respect to any of the
matters prohibited by this Section 5.1(b);
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(c) sell, transfer, lease, license, sublicense, mortgage, pledge, dispose
of, encumber, grant or otherwise dispose of any Intellectual Property rights,
or amend or modify in any material way any existing agreements with respect
to any Intellectual Property rights;
(d) incur any indebtedness for borrowed money or issue any debt securities
or assume, guarantee (other than guarantees by Focus of bank debt of its
Subsidiaries entered into in the ordinary course of business) or endorse or
otherwise as an accommodation become responsible for, the obligations of any
Person, or make any loans, advances or enter into any financial commitments,
except in the ordinary course of business consistent with past practice and
as otherwise permitted under any loan or credit agreement to which it is a
party; authorize any capital expenditures which are, in the aggregate, in
excess of $100,000 for it and, in the case of Focus, its Subsidiaries taken
as a whole; or enter into or amend in any material respect any contract,
agreement, commitment or arrangement with respect to any of the matters set
forth in this Section 5.1(d);
(e) hire or terminate any employee or consultant, except in the ordinary
course of business consistent with past practice; increase the compensation
(including, without limitation, bonus) payable or to become payable to its
officers or employees, except for retention agreements entered into in
anticipation of the Merger and except for previously disclosed officers
salary increases, increases in salary or wages of employees who are not
officers of it or, in the case of Focus, its Subsidiaries in the ordinary
course of business consistent with past practices, or grant any severance or
termination pay or stock options to, or enter into any employment or
severance agreement with any director, officer or other employee of it or, in
the case of Focus, any of its Subsidiaries, or establish, adopt, enter into
or amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any current or former
directors, officers or employees;
(f) change, any accounting policies or procedures (including procedures
with respect to reserves, revenue recognition, payments of accounts payable
and collection of accounts receivable) unless required by statutory
accounting principles or GAAP;
(g) create, incur, suffer to exist or assume any Encumbrance on any
material assets of it or, in the case of Focus, its Subsidiaries;
(h) other than in the ordinary course of business consistent with past
practice, (A) enter into any Material Agreement, (B) modify, amend or
transfer in any material respect or terminate any Material Agreement to which
it or, in the case of Focus, any of its Subsidiaries is a party or waive,
release or assign any material rights or claims thereto or thereunder or (C)
enter into or extend any lease with respect to real property with any third
party;
(i) make any Tax election or settle or compromise any federal, state,
local or foreign income tax liability or agree to an extension of a statute
of limitations;
(j) settle any material litigation or waive, assign or release any
material rights or claims except, in the case of litigation, any litigation
which settlement would not (A) impose either material restrictions on the
conduct of the business of it or, in the case of Focus, any of its
Subsidiaries or (B) for any individual litigation item settled, exceed
$100,000 in cost or value to it or, in the case of Focus, any of its
Subsidiaries. Neither Videonics, Focus or any Focus Subsidiaries shall pay,
discharge or satisfy any liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), except in the ordinary
course of business consistent with past practice in an amount or value not
exceeding $50,000 in any instance or series of related instances or $100,000
in the aggregate or in accordance with their terms as in effect as of the
date hereof;
(k) engage in any transaction, or enter into any agreement, arrangement,
or understanding with, directly or indirectly, any related party, other than
those existing as of the date hereof which are listed in the Disclosure
Schedule of such party;
(l) maintain in full force and effect all insurance, as the case may be,
currently in effect; and
(m) take any action which it believes when taken could reasonably be
expected to adversely affect or delay in any material respect the ability of
any of the Parties to obtain any approval of any Governmental Authority
required to consummate the transactions contemplated hereby;
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(n) other than pursuant to this Agreement, take any action to cause the
shares of their respective Common Stock to cease to be quoted on any of the
stock exchanges on which such shares are now quoted;
(o) take any action which it believes when taken would cause its
representations and warranties contained herein to become inaccurate in any
material respect.
Section 5.2 No Solicitation.
(a) From the date hereof until the earlier of the Effective Time or the
termination of this Agreement in accordance with its terms, neither Party
shall, nor shall it permit any of its affiliates to, nor shall it authorize
or permit or any of its or their respective officers, directors, employees,
representatives or agents (collectively, the "Representatives") directly or
indirectly, to (i) solicit, facilitate, initiate or encourage, or take any
action to solicit, facilitate, initiate or encourage, any inquiries or the
making of any proposal or offer that constitutes an Acquisition Proposal or
(ii) participate or engage in discussions or negotiations with, or provide
any information to, any Person concerning an Acquisition Proposal or which
might reasonably be expected to result in an Acquisition Proposal. Each party
shall immediately cease and cause to be terminated and shall cause all of its
Representatives to terminate all existing discussions or negotiations with
any Persons conducted heretofore with respect to, or that could reasonably be
expected to lead to, an Acquisition Proposal. Each party shall promptly
notify all of its Representatives of its obligations under this Section.
(b) Notwithstanding the foregoing, any Party (the "Solicited Party") may
participate in discussions or negotiations with, or furnish information to a
third party pursuant to a confidentiality agreement with terms no less
favorable to the Solicited Party than those in effect between the Solicited
Party and the other Parties hereto if and only if (i) such Solicited Party
has submitted an unsolicited bona fide written Acquisition Proposal to the
Solicited Party's Board of Directors and (ii) neither the Solicited Party nor
any of its Representatives, shall have violated Section 5.2(a) and the Board
of Directors of the Solicited Party (A) believes in good faith based on such
matters as it deems relevant, including the advice of the Solicited Party's
financial advisor, that such Acquisition Proposal constitutes a Superior
Proposal, (B) receives a written opinion of outside counsel to the effect
that, and based on such advice such Board determines by a majority vote in
its good faith judgment that, taking such action is required to satisfy the
fiduciary duties of such Board under applicable Law and (C) provides prior
written notice to the other Parties of its decision to so participate or
furnish.
(c) Except as set forth in the following sentence, neither the Board of
Directors of a Party to this Agreement nor any committee thereof shall (i)
approve or recommend, or propose to approve or recommend, any Acquisition
Proposal other than the Merger, (ii) withdraw or modify or propose to
withdraw or modify in a manner adverse to the other party its approval or
recommendation of the Merger, this Agreement or the transactions contemplated
hereby, (iii) upon a request by either of the other Parties to reaffirm its
approval or recommendation of this Agreement or the Merger, fail to do so
within two (2) Business Days after such request is made, (iv) enter, or cause
such Party or any Subsidiary of such Party to enter, into any letter of
intent, agreement in principle, acquisition agreement or other similar
agreement related to any Acquisition Proposal, or (v) resolve or announce its
intention to do any of the foregoing. The immediately preceding sentence
notwithstanding, in the event that prior to approval of the Merger by its
shareholders, the Board of Directors of a Party receives a Superior Proposal,
the Board of Directors of such party may (i) approve or recommend, or propose
to approve or recommend, such Superior Proposal, (ii) withdraw or modify, or
propose to withdraw or modify, in a manner adverse to the other Party its
recommendation of the Merger, this Agreement or the transactions contemplated
hereby, (iii) fail to reaffirm its recommendation of this Agreement or the
Merger after a request by the other Party to do so, or (iv) resolve or
announce its intention to do any of the actions set forth in the preceding
clauses (i) through (iii), if (1) such Board of Directors receives a written
opinion of outside counsel to the effect that, and based on such advice of
outside counsel such Board determines by a majority vote of directors in
their good faith judgment that, taking such action is required to satisfy the
fiduciary duties of such directors and (2) such Party furnishes the other
Parties two (2) Business Days' prior written notice of the taking of such
action (which notice shall include a description of the material terms and
conditions of the Superior Proposal and identify the person making the same).
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(d) In addition to the other obligations of the Parties set forth in this
Section 5.2, each Party shall immediately advise the other Party orally and
in writing of any request for information with respect to any Acquisition
Proposal, or any inquiry with respect to or which could result in an
Acquisition Proposal, the material terms and conditions of such request,
Acquisition Proposal or inquiry, and the identity of the person making the
same. Each Party shall inform the other Party on a prompt and current basis
of the status and content of any discussions regarding any Acquisition
Proposal with a third Party and as promptly as practicable of any change in
the price, structure or form of the consideration or material terms of and
conditions regarding any Acquisition Proposal or of any other developments or
circumstances which could reasonably be expected to culminate in the taking
of any of the actions referred to in Section 5.2(c). Nothing contained in
this Section 5.2(d) shall prevent any Party hereto from complying with Rule
14d-9 and Rule 14e-2 promulgated under the Exchange Act.
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ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Joint Proxy Statement and Registration Statement.
(a) Focus and Videonics shall (i) as promptly as practicable following the
date hereof prepare and file with the SEC joint preliminary proxy or
information statement relating to the Merger and this Agreement, (ii) obtain
and furnish the information required to be included by the SEC in the Joint
Proxy Statement and, after consultation with each other, respond promptly to
any comments made by the SEC with respect to the Joint Proxy Statement, (iii)
cause the Joint Proxy Statement and the prospectus to be included in the
Registration Statement, including any amendment or supplement thereto, to be
mailed to their respective shareholders at the earliest practicable date
after the Registration Statement is declared effective by the SEC, and (iv)
use all reasonable efforts to obtain the necessary approval of the Merger and
this Agreement by their respective shareholders and, in the case of Focus,
use all reasonable efforts to obtain the necessary approval of the increase
in the authorized capital of Focus required to complete the Merger. Neither
Videonics nor Focus shall file with or supplementally provide to the SEC or
mail to its shareholders the Joint Proxy Statement or any amendment or
supplement thereto without the prior consent of the other. Videonics and
Focus shall fully participate in the preparation of the Joint Proxy Statement
and any amendment or supplement thereto and shall consult with each other and
their advisors concerning any comments from the SEC with respect thereto.
(b) Focus shall prepare and file with the SEC a Registration Statement on
Form S-4 and the parties hereto shall use all reasonable efforts to have the
Registration Statement declared effective by the SEC as promptly as
practicable. Focus shall obtain and furnish the information required to be
included in the Registration Statement and, after consultation with
Videonics, respond promptly to any comments made by the SEC with respect to
the Registration Statement.
(c) The Joint Proxy Statement shall include the recommendation of the
Board of Directors of Videonics in favor of approval and adoption of this
Agreement and the Merger, except to the extent that Videonics shall have
withdrawn or modified its recommendation of this Agreement or the Merger as
permitted by Section 5.2.
(d) The Joint Proxy Statement shall include the recommendation of the
Board of Directors of Focus in favor of approval and adoption of this
Agreement, the Merger and the approval of the increase in the authorized
capital of Focus required to complete the Merger, except to the extent that
Focus shall have withdrawn or modified its approval of the Agreement or the
Merger as permitted by Section 5.2.
(e) Focus and Videonics shall, as promptly as practicable, make all
necessary filings with respect to the Merger under the Securities Act and the
Exchange Act and the rules and Regulations thereunder and under applicable
Blue Sky or similar securities laws, rules and Regulations, and shall use all
reasonable efforts to obtain required approvals and clearances with respect
thereto.
(f) The Parties will cooperate in the preparation of the Joint Proxy
Statement and the Registration Statement and in having the Registration
Statement declared effective as soon as practicable.
Section 6.2 Videonics Shareholders' Meeting. Videonics shall promptly after
the date hereof take all action necessary in accordance with CCL and its
Articles of Incorporation and bylaws to duly call, give notice of and (unless
Focus requests otherwise) hold the Videonics Shareholders Meeting as soon as
practicable following the date upon which the Registration Statement becomes
effective and shall consult with Focus in connection therewith. Once the
Videonics Shareholders Meeting has been called and noticed, Videonics shall not
postpone or adjourn (other than for the absence of a quorum and then only to a
future date specified by Focus) the Videonics Shareholders Meeting without the
consent of Focus. The Board of Directors of Videonics shall declare that this
Agreement is advisable and, subject to Section 5.2(c), recommend that this
Agreement and the transactions contemplated hereby be approved and authorized by
the shareholders of Videonics and include in the Joint Proxy Statement a copy of
such recommendations; provided, however, that the Board of Directors of
Videonics shall submit this Agreement to the shareholders of Videonics whether
or not the Board of Directors of Videonics at any time subsequent to making such
recommendation takes any action permitted by Section 5.2(c). Videonics shall
solicit from shareholders of Videonics proxies in favor of the Merger and shall
take all other action necessary or advisable to secure the vote or consent of
shareholders required by the CCL to authorize the Merger; provided, however,
that this provision shall not prohibit the Board of Directors from taking any
action permitted by Section 5.2(c).
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Section 6.3 Focus Shareholders' Meeting. Focus shall promptly after the
date hereof take all action necessary in accordance with DCL and its Certificate
of Incorporation and bylaws to duly call, give notice of and (unless Videonics
requests otherwise) hold the Focus Shareholders Meeting as soon as practicable
following the date upon which the Registration Statement becomes effective and
shall consult with Videonics in connection therewith. Once the Focus
Shareholders Meeting has been called and noticed, Focus shall not postpone or
adjourn (other than for the absence of a quorum and then only to a future date
specified by Videonics) the Focus Shareholders Meeting without the consent of
Videonics. The Board of Directors of Focus shall declare that the Merger is
advisable and, subject to Section 5.2(c), recommend that this Agreement and the
transactions contemplated hereby be approved and authorized by the shareholders
of Focus and that the authorized capital of Focus be increased to permit
consummation of the Merger and shall include in the Joint Proxy Statement a copy
of such recommendations; provided however, that the Board of Directors of Focus
shall submit this Agreement to the Focus shareholders and hold a shareholders'
vote to approve an increase in the authorized capital of Focus whether or not
the Board of Directors of Focus at any time subsequent to making such
recommendation takes any action permitted by Section 5.2(c). Focus shall solicit
from shareholders of Focus proxies in favor of the Merger and the increase in
the authorized capital of Focus and shall take all other action necessary or
advisable to secure the vote or consent of shareholders required by DCL to
authorize the Merger and the increase in the authorized capital of Focus;
provided, however, that this provision shall not prohibit the Board of Directors
from taking any action permitted by Section 5.2(c).
Section 6.4 Consummation of Merger; Additional Agreements.
(a) Upon the terms and subject to the conditions hereof and as soon as
practicable after the conditions set forth in Article VII hereof have been
fulfilled or waived, each of the Parties required to do so shall execute in
the manner required by the DCL and CCL and deliver to and file with the
Secretary of State of the State of Delaware and Secretary of State of the
State of California such instruments and agreements as may be required by the
DCL and CCL and the Parties shall take all such other and further actions as
may be required by Law to make the Merger effective.
(b) Each of the Parties will comply in all material respects with all
applicable laws and with all applicable rules and regulations of any
Governmental Authority in connection with its execution, delivery and
performance of this Agreement and the transactions contemplated hereby. Each
of the Parties agrees to use all commercially reasonable efforts to obtain in
a timely manner all necessary waivers, consents and approvals and to effect
all necessary registrations and filings, and to use all commercially
reasonable efforts to take, or cause to be taken, all other actions and to
do, or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement and to effect all necessary filings under the
Securities Act, the Exchange Act and the HSR Act.
(c) Each of Focus and Videonics shall, in connection with the efforts
referenced in Section 6.4(a) and (b), (i) cooperate in all respects with each
other in connection with any filing or submission and in connection with any
investigation or other inquiry, including any proceeding initiated by a
private party; (ii) promptly inform the other party of any material
communication received by such party from, or given by such party to any
Governmental Authority and of any material communication received or given in
connection with any proceeding by a private party, in each case regarding any
of the transactions contemplated hereby and (iii) consult with each other in
advance of any meeting or conference with any such Governmental Authority or,
in connection with any proceeding by a private party, with any other person,
and to the extent permitted by the applicable Governmental Authority or other
person, give the other Parties the opportunity to attend and participate in
such meetings and conferences.
(d) In furtherance and not in limitation of the covenants of the Parties
contained in Sections 6.4(a), (b) and (c), if any Action, including any
Action by a private party, is instituted (or threatened to be instituted)
challenging any transaction contemplated by this Agreement as violative of
any applicable Law, or if any Law is enacted, entered or promulgated or
enforced by a Governmental Authority which would make the Merger or the other
transactions contemplated hereby illegal or otherwise prohibit or materially
impair or delay consummation of the transactions contemplated hereby or
thereby, each of Focus and Videonics shall cooperate in all respects with
each other and use all commercially reasonable efforts to contest and resist
any such Action, to have vacated, lifted, reversed or overturned any Law,
whether temporary, preliminary or permanent, that is in effect
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and that prohibits, prevents or restricts consummation of the transactions
contemplated by this Agreement and to have such Law repealed, rescinded or
made inapplicable. Notwithstanding the foregoing or any other provision of
this Agreement, nothing in this Section 6.4 shall limit a Party's right to
terminate this Agreement pursuant to Section 8.1 so long as such Party has up
to then complied in all respects with its obligations under this Section 6.4.
(e) If any objections are asserted with respect to the transactions
contemplated hereby under any applicable Law or if any suit is instituted by
any Governmental Authority or any private party challenging any of the
transactions contemplated hereby as violative of any applicable Law, each of
Focus and Videonics shall use its commercially reasonable efforts to resolve
any such objections or challenge as such Governmental Authority or private
party may have to such transactions under such Law so as to permit
consummation of the transactions contemplated by this Agreement.
Section 6.5 Notification of Certain Matters. Each of Videonics and Focus
shall give prompt notice to the other of the following:
(a) the occurrence or nonoccurrence of any event whose occurrence or
nonoccurrence would be likely to cause either (i) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time, or
(ii) directly or indirectly, any Material Adverse Effect on such Party;
(b) any material failure of such Party, or any officer, director, employee
or Agent of any thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder, and
(c) any facts relating to such Party which would make it necessary or
advisable to amend the Joint Proxy Statement or the Registration Statement in
order to make the statements therein not misleading or to comply with
applicable Law; provided, however, that the delivery of any notice pursuant
to this Section 6.5 shall not limit or otherwise affect the remedies
available hereunder to the Party receiving such notice.
Section 6.6 Access to Information; Confidentiality.
(a) From the date hereof to the Effective Time, each of Videonics and
Focus shall, and, in the case of Focus, shall cause its Subsidiaries, and its
and their officers, directors, employees, auditors, counsel and agents to
afford the officers, employees, auditors, counsel and agents of the other
Party complete access at all reasonable times to such Party's and its
Subsidiaries' officers, employees, auditors, counsel agents, properties,
offices and other facilities and to all of their respective books and records
(except as may be required by Law), and shall furnish the other with all
financial, operating and other data and information as such other Party may
reasonably request, including in connection with confirmatory due diligence.
(b) Each of Videonics and Focus agrees that all information so received
from the other Party shall be deemed received pursuant to the Nondisclosure
Agreement and such Party shall, and shall cause its Subsidiaries and each of
its and their respective Representatives, to comply with the provisions of
the Nondisclosure Agreement with respect to such information and the
provisions of the Nondisclosure Agreement are hereby incorporated herein by
reference with the same effect as if fully set forth herein, provided that
such information may be used for any purpose contemplated hereby.
Section 6.7 Public Announcements. Focus and Videonics shall consult with
and obtain the approval of the other party before issuing any press release or
other public announcement with respect to the Merger or this Agreement and shall
not issue any such press release prior to such consultation and approval, except
as may be required by applicable Law or any listing agreement related to the
trading of the shares of either party on any national securities exchange or
national automated quotation system, in which case the party proposing to issue
such press release or make such public announcement shall use reasonable efforts
to consult in good faith with the other party before issuing any such press
release or making any such public announcement. Notwithstanding the foregoing,
in the event either party's Board of Directors withdraws its recommendation of
this Agreement in compliance herewith, such will no longer be required to
consult with or obtain the agreement of the other party in connection with any
press release or public announcement.
Section 6.8 Employee Benefit Plans. The Videonics Plans and the Focus Plans
in effect at the date hereof shall remain in effect immediately after the
Effective Time with respect to classes of employees covered by such
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plans immediately prior to the Effective Time, provided that, as soon as
practicable after the Effective Time, the Board of Directors of Focus will
examine the Videonics Plans and the Focus Plans and will select plans for Focus
and Videonics that have substantially similar terms to the best of each type of
plan currently available to employees of either of Focus or Videonics.
Section 6.9 Succession.
(a) At the Effective Time, (i) Michael L. D'Addio shall hold the positions
of President and Chief Executive Officer of Focus and (ii) Thomas L. Massie
shall remain as Chairman of the Board of Focus for the remainder of his
current term. If Mr. D'Addio is unable or unwilling to hold such offices as
set forth above, his successor shall be selected by the Board of Directors of
Focus.
(b) As soon as practicable after the date hereof, Focus shall enter into
an employment agreement effective as of the Effective Time (the "Employment
Agreement") with Messr. D'Addio containing arrangements concerning management
succession satisfactory to each Party.
Section 6.10 Stock Exchange Listing. Each of the Parties shall use its best
efforts to obtain, prior to the Effective Time, the approval for listing on the
NASDAQ, effective upon official notice of issuance, of the shares of Focus
Common Stock into which the Videonics Common Stock will be converted pursuant to
Article II hereof and which will be issuable upon exercise of options pursuant
to Section 2.12 hereof.
Section 6.11 Post-Merger Focus Board of Directors.
(a) At the Effective Time, one or more of the incumbent directors shall
resign from the Board of Directors of Focus so that there shall be sufficient
vacancies for the Board of Directors to appoint three directors, one being
appointed for each of one, two and three years, and all of whom shall be
nominated by Videonics as provided below. After the Effective Time, the Board
of Directors of Focus shall be comprised of seven directors as provided
below. To the extent possible, the Videonics nominees shall be selected from
persons who are directors of Videonics prior to the Effective Time.
(b) The persons to serve initially on the Board of Directors of Focus at
the Effective Time who are Videonics Directors (as defined below) shall be
selected solely by and at the absolute discretion of the Board of Directors
of Videonics prior to the Effective Time; and the persons to serve on the
Board of Directors of Focus at the Effective Time who are Focus Directors (as
defined below) shall be selected solely by and at the absolute discretion of
the Board of Directors of Focus prior to the Effective Time. In the event
that, prior to the Effective Time, any person so selected to serve on the
Board of Directors of Focus after the Effective Time is unable or unwilling
to serve in such position, the Board of Directors which selected such person
shall designate another of its members to serve in such person's stead in
accordance with the provisions of the immediately preceding sentence.
(c) If, at any time prior to September 1, 2002, the number of Videonics
Directors is less than three then, subject to the fiduciary duties of the
directors, the Board of Directors shall appoint to fill any existing vacancy
or vacancies, as appropriate, such person or persons as may be requested by
the remaining Videonics Directors (if the number of Videonics Directors is,
or would otherwise become, less than three) or by the remaining Focus
Directors (if the number of Focus Directors is, or would otherwise become,
less than four) to ensure that there shall be four Focus Directors. The
provisions of the preceding two sentences shall not apply in respect of any
vacancy which occurs after September 1, 2002. The term "Videonics Director"
means (i) any person serving as a director of Videonics on the date hereof
who becomes a director of Focus at the Effective Time and (ii) any person who
subsequently becomes a director of Focus and who is designated by the
Videonics Directors pursuant to this paragraph; and the term "Focus Director"
means (i) any person serving as a director of Focus on the date hereof who
continues as a director of Focus after the Effective Time and (ii) any person
who becomes a director of Focus and who is designated by the Focus Directors
pursuant to this paragraph. From the Effective Time through September 1,
2002, the Board of Directors shall consist of a number of Directors as
described above and such number of Directors shall not be amended.
(d) Each of Videonics and Focus shall take such action as shall reasonably
be deemed by either thereof to be advisable to give effect to the provisions
set forth in this section, including but not limited to incorporating such
provisions in the bylaws of Focus in effect at the Effective Time.
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Section 6.12 Blue Sky. Videonics and Focus will use their best efforts to
obtain prior to the Effective Time all necessary blue sky permits and approvals
required to permit the distribution of the shares of Focus Common Stock to be
issued in accordance with the provisions of this Agreement.
Section 6.13 Tax-Free Reorganization. Each of the Parties will use its best
efforts to cause the Merger to qualify as a tax-free reorganization under the
Code.
ARTICLE VII
CONDITIONS TO MERGER
Section 7.1 Conditions to Obligations of Each Party to Effect the Merger.
The respective obligations of each Party to effect the Merger shall be subject
to the following conditions:
(a) Shareholder Approval. The Videonics Shareholder Approval, Focus
Shareholder Approval and Merger Subsidiary Shareholder Approval shall have
been obtained;
(b) Amendment of Articles of Focus. The Certificate of Incorporation of
Focus shall have been amended to increase the authorized capital of Focus to
permit the issuance of Focus Common Stock in accordance with the requirements
of Section 2.2;
(c) Legality. No Law shall have been enacted, entered, promulgated or
enforced by any Governmental Authority which is in effect and has the effect
of (i) making the Merger illegal or otherwise prohibiting the consummation of
the Merger or (ii) creating a Material Adverse Effect on Videonics or Focus,
with or without including its ownership of Videonics and its Subsidiaries
after the Effective Time;
(d) HSR Act. Any waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated;
(e) Regulatory Matters. All authorizations, consents, orders, permits or
approvals of, or declarations or filings with, and all expirations of waiting
periods imposed by, any Governmental Authority (all of the foregoing,
"Consents") which are necessary for the consummation of the transactions
contemplated hereby, other than Consents which, if not obtained, would not
have a Material Adverse Effect on Focus, with or without including its
ownership of Videonics and its Subsidiaries after the Merger, or Videonics,
shall have been filed, have occurred or have been obtained (all such Consents
being referred to as the "Requisite Regulatory Approvals") and all such
Requisite Regulatory Approvals shall be in full force and effect, provided,
however, that a Requisite Regulatory Approval shall not be deemed to have
been obtained if in connection with the grant thereof there shall have been
an imposition by any Governmental Authority of any condition, requirement,
restriction or change of regulation, or any other action directly or
indirectly related to such grant taken by such Governmental Authority, which
would reasonably be expected to have a Material Adverse Effect on either of
(A) Videonics or (B) Focus (either with or without including its ownership of
Videonics and its Subsidiaries after the Merger);
(f) Registration Statement Effective. The Registration Statement shall
have been declared effective and no stop order suspending the effectiveness
of the Registration Statement shall then be in effect, and no proceedings for
that purpose shall then be threatened by the SEC or shall have been initiated
by the SEC and not concluded or withdrawn;
(g) Blue Sky. All state securities or blue sky permits or approvals
required to carry out the transactions contemplated hereby shall have been
received;
(h) Stock Exchange Listing. The shares of Focus Common Stock into which
the Videonics Common Stock will be converted pursuant to Article II hereof
and the shares of Focus Common Stock issuable upon the exercise of options
pursuant to Section 2.12 hereof shall have been duly approved for listing on
the NASDAQ, subject to official notice of issuance;
(i) Consents Under Agreements. Each of Videonics and Focus shall have
obtained the consent or approval of any person whose consent or approval
shall be required under any agreement or instrument in order to permit the
consummation of the transactions contemplated hereby or material agreement,
except those which the failure to obtain would not, individually or in the
aggregate, have a Material Adverse Effect on Videonics or Focus, including
its ownership of Videonics and its Subsidiaries after the Merger;
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(j) No Material Adverse Effect. From and including the date hereof, there
shall not have occurred any event and no circumstance shall exist which,
alone or together with any one or more other events or circumstances has had,
is having or would reasonably be expected to have a Material Adverse Effect
on Videonics, Focus or any Focus Subsidiary;
(k) Satisfactory Completion of Due Diligence. Within seven (7) days of the
date hereof, both parties shall have satisfactorily completed their due
diligence review of the other party and shall be satisfied with the results
thereof; and
(l) Tax Opinion. The parties shall have received an opinion of either
Manatt, Phelps & Phillips, counsel to Videonics, or Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, PC, counsel to Focus, dated as of the Closing
Date, in form and substance reasonably satisfactory to the paties,
substantially to the effect that, on the basis of the facts, representations
and assumptions set forth in such opinion, the Merger constitutes a tax-free
reorganization under the Code and therefore: (A) no gain or loss will be
recognized for federal income tax purposes by Focus, Videonics or Merger
Subsidiary as a result of the formation of Merger Subsidiary and the Merger;
(B) no gain or loss will be recognized for federal income tax purposes by the
shareholders of Videonics upon their exchange of Videonics Common Stock
solely for Focus Common Stock pursuant to the Merger (except with respect to
cash received in lieu of a fractional share interest in Focus Common Stock);
and (C) no gain or loss will be recognized for federal income tax purposes by
the shareholders of Focus as a result of the Merger, including the
Certificate of Amendment. In rendering such opinion, legal counsel may
require and rely upon representations and covenants including representations
and covenants contained in officer's certificates of Videonics and Focus.
Section 7.2 Additional Conditions to Obligations of Videonics. The
obligations of Videonics to effect the Merger are also subject to the
fulfillment of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Focus contained in this Agreement shall be true and correct on the date
hereof and (except to the extent such representations and warranties speak as
of a date earlier than the date hereof) shall also be true and correct on and
as of the Closing Date, except for changes contemplated by this Agreement,
with the same force and effect as if made on and as of the Closing Date,
provided, however, that for purposes of this Section 7.2(a) only, such
representations and warranties shall be deemed to be true and correct unless
the failure or failures of such representations and warranties to be so true
and correct (without regard to materiality qualifiers contained therein),
individually or in the aggregate, results or would reasonably be expected to
result in a Material Adverse Effect on Focus, either with or without
including its ownership of Videonics and its Subsidiaries after the Merger;
(b) Agreements and Covenants. Focus and Merger Subsidiary shall have
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with by them on or before the Effective
Time, provided, however, that for purposes of this Section 7.2(b) only, such
agreements and covenants shall be deemed to have been complied with unless
the failure or failures of such agreements and covenants to have been
complied with (without regard to materiality qualifiers contained therein),
individually or in the aggregate, results or would reasonably be expected to
result in a Material Adverse Effect on Focus, either with or without
including its ownership of Videonics and its Subsidiaries after the Merger;
(c) Certificates. Videonics shall have received a certificate of an
executive officer of Focus to the effect set forth in paragraphs (a) and (b)
above;
(d) Disclosure Schedule. (i) Focus shall have delivered the Focus
Disclosure Schedule within Seven (7) days of the date hereof and (ii) all
matters disclosed in the Focus Disclosure Schedule that could have a Material
Adverse Effect on Focus shall be matters that were disclosed to Videonics on
or before the execution and delivery by Videonics of this Agreement; and
(e) Stock Option Plan. Focus shall have amended its 2000 Stock Option Plan
to increase by 1,000,000 the number of shares of Focus Common Stock reserved
for issuance thereunder and shall have submitted such amended plan to its
shareholders for approval.
Section 7.3 Additional Conditions to Obligations of Focus. The obligations
of Focus to effect the Merger are also subject to the fulfillment of the
following conditions:
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(a) Representations and Warranties. The representations and warranties of
Videonics contained in this Agreement shall be true and correct on the date
hereof and (except to the extent such representations and warranties speak as
of a date earlier than the date hereof) shall also be true and correct on and
as of the Closing Date, except for changes contemplated by this Agreement,
with the same force and effect as if made on and as of the Closing Date,
provided, however, that for purposes of this Section 7.3(a) only, such
representations and warranties shall be deemed to be true and correct unless
the failure or failures of such representations and warranties to be so true
and correct (without regard to materiality qualifiers contained therein),
individually or in the aggregate, results or would reasonably be expected to
result in a Material Adverse Effect on Videonics or Focus (only after
including its ownership of Videonics and its Subsidiaries after the Merger);
(b) Agreements and Covenants. Videonics shall have performed or complied
with all agreements and covenants required by this Agreement to be performed
or complied with by them on or before the Effective Time, provided, however,
that for purposes of this Section 8.3(b) only, such agreements and covenants
shall be deemed to have been complied with unless the failure or failures of
such agreements and covenants to have been complied with (without regard to
materiality qualifiers contained therein), individually or in the aggregate,
results or would reasonably be expected to result in a Material Adverse
Effect on Videonics;
(c) Certificates. Focus shall have received a certificate of an executive
officer of Videonics to the effect set forth in paragraphs (a) and (b) above;
and
(d) Disclosure Schedule. (i) Videonics shall have delivered the Videonics
Disclosure Schedule within seven (7) days of the date hereof and (ii) all
matters disclosed in the Videonics Disclosure Schedule that could have a
Material Adverse Effect on Videonics shall be matters that were disclosed to
Focus on or before the execution and delivery by Focus of this Agreement.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 Termination. This Agreement may be terminated at any time
before the Effective Time, in each case as authorized by the respective Boards
of Directors of Videonics or Focus:
(a) By mutual written consent of each of Videonics and Focus;
(b) By either Videonics or Focus if the Merger shall not have been
consummated on or before December 31, 2000 (the "Initial Termination Date"
and as such may be extended pursuant to this paragraph, the "Termination
Date"), provided, however, that if on the Termination Date any of the
conditions to the Closing set forth in Sections 7.1(b), (c)(i), (d), (e),
(f), (g), (h) or (i) shall not have been fulfilled, but all other conditions
to the Closing shall be fulfilled or shall be capable of being fulfilled,
then the Termination Date shall be extended to March 30, 2001, (the "Extended
Termination Date"); and provided further that if on the Extended Termination
Date any of the conditions to the Closing set forth in Sections 7.1(b),
(c)(i), (d), (e), (f), (g), (h) or (i) shall not have been fulfilled, but all
other conditions to the Closing shall be fulfilled or shall be capable of
being fulfilled, then the Termination Date shall be further extended to June
30, 2001 (the "Final Termination Date"), unless within five days prior to the
Extended Termination Date any Party reasonably determines that it is
substantially unlikely that any of the conditions to the Closing set forth in
Sections 7.1(b), (c)(i), (d), (e), (f), (g), (h) or (i) will be fulfilled by
the Final Termination Date and delivers to the other Parties a notice to such
effect. The right to terminate this Agreement under this Section 8.1(b) shall
not be available to any Party whose failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of any
condition to be satisfied;
(c) By Videonics or Focus if after the date hereof a court of competent
jurisdiction or Governmental Authority shall have issued an order, decree or
ruling or taken any other action (which order, decree or ruling the Parties
shall use their commercially reasonable efforts to lift), in each case
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling or other
action shall have become final and nonappealable;
(d) (i) by Videonics, (A) if Focus shall have breached or failed to
perform in any material respect any of its representations, warranties,
covenants or other agreements contained in this Agreement, which breach
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or failure to perform (1) is incapable of being cured by Focus prior to the
Termination Date and (2) renders any condition under Section 7.1 or 7.2
incapable of being satisfied prior to the Termination Date, or (B) if a
condition under Sections 7.1 or 7.2 to Videonics' obligations hereunder
cannot be satisfied prior to the Termination Date; (ii) by Focus, (A) if
Videonics shall have breached or failed to perform in any material respect
any of its representations, warranties, covenants or other agreements
contained in this Agreement, which breach or failure to perform (1) is
incapable of being cured by Videonics prior to the Termination Date and (2)
renders any condition under Sections 7.1 or 7.3 incapable of being satisfied
prior to the Termination Date, or (B) if a condition under Sections 7.1 or
7.3 to Focus' obligations hereunder cannot be satisfied prior to the
Termination Date;
(e) By either of Focus or Videonics if the Board of Directors of the other
Party or any committee of the Board of Directors of the other Party (i) shall
fail to include in the Joint Proxy Statement its recommendation without
modification or qualification that shareholders approve this Agreement and
the Merger, (ii) shall withdraw or modify in any adverse manner its approval
or recommendation of this Agreement or the Merger, (iii) shall fail to
reaffirm such approval or recommendation upon such Party's request, (iv)
shall approve or recommend any Acquisition Proposal or (v) shall resolve to
take any of the actions specified in this Section 8.1(e); or
(f) By Focus or Videonics if any of the required approvals of the
shareholders of Videonics or Focus shall fail to have been obtained at duly
held shareholders' meetings of such companies, including any adjournments
thereof.
Section 8.2 Effect of Termination.
(a) In the event of termination of this Agreement as provided in Section
8.1 hereof, and subject to the provisions of Section 9.1 hereof, this
Agreement shall forthwith become void and there shall be no liability on the
part of any of the Parties, except (i) as set forth in this Section 8.2 and
in Sections 3.10, 3.16, 4.10, 4.16 and 9.3 hereof, and (ii) nothing herein
shall relieve any Party from liability for any willful breach hereof.
(b) If this Agreement (i) is terminated by Videonics pursuant to Section
8.1(e) hereof, (ii) could have been (but was not) terminated by Videonics
pursuant to Section 8.1(e) hereof and is subsequently terminated by Focus or
Videonics pursuant to Section 8.1(f) because of the failure to obtain the
Focus Shareholder Approval, (iii) (A) could not have been terminated by
Videonics pursuant to Section 8.1(e) hereof but is subsequently terminated by
Focus or Videonics pursuant to Section 8.1(f) because of the failure to
obtain the Focus Shareholder Approval, (B) prior to the Focus Shareholders'
Meeting there shall have been an Acquisition Proposal, an announcement of any
intention with respect to an Acquisition Proposal, or any agreement with
respect to an Acquisition Proposal involving Focus or any of Focus'
Subsidiaries, and (C) within 12 months after the termination of this
Agreement, Focus enters into a definitive agreement with any third party with
respect to any Acquisition Proposal, or (iv) is terminated by Videonics as a
result of Focus' material breach of Sections 6.1 or 6.3 hereof which, in the
case of a breach thereof that can be cured by Focus, is not cured within 30
days after notice thereof to Focus, Focus shall pay to Videonics a
termination fee of three hundred thousand dollars ($300,000).
(c) If this Agreement (i) is terminated by Focus pursuant to Section
8.1(e) hereof, (ii) could have been (but was not) terminated by Focus
pursuant to Section 8.1(e) hereof and is subsequently terminated by Videonics
or Focus pursuant to Section 8.1(f) because of the failure to obtain the
Videonics Shareholder Approval, (iii) (A) could not have been terminated by
Focus pursuant to Section 8.1(e) hereof but is subsequently terminated by
Videonics or Focus pursuant to Section 8.1(f) because of the failure to
obtain the Videonics Shareholder Approval, (B) prior to the Videonics
Shareholders' Meeting there shall have been an Acquisition Proposal, an
announcement of any intention with respect to an Acquisition Proposal, or any
agreement with respect to any Acquisition Proposal involving Videonics, and
(C) within 12 months after the termination of this Agreement, Videonics
enters into a definitive agreement with any third party with respect to any
Acquisition Proposal, or (iv) is terminated by Focus as a result of
Videonics' material breach of Section 6.1 or 6.2 hereof which, in the case of
a breach that can be cured by Videonics, is not cured within 30 days after
notice thereof to Videonics, Videonics shall pay to Focus a termination fee
of three hundred thousand dollars ($300,000).
(d) Each termination fee payable under Sections 8.2(b) and (c) above shall
be payable in cash, payable no later than one business day following the
delivery of notice of termination to the other Party, or, if such fee shall
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be payable pursuant to clause (iii) of either of Section 8.2(b) or (c), such
fee shall be payable no later than one business day following the day such
Party enters into the definitive agreement referenced in such clause (iii).
(e) Videonics and Focus agree that the agreements contained in Sections
8.2(b) and (c) above are an integral part of the transactions contemplated by
this Agreement and constitute liquidated damages and not a penalty. In the
event of any dispute as to whether any fee due under such Sections 8.2(b) and
(c) is due and payable, the prevailing party shall be entitled to receive
from the other Party the costs and expenses (including legal fees and
expenses) in connection with any action, including the filing of any lawsuit
or other legal action, relating to such dispute. Interest shall be paid on
the amount of any unpaid fee at the publicly announced prime rate of
Citibank, N.A. from the date such fee was required to be paid.
Section 8.3 Amendment. This Agreement may be amended by the Parties
pursuant to a writing adopted by action taken by all of the Parties at any time
before the Effective Time; provided, however, that, after approval of this
Agreement by the shareholders of Focus and Videonics, no amendment may be made
which would (a) alter or change the amount or kinds of consideration to be
received by the holders of Videonics Common Stock upon consummation of the
Merger, (b) alter or change any term of the Articles of Incorporation of
Videonics or the Certificate of Incorporation of Focus (except for the
implementation at the Effective Time of the Certificate Amendment) or (c) alter
or change any of the terms and conditions of this Agreement if such alteration
or change would adversely affect the holders of any class or series of
securities of Videonics or Focus. This Agreement may not be amended except by an
instrument in writing signed by the Parties.
Section 8.4 Waiver. At any time before the Effective Time, any Party may
(a) extend the time for the performance of any of the obligations or other acts
of the other Parties, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a Party to any such extension or waiver shall be valid
only as against such Party and only if set forth in an instrument in writing
signed by such Party.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Non-Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements in this Agreement shall terminate at
the Effective Time or upon the termination of this Agreement pursuant to Section
8.1 hereof, as the case may be, except that (a) the agreements set forth in
Article I and Sections 2.2, 2.4, 2.6, 2.7, 2.8, 2.11, 2.12 and 6.11 hereof shall
survive the Effective Time indefinitely, (b) the agreements and representations
set forth in Sections 3.10, 3.16, 4.10, 4.16, 6.6, 8.2 and 9.3 hereof shall
survive termination indefinitely and (c) nothing contained herein shall limit
any covenant or Agreement of the Parties which by its terms contemplates
performance after the Effective Time.
Section 9.2 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date of receipt and shall be delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested), sent
by overnight courier or sent by telecopy, to the Parties at the following
addresses or telecopy numbers (or at such other address or telecopy number for a
Party as shall be specified by like notice):
(a) if to Videonics:
Videonics Corporation, 1370 Dell Avenue, Campbell,
California 95008
Attention: Michael D'Addio, Chairman and CEO,
Phone: (408) 866-8300, Fax: (408) 866-4859
with a copy to (which shall not constitute notice):
Manatt, Phelps & Phillips, 1001 Page Mill Road, Bldg. 2,
Suite 100,
Palo Alto, California 94304-1006
Attention: Jerold F. Petruzzelli, Esq., Phone: (650)
812-1335,
Fax: (650) 213-0260
(b) if to Focus:
Focus Enhancements, Inc., 600 Research Drive, Wilmington,
Massachusetts 01887, Attention: Vice President and General
Counsel,
Phone: (978) 988-5888 Fax: (978) 661-0160
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with a copy to (which shall not constitute notice):
Mintz, Levin, Cohen, Ferris & Pompeo, One Financial
Center, Boston,
Massachusetts 02109, Attention: Neil Aronson, Esq.
Phone: (617) 542-6000 Fax: (617) 542-2241
Section 9.3 Expenses. Except as otherwise provided in this Agreement, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the Party incurring such costs
and expenses, except that those expenses incurred in connection with the
printing of the Joint Proxy Statement and the Registration Statement, as well as
the filing fees related thereto and any filing fee required in connection with
the filing of Pre-merger Notifications under the HSR Act, shall be shared
equally by Videonics and Focus.
Section 9.4 Certain Definitions. For purposes of this Agreement, the
following terms shall have the following meanings:
(a) "Acquisition Proposal" shall mean any inquiry, proposal or offer from
any Person (other than Focus, Merger Subsidiary, Videonics or any of their
affiliates) relating to any merger, consolidation, recapitalization,
liquidation or other direct or indirect business combination, involving any
of the Parties or any of their respective Subsidiaries or the issuance or
acquisition of shares of capital stock or other equity securities of any of
the Parties or any of their respective Subsidiaries representing 19.9% or
more of the outstanding capital stock of such Party or Subsidiary, as the
case may be, or any tender or exchange offer that if consummated would result
in any Person, together with all affiliates thereof, (other than Focus,
Merger Subsidiary, Videonics or any of their affiliates) beneficially owning
shares of capital stock or other equity securities of any of the Parties or
any of their respective Subsidiaries representing 19.9% or more of the
outstanding capital stock of such Party or Subsidiary, as the case may be, or
the sale, lease exchange, license (whether exclusive or not), or other
disposition of any significant portion of the Intellectual Property rights,
or any significant portion of the business or other assets of any Party or
any of its Subsidiaries, or any other transaction, the consummation of which
could reasonably be expected to impede, interfere with, prevent or materially
delay the consummation of the transactions contemplated hereby or which would
reasonably be expected to diminish significantly the benefits to any of the
Parties of the transactions contemplated hereby.
(b) "Actions" means any claim, action, suit, charge, complaint,
arbitration, proceeding or announced investigation by or before any
Governmental Authority.
(c) "affiliate" of a person means a person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned person.
(d) "Blue Sky Laws" means the state securities laws.
(e) "Commercially reasonable efforts" shall mean those efforts necessary
or advisable to advance the interests of the Parties in achieving the
purposes and specific requirements and satisfying the conditions of this
Agreement, provided that such efforts will not require or include either
expense or conduct not ordinarily incurred or engaged in by Parties seeking
to implement agreements of this type unless part of a separate mutual
understanding of the Parties not contained in this Agreement whether reached
before or after the Agreement is executed.
(f) "Control" (including the terms "controlled by" and "under common
control with") means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a person,
whether through the ownership of stock, as trustee or executor, by contract
or credit arrangement or otherwise.
(g) "Encumbrance" means any security interest granted in assets located in
the United States or similar security right granted outside of the United
States, pledge, mortgage, lien (including, without limitation, environmental
and tax liens), encumbrance, adverse claim, preferential arrangement or
restriction of any kind, including, without limitation, any restriction on
the use, voting, transfer, receipt of income or other exercise of any
attributes of ownership.
(h) "Environmental Law" means any Law relating to: (A) the protection,
investigation or restoration of the environment, health, safety, or natural
resources, (B) the handling, use, presence, disposal, release,
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discharge or threatened release or discharge of any Hazardous Substance or
(C) noise, odor, wetlands, pollution, contamination or any injury or threat
of injury to persons or property in connection with any Hazardous Substance.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(j) "Focus Equity Rights" shall mean subscriptions, options, warrants,
calls, commitments, agreements, conversion rights or other rights of any
character (contingent or otherwise) to purchase or otherwise acquire any
shares of the capital stock of Focus from Focus or any of Focus' Subsidiaries
at any time, or upon the happening of any stated event.
(k) "GAAP" means generally accepted accounting principles applied in a
manner consistent with past practice.
(l) "Governmental Authority" means any federal, state, local or foreign
government, any court, administrative, regulatory or other governmental
agency, commission or authority or any non-governmental U.S. or foreign self-
regulatory agency, commission or authority or any arbitral tribunal.
(m) "Hazardous Substance" means any substance that is: listed, classified
or regulated pursuant to any Environmental Law, including any petroleum
product or by-product, asbestos- containing material, lead-containing paint
or plumbing, polychlorinated biphenyls, radioactive materials or radon.
(n) "HSR Act" means the pre-Merger notification requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
(o) "Intellectual Property" of any Party, means all designs, patents,
patent applications and other rights, trademarks, trademark registrations and
applications, service marks, service mark registrations and applications,
copyrights, copyright registrations and applications, trade or brand names,
trade secrets, proprietary manufacturing information, know how, inventions,
inventors notes and drawings owned or used by such Party.
(p) "Knowledge" of any Party shall mean the actual knowledge of the
executive officers of such Party.
(q) "Law" means any federal, state, local or foreign statute, act, law,
ordinance, regulation, rule, code, order, decree, judgment, policy, other
requirement or rule of law.
(r) "Material Adverse Effect" means any change in or effect on the
business of the referenced corporation or any of its Subsidiaries that is or
will be materially adverse to the business, operations (including the income
statement), properties (including intangible properties), condition
(financial or otherwise), assets, liabilities or regulatory status of such
referenced corporation and its Subsidiaries taken as a whole, but shall not
include the effects of changes that are generally applicable in (A) the
United States economy or (B) the United States securities markets if, in any
of (A) or (B), the effect on Videonics or Focus, determined without including
its ownership of Videonics after the Merger, (as the case may be) and its
respective Subsidiaries, taken as a whole, is not materially disproportionate
relative to the effect on the other and its Subsidiaries, taken as a whole.
All references to Material Adverse Effect on Focus or its Subsidiaries
contained in Article III, IV, VI or VII of this Agreement shall be deemed to
refer solely to Focus and its Subsidiaries without including its ownership of
Videonics and its Subsidiaries after the Merger.
(s) "Permits" permits, franchises, licenses, authorizations, certificates,
variances, exemptions, orders, registrations or consents that are granted by
any Governmental Authority (including any stock exchange or other
self-regulatory body).
(t) "Person" means an individual, corporation, partnership, association,
trust, estate, limited liability company, labor union, unincorporated
organization, entity or group (as defined in the Exchange Act).
(u) "SEC" means the United States Securities and Exchange Commission.
(v) "Software" means any and all (i) computer programs, including any and
all software implementations of algorithms, models and methodologies, whether
in source code or object code, (ii) databases and compilations, including any
and all data and collections of data, whether machine readable or otherwise,
(iii) descriptions, flow-charts and other work product used to design, plan,
organize and develop any of the foregoing, and (iv) all documentation,
including user manuals and training materials, relating to any of the
foregoing.
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(w) "Subsidiary" or "Focus Subsidiary" means any corporation or other
legal entity of which Focus (either alone or through or together with any
other Subsidiary or Subsidiaries), owns, directly or indirectly, more than
50% of the stock or other equity interests the holders of which are generally
entitled to vote for the election of the board of directors or other
governing body of such corporation or other legal entity.
(x) "Securities Act" means the Securities Act of 1933, as amended.
(y) "Superior Proposal" means any bona fide Acquisition Proposal to effect
a merger, consolidation or sale of all or substantially all of the assets or
capital stock of any of Focus or Videonics which is on terms which the Board
of Directors of such Party determine by a majority vote of its directors in
their good faith judgment (based on the written opinion, with only customary
qualifications, of a financial advisor of nationally recognized reputation
that the consideration provided in such Acquisition Proposal likely exceeds
the value of the consideration provided for in the Merger), after taking into
account all relevant factors, including any conditions to such Acquisition
Proposal, the timing of the closing thereof, the risk of nonconsummation, the
ability of the person making the Acquisition Proposal to finance the
transaction contemplated thereby and any required governmental or other
consents, filings and approvals, to be more favorable to the shareholders of
such Party than the Merger (or any revised proposal made by the other Party).
(z) "Tax" or "Taxes" shall mean taxes and governmental impositions of any
kind in the nature of (or similar to) taxes, payable to any federal, state,
local or foreign taxing authority, including but not limited to those on or
measured by or referred to as income, franchise, profits, gross receipts,
capital ad valorem, custom duties, alternative or add-on minimum taxes,
estimated, environmental, disability, registration, value added, sales, use,
service, real or personal property, capital stock, license, payroll,
withholding, employment, social security, workers' compensation, unemployment
compensation, utility, severance, production, excise, stamp, occupation,
premiums, windfall profits, transfer and gains taxes, and interest, penalties
and additions to tax imposed with respect thereto; and "Tax Returns" shall
mean returns, reports and information statements, including any schedule or
attachment thereto, with respect to Taxes required to be filed with the
Internal Revenue Service or any other governmental or taxing authority or
agency, domestic or foreign, including consolidated, combined and unitary tax
returns.
(aa) "Videonics Equity Rights" shall mean subscriptions, options,
warrants, calls, commitments, agreements, conversion rights or other rights
of any character (contingent or otherwise) to purchase or otherwise acquire
any shares of the capital stock of Videonics from Videonics or any of
Videonics' Subsidiaries at any time, or upon the happening of any stated
event.
Section 9.5 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 9.6 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of Law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any Party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the Parties shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the maximum extent possible.
Section 9.7 Entire Agreement; No Third-Party Beneficiaries. This Agreement
constitutes the entire agreement and, except as expressly set forth herein,
supersedes any and all other prior agreements and undertakings, both written and
oral, among the Parties, or any of them, with respect to the subject matter
hereof and, except for Section 6.11 (Post-Merger Focus Board of Directors), is
not intended to confer upon any person other than Videonics, Focus, and Merger
Subsidiary and, after the Effective Time, their respective shareholders, any
rights or remedies hereunder.
Section 9.8 Assignment. This Agreement shall not be assigned by operation
of Law or otherwise.
Section 9.9 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of Delaware applicable to
contracts executed in and to be performed entirely within that State,
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without regard to the conflicts of laws provisions thereof; provided that the
Merger shall be governed by the Laws of the State of Delaware applicable to
contracts executed in and to be performed entirely within that State, without
regard to the conflicts of laws provisions thereof.
Section 9.10 Counterparts. This Agreement may be executed in two or more
counterparts, and by the different Parties in separate counterparts, each of
which when executed shall be deemed to be an original, but all of which shall
constitute one and the same Agreement.
Section 9.11 Interpretation.
(a) Whenever the words "include", "includes" or "including" are used in
this Agreement they shall be deemed to be followed by the words "without
limitation."
(b) Words denoting any gender shall include all genders. Where a word or
phrase is defined herein, each of its other grammatical forms shall have a
corresponding meaning. The plural shall include the singular, and vice versa.
(c) A reference to any party to this Agreement or any other agreement or
document shall include such party's successors and permitted assigns.
(d) A reference to any legislation or to any provision of any legislation
shall include any modification or re-enactment thereof, any legislative
provision substituted therefor and all regulations and statutory instruments
issued thereunder or pursuant thereto.
(e) All references to "$" and dollars shall be deemed to refer to United
States currency unless otherwise specifically provided.
In Witness Whereof, Videonics, Focus and Merger Subsidiary have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
VIDEONICS CORPORATION FOCUS ENHANCEMENTS, INC.
By: /s/ Michael L. D'Addio By: /s/ Thomas Massie
--------------------- ---------------------
Name: Michael L. D'Addio Name: Thomas L. Massie
Title: Chairman and Chief Executive Officer Title: Chairman of the Board
PC VIDEO CONVERSION, INC.
By: /s/ Christopher Ricci
---------------------
Name: Christopher P. Ricci
Title: Secretary
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APPENDIX B
DISSENTERS' RIGHTS UNDER CHAPTER 13 OF CALIFORNIA
GENERAL CORPORATION LAW
CALIFORNIA CORPORATIONS CODE SECTION 1300-1312.
1300. (a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions(a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter. (b) As used
in this chapter, "dissenting shares" means shares which come within all of the
following descriptions: (1) Which were not immediately prior to the
reorganization or short-form merger either (A) listed on any national securities
exchange certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the National Market System of the NASDAQ Stock
Market, and the notice of meeting of shareholders to act upon the reorganization
summarizes this section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with respect to which
there exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A)or (B) if demands for payment
are filed with respect to 5 percent or more of the outstanding shares of that
class. (2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation purchase
at their fair market value, in accordance with Section 1301. (4) Which the
dissenting shareholder has submitted for endorsement, in accordance with Section
1302. (c) As used in this chapter, "dissenting shareholder" means the record
holder of dissenting shares and includes a transferee of record.
1301. (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections1300, 1302, 1303, 1304 and this section, a statement of the
price determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300,unless they lose their status as dissenting shares under Section1309. (b)
Any shareholder who has a right to require the corporation to purchase the
shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b)thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder. (c) The demand shall state the number and class of
the shares held of record by the shareholder which the shareholder demands that
the corporation purchase and shall contain a statement of what such shareholder
claims to be the
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fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i)of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
1303. (a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation. (b) Subject to the
provisions of Section 1306, payment of the fair market value of dissenting
shares shall be made within 30 days after the amount thereof has been agreed or
within 30 days after any statutory or contractual conditions to the
reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. (a) If the corporation denies that the shares are dissenting shares,
or the corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint. (b) Two or more
dissenting shareholders may join as plaintiffs or be joined as defendants in any
such action and two or more such actions may be consolidated. (c) On the trial
of the action, the court shall determine the issues. If the status of the shares
as dissenting shares is in issue, the court shall first determine that issue. If
the fair market value of the dissenting shares is in issue, the court shall
determine, or shall appoint one or more impartial appraisers to determine, the
fair market value of the shares.
1305. (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, he court may confirm it. (b) If a majority of the appraisers
appointed fail to make and file a report within 10 days from the date of their
appointment or within such further time as may be allowed by the court or the
report is not confirmed by the court, the court shall determine the fair market
value of the dissenting shares. (c) Subject to the provisions of Section 1306,
judgment shall be rendered against the corporation for payment of an amount
equal to the fair market value of each dissenting share multiplied by the number
of dissenting shares which any dissenting shareholder who is a party, or who has
intervened, is entitled to require the corporation to purchase, with interest
thereon at the legal rate from the date on which judgment was entered. (d) Any
such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the
endorsement and delivery to the corporation of the certificates for the shares
described in the judgment. Any party may appeal from the judgment. (e) The costs
of the action, including reasonable compensation tot he appraisers to be fixed
by the court, shall be assessed or apportioned as the court considers equitable,
but, if the appraisal exceeds the price offered by the corporation, the
corporation shall pay the costs (including in the discretion of the court
attorneys' fees, fees of expert witnesses and interest at the legal
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rate on judgments from the date of compliance with Sections 1300, 1301 and1302
if the value awarded by the court for the shares is more than125 percent of the
price offered by the corporation under subdivision(a) of Section 1301).
1306. To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307. Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.
1308. Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consentsthereto.
1309. Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following: (a) The corporation abandons the reorganization. Upon abandonment
of the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles. (c) The dissenting shareholder
and the corporation do not agree upon the status of the shares as dissenting
shares or upon the purchase price of the shares, and neither files a complaint
or intervenes in a pending action as provided in Section 1304, within six months
after the date on which notice of the approval by the outstanding shares or
notice pursuant to subdivision (i) of Section1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation, withdraws
the shareholder's demand for purchase of the dissenting shares.
1310. If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
1311. This chapter, except Section 1312, does not apply to classes of
shares whose terms and provisions specifically set forth the amount to be paid
in respect to such shares in the event of a reorganization or merger.
1312. (a) No shareholder of a corporation who has a right under this
chapter to demand payment of cash for the shares held by the shareholder shall
have any right at law or in equity to attack the validity of the reorganization
or short-form merger, or to have there organization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization. (b) If
one of the parties to a reorganization or short-form merger is directly or
indirectly controlled by, or under common control with, another party to the
reorganization or short-form merger, subdivision (a) shall not apply to any
shareholder of such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the shareholder institutes
any action to attack the validity of the reorganization or short-form merger or
to have the reorganization or short-form merger set aside or rescinded, the
shareholder shall not thereafter have any right to demand payment of cash for
the shareholder's shares pursuant to this chapter. The court in any action
attacking the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain or
enjoin the consummation of the transaction except upon 10 days' prior notice to
the corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member. (c) If one of the parties to
a reorganization or short-form merger is directly or indirectly controlled by,
or under common control with, another party to the reorganization or short-form
merger, in any action to attack the validity of the
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reorganization or short-form merger or to have the reorganization or short-form
merger set aside or rescinded, (1) a party to a reorganization or short-form
merger which controls another party to the reorganization or short-form merger
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of the controlled party, and(2) a person who controls two or
more parties to a reorganization shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of any party so
controlled.
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APPENDIX C
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
FOCUS ENHANCEMENTS, INC.
FOCUS Enhancements, Inc. a corporation organized and existing under the
laws if the State of Delaware (the "Corporation"), pursuant to the provisions of
the General Corporation Law of the State of Delaware (the "DGCL"), DOES HEREBY
CERTIFY as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting the first paragraph of Section 4 of the Certificate of
Incorporation in its present form and substituting therefore new first and
second paragraphs of Section 4 in the following form:
A. The Corporation is authorized to issue two classes of stock, to be
designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares this corporation is authorized to issue is
Fifty-Three Million (53,000,000) shares capital stock.
B. Of such authorized shares, Fifty Million (50,000,000) shares shall be
designated "Common Stock" and have a par value of $0.01 per share.
Three Million (3,000,000) shares shall be designated "Preferred Stock"
and have a par value of $0.01 per share.
SECOND: The amendment of the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly adopted in
accordance with the provisions of Section 242 of the DGCL by (a) the Board of
Directors of the Corporation having duly adopted a resolution setting forth such
amendment and declaring its advisability and submitting it to the shareholders
of the Corporation for their approval, and (b) the shareholders of the
Corporation having duly adopted such amendment by vote of the holders of a
majority of the outstanding stock entitled to vote thereon at a special meeting
of shareholders called and held upon noticed in accordance with Section 222 of
the DGCL.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and the Certificate of Amendment to be signed by Brett Moyer,
its Chief Operating Officer, and attested to by , its Secretary, this
------------ .
FOCUS ENHANCEMENTS, INC.
By:
-------------------------------------
Brett Moyer
Chief Operating Officer
ATTEST:
-------------------------
Secretary
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APPENDIX D
[Letterhead of Union Atlantic Capital L.C.]
October 20, 2000
To The Board of Directors
Focus Enhancements, Inc.
Gentlemen:
We understand that Focus Enhancements, Inc. ("Company" hereinafter) has
entered into a merger agreement dated as of August 30, 2000 ("Agreement") with
Videonics, Inc. ("VDS" hereinafter) and PC Video Conversion, Inc. ("Acquisition
Sub" hereinafter) whereby VDS will be merged with and into Acquisition Sub
("Merger" hereinafter). Capitalized terms not otherwise defined herein are
defined as set forth in the Agreement. The aggregate consideration deliverable
by Company in the Merger (the "Merger Consideration") will be equal to (a) a sum
of .87 shares of the Company's common stock times the number of shares of VDS
common shares issued prior to the Effective Time including all VDS common shares
issuable upon the exercise or conversion of options, warrants, convertible
securities or other rights to acquire VDS that are outstanding as of the date of
the Agreement. The Merger and other related transactions disclosed to Union
Atlantic Capital, L.C. are all referred to collectively herein as the
"Transaction." You have requested our opinion (the "Opinion") as to the matters
set forth below. The Opinion does not address the Company's underlying business
decision to effect the Transaction. We have not been requested to, and did not,
solicit third party indications of interest in acquiring all or any part of the
Company or VDS. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. Reviewed the Company's and VDS's annual reports to shareholders on
Forms 10-KSB/A and 10-K for the fiscals year ended 1999 and quarterly reports
on Forms 10-QSB and 10-Q for the quarter ending June 30, 2000. We also
reviewed Company-prepared interim financial statements for the period ended
September 30, 2000, which the Company's and VDS's management has identified
as being the most current financial statements available;
2. Reviewed copies of the following agreements: Agreement and Plan of
Merger dated August 30, 2000 by and among the Company and VDS.
3. Met with certain members of the senior management of the Company and
VDS to discuss the operations, financial condition, future prospects and
projected operations and performance of the Company;
4. Reviewed forecasts and projections prepared by the Company's and
VDS's management with respect to the Company for the years ended December
31, 2000 through 2004;
5. Reviewed the historical market prices and trading volume for the
Company's and VDS's publicly traded securities;
6. Reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company, and publicly available
prices and premiums paid in other transactions that we considered similar to
the Transaction;
7. Conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company and VDS, and that there has been no
material change in the assets, financial condition, business or prospects of the
Company and VDS since the date of the most recent financial statements made
available to us.
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We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and VDS and do not assume
any responsibility with respect to it. We have not made any physical inspection
or independent appraisal of any of the properties or assets of the Company or
VDS. Our opinion is necessarily based on business, economic, market and other
conditions as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the consideration to be tendered by the Company in connection with the
Transaction is fair to the shareholders of the Company from a financial point of
view.
UNION ATLANTIC CAPITAL, L.C.
/s/ Union Atlantic Capital, L.C.
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APPENDIX E
FOCUS ENHANCEMENTS, INC.
2000 NON-QUALIFIED STOCK OPTION PLAN
1. Purpose. This Non-Qualified Stock Option Plan, to be known as the 2000
Non-Qualified Stock Option Plan (hereinafter, this "Plan") is intended to
promote the interests of FOCUS Enhancements, Inc. (hereinafter, the "Company")
by providing an inducement to obtain and retain the services of qualified
persons to serve as employees of the Company or members of its Board of
Directors (the "Board").
2. Available Shares. The total number of shares of Common Stock, par value
$.01 per share, of the Company (the "Common Stock") for which options may be
granted under this Plan shall not exceed 5,000,000 shares, subject to adjustment
in accordance with paragraph 10 of this Plan. Shares subject to this Plan are
authorized but unissued shares or shares that were once issued and subsequently
reacquired by the Company. If any options granted under this Plan are
surrendered before exercise or lapse without exercise, in whole or in part, the
shares reserved therefor shall continue to be available under this Plan.
3. Administration. This Plan shall be administered by the Board or by a
committee appointed by the Board (the "Committee"). In the event the Board fails
to appoint or refrains from appointing a Committee, the Board shall have all
power and authority to administer this Plan. In such event, the word "Committee"
wherever used herein shall be deemed to mean the Board. The Committee shall,
subject to the provisions of the Plan, have the power to construe this Plan, to
determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of this Plan as it may deem desirable. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to this Plan or any option granted
under it.
4. Grant of Options. Subject to the availability of shares under this Plan,
the Board may make additional grants to employees of the Company and/or members
of the Board under this Plan from time to time, including but not limited to,
the Grant Date.
Anything in this Plan to the contrary notwithstanding, the effectiveness of
this Plan and of the grant of all options hereunder is in all respect subject to
this Plan and options granted under it shall be of no force and effect unless
and until the approval of this Plan in accordance with the Company's by-laws by
the vote of the holders of a majority of the Company's shares of Common Stock
present in person or by proxy and entitled to vote at a meeting of shareholders
at which this Plan is presented for approval.
5. Option Price. The purchase price of the stock covered by an option
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on either (i) the day the option is granted, or (ii) such other day as
the Board shall determine at their sole discretion. The option price will be
subject to adjustment in accordance with the provisions of paragraph 10 of this
Plan. For purposes of this Plan, if, at the time an option is granted under the
Plan, the Company's Common Stock is publicly traded, "fair market value" shall
be determined as of the last business day for which the prices or quotes
discussed in this sentence are available prior to the date such option is
granted and shall mean (i) the lower of the last sale price for the Company's
Common Stock or the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the Nasdaq National Market, if the Common Stock is not then traded on a
national securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the NASDAQ
National Market List. However, if the Common Stock is not publicly traded at the
time an option is granted under the Plan, "fair market value" shall be deemed to
be the fair value of the Common Stock as determined by the Committee after
taking into consideration all factors which it deems appropriate, including,
without limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
6. Period of Option. Unless sooner terminated in accordance with the
provisions of paragraph 8 of this Plan, an option granted hereunder shall expire
on the date which is five (5) years after the date of grant of the option.
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7. (a) Vesting of Shares and Non-Transferability of Options. Options
granted under this Plan shall not be exercisable until they become vested.
Options granted under this Plan shall vest in the optionee and thus become
exercisable in accordance with the following schedule, or other schedule as
determined by the Committee from time to time, or upon the occurrence of a
specified event, provided that the optionee has continuously served as a member
of the Board, as an employee of the Company, or in another advisory role to the
Company, as stated more specifically in the option grant letter, through such
vesting date then after the expiration each three (3) calendar months from the
Granting Date, the Option may be exercised to the extent of not more than eight
and one-third percent (81|M/3%) of the Optioned Shares for each such three month
period that elapses from the Granting Date.
The number of shares as to which options may be exercised shall be
cumulative, so that once the option shall become exercisable as to any shares it
shall continue to be exercisable as to said shares, until expiration or
termination of the option as provided in this Plan; provided however, that if
stockholder approval is required under applicable law, any option granted under
this Plan shall in no event be exercised unless and until this Plan has been
approved by the Company's stockholders, but upon such approval the vesting shall
become effective as of the date of the grant.
(b) Meetings. Notwithstanding subsection (a) of this Section 7, if a
Board optionee fails to attend less than 80% of the Board meetings held in
the twelve months prior to any vesting date, the number of shares vesting on
such vesting date shall be reduced proportionately based on the percentage of
Board meetings attended by such optionee.
(c) Non-transferability. Any option granted pursuant to this Plan shall
not be assignable or transferable other than by will or the laws of descent
and distribution or pursuant to a domestic relations order and shall be
exercisable during the optionee's lifetime only by him or her.
8. Termination of Option Rights.
(a) Except as otherwise specified in the agreement relating to an option,
in the event an optionee ceases to be an employee of Company or a member of
the Board, as the case may be, for any reason other than death or permanent
disability, any then unexercised portion of options granted to such optionee
shall, to the extent not then vested, immediately terminate and become void;
any portion of an option which is then vested but has not been exercised at
the time the optionee so ceases to be a member of the Board or an employee
may be exercised, to the extent it is then vested by the optionee within
ninety days after such event.
(b) In the event that an optionee ceases to be an employee of the Company
or a member of the Board, as the case may be, by reason of his or her death
or permanent disability, any option granted to such optionee shall be
immediately and automatically accelerated and become fully vested and all
unexercised options shall be exercisable by the optionee (or by the
optionee's personal representative, heir or legatee, in the event of death)
for a period of one year thereafter. Any options which are then exercisable
but have not been exercised at the time the Optionee so ceases to be a member
of the Board of Directors or an employee may be exercised, to the extent any
portion of such options are then exercisable, by the Optionee at any time
prior to the scheduled expiration date of the option. Notwithstanding the
foregoing, in the event any Optionee (i) ceases to be a member of the Board
of Directors at the request of the Company, (ii) is removed without cause, or
(iii) otherwise does not stand for nomination or re-election as a director of
the Company at the request of the Company, then any portion of any Option
granted to such Optionee which is not then exercisable shall be accelerated
and such Option shall be fully exercisable by the Optionee at any time prior
to the scheduled expiration date. No portion of this Option may be exercised
if the Optionee is removed from the Board of Directors for any one of the
following reasons: (i) disloyalty, gross negligence, dishonesty or breach of
fiduciary duty to the Company; or (ii) the commission of an act of
embezzlement, fraud or deliberate disregard of the rules or polices of the
Company which results in loss, damage or injury to the Company, whether
directly or indirectly; or (iii) the unauthorized disclosure of any trade
secret or confidential information of the Company; or (iv) the commission of
an act which constitutes unfair competition with the Company or which induces
any customer of the Company to break a contract with the Company; or (v) the
conduct of any activity on behalf of any organization or entity which is a
competitor of the Company (unless such conduct is approved by a majority of
the members of the Board of Directors).
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9. Exercise of Option. Subject to the terms and conditions of this Plan and
the option agreements, an option granted hereunder shall, to the extent then
exercisable, be exercisable in whole or in part by giving written notice to the
Company by mail or in person addressed to FOCUS Enhancements, Inc., 600 Research
Drive, Wilmington, Massachusetts, at its principal executive offices, or other
such address as Optionee may be informed from time to time, stating the number
of shares with respect to which the option is being exercised, accompanied by
payment in full for such shares. Payment may be (a) in United States dollars in
cash or by check, (b) in whole or in part in shares of the Common Stock of the
Company already owned by the person or persons exercising the option or shares
subject to the option being exercised (subject to such restrictions and
guidelines as the Board may adopt from time to time), valued at fair market
value determine in accordance with the provisions of paragraph 5 or (c)
consistent with applicable law , through the delivery of an assignment to the
Company of a sufficient amount of the proceeds from the sale to the broker or
selling agent to pay that amount to the Company, which sale shall be at the
participant's direction at the time of exercise. There shall be no such exercise
at any one time as to fewer than one hundred (100) shares. The Company's
transfer agent shall, on behalf of the Company, prepare a certificate or
certificates representing such shares acquired pursuant to exercise of the
option, shall register the optionee as the owner of such shares on the books of
the Company and shall cause the fully executed certificate(s) representing such
shares to be delivered to the optionee as soon as practicable after payment of
the option price in full. The holder of an option shall not have any rights of a
stockholder with respect to the shares covered by the option, except to the
extent that one or more certificates for such shares shall be delivered to him
or her upon the due exercise of the option.
10. Adjustments Upon Changes in Capitalization and Other Events. Upon the
occurrence of any of the following events, an optionee's rights with respect to
options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) Stock Dividends and Stock Splits. If the shares of Common Stock shall
be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable
upon the exercise of options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase
price per share to reflect such subdivisions, combination or stock dividend.
(b) Recapitalization Adjustments. If (i) the Company is to be
consolidated with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise and (ii) the Board
resolves at its sole discretion to vest options upon the completion of such
merger or sale, then each option granted under this Plan which is outstanding
but unvested as of the effective date of such event shall become exercisable
in full twenty (20) days prior to the effective date of such event. In the
event of a reorganization, re-capitalization, merger, consolidation, or any
other change in the corporate structure or shares of the Company, to the
extent permitted by Rule 16b-3 of the Securities Exchange Act of 1934,
adjustments in the number and kind of shares authorized by this Plan and in
the number and kind of shares covered by, and in the option price of
outstanding options under this Plan necessary to maintain the proportionate
interest of the optionees and preserve, without exceeding, the value of such
options, shall be made. Notwithstanding the foregoing, no such adjustment
shall be made which would, within the meaning of any applicable provisions of
the Internal Revenue Code of 1986, as amended, constitute a modification,
extension or renewal of any Option or a grant of additional benefits to the
holder of an Option.
(c) Issuances of Securities. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
(d) Adjustments. Upon the happening of any of the foregoing events, the
class and aggregate number of shares set forth in paragraph 2 of this Plan
that are subject to options which previously have been or subsequently may be
granted under this Plan shall also be appropriately adjusted to reflect such
events. The Board shall determine the specific adjustments to be made under
this paragraph 11, and its determination shall be conclusive.
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11. Legend on Certificates. The certificates representing shares issued
pursuant to the exercise of an option granted hereunder shall carry such
appropriate legend, and such written instructions shall be given to the
Company's transfer agent, as may be deemed necessary or advisable by counsel to
the Company in order to comply with the requirements of the Securities Act of
1993 or any state securities laws.
12. Representations of Optionee. If requested by the Company, the optionee
shall deliver to the Company written representations and warranties upon
exercise of the option that are necessary to show compliance with Federal and
state securities laws, including representations and warranties to the effect
that a purchase of shares under the option is made for investment and not with a
view to their distribution (as that term is used in the Securities Act of 1993).
13. Option Agreement. Each option granted under the provisions of this Plan
shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company and by the optionee to whom such
option is granted. The option agreement shall contain such terms, provisions and
conditions not inconsistent with this Plan as may be determined by the committee
and the officer executing it.
14. Termination and Amendment of Plan. ptions may no longer be granted
under this Plan after April 27, 2010, and this Plan shall terminate when all
options granted or to be granted hereunder are no longer outstanding. The Board
may at any time terminate this Plan or make such modification or amendment
thereof as it deems advisable; provided, however, that if stockholder approval
of the Plan is required by law, the Board may not, without approval by the
affirmative vote of the holders of a majority of the shares of Common Stock
present in person or by proxy and voting on such matter at a meeting, (a)
increase the maximum number of shares for which options may be granted under
this Plan (except by adjustment pursuant to Section 10), (b) materially modify
the requirements as to eligibility to participate in this Plan, (c) materially
increase benefits accruing to option holders under this Plan or (d) amend this
Plan in any manner which would cause Rule 16b-3 under the Securities Exchange
Act (or any successor or amended provision thereof) to become inapplicable to
this Plan; and provided further that the provisions of this Plan specified in
Rule 16b-3(c)(2)(ii)(A) (or any successor or amended provision thereof) under
the Securities Exchange Act of 1934 (including without limitation, provisions as
to eligibility, amount, price and timing of awards) may not be amended more than
once every six months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act, or the rules
thereunder. Termination or any modification or amendment of this Plan shall not,
without consent of a participant, affect his or her rights under an option
previously granted to him or her.
15. Withholding of Income Taxes. Upon the exercise of an option, the
Company, in accordance with Section 3402(a) of the Internal Revenue Code, may
require the optionee to pay withholding taxes in respect to amounts considered
to be compensation includible in the optionee's gross income.
16. Compliance with Regulations. It is the Company's intent that the Plan
comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934
(or any successor or amended provision thereof) and any applicable Securities
and Exchange Commission interpretations thereof. If any provision of this Plan
is deemed not to be in compliance with Rule 16b-3, the provision shall be null
and void.
17. Governing Law. The validity and construction of this Plan and the
instruments evidencing options shall be governed by the laws of the State of
Delaware, without giving effect to the principles of conflicts of law thereof.
Approved by Board of Directors of the Company: August 15, 2000.
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APPENDIX F
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999, 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 1-11860
FOCUS Enhancements, Inc.
(Name of Small Business Issuer in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
04-3186320
(I.R.S. Employer Identification No.)
600 RESEARCH DRIVE
Wilmington, Massachusetts 01887
(Address of Principal Executive Offices)
(978) 988-5888
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of Act:
Title of Each Class
Common Stock, $.01 par value
Name of Exchange on which Registered
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 S-B 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 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 1999 were
$17,182,985. The aggregate market value of voting Common Stock held by
non-affiliates of the Registrant was approximately $51,348,421 based on the
closing bid price of the Registrant's Common Stock on April 12, 2000 as reported
by NASDAQ ($2.0625 per share).
As of April 14, 2000, there were 24,896,204 shares of Common Stock
outstanding.
Document Incorporated by Reference: Portions of the Definitive Proxy
Statement for the Annual Meeting of Stockholders for the fiscal year ended
December 31, 1999, to be filed pursuant to Regulations 14A (the "Proxy
Statement"), are incorporated by reference in Part III of this Form 10-KSB.
--------------------------------------------------------------------------------
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PART I
ITEM 1. BUSINESS
Business of the Company
FOCUS Enhancements, Inc., (`the Company' or `FOCUS'), internally develops
proprietary technology for the conversion and enhancement of PC and Macintosh
output for display on televisions and large-screen monitors, and markets and
sells, worldwide, a line of video conversion products using this technology.
These video conversion products range from custom-designed video co-processor
chips, used by leading Original Equipment Manufacturers (OEMs), to computer
peripherals marketed to consumers directly and through a global network of
value-added resellers (VARs), distributors and retailers. In a 1997 independent
survey by Frost & Sullivan, FOCUS was recognized as an industry leader in the
development and marketing of PC-to-TV video conversion products that make
personal computers "TV ready" and televisions "PC ready". In 1999, FOCUS
continued to solidify this leadership position through:
1. Increased research and development investment, resulting in additional
patents being awarded to the Company, and in industry-wide recognition of the
superior video quality of its products,
2. Significant new licensing agreements with OEMs for use of FOCUS'
proprietary TV video conversion ASIC chips in current and future product
designs, and
3. New strategic alliances with major OEMs, resellers and national retail
chains.
In our 1998 Annual Report the Company stated that it was in discussions
with other PC manufacturers, television manufacturers, VGA chip and VGA card
developers. In 1999 many of these discussions came to fruition.
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 significant
strategic role in allowing FOCUS to gain a major technological position 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 began to consolidate its
operating activities to the Company's corporate headquarters.
The Company's executive offices are located at 600 Research Drive,
Wilmington, Massachusetts 01887. Its Research and Development center is located
at 9275 SW Nimbus Avenue, Beaverton, Oregon. 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) 988-5888, and its
Worldwide Web address is http:www.focusinfo.com.
Business Strategy
In 1999 the Company continued to concentrate its resources on the growing
PC- to-TV scan conversion technology market, which has been projected by
independent industry sources to grow, within the United States alone, at an
annual compound growth rate of approximately 24%, achieving sales of over 200
million dollars by the year 2003, see Frost & Sullivan 1997 report. Following
key strategic acquisitions over the past six years, and the discontinuance of
any lines not directly in line with the Company's strategic direction, the
Company continues to focus on internal research and development of cutting-edge
video enhancement technology and products. Also, while continuing to service and
expand its global marketing network targeting Professional Consumers and Home
Consumers, the Company has long recognized that the greatest growth potential
for its technology is through sales to, and licensing agreements with, leading
OEMs. Because the patented design of FOCUS' FS400 family of
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ASICs has allowed the Company to dramatically improve video quality while
reducing cost, leading manufacturers in the Internet Appliance (IA), PC
Reference Design, and Television markets signed agreements with FOCUS in 1999.
Product Strategy
The company continues on its course of concentrating on developing
low-cost, high-quality video conversion technology. For the year ended December
31, 1999 research and development expenditures were $1,400,732. Approximately
77% of this expenditure was directed toward new product activities.
Marketing and Sales Strategy
* The Company vigorously pursued the OEM market for its technology in 1999,
resulting in numerous Licensing Integration agreements with some of the
most significant names in the United States and global TV, PC and Internet
Appliance markets. In 2000 the Company will continue to concentrate its
marketing efforts toward those OEMs which dominate their respective
markets, and which have the manufacturing, sales and distribution networks
in place to capitalize on the huge growth forecast for the PC-to-TV and
TV-to-PC conversion products over the next decade. Also, the redesigned
Company web site, launched in March 1999, features a new OEM Custom
Integration section to showcase FOCUS' line of proprietary video conversion
ASICs and OEM solutions.
* The Professional Consumer market continues to be a growing segment, and the
Company made significant inroads into that market in 1999. In September the
Company unveiled its new Tview QuadScan Pro, a cost-effective, high-
resolution line quadrupler/video scaler at the CEDIA Expo '99. The QuadScan
is being marketed for professional AV applications, as well as for home
theater use. FOCUS continued to expand its presence in the
Videoconferencing and Education markets through new strategic alliances
consummated in 1999. Additionally, the Company added a new Professional
Consumer Products section to its redesigned World Wide Web site.
* While the Company has determined that the OEM market offers the best
potential for future growth, it also continues to recognize its consumer
channel, through its reseller distribution network as a substantial,
revenue- generating market. One of the potentially most significant new
distributor agreements was signed with The Douglas Stewart Company, the
nation's largest marketer of computer products, electronics and student
supplies to the education market. The Company also continues to offer
cooperative advertising incentives to resellers on a
percentage-of-product-purchases basis. Funded programs include sales
incentives, special pricing programs, and targeted advertising campaigns.
* Direct Marketing to business, education and end-user consumers continues to
be a viable and profitable segment for the Company. Arrangements with
independent, third-party mail order companies such as MicroWarehouse, CDW,
Global Computer Supplies, MultiZones and PC Connections have proven to be a
cost-effective method for achieving direct sales.
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 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 cross-marketed for
synergistic products.
* Cross-Marketing. 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.
* 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.
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* 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 December 1999, the
Company's products are marketed in over 2,200 store fronts globally.
In the United States and Canada, the Company markets and sells its products
through national resellers such as CompUSA, 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, 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.
* Telemarketing and Telesales. The Company is receiving and placing over
50,000 sales 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.
Additionally, in 1999 the Company established a new rebate program 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. 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-to-TV 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 board-level
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 set-top 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 set-top
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.
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.
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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 QuadScan is a line Quadrupler/Scaler that eliminates visible scan lines and
flicker from standard video for the home theater/professional video markets.
Video Scan Conversion Integrated-Circuit Products (ASICs)
Integrated Circuits. The Company currently offers three families of
integrated circuits. The FS300 family of ASICs was developed for both consumer
and commercial applications. The FS300 was 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 FS300 supports resolutions of up to 10x4 x 768 and features patented "video
scaling" technology whereby the image on the television is scaled both
horizontally and vertically to perfectly fit the entire contents of the computer
screen on the TV.
During 1998-1999, the Company developed a fourth generation scan converter
to advance the technology to optimize the image quality on a TV, the FS400
family. Four major areas of advancement in the FS400 family are total
compatibility with all computer systems up to very high resolution 2560 x 2048
displays, significantly improved TV image quality including an advanced
sharpness-enhanced 2D flicker filter (patent pending), auto-sensing, sizing, and
scaling for hands off TV operation, and advanced digital and progressive TV
output modes. A version of the FS400 also supports the new DVD copy protection
schemes with Macrovision encoding for DVD movie capable systems. The FS400
delivers all these features with lower power, lower cost, and a smaller package.
The FS400 will replace the FS310 over Y2000.
The Company also announced its FS450 iNet TV ASIC in July 1999. The FS450
family of ASICs was specifically designed for the exploding internet set top box
market, information appliances, and TV enabled PCs. It utilizes the high quality
output characteristics of the FS400 family with a low cost digital interface to
most graphic ICs found in low cost PCs, set top boxes, and 3D graphic cards. It
is in 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
including HDTV, interactive television, information appliances, LCD panels and
plasma display markets.
In December of 1999, the Company announced sale of 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 additional ASICs in 2000.
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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 the new InVideo(TM) USB Capture. The
InVideo(TM) USB Capture allows users to access video from any NTSC/PAL video
source and save it directly to any computer. Moreover, 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
the Windows 98 operating systems.
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.
* 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
cost-effective and space effective tool.
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.
* Internet Viewing. TView products also take advantage of the rise in
popularity of the Internet and the advent of Internet-related 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.
* 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 technology 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.
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.
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
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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 in-house 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 three-year 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 36% and 17% of total product revenue during
the years ended December 31, 1998 and 1999, respectively. In 1999, product
returns were the result of normal customer returns in the Company's retail,
distribution and mail order channels. The decrease in product returns was
principally the result of the consolidation of one of the Company's distribution
channels effective in Q498.
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 after-market 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 pack-out and
direct shipment. All subcontracted turnkey houses currently used by the Company
are ISO 9002 certified. During 1999, the Company relied on two turnkey
manufacturers for approximately 90% of the Company's product manufacturing.
Effective in Q499, the Company relied on a new Far East turnkey manufacturer for
approximately 90% of the Company's manufacturing. The Company has since begun
using an additional Far East Manufacturer as a 2nd source of turnkey products.
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
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<PAGE>
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 1999, product returns that
are determined to be defective represented approximately 0.5% of the total
product revenues.
Intellectual Property and Proprietary Rights
The Company currently has five patents pending and five patents issued, six
of which relate to its PC-to-TV video conversion chips, and anticipates filing
another patent application in the third quarter of 2000. 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 non-disclosure of confidential information and the
assignment of proprietary know-how and inventions developed on behalf of the
Company. In addition, the Company seeks to protect its trade secrets and know-
how 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 relies upon 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
Personnel
As of December 31, 1999, the Company employed 54 people on a full-time
basis, of which 16 are in research and development, 9 in marketing and sales, 7
in customer support, 10 in operations, and 12 in finance and administration.
Backlog
At December 31, 1999, the Company had a backlog of approximately $911,000
for products ordered by customers as compared to a backlog of $282,000 at
December 31, 1998, an increase of $629,000 or 223%. The Company expects to fill
these orders in 2000. The increase in backlog in 1999 as compared to 1998 is
primarily due to development delays on the FS400 ASIC combined with production
delays on Professional AV products in the fourth quarter of 1999. 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, 1999, the Company leased approximately 40,000 square
feet of space at four locations. The Company leased approximately 22,000 square
feet of space at $16,380 per month in Wilmington, Massachusetts, which was used
for administration, sales, marketing, customer service, limited assembly,
quality
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<PAGE>
control, packaging and shipping. This lease is scheduled to expire in February
2004. The company leases additional space in the following locations: Orinda,
California, Morgan Hill, California, and Beaverton, Oregon. The Orinda facility
is mainly used for research and development with approximately 500 square feet
at $950 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 $4,320 per month, expiration being May 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 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.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in a lawsuit filed in United
States District Court for the District of Massachusetts, on or about November 9,
1999, on behalf of Frank E. Ridel and other currently-unnamed person(s) who are
alleged to have purchased shares of our common stock from July 17, 1997 to
February 19, 1999. In March of 2000, 15 additional actions were filed which made
claims on behalf of shareholders who purchased stock from the previous class
period through March 1, 2000. The actions are in the process of being
consolidated. The complaints allege that the company, its chief executive
officer and its chief financial officers, violated federal securities laws in
connection with a number of allegedly false or misleading statements and seeks
certification as a class action and certain unquantified damages. We intend to
contest this case vigorously.
From time to time, the Company is party to certain other claims and legal
proceedings that arise in the ordinary course of business of which, in the
opinion of management, do not 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, 1999 to a vote of security holders of the Company, whether through
solicitation of proxies or otherwise.
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 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 inter-dealer 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, 2000 was $3.125 per share.
F-9
<PAGE>
<TABLE>
<CAPTION>
Warrants Common Stock
---------------------------------------- -----------------------
High Bid Low Bid High Bid Low Bid
------------------ ------------------- ---------- ----------
<S> <C> <C> <C> <C>
Calendar 1999 Quotations
First Quarter Expired Expired $ 1.81 $ .91
Second Quarter Expired Expired $ 1.75 $ 1.00
Third Quarter Expired Expired $ 2.00 $ .94
Fourth Quarter Expired Expired $ 9.13 $ 1.00
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
</TABLE>
As of March 8, 2000, there were 226 holders of record of the Company's
24,881,204 shares of Common Stock outstanding on that date. As of March 9, 2000
the Company estimates that approximately 11,500 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 intends to retain future earnings, if
any, for use in its business.
ITEM 5(b) SALES OF UNREGISTERED SECURITIES DURING THE YEAR ENDED
DECEMBER 31, 1999
During the fiscal year ended December 31, 1999, we sold the following
securities pursuant to one or more exemptions from registration under the
Securities Act of 1933, as amended, including the exemption provided by Section
4(2) thereof:
See Liquidity and Capital Resources section on pages 19, 20 and 21.
We relied on one or more exemptions from registration under the Securities
Act of 1933, as amended (the "Securities Act"), for each of the foregoing
transactions, including without limitation the exemption provided by Section
4(2) of the Securities Act. We used all of the net cash proceeds raised by the
sale of unregistered securities to repay indebtedness and for working capital.
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
marketed two new products as a result of the acquisition, identified as its
InVideo product line. Sales of this product line in 1999 totaled approximately
$465,000 as compared with $500,000 for 1998. Gross profits for these products
were approximately $145,000 as compared to $200,000 in 1998. Sales related
expenses totaled $90,000 in 1999 compared to $200,000 in 1998. This acquisition
resulted in no additional personnel being added to the Company.
On July 29, 1998, the Company acquired the net assets of PC Video
Conversion, Inc. ("PC Video"), a manufacturer of Professional A/V products. In
1999, revenues from products resulting from this acquisition totaled
approximately $2,100,000 compared to approximately $700,000 in 1998. Gross
margin on sales of professional A/V products was approximately $1,300,000 in
1999 compared to approximately $500,000 in 1998. Operating expenses totaled
approximately $850,000 in 1999 versus approximately $600,000 in 1998.
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. In June and July 1999, the
Company sold the 189,701 shares of AESP stock yielding gross proceeds of
approximately $329,000 and recognizing a gain of approximately $80,000.
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<PAGE>
Results of Operations
Year ended December 31, 1999 as compared to Year Ended December 31, 1998
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales ............................................ 98% 100%
Licensing fees ....................................... 2 --
--- ---
Total revenues ..................................... 100 100
Cost of goods sold ................................... 61 84
--- ---
Gross profit ......................................... 39 16
--- ---
Operating expenses:
Sales, marketing and support ....................... 23 37
General and administrative ......................... 11 12
Research and development ........................... 8 9
Depreciation and amortization ...................... 4 8
Impairment of goodwill ............................. -- 17
--- ---
Total operating expenses .................................. 46 83
--- ---
Loss from operations ................................. (7) (67)
Interest expense, net ................................ (3) (1)
Other income ......................................... 1 1
Gain (loss) on securities available for sale ......... -- (2)
Income (loss) before income taxes .................... (9) (69)
Income tax expense ................................... -- --
---- -----
Net loss ............................................. (9)% (69)%
==== =====
</TABLE>
Net Sales
Net sales for the year ended December 31, 1999 were $17,183,000 as compared
with $18,440,000 for the year ended December 31, 1998, a decrease of $1,257,000,
or 7%. During the year ended December 31, 1999, the Company had net sales
increases to Professional AV customers (205%) and Internet customers, while it
had decreases in net sales to US Resellers (9%), to International customers
(10%), to OEM customers (37%), and Other sales (79%).
In 1999, net sales to US Resellers (Distributors, Retailers, VAR's and
Education segments) were approximately $11,402,000 as compared to $12,498,000 in
1998, a decrease of $1,096,000 or 9%. Net sales included sales to a major
distributor totaling approximately $4,318,000 or 25% as compared to 5,686,000 or
31% in 1998. The decrease in absolute dollars is the result of a reduction in
major retailers that were directed to this distributor in 1999 as compared to
1998.
During 1999, net sales to OEM customers were approximately $2,442,000 as
compared to $3,866,000 in 1998, a decrease of $1,424,000 or 37%. The decline in
OEM sales was primarily due to the delay in development and completion of the
Company's new FS400 mixed signal ASIC for the television, computer and internet
appliance markets. This ASIC was completed in Q499 and is in full production in
Q100.
Net sales to international customers in 1999 were approximately $758,000
compared to $605,000 in 1998, an increase of $153,000 or 25%. The increase is
principally the result of the addition of professional AV sales to the
international sector.
In 1999, net sales to Professional AV customers were approximately
$2,112,000 compared to $692,000 in 1998, an increase of $1,420,000 or 205%. The
increase is primarily due to development of a distribution and reseller channel
in 1999, combined with the introduction of two new products. In addition, 1998
results only consist of five months activity pursuant to the purchase of PC
Video Conversion, Inc. on July 30, 1998.
In 1999, net sales to customers on-line via the internet were approximately
$167,000 compared to $0 in 1998. The increase is principally the result of the
Company establishing an e-commerce site which offers products direct to
customers.
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<PAGE>
Other net sales in 1999 were approximately $165,000 as compared to $780,000
in 1998, a decrease of $615,000 or 79%. Other sales in 1998 principally
consisted of networking and other discontinued product sales. The Company sold
its networking product line in September, 1997 to AESP.
Licensing Fees
In 1999, the Company received licensing fees of $350,000 as compared with
$-0- in 1998. Licensing fees in 1999 were comprised of single source,
non-recurring licensing revenues.
Cost of Goods Sold
Cost of goods sold was $10,544,000, or 61% of net sales, for the year ended
December 31, 1999, as compared with $15,411,000, or 84% of net sales, for the
year ended December 31, 1998, a decrease of $4,867,000 or 32%. In the fourth
quarter of 1999, the Company adjusted the carrying values of certain inventory
items to their estimated net realizable values. As a result, the Company charged
approximately $527,000 to expense in the fourth quarter of 1999 writing off
certain items and increasing its inventory reserves to approximately $399,000.
In the fourth quarter of 1998, as a result of a detailed review of its
inventories 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, 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 additional $240,000 in
market development costs in 1998 as a result of its expansion into the office
superstore retail market. Cost of sales as a percentage of sales in 1999 were
slightly lower compared to 1998, exclusive of the inventory adjustments and
market development expenses in 1998. This is principally the result of continued
cost reductions in manufacturing designs along with a new Far East manufacturing
relationship established in Q499 resulting in lower manufacturing costs.
During the fourth quarter of 1999, the Company reduced cost of sales by
$420,000, representing the cost of product sales returns from major customers,
including anticipated sales returns in the first quarter of 2000. The Company
also adjusted cost of sales by accruing for price protection and cooperative
advertising credit claimed on prior products sold as the Company's management
decided in the fourth quarter of 1999 to offer pricing incentives to remain
competitive in 2000. This accrual resulted in a charge of approximately
$194,000.
During the fourth quarter of 1998, the Company reduced cost of sales by
approximately $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.
Sales, Marketing and Support Expenses.
Sales, marketing and support expenses were $3,970,000, or 23% of net
revenues, for the year ended December 31, 1999, as compared with $6,902,000, or
37% of net revenues, for the year ended December 31, 1998, a decrease of
$2,932,000 or 42%. The decrease in sales, marketing and support expenses in
absolute dollars is primarily the result of reduced marketing and advertising
expenditures resulting from the consolidation of a segment of the Company's
retail channel in Q498. In addition, the Company postponed marketing activities
pertaining to its new FS400 ASIC that encountered development delays and was not
released from engineering until Q499.
General and Administrative Expenses.
General and administrative expenses for the year ended December 31, 1999
were $1,878,000 or 11% of net revenues, as compared with $2,166,000 or 12% of
net revenues for the year ended December 31, 1998, a decrease of $288,000 or
13%. The decrease in terms of absolute dollars and as a percentage of net
revenues is primarily due to decreases in provisions for bad debts of
approximately $99,000, consulting fees of approximately $80,000, office supplies
of approximately $51,000, recruiting expenses of approximately $45,000, investor
relations expenses of approximately $41,000 and temporary help of approximately
$25,000. These reductions were offset by an increase in stock compensation
charges of approximately $65,000.
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<PAGE>
Research and Development Expenses.
Research and development expenses for the year ended December 31, 1999 were
approximately $1,401,000 or 8% of net revenues, as compared with $1,699,000 or
9% of net revenues, for the year ended December 31, 1998, a decrease of $298,000
or 18%. The decrease in research and development expenses in both absolute
dollars and as a percentage of revenues is due primarily to a reduction of
period expenses in the Beaverton, OR development center resulting from
incremental increases in capitalized ASIC development costs of approximately
$605,000, offset by an increase in Professional AV products R&D of approximately
$305,000. This increase is a result of a full twelve months activity as compared
with only five months activity in 1999 pursuant to the acquisition of PC Video
Conversion, Inc. on July 29, 1998.
Depreciation and Amortization.
Depreciation and amortization expenses for the year ended December 31, 1999
were $557,000 or 4% of net revenues, as compared with $1,499,000 or 8% of net
revenues, for the year ended December 31, 1998, a decrease of $942,000 or 63%.
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, in 1998 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, 1999 was $531,000, or
3% of net revenues, as compared to $226,000, or 1% of net revenues, for the year
ended December 31, 1998, an increase of $305,000 or 135%. The increase in
interest expense is attributable to an increase in interest bearing obligations
at increased interest rates. On March 31, 1999, the Company was required to
restructure its line of credit with its commercial bank resulting in an increase
in interest rate combined with additional transaction fees.
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").
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
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<PAGE>
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, 1999, the Company had other income of
$138,000 or 1% of net revenues as compared to other income of $100,000 or 0.5%
of net revenues for the year ended December 31, 1998, an increase of $38,000.
Gain (Loss) On Securities Available for Sale
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 was no indication that the fair market
value of this investment would 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.
During June and July 1999, the Company sold the 189,701 shares of AESP
common stock. The Company received gross proceeds of approximately $329,000 and
recognized a gain of approximately $80,000 on the transaction.
Net Loss.
For the year ended December 31, 1999, the Company reported a net loss of
$1,480,000, or $0.08 per share (basic), as compared to a net loss of
$12,787,000, or $0.78 per share (basic), for the year ended December 31, 1998, a
reduction in loss of $11,307,000. For the quarter ended December 31, 1999, the
Company recorded a net loss of approximately $1,779,000. This loss resulted from
certain adjustments in the fourth quarter as follows: product returns from
discontinued resellers (approximately $367,000), inventory adjustments
(approximately $527,000), accounts receivable adjustments (approximately
$383,000), accrued expense adjustment (approximately $254,000), stock
compensation and other charges (approximately $284,000).
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),
accrued expense adjustments (approximately $2,125,000), fixed asset adjustments
(approximately $766,000), and revaluation of stock investments (approximately
$346,000).
Financial Condition
Total Assets.
Total assets increased $2,279,000 or 18%, from December 31, 1998 to
December 31, 1999. The increase in assets is due to: increases of cash and
certificates of deposit by $2,889,000, accounts receivable by $360,000, property
and equipment by $174,000, capitalized software development costs by $1,645,000
and other current assets by $24,000; offset by reductions of securities
available for sale by $249,000, inventory by $2,360,000, goodwill by $186,000
and other assets by $17,000. Cash and certificates of deposits increased 210%
principally resulting from equity infusions in 1999 from private placements of
common stock and issuances of common stock
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<PAGE>
pursuant to exercises of common stock warrants and options. Accounts receivable
increased by 14% in 1999 compared with 1998 principally due increased sales in
Q499 compared to Q498. In Q498 the Company restructured a segment of a
non-performing reseller channel resulting in significant sales returns. Property
and equipment increased 22% primarily due to investments in year 2000 compliant
computer hardware and software systems. Capitalized software development costs
increased 344% resulting from increased investments in ASIC development costs.
Securities available for sale decreased by 100% in 1999 compared with 1998 due
to the sale of the 189,701 shares of AESP stock in June and July 1999. The
decrease in inventory in 1999 as compared with 1998 is the result of increased
sales combined with inventory adjustments in Q499 compared to significant
product returns and inventory adjustments in Q498. Goodwill decreased by 23% in
1999 compared with 1998 due to normal amortization.
Total Liabilities.
Total liabilities decreased $4,051,000, or 41% from December 31, 1998 to
December 31, 1999. The decrease is primarily due to: decreases in accounts
payable by $2,586,000, accrued liabilities by $1,291,000, capital leases and
long term debt by $393,000 and deferred income by $84,000; offset by increases
in notes payable by $304,000. Decreases in accounts payable is principally the
result of increased payments on debt obligations and vendor payables combined
with the reclassification of certain accounts payable to notes payable
(approximately $1,006,000). Accrued liabilities decreased as a result of reduced
marketing activities in 1999 as compared to 1998. Long term debt decreased
primarily due to payments under capital leases and long-term notes payable in
accordance with contractual agreements.
Stockholders' Equity.
Stockholders' equity increased $6,329,000 from December 31, 1998 to
December 31, 1999. The increase is primarily due the issuance of common stock
resulting from the exercise of common stock options and warrants totaling
$2,596,000, as well as a private offerings of the Company's common stock of
approximately $4,414,000 the repayment of a note receivable for common stock of
approximately $316,000 and the liquidation of liabilities through stock
issuances of approximately $320,000. These increases were offset by a net loss
incurred in fiscal year 1999 of $1,480,000.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
the public and private sale of common stock, short-term borrowing from private
lenders, and favorable credit arrangements with vendors and suppliers.
Net cash used in operating activities for the years ended December 31, 1999
and 1998 was $753,000 and $4,591,000, respectively. In 1999, net cash used in
operating activities consisted principally of the net loss of $1,480,000,
increase in accounts receivable of $360,000, and a decrease in accounts payable
and accrued liabilities of $1,854,000 offset principally by depreciation of
$557,000 and a decrease in inventory of $2,360,000. In addition, the Company
issued common stock for services and debt of $159,000 and recognized a gain on
the sale of securities of $80,000 and previously deferred income of $84,000. 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.
Net cash used in investing activities for the years ended December 31, 1999
and 1998 was $5,471,000 and $2,042,000, respectively. In 1999, cash used in
investing activities consisted primarily of the purchase of property and
equipment and capitalized software development costs of $2,158,000, increases in
certificate of deposits of $281,000, offset by proceeds received from the sale
of securities available for sale of $329,000. In 1998, cash used in investing
activities consisted primarily of the purchase of property and equipment and
capitalized software development costs of $858,000 and cash paid in
acquisitions, net of cash received, of $931,000, and increases in certificate of
deposits of $253,000.
Net cash from financing activities for the years ended December 31, 1999
and 1998 was $5,471,000 and $7,042,000, respectively. In 1999, the Company
received $4,414,000 in net proceeds from private offerings of
F-15
<PAGE>
Common Stock and $2,596,000 from the exercise of common stock options and
warrants, and repayment of a note receivable for common stock of $316,000. The
proceeds in 1999 were offset by $1,721,000 in payments on notes payable, and
payments made under capital lease obligations of $134,000. 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.
As of December 31, 1999, the Company had working capital of $5,633,000, as
compared to working capital of $1,435,000 at December 31, 1998, an increase of
$4,198,000. The Company's cash and certificates of deposit were $4,271,000 at
December 31, 1999, compared to $1,381,000, at December 31, 1998.
On February 22, 1999, the Company issued warrants to purchase 30,000 shares
of common stock as partial compensation to an unaffiliated investor relations
firm. The warrants are exercisable until February 22, 2004 at an exercise price
of $1.063 per share. These warrants were exercised on February 23, 2000 (15,000)
and March 2, 2000 (15,000).
On February 22, 1999, the Company issued warrants to purchase 100,000
shares of common stock as partial compensation to an unaffiliated investment
advisor. The warrants are exercisable until September 9, 2002 at an exercise
price of $1.063 per share. These warrants were exercised on December 10, 1999.
On February 22, 1999, the Company issued warrants to purchase 50,000 shares
of common stock pursuant to a debt financing arrangement with an unrelated
individual. The warrants are exercisable until February 22, 2004 at an exercise
price of $1.063 per share. These warrants were exercised on December 3, 1999.
On March 22, 1999, the Company issued warrants to purchase 100,000 shares
of common stock representing partial fees pursuant to a debt financing
arrangement with an unaffiliated commercial bank. The warrants are exercisable
until March 22, 2006 at an exercise price of $1.70 per share. These warrants
were exercised on November 23, 1999 under a net exercise provision resulting in
the issuance of 38,181 shares.
On June 4, 1999, the Company entered into a financing agreement resulting
in $1,200,000 in gross proceeds from the sale of 1,350,000 shares of common
stock and the issuance of a warrant to purchase an additional 120,000 shares of
common stock in a private placement to an unaffiliated accredited investor. The
warrant is exercisable until June 30, 2004 at a per-share exercise price of
$1.478125. In addition Union Atlantic received a warrant to purchase 25,000
shares of common stock as compensation for brokering the private placement. The
warrant is exercisable until June 30, 2004 at a per-share exercise price of
1.478125. The Company filed a registration statement under the Securities Act of
1933 for the shares issued in connection with this transaction and issuable upon
exercise of the warrants. The Company received proceeds from this transaction in
two tranches of $600,000. The first tranche was funded on June 14, 1999 for
$600,000 less fees and expenses associated with this offering of $60,897
yielding net proceeds of $539,103. The second tranche for $600,000 less
applicable fees of $58,222 yielding net proceeds of $541,778 was funded on
August 18, 1999.
On September 17, 1999, the Company entered into a financing agreement
resulting in $1,500,000 in gross proceeds from the sale of 1,583,333 shares of
common stock and the issuance of a warrant to purchase an additional 150,000
shares of common stock in a private placement to an unaffiliated accredited
investor. The warrant is exercisable until September 17, 2002 at a per-share
exercise price of $1.5375. The Company filed a registration statement under the
Securities Act of 1933 for the shares issued in connection with this transaction
and issuable upon exercise of the warrant. The Company received proceeds from
this transaction in two tranches of $750,000. The first tranche was funded on
September 21, 1999 for $750,000 less fees and expenses associated with this
offering of $64,903 yielding net proceeds of $685,097. The second tranche was
funded on November 17, 1999 for $750,000 less fees and expenses associated with
this offering of $60,000 yielding net proceeds of $690,000.
On September 22, 1999, the Company received gross proceeds of $135,000 from
the issuance of 120,000 shares of common stock resulting from the exercise of
common stock warrants issued pursuant to the June 4, 1999 private placement.
In November 1999, the Company completed a financing of $2,000,000 in gross
proceeds from the sale of 1,250,000 shares of common stock and the issuance of
three warrants to purchase an additional 125,000 shares of common stock in a
private placement to three unaffiliated accredited investors. The warrants are
exercisable until December 1, 2004 at a per-share exercise price of $3.1969 The
shares issued in connection with this transaction
F-16
<PAGE>
and issuable upon exercise of the warrant will be registered under the
Securities Act of 1933. Fees and expenses associated with this offering amounted
to approximately $42,000 yielding net proceeds of $1,958,000.
During the year ended December 31, 1999, the Company issued at various
times, 2,095,780 shares of common stock resulting from other exercises of
options and warrants, receiving cash of approximately $2,461,000. 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. On December 28, 1999, the Company received
$352,000 in full payment of this note, including accrued interest at 8%.
On January 18, 2000, the Company received gross proceeds of $990,000 from
the issuance of 330,000 shares of common stock resulting from the exercise of
common stock warrants issued pursuant to a private placement with an
unaffiliated investor on September 10, 1997.
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. 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, when
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.
Recent Accounting Pronouncements
The FASB has issued a proposed interpretive release, Stock Compensation-
Interpretation of APB Opinion 25 ("Interpretation"). The Interpretation will
provide accounting guidance on several issues that are not specifically
addressed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Of the many questions addressed in the
Interpretation, the most significant are a clarification of the definition of
the term "employee" for purposes of applying the opinion and the accounting for
options that have been repriced.
The Interpretation is generally effective beginning July 1, 2000. The
Interpretation applies prospectively at that date for repricings that occurred
after December 15, 1998. It also applies prospectively on July 1, 2000 to new
awards granted after December 15, 1998 for purposes of applying the definition
of "employee".
In December 1999, the Securities and Exchange Commission (the "Commission")
published Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition",
which provides guidance for applying generally accepted accounting principles to
revenue recognition in financial statements filed with the Commission, including
income statement presentation and disclosure. As originally issued, SAB 101 was
to be applied no later than the first quarter of the fiscal year beginning after
December 15, 1999. However, the Commission has delayed the effective date of the
SAB for companies with fiscal years beginning between December 16, 1999 and
March 15, 2000. For such entities, the mandatory implementation date may now be
no later than the second quarter of the fiscal year beginning after December 15,
1999.
The Company is in the process of reviewing and evaluating the
pronouncements detailed above to determine the potential impact on the financial
statements of the Company.
F-17
<PAGE>
Certain Factors That May Affect Future Results
The Company does not provide forecasts of the future financial performance
of the Company. However, from time to time, information provided by the Company
or statements made by its employees may contain "forward looking" information
that involve risks and uncertainties. In particular, statements contained in
this Form 10-KSB 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.
F-18
<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-23, which are contained
in this Annual Report immediately following page 29. The consolidated financial
statements filed in this Item 7 are as follows:
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ........................................................ F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 ............................. F-2
Consolidated Statements of Operations for the Years Ended December 31, 1999 and 1998 ..... F-3
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999 and F-4
1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999 and 1998 ..... F-5
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
This Amendment No. 1 on form 10-KSB/a to the registrant's annual report on
form 10-KSB for the year ended December 31, 1999, (the "Report") is being filed
to include the information required to be set forth in part III of the report
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
Directors
Thomas L. Massie is Chairman of the Board 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 went public 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. MacMemory
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.
Mr. Massie is 38 years old and his term expires in 2002.
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
F-19
<PAGE>
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. Mr. Coldrick
is 57 years old and his term expires in 2001.
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. Mr. Cavalier
is 58 years old and his term expires in 2002.
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. Mr. Mahoney is 42 years old and his term expires in
2001.
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
three United States Patents for data communications inventions and he was
honored as Florida's "Entrepreneur of the Year" in 1984. Mr. Dambrackas is 55
years old and his term expires in 2000.
Executive Officers
Christopher P. Ricci joined the Company as Sr. Vice President of Business
Development, General Counsel and Secretary in 1998. From 1996 to 1998, Mr. Ricci
led 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 and 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. Mr.
Ricci is 34 years old.
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
F-20
<PAGE>
TView from inception to a $5M 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 $20MM 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. Mr. Hamilton is 49 years old.
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). Mr. Moyer is 41 years old.
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 the Vice President for Number Nine Computer Corporation, a
publicly held multi-million dollar company. From 1980 to 1988 he held various
management positions with the Intel Corporation. Mr. Schillhammer graduated
from Dartmouth College with a bachelor's degree in Engineering. Mr.
Schillhammer is 45 years old.
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 executive 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
believe that during the year ended December 31, 1999, all filing requirements
applicable to its directors, executive officers and greater-than-10% beneficial
owners were met.
Item 10. 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, 1999, 1998, and 1997, of those persons
who were, at December 31, 1999, (i) the Company's Chief Executive Officer and
(ii) the four other highest paid executive officers of the Company receiving
total cash and bonus compensation in excess of $100,000 (the "Named Officers").
The Company did not grant any restricted stock awards or stock appreciation
rights or make any long term incentive plan payouts to the individuals named in
the tables below during the fiscal year indicated.
F-21
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation(1)
Name and Other Annual
Principal Position Salary($) Bonus($) Compensation($)(2) Options/SAR(3)
------------------------------ ----------- ------------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
Thomas L. Massie ............. 1999 $150,000 $ 69,154 -- 100,000
Chairman of the Board 1998 $150,000 $ 132,833 -- 200,000
1997 $150,000 $ 45,000 -- 500,000
Christopher P. Ricci ......... 1999 $150,000 $ 15,200 -- 45,000
Sr. Vice President and 1998 $150,000 $ 27,500 -- 125,000
General Counsel 1997 -- -- -- --
Brett Moyer .................. 1999 $130,000 $ 63,724 (4) -- 40,000
Vice President of 1998 $130,000 $ 41,000 (4) -- 100,000
Pro AV Sales 1997 $130,000 $ 45,000 -- 250,000
Thomas Hamilton .............. 1999 $129,192 -- -- 175,000
Vice President of 1998 $110,000 $ 5,000 -- 25,000
Research 1997 $110,000 $ 4,179 -- --
William Schillhammer ......... 1999 $ 95,000 $ 52,900 (4) -- 40,000
Vice President of 1998 $ 85,000 $ 22,204 (4) -- 122,000
OEM Sales 1997 -- -- -- --
<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, 1999 to the executives named in the
Summary Compensation Table above. The Company did not grant any stock
appreciation rights during the fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percentage of Individual Grants
Total Options -----------------------------------
Shares Subject Granted to
to Options Employees in FY
Name Granted 1999(1) Exercise Price Expiration Date
------------------------------ ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Thomas L. Massie ............. 100,000 8.13% $ 1.2813 11/12/2004
Christopher P. Ricci ......... 25,000 3.66% $ 1.063 2/22/2004
20,000 $ 1.2813 11/12/2004
Brett Moyer .................. 40,000 3.25% $ 1.2813 11/12/2004
Bill Schillhammer ............ 40,000 3.25% $ 1.2813 11/12/2004
Thomas Hamilton .............. 25,000 14.23% $ 1.063 2/22/2004
50,000 $ 1.00 9/7/2004
100,000 $ 1.2813 11/12/2004
<FN>
------------
(1) A total of 1,229,386 options were granted to employees, directors and
consultants in 1999 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>
F-22
<PAGE>
The following table sets forth information concerning option exercises
during fiscal year 1999 and the value of unexercised options as of December 31,
1999 held by the executives named in the Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised,
Unexercised In-the-Money Options
Shares Options at December 31, 1998 at December 31,
Acquired on Value (Exercisable/ 1998 (Exercisable/
Exercise(#) Realized($) Unexercisable) Unexercisable)(1)
------------- ------------- ------------------------------ -------------------------------
<S> <C> <C> <C> <C>
Thomas L. Massie ............. 500,000 3,527,000 150,000 $1,072,500
(Exercisable) (Exercisable)
300,000 $2,109,000
(Unexercisable) (Unexercisable)
Christopher P. Ricci ......... 41,668 292,926 0 $ 0
(Exercisable) (Exercisable)
128,332 $ 904,885
(Unexercisable) (Unexercisable)
Brett Moyer .................. 200,001 1,406,007 0 $ 0
(Exercisable) (Exercisable)
189,999 $1,333,241
(Unexercisable) (Unexercisable)
William Schillhammer ......... 15,000 105,450 30,668 213,533
(Exercisable) (Exercisable)
131,332 923,264
(Unexercisable) (Unexercisable)
Thomas Hamilton .............. 88,334 620,989 0 $ 0
(Exercisable) (Exercisable)
191,666 $1,362,745
(Unexercisable) (Unexercisable)
<FN>
------------
(1) Value is based on the difference between option exercise price and the fair
market value at December 31, 1999 ($8.25 per share, the closing price as
quoted on the NASDAQ SmallCap Market at the close of trading on December 31,
1999) multiplied by the number of shares underlying the option.
</FN>
</TABLE>
Employment Agreements
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,
2000, 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 acceleration of vesting of all options held by
Mr. Moyer 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.
FOCUS and Christopher Ricci are parties to an employment contract effective
March 1, 1998, 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 our Senior Vice President, General
Counsel and Secretary. This employment contract requires the acceleration of
vesting of all options held by Mr. Ricci so as to be immediately exercisable if
Mr. Ricci is terminated without cause during the term of the contract. In
addition, in the case of a change in control of FOCUS, for up to one year
following such change in control Mr. Ricci, at his sole election, may choose to
terminate his employment, in which case Mr. Ricci would be entitled to receive a
lump sum cash payment equal to two years' salary plus the continuation of such
salary for an additional two years after such termination. Mr. Ricci's
employment contract provides for annual bonuses to be determined by the Board of
Directors and employee benefits, including health and disability insurance, to
be provided in accordance with company policies.
F-23
<PAGE>
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, 2000, 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 acceleration of
vesting of all options held by Mr. Morton 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
acceleration of vesting of all options held by Mr. Hamilton 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.
Compensation of Directors
Directors of the Company receive no direct cash compensation for their
services as directors. In 1999, the Company paid Union Atlantic L.C. $66,000 in
placement fees in connection with equity financing agreements brokered by Union
Atlantic. The Company paid consulting fees and expenses to Union Atlantic
amounting to $46,226 in 1999. 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
Board of 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. Mr. Massie received a grant, subject to
approval by the Company's stockholders, of an option for 200,000 shares under
the 2000 NQSO Plan. Mr. Moyer received a grant, subject to approval by the
Company's stockholders, of an option for 100,000 shares. 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 April 22, 1999, Mr. Dambrackas was granted,
subject to approval by the Company's stockholders, a stock option for 100,000
shares of Common Stock at an exercise price of $1.4063, the fair market value on
the date of grant.
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.
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 May 1, 2000 by (i) each
person known to the Company who beneficially owns 5% or more of the 24,896,204
outstanding shares of its Common Stock, (ii) each director of the Company, (iii)
each executive officer identified in the Summary Compensation Tables below, 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
F-24
<PAGE>
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. All communications for the individuals listed below should be
directed to c/o Focus Enhancements, Inc., 600 Research Drive, Wilmington, MA
01887.
<TABLE>
<CAPTION>
Amount of Beneficial Ownership
--------------------------------
Name of Beneficial Owner Number of Shares Percent(1)
------------------------------------------------------------------------- ------------------ -----------
<S> <C> <C>
Thomas L. Massie (2) .................................................... 316,667 1.27
John C. Cavalier (3) .................................................... 42,853 *
William B. Coldrick (4) ................................................. 125,000 *
Timothy E. Mahoney (5) .................................................. 33,333 *
William Dambrackas (6) .................................................. 33,334 *
Christopher P. Ricci (7) ................................................ 41,667 *
Brett A. Moyer (8) ...................................................... 83,333 *
Thomas Hamilton (9) ..................................................... 14,334 *
William R. Schillhammer III (10) ........................................ 54,668 *
All executive officers and directors as a group (9 persons)(11) ......... 745,189 2.99
<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) Does not include 133,333 shares issuable pursuant to outstanding stock
options that are not exercisable at May 1, 2000 or within 60 days
thereafter.
(3) Includes 9,519 shares of Common Stock held directly by Mr. Cavalier. Does
not include 50,000 shares issuable pursuant to outstanding stock options
that are not currently at May 1, 2000 or within 60 days thereafter.
(4) Does not include 50,000 shares issuable pursuant to outstanding stock
options that are not exercisable at May 1, 2000, or within 60 days
thereafter.
(5) Does not include 50,000 shares issuable pursuant to outstanding stock
options that are not exercisable at May 1, 2000, or within 60 days
thereafter.
(6) Does not include 66,666 shares issuable pursuant to outstanding stock
options that are not exercisable at May 1, 2000, or within 60 days
thereafter.
(7) Does not include 86,665 shares issuable pursuant to outstanding stock
options that are not exercisable at May 1, 2000, or within 60 days
thereafter.
(8) Does not include 106,666 shares issuable pursuant to outstanding stock
options that are not exercisable at May 1, 2000, or within 60 days
thereafter.
(9) Includes 6,000 shares of common stock held directly by Mr. Hamilton. Does
not include 183,332 shares issuable pursuant to outstanding stock options
that are not exercisable at May 1, 2000, or within 60 days thereafter.
(10) Includes 4,000 shares of common stock held directly by Mr. Schillhammer.
Does not include 111,332 shares issuable pursuant to outstanding stock
options that are not exercisable at May 1, 2000, or within 60 days
thereafter.
(11) Includes 19,519 shares of Common Stock. Also includes 725,670 shares
issuable pursuant to options and warrants to purchase Common Stock
exercisable at May 1, 2000, or within 60 days thereafter.
</FN>
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1999, the Company paid Union Atlantic L.C. $66,000 in placement fees in
connection with equity financing agreements brokered by Union Atlantic. The
Company paid consulting fees and expenses to Union Atlantic amounting to $46,226
in 1999. Timothy Mahoney, who is a FOCUS director, is a partner of Union
Atlantic.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
F-25
<PAGE>
The following exhibits, required by Item 601 of Regulation S-B, are filed
as a part of this Annual Report on Form 10-KSB 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 S-B.
<TABLE>
<CAPTION>
Exhibit
Item No. Item and Description
---------- -------------------------------------------------------------------------------------------------------
<S> <C>
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 By-laws 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 Non-Qualified Stock Option Agreement, as amended, under the 1992 Stock Option Plan, as
amended (1)
10.5 1993 Non-Employee Director Stock Option Plan (4)
10.6 Form of Non-Qualified Stock Option Agreement under the 1993 Non- Employee Director Stock
Option Plan (4)
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 W-K 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 Non-Employee Director Stock Plan (7)
10.22 Form of Non-Qualified Stock Option Agreement under the 1995 Non- Employee Director Stock Plan (6)
10.23 Form of Settlement Agreement between the Company and Lapis Technologies, Inc. Shareholders (7)
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Item No. Item and Description
---------- ---------------------------------------------------------------------------------------------------
<S> <C>
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)
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 Non-Qualified Stock Option Agreement for a Corporate Officer (12)
10.44 Key Officer Non-Qualified Stock Option Agreement for a Corporate Officer (12)
10.45 Key Officer Non-Qualified 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
10.49 Common Stock and Warrants Purchase Agreement with AMRO International, S.A.(14)
10.50 Form of Stock Purchase Warrant issued to AMRO International, S.A. (included as Exhibit A to the
Common Stock and Warrants Purchase Agreement). (14)
10.51 Form of Registration Rights Agreement with AMRO International, S.A. (included as Exhibit B to
the Common Stock and Warrants Purchase Agreement. (14)
10.52 Registration Rights Agreement dated as of July 29, 1998 between the Company and PC Video
Conversion, Inc. (15)
10.53 Form of Common Stock Purchase Warrant issued to Brian Swift and Edward Price. (16)
10.54 Common Stock Purchase Warrant issued to Silicon Valley Bank. (16)
10.55 Common Stock and Warrant Purchase Agreement, as amended, with BNC Bach International Ltd.,
INC (17).
10.56 Form of Stock Purchase Warrant issued to BNC Bach International, Inc. (included as Exhibit A to
the Common Stock and Warrant Agreement (17).
10.57 Form of Registration Rights Agreement with BNC Bach International Ltd., Inc. (included as Exhibit
B to the Common Stock and Warrant Purchase Agreement (17).
10.58 Common Stock and Warrant Purchase Agreement with The Raptor Global Portfolio Ltd., The Altar
Rock Fund L.P. and Roseworth Group, LTD (18).
10.59 Form of Stock Purchase Warrant issued to The Raptor Global Portfolio Ltd. (for 87,150 shares), The
Altar Rock Fund L.P. (for 350 shares) and Roseworth Group, Ltd. (for 37,500 shares) (included as
Exhibit A to the Common Stock and Warrant Purchase Agreement) (18).
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Item No. Item and Description
---------- --------------------------------------------------------------------------------------------
<S> <C>
10.60 Form of Registration Rights Agreement with The Raptor Global Portfolio Ltd., The Altar Rock
Fund L.P. and Roseworth Group, Ltd. (included as Exhibit B to the Common Stock and Warrant
Purchase Agreement) (18).
10.61 Contract for services to be rendered to FOCUS Enhancements, Inc. by R.J. Falkner & Company,
INC (18).
10.62 Form of Stock Purchase Warrant issued to each of R. Jerry Falkner and Richard W. West (18).
10.63 Agreement between Union Atlantic, L.C. and FOCUS Enhancements, Inc. confirming agreement to
issue warrant in exchange for fee reduction (18).
10.64 Stock Purchase Warrant issued to Union Atlantic, L.C. (18).
11 Statement re Computation of Earnings [Loss] Per Share
21 Subsidiaries of the Company
23 Consent of Wolf & Company P.C., Independent Accountants
27 Financial Data Schedule for year ended December 31, 1999
<FN>
------------
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2,
No. 33-60248-B, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 29, 1993, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 10-QSB for the period ended
September 30, 1995, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Form 10-KSB for the year ended
December 31, 1993, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 10-KSB 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 S-8,
No. 33-80651, 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 SB-2,
No. 33-80033, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Form 10-QSB for the period ended June
30, 1995, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Form 8-K dated November 4, 1996
(10) Filed as an exhibit to the Company Form 10-KSB 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 S-3,
No. 333-26911, 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 S-8,
No. 333-33243, filed with the Commission on August 8, 1997, and
incorporated herein by reference.
(13) Filed as an exhibit to the Company's Form 8-K dated September 10, 1997
(14) Filed as an exhibit to the Company's Registration Statement on Form S-3,
No. 333-81177, filed with the Commission on June 21, 1999, and incorporated
herein by reference.
(15) Filed as an exhibit to the Company's Form 10-QSB dated August 14, 1998 and
incorporated herein by reference.
(16) Filed as an exhibit to the Company's Form 10-QSB dated May 17, 1999 and
incorporated herein by reference.
(17) Filed as an exhibit to the Company's Registration Statement on Form S-333,
No. 333-82163, filed with the Commission on July 2, 1999, and incorporated
herein by reference.
(18) Filed as an exhibit to the Company's Registration Statements on From
S-333, No. 333-94621, filed with the Commission on January 13, 2000, and
incorporated herein by reference.
</FN>
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fiscal quarter ended
December 31, 1999.
F-28
<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, 1999 and 1998, 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, 1999 and 1998, and the
consolidated results of their operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
As indicated in Note 8, the Company has been named as a defendant in sixteen
lawsuits. The complaints allege that the Company, its Chief Executive Officer,
and its Chief Financial Officer violated federal securities laws in connection
with a number of allegedly false or misleading statements and seek certification
as a class action and certain unquantified damages. The Company intends to
contest this litigation vigorously.
/s/ WOLF & COMPANY, P.C.
WOLF & COMPANY, P.C.
Boston, Massachusetts
April 11, 2000
F-29
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,736,517 $ 1,128,380
Certificate of deposit 534,091 253,067
Securities available for sale -- 248,983
Accounts receivable, net of allowances of $294,907 and $649,987 at
December 31, 1999 and 1998, respectively 2,913,005 2,553,139
Inventories 3,588,702 5,948,624
Prepaid expenses and other current assets 240,732 217,092
------------- -------------
Total current assets 11,013,047 10,349,285
Property and equipment, net 968,594 794,716
Capitalized software development costs 2,122,450 477,761
Other assets, net 287,116 304,498
Goodwill, net 624,277 810,673
------------- -------------
Total assets $ 15,015,484 $ 12,736,933
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,006,258 $ 702,057
Current portion of long-term debt 312,556 283,180
Obligations under capital leases 129,451 119,536
Accounts payable 3,413,285 5,999,694
Accrued liabilities 518,726 1,810,025
------------- -------------
Total current liabilities 5,380,276 8,914,492
Deferred income -- 84,212
Obligations under capital leases, non-current 202,002 321,760
Long-term debt, net of current portion 226,041 538,597
------------- -------------
Total liabilities 5,808,319 9,859,061
------------- -------------
Commitments and contingencies Stockholders' equity:
Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 30,000,000 shares authorized, 24,504,203
and 18,005,090 shares issued and outstanding at December 31, 1999 and
1998, respectively 245,042 180,051
Additional paid-in capital 46,340,891 38,913,304
Accumulated deficit (36,678,638) (35,198,935)
Note receivable, common stock -- (316,418)
Treasury stock at cost, 450,000 shares (700,130) (700,130)
------------- -------------
Total stockholders' equity 9,207,165 2,877,872
------------- -------------
Total liabilities and stockholders' equity $ 15,015,484 $ 12,736,933
============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
F-30
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Net sales $ 16,832,985 $ 18,440,226
Licensing fees 350,000 --
------------ -------------
Net revenues 17,182,985 18,440,226
Cost of goods sold 10,543,997 15,410,912
------------ -------------
Gross profit 6,638,988 3,029,314
------------ -------------
Operating expenses:
Sales, marketing and support 3,969,705 6,901,546
General and administrative 1,878,045 2,166,352
Research and development 1,400,732 1,698,977
Depreciation and amortization expense 557,303 1,499,496
Impairment of goodwill -- 3,053,880
------------ -------------
Total operating expenses 7,805,785 15,320,251
------------ -------------
Loss from operations (1,166,797) (12,290,937)
Interest expense, net (531,023) (225,802)
Other income, net 138,002 100,073
Gain/(loss) on securities available for sale 80,115 (346,017)
------------ -------------
Loss before income taxes (1,479,703) (12,762,683)
Income tax expense -- 24,641
------------ -------------
Net loss $ (1,479,703) $ (12,787,324)
============ =============
Loss per common share:
Basic $ (0.08) $ (0.78)
============ =============
Diluted $ (0.08) $ (0.78)
============ =============
Weighted average common shares outstanding:
Basic 18,743,698 16,336,872
============ =============
Diluted 18,743,698 16,336,872
============ =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-31
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional
Shares Amount Paid-in Capital
------------ ----------- -----------------
<S> <C> <C> <C>
Balance at
December 31, 1997 14,010,186 $140,102 $27,339,892
Issuance of common stock
upon exercise of stock
options and warrants 2,429,958 24,299 7,296,082
Issuance of common stock
from private offerings,
net of issuance costs of
$ 172,645 1,092,150 10,922 2,816,433
Issuance of common stock
for acquisitions of
Digital Vision, Inc. and
PC Video Conversion,
Inc. 472,796 4,728 1,460,897
Purchase of treasury stock -- -- --
Net loss -- -- --
---------- -------- -----------
Balance at
December 31, 1998 18,005,090 180,051 38,913,304
Issuance of common stock
upon exercise of stock
options and warrants 2,215,780 22,158 2,573,865
Issuance of common stock
from private offerings,
net of issuance costs of
$ 286,022 4,183,333 41,833 4,372,145
Common stock issued in
settlement of accounts
payable 100,000 1,000 322,260
Common stock warrants
issued for services and
debt -- -- 159,317
Repayment of note
receivable-common
stock -- -- --
Net loss -- -- --
---------- -------- -----------
Balance at
December 31, 1999 24,504,203 $245,042 $46,340,891
========== ======== ===========
<CAPTION>
Note Total
Accumulated Receivable Treasury Stockholders'
Deficit Common Stock Stock Equity
----------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1997 $ (22,411,611) $ -- $ -- $ 5,068,383
Issuance of common stock
upon exercise of stock
options and warrants -- (316,418) -- 7,003,963
Issuance of common stock
from private offerings,
net of issuance costs of
$ 172,645 -- -- -- 2,827,355
Issuance of common stock
for acquisitions of
Digital Vision, Inc. and
PC Video Conversion,
Inc. -- -- -- 1,465,625
Purchase of treasury stock -- -- (700,130) (700,130)
Net loss (12,787,324) -- -- (12,787,324)
------------- ----------- ---------- --------------
Balance at
December 31, 1998 (35,198,935) (316,418) (700,130) 2,877,872
Issuance of common stock
upon exercise of stock
options and warrants -- -- -- 2,596,023
Issuance of common stock
from private offerings,
net of issuance costs of
$ 286,022 -- -- -- 4,413,978
Common stock issued in
settlement of accounts
payable -- -- -- 323,260
Common stock warrants
issued for services and
debt -- -- -- 159,317
Repayment of note
receivable-common
stock -- 316,418 -- 316,418
Net loss (1,479,703) -- -- (1,479,703)
------------- ----------- ---------- --------------
Balance at
December 31, 1999 $ (36,678,638) $ -- $ (700,130) $ 9,207,165
============= =========== ========== ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-32
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,479,703) $ (12,787,324)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 557,303 1,499,496
Amortization of discount on note payable 42,344 17,696
Common stock warrants issued for service or debt 159,317 --
Deferred income (84,212) --
Loss (gain) on securities available for sale (80,115) 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 (359,866) 3,324,750
Decrease (increase) in inventories 2,359,922 (1,587,185)
Decrease (increase) in prepaid expenses and other assets (13,458) 237,799
Increase (decrease) in accounts payable (563,149) 386,892
Increase (decrease) in accrued liabilities (1,291,299) 916,044
------------ -------------
Net cash used in operating activities (752,916) (4,591,935)
------------ -------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 329,098 --
Increase in certificate of deposit (281,024) (253,067)
Additions to property and equipment and capitalized software development
costs (2,157,623) (858,011)
Cash paid in acquisitions, net of cash received -- (930,563)
------------ -------------
Net cash used in investing activities (2,109,549) (2,041,641)
------------ -------------
Cash flows from financing activities:
Payments on notes payable and long-term debt (1,721,323) (1,953,900)
Payments under capital lease obligations (134,494) (135,183)
Payments for purchase of treasury stock -- (700,130)
Repayment of note receivable-common stock 316,418 --
Net proceeds from private offerings of common stock 4,413,978 2,827,355
Net proceeds from exercise of common stock options and warrants 2,596,023 7,003,963
------------ -------------
Net cash provided by financing activities 5,470,602 7,042,105
------------ -------------
Net increase in cash and cash equivalents 2,608,137 408,529
Cash and cash equivalents at beginning of year 1,128,380 719,851
------------ -------------
Cash and cash equivalents at end of year $ 3,736,517 $ 1,128,380
============ =============
</TABLE>
F-33
<PAGE>
<TABLE>
<S> <C> <C>
Supplemental Cash Flow Information:
Interest paid $ 441,558 $200,129
Income taxes paid -- 5,020
Equipment acquired under capital leases 24,651 400,304
Common stock issued in settlement of accounts payable 323,260 --
Note payable issued in settlement of accounts payable 1,700,000 --
</TABLE>
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-34
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business of the Company. FOCUS Enhancements, Inc. (the "Company" "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, Furthertech Company, Ltd, and Asemtec 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 twelve 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 wholly-owned subsidiariary PC Video Conversion,
Inc. The Company's other subsidiaries, Lapis Technologies, Inc., TView, Inc. and
FOCUS Enhancements, B.V. (Netherlands corporation) became inactive or were
merged into FOCUS in 1999. 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 year ended December 31, 1998.
1998
---------------
Net sales $ 20,023,000
Loss from operations (11,753,700)
Net loss (12,254,500)
Net loss per common share
Basic $ (.73)
Diluted $ (.73)
Reclassifications. Certain accounts have been reclassified in the 1998
consolidated financial statements to conform to the 1999 presentation.
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, the value of equity instruments issued for
services and the recoverability of goodwill related to acquisitions. It is at
least reasonably possible that the estimates will change within the next year.
F-35
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 short-term 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, 1999, a major distributor
represented approximately 23% of the Company's accounts receivable, a major
retailer represented approximately 13% of the Company's accounts receivable and
a second major distributor represented approximately 12% of the Company's
accounts receivable. 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. 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.
The company maintains its bank accounts with high quality financial
institutions to minimize credit risk, however, the company's balances may
periodically exceed federal deposit insurance limits.
Inventories. Inventories are stated at the lower of cost or market value
using the first-in, first-out 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 straight-line 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 3-5 years
Furniture and fixtures 5 years
Purchased software 1-3 years
Leasehold improvements Lesser of 5 years or the term of the lease
Capitalized Software Development Costs. Capitalized software development
costs are stated at cost and will be amortized on a units of production method
over the estimated useful life of the asset commencing on the date the product
is released. The Company capitalized $1,644,689 and $477,761 of software
development costs in 1999 and 1998, respectively. No products related to
capitalized software development costs were released as of December 31, 1999.
Goodwill. Goodwill resulting from business combinations is amortized on a
straight-line basis over periods ranging from five to seven years. The Company
evaluates the net realizable value of goodwill periodically based
F-36
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
on a number of factors including operating results, business plans, budgets and
economic projections. The Company's evaluation also considers non-financial 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 $1,756,000
and $3,309,000 for the years ended December 31, 1999 and 1998, respectively.
Legal Fees. Legal fees are charged to expense in the period the legal
services are performed.
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. On July 1, 1999, the Company closed its foreign
subsidiary and on August 15, 1999 dissolved this entity.
Stock Compensation Plans. Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" 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
plans 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. Basic earnings per share represents income
available to common stock divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would
result from the assumed conversion. Potential common shares that may be issued
by the Company relate solely to outstanding stock options and warrants, and are
determined using the treasury stock method. The assumed conversion of
outstanding dilutive stock options and warrants would increase the shares
outstanding but would not require an adjustment to income as a result of the
conversion. For the years ended December 31, 1999 and 1998, options and warrants
applicable to 4,240,655 shares and 4,937,645 shares, respectively were anti-
dilutive and excluded from the diluted earnings per share computation.
Comprehensive Income. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Certain Financial Accounting Standards Board ("FASB") statements, however,
require entities to report specific changes in assets and liabilities, such as
unrealized gains and losses on
F-37
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
available-for-sale 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. There was no accumulated
comprehensive income at December 31, 1999 and 1998.
Segment Information. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," 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 general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
Recent Accounting Pronouncements
The FASB has issued a proposed interpretive release, Stock Compensation-
Interpretation of APB Opinion 25 ("Interpretation"). The Interpretation will
provide accounting guidance on several issues that are not specifically
addressed in APB Opinion No. 25, "Accounting for Stock Issued to Employees." Of
the many questions addressed in the Interpretation, the most significant are a
clarification of the definition of the term "employee" for purposes of applying
the opinion and the accounting for options that have been repriced.
The Interpretation is generally effective beginning July 1, 2000. The
Interpretation applies prospectively at that date for repricings that occurred
after December 15, 1998. It also applies prospectively on July 1, 2000 to new
awards granted after December 15, 1998 for purposes of applying the definition
of "employee".
In December 1999, the Securities and Exchange Commission (the "Commission")
published Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition",
which provides guidance for applying generally accepted accounting principles to
revenue recognition in financial statements filed with the Commission, including
income statement presentation and disclosure. As originally issued, SAB 101 was
to be applied no later than the first quarter of the fiscal year beginning after
December 15, 1999. However, the Commission has delayed the effective date of the
SAB for companies with fiscal years beginning between December 16, 1999 and
March 15, 2000. For such entities, the mandatory implementation date may now be
no later than the second quarter of the fiscal year beginning after December 15,
1999.
The Company is in the process of reviewing and evaluating the
pronouncements detailed above to determine the potential impact on the financial
statements of the Company.
2. Fourth Quarter Adjustments
In the fourth quarters of 1999 and 1998, the Company sustained net losses
of $1,779,000 and $14,235,000, respectively. A summary of the effect on net
income of sales returns and other significant year-end adjustments follows:
Description 1999 1998
--------------------------------------- ----------- -------------
Sales returns $367,000 $3,455,000
Impairment loss on goodwill -- 3,054,000
Inventory 527,000 1,929,000
Fixed assets -- 766,000
Write-down of securities -- 346,000
Accounts receivable 383,000 --
Accrued expenses 254,000 2,125,000
Stock compensation and other 284,000 --
F-38
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Inventories
Inventories at December 31, consist of the following:
1999 1998
------------- ------------
Raw materials $1,039,356 $ 230,364
Work in process 171,637 --
Finished goods 2,377,709 5,718,260
---------- ----------
Totals $3,588,702 $5,948,624
========== ==========
The Company periodically reviews its inventories for obsolescence and
adjusts carrying costs to estimated net realizable values when they are
determined to be less than cost. In the fourth quarter of 1999, the Company
identified certain excess and obsolete inventory and charged approximately
$527,000 to expense, writing off certain inventory and increasing inventory
reserves to $399,000 at December 31, 1999. In the fourth quarter of 1998, as a
result of a detailed 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 expense
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,
----------------------------
1999 1998
------------- ------------
Equipment $1,062,443 $ 893,116
Furniture and fixtures 107,530 132,522
Leasehold improvements 295,249 134,599
Purchased software 246,980 29,100
---------- ----------
1,712,202 1,189,337
Less accumulated depreciation and
amortization 743,608 394,621
---------- ----------
Net book value $ 968,594 $ 794,716
========== ==========
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1999 and 1998 totaled $363,707 and $1,135,259,
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.
The Company has $140,000 in notes receivable bearing interest at 8.0% per
annum due from an officer of the Company at December 31, 1999 and 1998. At
December 31, 1999, interest receivable of $28,467 is included in accounts
receivable. Interest income recognized on the notes receivable for the years
ended December 31, 1999 and 1998 amounted to $11,200 and $6,067, respectively.
Restricted Assets.
As part of the Company's acquisition of TView, Inc. in September 1996, the
Company assumed a $125,000 irrevocable stand-by letter of credit with a bank to
secure office space in Beaverton, Oregon. During 1997, the
F-39
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Company placed $125,000 in an interest bearing account at the Company's bank to
secure the letter of credit. During 1999, the Company requested and received
$83,334 from the interest bearing account, thus reducing the stand-by letter of
credit. The amount recorded as an other asset as of December 31, 1999 is $41,666
as compared to $125,000 at December 31, 1998.
6. Notes Payable
Line of Credit, Bank.
During 1999, the Company repaid all monies owed under an accounts
receivable financing agreement with its bank, and closed its account. At
December 31, 1998, the Company maintained a line of credit with the same bank.
Borrowings under the line were payable upon demand and were collateralized by
all of the assets of the Company, except as noted below. Borrowings aggregated
$620,000 at December 31, 1998, and were charged 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. 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 allowed for advances on accounts receivable not to exceed 80% of
qualified invoices. Interest was charged on the outstanding balance at a rate of
the prime lending rate plus 4.5%. Under the terms of this agreement the bank was
issued warrants to purchase 100,000 shares of the Company's common stock at a
price of $1.70 per share.
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. The
loan was paid in full at December 31, 1999.
Term Loan, Vendor.
On April 20, 1999, the Company converted certain accounts payable due to a
contract manufacturer to a term note in the amount of $1,700,000 with interest
at a rate of 12% per annum. The balance of the Note was $1,006,258 at December
31, 1999. On December 31, 1999, the Company and the holder of the note reached
an agreement as to the settlement of the note and related accounts payable. On
January 5, 2000 the Company repaid $1,000,000 of these obligations and on
January 28, 2000, escrowed $669,000 to be paid to the holder in three equal
installments on February 5, March 5, and April 5, 2000.
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 Conversion, Inc. 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, 1999 are as
follows:
2000 312,556
2001 226,041
-------
Total $538,597
========
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
F-40
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. In June and July 1999, the Company sold the 189,701
shares of AESP stock yielding gross proceeds of approximately $329,000 and
recognizing a gain of approximately $80,000.
Accounts Payable.
During the year ended December 31, 1999, the Company recognized a total of
$71,076 of other income in connection with the release of selected obligations
and the reduction of certain accounts payable.
8. Commitments and Contingencies
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, 1999 and 1998 was approximately $400,000 and $451,000,
respectively.
The Company leases certain computer and office equipment under capital
leases with three to five-year terms. The cost of assets under capital leases
was $468,525 and $443,874 at December 31, 1999 and 1998, respectively, and
accumulated amortization was $135,832 and $44,181, respectively. Capitalized
leased assets are included in property and equipment.
Minimum lease commitments at December 31, 1999 are as follows:
Capital Leases Operating Leases
---------------- -----------------
2000 $165,988 $ 322,357
2001 121,289 263,477
2002 69,075 240,080
2003 47,143 208,617
2004 1,118 69,312
-------- ----------
Total minimum lease payments 404,613 1,103,843
==========
Less amounts representing interest 73,160
--------
Present value of minimum obligations 331,453
Less current portion 129,451
--------
Non-current portion $202,002
========
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.
Letters of Credit.
In September 1999, the Company entered into an agreement with a new
subcontractor. As part of the agreement the Company was required to obtain from
its bank an irrevocable sight letter of credit to secure payment of each order
placed with this vendor. The Company was required to secure these letters of
credit by
F-41
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
depositing cash in an interest bearing account with the bank. At December 31,
1999, the Company maintained an interest bearing account collateralizing sight
letters of credit in the amount of $534,091. This amount is recorded in current
assets.
In July, 1998, the Company entered into an agreement with another
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. This agreement was terminated during
1999.
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") by March
29, 2001. In return, the Company has received certain pricing commitments over
the term of the master purchase agreement. For the period October 1, 1997
through December 31, 1999, the Company purchased approximately $995,000 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 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.
Litigation.
The Company has been named as a defendant in a lawsuit filed in United
States District Court for the District of Massachusetts, on or about November 9,
1999, on behalf of Frank E. Ridel and other currently-unnamed person(s) who are
alleged to have purchased shares of our common stock from July 17, 1997 to
February 19, 1999. In March of 2000, 15 additional actions were filed which made
claims on behalf of shareholders who purchased stock from the previous class
period through March 1, 2000. The actions are in the process of being
consolidated. The complaints allege that the company, its chief executive
officer and its chief financial officers, violated federal securities laws in
connection with a number of allegedly false or misleading statements and seeks
certification as a class action and certain unquantified damages. We intend to
contest this case vigorously.
From time to time, the Company is party to certain other claims and legal
proceedings that arise in the ordinary course of business which, in the opinion
of management, will not have a material adverse effect on the Company's
financial position or results of operation.
Special Investigation
The Company's independent auditors, Wolf & Company, P.C., brought to the
attention of the Board certain matters relating to the Company's financial
controls. The Board of Directors thereafter formed a special committee to
investigate. The special committee engaged the law firm of Foley, Hoag & Eliot
LLP, which engaged the accounting firm of Arthur Andersen LLP to aid in the
investigation. Based upon its investigation, the committee has concluded that,
despite his denials, an accounting manager in the Company's finance department
misstated the inventory records of the Company's Pro AV series for purposes of
presentation to the Company's outside auditors in connection with the audit for
the year ended December 31, 1999. A revised inventory list for the Pro AV series
as of December 31, 1999 has been compiled in connection with the special
committee's review and has been subject to audit tests performed by Wolf &
Company, P.C. as part of its year end audit of the financial statements of the
Company as a whole. The accounting manager in question has been discharged. The
Board is continuing its review of the special committee's report.
As a result of the Committee's investigation, the Company incurred
significant fees and expenses which will be charged to earnings in the quarter
ended March 31, 2000. The total amount of such expenses has not been determined
at this time.
F-42
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. STOCKHOLDERS' EQUITY
Common Stock.
On February 22, 1999, the Company issued warrants to purchase 30,000 shares
of common stock as partial compensation to an unaffiliated investor relations
firm. The warrants are exercisable until February 22, 2004 at an exercise price
of $1.063 per share. The Company recorded $15,033 in expense for the year ended
December 31, 1999 based on the fair value of the warrants. These warrants were
exercised on February 23, 2000 (15,000) and March 2, 2000 (15,000).
On February 22, 1999, the Company issued warrants to purchase 100,000
shares of common stock as partial compensation to an unaffiliated investment
advisor. The warrants are exercisable until September 9, 2002 at an exercise
price of $1.063 per share. These warrants were exercised on December 10, 1999.
The Company recorded charges of $50,111 for the year ended December 31, 1999
based on the fair value of the warrants.
On February 22, 1999, the Company issued warrants to purchase 50,000 shares
of common stock pursuant to a debt financing arrangement with an unrelated
individual. The warrants are exercisable until February 22, 2004 at an exercise
price of $1.063 per share. These warrants were exercised on December 3, 1999.
The Company recorded charges of $25,055 for the year ended December 31, 1999
based on the fair value of the warrants.
On March 22, 1999, the Company issued warrants to purchase 100,000 shares
of common stock representing partial fees pursuant to a debt financing
arrangement with an unaffiliated commercial bank. The warrants are exercisable
until March 22, 2006 at an exercise price of $1.70 per share. These warrants
were exercised on November 23, 1999 under a net exercise provision resulting in
the issuance of 38,181 shares. The Company recorded charges of $69,118 for the
year ended December 31, 1999 based on the fair value of the warrants.
On June 4, 1999, the Company entered into a financing agreement resulting
in $1,200,000 in gross proceeds from the sale of 1,350,000 shares of common
stock and the issuance of a warrant to purchase an additional 120,000 shares of
common stock in a private placement to an unaffiliated accredited investor. The
warrant is exercisable until June 30, 2004 at a per-share exercise price of
$1.478125. The Company also issued a warrant to purchase 25,000 shares of common
stock at $1.478125 per share exercisable through June 4, 2004 to Union Atlantic,
L.C. in connection with the placement. The Company filed a registration
statement under the Securities Act of 1933 for the shares issued in connection
with this transaction and issuable upon exercise of the warrants. The Company
received proceeds from this transaction in two tranches of $600,000. The first
tranche was funded on June 14, 1999 for $600,000 less expenses associated with
this offering of $60,897 yielding net proceeds of $539,103. The second tranche
for $600,000 less expenses of $58,222 yielding net proceeds of $541,778 was
funded on August 18, 1999.
On September 17, 1999, the Company entered into a financing agreement
resulting in $1,500,000 in gross proceeds from the sale of 1,583,333 shares of
common stock and the issuance of a warrant to purchase an additional 150,000
shares of common stock in a private placement to an unaffiliated accredited
investor. The warrant is exercisable until September 17, 2002 at a per-share
exercise price of $1.5375. The shares issued in connection with this transaction
and issuable upon exercise of the warrant will be registered under the
Securities Act of 1933. The Company received proceeds from this transaction in
two tranches of $750,000 . The first tranche was funded on September 21, 1999
for $750,000 less expenses of $64,903 yielding net proceeds of $685,097. The
second tranche was funded in October 1999 for $750,000 less fees and expenses
associated with this offering of $60,000 yielding net proceeds of $690,000.
On September 22, 1999, the Company received gross proceeds of $135,000 from
the issuance of 120,000 shares of common stock resulting from the exercise of
common stock warrants issued pursuant to the June 4, 1999 private placement.
On November 19, 1999, the Company agreed to issue 100,000 shares of common
stock to a subcontractor in settlement of $323,260 of accounts payable. The
Company agreed to register the shares under the Securities Act
F-43
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
of 1933. The Company also agreed to issue up to an additional 100,000 shares of
common stock if the average market price for the five trading days preceding the
effective date of the registration statement is less than $3.23 per share. The
Company was not required to issue any of the additional shares.
In November, 1999, the Company completed a financing of $2,000,000 in gross
proceeds from the sale of 1,250,000 shares of common stock and the issuance of
three warrants to purchase an aggregate of 125,000 shares of common stock in a
private placement to three unaffiliated accredited investors. The warrants are
exercisable until December 1, 2004 at a per-share exercise price of $3.1969. The
shares issued in connection with this transaction and issuable upon exercise of
the warrant will be registered under the Securities Act of 1933. Expenses
associated with this offering amounted to approximately $42,000 yielding net
proceeds of $1,958,000.
During the year ended December 31, 1999, the Company issued at various
times, 2,095,780 shares of common stock resulting from other exercises of
options and warrants, receiving cash of approximately $2,461,023.
On January 18, 2000, the Company received gross proceeds of $990,000 from
the issuance of 330,000 shares of common stock resulting from the exercise of
common stock warrants issued pursuant to a private placement with an
unaffiliated investor on September 10, 1997. During the period from January 1,
2000 to March 31, 2000 the Company issued 62,001 shares on the exercise of other
options and warrants.
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
exercise of 910,650 of the Company's redeemable common stock purchase warrants
(the "Warrants") issued in connection with the Company's initial public offering
in May 1993. The Company issued 1,649,202 shares of common stock as a result of
the exercise. 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.
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. In December 1999, the Company received
approximately $352,000 in full payment of this note, including accrued interest.
F-44
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
COMMON STOCK PURCHASE WARRANTS.
Common stock warrant activity is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ------------------------------------
Grant Price Grant Price
Shares Range Shares Range
------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Warrants outstanding at beginning of year 1,018,329 $0.90 - $9.11 3,715,507 $0.90 - $9.11
Anti-dilution adjustment -- 61,237
Warrants granted 700,000 $ 1.06-$3.20 682,074 $ 2.75-$4.21
Warrants exercised (370,000) $ 1.06-$1.70 (2,035,180) $ 1.22-$3.73
Warrants canceled (25,000) $ 1.48 (1,405,309) $ 3.25-$3.81
--------- ----------
Warrants outstanding at end of year 1,323,329 $1.06 - $9.11 1,018,329 $0.90 - $9.11
========= ================ ========== ================
Warrants exercisable at end of year 1,323,329 $1.06 - $9.11 1,018,329 $0.90 - $9.11
--------- ---------------- ---------- ----------------
Weighted average fair value of warrants
granted during the year $ .68 $ 1.25
</TABLE>
1992 Stock Option Plan.
The Company's 1992 Stock Option Plan (the "Plan"), provides for the
granting of incentive and non-qualified options to purchase up to approximately
1,800,000 shares of common stock. Incentive stock options may be granted to
employees of the Company. Non-qualified 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 fair-market
value of common stock at date of grant. Non-qualified options may not be granted
at a price less than 85% of fair-market value of common stock at date of grant.
As of December 31, 1999, all options granted under the plan were issued at
market value at the date of grant. Options generally vest annually over a
three-year period and are exercisable over a five-year 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, 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,
1999, options under the Plan to purchase 1,160,972 shares of the Company's
common stock were outstanding with exercise prices of $1.00 to $1.3438 per
share.
1995 Key Officer Non Qualified Stock Options.
In 1995, the Board of Directors authorized the issuance to two officers
warrants to purchase an aggregate of 500,000 shares of common stock at $1.10 per
share. The options expire in April 2002. As of December 31, 1999, options to
purchase 150,000 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
non-employee 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 five-year period with vesting determined at
varying amounts over a three year period. As of December 31, 1999, options under
the 1997 Director Plan to purchase 237,372 shares of the Company's common stock
were outstanding with an exercise price between $ 1.00 and $1.88 per share.
1997 Key Officer Non Qualified Stock Options.
In March 1997, the Board of Directors authorized the grant of non-qualified
stock options to certain key officers of the Company (the "1997 Key Officer
Agreements"). The 1997 Key Officer Agreements related to the
F-45
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, 1999, options under the 1997 Key Officer Agreements to purchase
350,000 shares of the Company's common stock were outstanding with exercise
prices of $1.22 and $1.2813 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 non-employee 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
five-year period with vesting determined at varying amounts over a three year
period. As of December 31, 1999, options under the 1998 NQSO Plan to purchase
980,936 shares of the Company's common stock were outstanding with an exercise
price between $1.06 and $1.41.
<TABLE>
A summary of the status of the Company's outstanding stock options as of
December 31, 1999 and 1998, and the changes during the years then ended, is
presented below:
<CAPTION>
1999 1998
------------------------------------ -----------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 3,919,396 $ 1.22 2,966,396 $ 1.81
Options granted 1,191,340 $ 1.17 3,873,680 $ 1.42
Options exercised (1,816,125) $ 1.53 (394,778) $ 1.90
Options canceled (403,497) $ 1.23 (2,525,982) $ 1.96
---------- ----------
Options outstanding at end of year 2,891,114 $ 1.21 3,919,316 $ 1.22
========== ==========
Options exercisable at end of year 393,391 $ 1.21 1,289,536 $ 1.20
========== ==========
Weighted average fair value of options
granted during the year .57 $ .92
</TABLE>
Information pertaining to options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices 12/31/99 Life Price 12/31/99 Price
----------------------------------- ------------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$0.91-1.82 2,841,114 2.2 yrs 1.10 381,148 1.10
$1.83-2.73 50,000 4.90 yrs 1.88 12,243 1.88
--------- -------
Outstanding at December 31, 1999 2,891,114 3.6 yrs 1.21 393,391 1.21
========= =======
</TABLE>
Stock-based Compensation.
<TABLE>
At December 31, 1999, the Company has stock option plans and non-plan stock
options that are described above. The Company applies APB Opinion No. 25 and
related interpretations in accounting for stock options. Accordingly, no
compensation cost has been recognized for stock options issued to employees. Had
compensation cost for the Company's stock-based compensation plans and non- plan
stock options outstanding been determined
F-46
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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:
<CAPTION>
Years ended December 31,
------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C> <C>
Net loss As reported $ (1,479,703) $ (12,787,324)
Pro forma $ (2,587,558) $ (14,483,121)
Basic loss per share As reported $ (.08) $ (.78)
Pro forma $ (.14) $ (.89)
Diluted loss per share As reported $ (.08) $ (.78)
Pro forma $ (.14) $ (.89)
</TABLE>
Common stock equivalents have been excluded from all calculations of loss
per share and pro forma loss per share in 1999 and 1998 because the effect of
including them would be anti-dilutive.
The fair value of each grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999 and 1998, respectively; dividend yield of
0.0 percent; expected volatility of 50% and 75%, risk-free interest rates of
6.0% and expected lives of 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. 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,
------------------
1999 1998
------ ---------
Current:
Federal income taxes $ -- $ --
State income taxes -- 24,641
---- -------
-- 24,641
Deferred federal and state income taxes -- --
---- -------
$ -- $24,641
==== =======
<TABLE>
The differences between the provisions for income taxes from the benefits
computed by applying the statutory Federal income tax rate are as follows:
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998
--------------- -----------------
<S> <C> <C>
Benefit computed at statutory rate (34%) $ (503,000) $ (4,339,000)
State income tax benefit, net of federal tax (92,000) (766,000)
Increase in valuation allowance on deferred tax asset 546,000 5,029,000
Other, net 49,000 100,641
----------- -------------
$ -- $ 24,641
=========== =============
</TABLE>
F-47
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
The net deferred tax asset consists of the following:
<CAPTION>
December 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred tax asset $ 15,611,000 $ 15,065,000
Deferred tax liability -- --
Valuation allowance on deferred tax asset (15,611,000) (15,065,000)
------------- -------------
Net deferred tax asset $ -- $ --
============= =============
</TABLE>
<TABLE>
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
<CAPTION>
December 31,
----------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Net operating loss carry forward $ 11,526,000 $ 9,909,000
Income tax credit carry forward 185,000 185,000
Tax basis in excess of book basis of fixed
assets 157,000 157,000
Book inventory cost less than tax basis 160,000 867,000
Reserve for bad debts not deductible for
income taxes 118,000 260,000
Tax basis in excess of book basis of other
assets 466,000 466,000
Tax basis in subsidiaries in excess of book
value 2,999,000 3,221,000
------------- -------------
15,611,000 15,065,000
Valuation allowance on deferred tax asset (15,611,000) (15,065,000)
------------- -------------
Net deferred tax asset $ -- $ --
============= =============
</TABLE>
<TABLE>
A summary of the change in the valuation allowance on deferred tax assets
is as follows:
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Balance at beginning of year $15,065,000 $10,036,000
Addition to the allowance for the benefit
of net operating loss carry forwards not
recognized 546,000 5,029,000
----------- -----------
Balance at end of year $15,611,000 $15,065,000
=========== ===========
</TABLE>
<TABLE>
At December 31, 1999, the Company has the following carry forwards
available for income tax purposes:
<S> <C>
Federal net operating loss carry forwards expiring in various
amounts through 2020 $28,815,000
===========
State net operating loss carry forwards expiring in various
amounts through 2005 $19,485,000
===========
Credit for research activities $ 185,000
===========
</TABLE>
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 are
subject to annual limitations based on ownership changes in the Company's common
stock as provided in Section 382 of the Internal Revenue Code.
F-48
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
In the fourth quarter of 1998, as a result of its evaluation of the
impairment of intangible assets related to this acquisition, the Company
wrote-off 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.
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 $366,267 and $488,355, net of
accumulated amortization of $349,757 and $227,669, 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.
In the fourth quarter of 1998, as a result of its evaluation of the
impairment of intangible assets related to this acquisition, the Company
wrote-off 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. At December 31, 1999,
the balance of the goodwill was $95,245. 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 agreed to register the shares under the
Securities Act of 1933. 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, LC.
In December 1998, as a result of its evaluation of the impairment of
intangible assets related to this acquisition, the Company wrote-off a portion
of the goodwill in the amount of approximately $1,441,000 resulting
F-49
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. At
December 31, 1999, the balance of goodwill was $162,765. 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 began to consolidate 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. Sales to a
major distributor in 1999 represented approximately $4,318,000 or 25% of the
Company's revenues as compared to approximately $5,686,000, or 31% of revenues
for 1998.
Sales outside North America for the year ended December 31, 1999 were
approximately $704,000, principally to Europe ($396,000) and Asia ($308,000).
Sales outside North America for the year ended December 31, 1998 were
approximately $951,000, principally to Europe ($604,000) and Asia ($347,000).
13. Employee Benefit Plan
Effective July 1, 1998, the Company 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, 1999.
14. Related Party Transactions
In connection with the Company's private placement transactions (see Note
9), the Company paid placement fees of $66,000 to Union Atlantic, LC. In
addition, the Company paid consulting fees and expenses to Union Atlantic, LC
amounting to $46,226 in 1999. A Director of the Company is a partner in Union
Atlantic, LC.
F-50
<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 10-KSB/A to be signed
on its behalf by the undersigned, thereunto duly authorized.
FOCUS ENHANCEMENTS, INC.
By: /s/ William Coldrick
-------------------------
William Coldrick
Vice Chairman
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 Chairman of the Board May 1, 2000
---------------------------
Thomas L. Massie
/s/ Brett A. Moyer Principal Accounting Officer May 1, 2000
---------------------------
Brett A. Moyer
/s/ John C. Cavalier Director May 1, 2000
---------------------------
John C. Cavalier
/s/ William B. Coldrick Director May 1, 2000
---------------------------
William B. Coldrick
/s/ Timothy E. Mahoney Director May 1, 2000
---------------------------
Timothy E. Mahoney
/s/ William Dambrackas Director May 1, 2000
---------------------------
William Dambrackas
F-51
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
APPENDIX G
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-11860
------------------------------
FOCUS Enhancements, Inc.
(Exact name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization) 04-3186320
(IRS Employer
identification No.)
600 Research Drive
Wilmington, MA 01887
(Address of principal executive offices)
(978) 988-5888
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of September 30, 2000, there were outstanding 25,900,203 SHARES OF
COMMON STOCK, $.01 PAR VALUE PER SHARE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................................... $ 1,285,610 $ 3,736,517
Certificate of deposit ............................................. 1,280,635 534,091
Accounts receivable, net of allowances of $417,860 and $1,402,176
at September 30, 2000 and December 31, 1999, respectively ......... 2,801,828 2,913,005
Inventories ........................................................ 1,983,662 3,588,702
Prepaid expenses and other current assets .......................... 340,474 240,732
------------- -------------
Total current assets ............................................. 7,692,209 11,013,047
Property and equipment, net ........................................ 781,342 968,594
Capitalized software development costs ............................. 3,147,890 2,122,450
Other assets, net .................................................. 293,980 287,116
Goodwill, net ...................................................... 483,944 624,277
------------- -------------
Total assets ..................................................... $ 12,399,365 $ 15,015,484
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ...................................................... $ -- $ 1,006,258
Obligations under capital leases ................................... 46,337 129,451
Current portion of long-term debt .................................. 317,367 312,556
Accounts payable ................................................... 2,767,497 3,413,285
Accrued liabilities ................................................ 463,136 518,726
Accrued legal judgement expense .................................... 2,147,722 --
------------- -------------
Total current liabilities ........................................ 5,742,059 5,380,276
Obligations under capital leases ...................................... 190,469 202,002
Long-term debt, net of current portion ............................. 63,560 226,041
------------- -------------
Total liabilities .................................................. 5,996,088 5,808,319
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value; 3,000,000 shares authorized; none
issued ............................................................ -- --
Common stock, $.01 par value; 30,000,000 shares authorized,
26,350,203 and 24,504,203 shares issued at September 30, 2000
and December 31, 1999, respectively ............................... 263,502 245,042
Additional paid-in capital ......................................... 48,726,937 46,340,891
Accumulated deficit ................................................ (41,887,032) (36,678,638)
Treasury stock at cost, 450,000 shares ............................. (700,130) (700,130)
------------- -------------
Total stockholders' equity ....................................... 6,403,277 9,207,165
------------- -------------
Total liabilities and stockholders' equity ....................... $ 12,399,365 $ 15,015,484
============= =============
<FN>
See accompanying notes to Unaudited Consolidated Financial Statements
</FN>
</TABLE>
G-2
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 30, September 30,
2000 1999
--------------- --------------
<S> <C> <C>
Net sales ........................................ $ 4,116,181 $ 2,998,031
Licensing fees ................................... -- 200,000
------------ -----------
Net revenues ..................................... $ 4,116,180 $ 3,198,031
Cost of goods sold ............................... 2,714,705 1,257,490
------------ -----------
Gross profit .................................. 1,401,476 1,940,541
------------ -----------
Operating expenses:
Sales, marketing and support .................. 760,721 886,620
General and administrative .................... 523,779 387,942
Research and development ...................... 212,757 305,762
Depreciation and amortization expense ......... 282,753 144,638
------------ -----------
Total operating expenses .................... 1,780,010 1,724,962
------------ -----------
(Loss)Income from operations ..................... (378,534) 215,579
Interest expense, net ............................ (3,628) (156,890)
Other income, net ................................ 13,038 82,670
Legal judgement Expense (CRA) .................... (2,147,722) --
------------ -----------
(Loss)Income before income taxes ................. (2,516,846) 141,359
Income tax expense ............................... -- --
------------ -----------
Net (Loss)Income ................................. $ (2,516,846) $ 141,359
============ ===========
Net (Loss)Income per common share
Basic ......................................... $ (0.10) $ 0.01
============ ===========
Diluted ....................................... $ (0.10) $ 0.01
============ ===========
Weighted average common shares outstanding
Basic ......................................... 25,863,036 19,061,111
============ ===========
Diluted ....................................... 25,863,036 19,389,684
============ ===========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
G-3
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
2000 1999
--------------- --------------
<S> <C> <C>
Net sales .......................................... $ 12,130,425 $12,142,413
Licensing fees ..................................... -- 200,000
------------ -----------
Net revenues ....................................... $ 12,130,425 $12,342,413
Cost of goods sold ................................. 8,379,290 6,322,656
------------ -----------
Gross profit .................................... 3,751,135 6,019,757
------------ -----------
Operating expenses:
Sales, marketing and support .................... 2,747,566 2,907,104
General and administrative ...................... 2,377,417 1,169,112
Research and development ........................ 757,943 1,068,568
Depreciation and amortization expense ........... 733,426 417,864
Restructuring expense ........................... 202,252 --
------------ -----------
Total operating expenses ...................... 6,818,604 5,562,648
------------ -----------
(Loss) Income from operations ...................... (3,067,469) 457,109
Interest expense, net .............................. (57,706) (323,751)
Other income, net .................................. 66,649 165,683
Legal judgement expense (CRA) ...................... (2,147,722) --
------------ -----------
(Loss) Income before income taxes .................. (5,206,248) 299,041
Income tax expense ................................. (2,146) --
------------ -----------
Net (Loss) Income .................................. $ (5,208,394) $ 299,041
============ ===========
Net (Loss) Income per common share .................
Basic ........................................... $ (0.21) $ 0.02
============ ===========
Diluted ......................................... $ (0.21) $ 0.02
============ ===========
Weighted average common shares outstanding .........
Basic ........................................... 25,003,382 18,210,783
============ ===========
Diluted ......................................... 25,003,382 18,673,763
============ ===========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
G-4
<PAGE>
FOCUS ENHANCEMENTS, INC.
STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
---------------------------- Additional
Shares Amount Paid-in Capital
--------------- ------------ -----------------
<S> <C> <C> <C>
Balance at December 31, 1999 .......... 24,504,203 $ 245,042 $46,340,891
Issuance of common stock upon
exercise of stock options and
warrants ............................. 446,000 4,460 1,116,046
Issuance of common stock from
private offerings, net of
issuance cost of $216,000 ............ 1,400,000 14,000 1,270,000
Net loss .............................. (5,208,394)
Balance at September 30, 2000 ......... 26,350,203 $ 263,502 $48,726,937
========== ========= ===========
<CAPTION>
Total
Accumulated Treasury Stockholders'
Deficit Stock Equity
----------------- -------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1999 .......... $ (36,678,638) $ (700,130) $9,207,165
Issuance of common stock upon
exercise of stock options and
warrants ............................. 1,120,506
Issuance of common stock from
private offerings, net of
issuance cost of $216,000 ............ 1,284,000
Net loss .............................. (5,208,394)
Balance at September 30, 2000 ......... $ (41,887,032) $ (700,130) $6,403,277
============= ========== ==========
<FN>
See accompanying notes to Unaudited Financial Statements
</FN>
</TABLE>
G-5
<PAGE>
FOCUS ENHANCEMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss ................................................................ $ (5,208,394) $ 299,041
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization ......................................... 733,426 417,864
Deferred Income ....................................................... 0 (84,212)
Amortization of discount on note payable .............................. 5,563 5,563
Increase in accrued interest on notes receivable, common stock ........ 0 (10,547)
Changes in operating assets and liabilities, net of the effects of
acquisition: .........................................................
(Increase) decrease in accounts receivable ........................... 111,177 (957,528)
Decrease in securities available for sale ............................ -- 248,983
Decrease (increase) in inventories ................................... 1,605,040 2,433,675
Decrease (increase) in prepaid expenses and other assets ............. (1,132,034) (1,356,551)
(Decrease) increase in accounts payable .............................. (551,530) (254,510)
(Decrease) increase in accrued liabilities ........................... 2,092,132 (1,416,474)
------------ ------------
Net cash used (Provided)in operating activities ..................... (2,305,183) (674,696)
------------ ------------
Cash flows from investing activities:
Decrease (increase) in certificates of deposit .......................... (746,544) 113,067
Purchase of property and equipment ...................................... (405,851) (484,026)
------------ ------------
Net cash used in investing activities ............................... (1,152,395) (370,959)
------------ ------------
Cash flows from financing activities:
Payments on notes payable ............................................... (1,100,517) (1,447,057)
Payments under capital lease obligations ................................ (252,318) (73,963)
Payments on long-term debt .............................................. -- (209,733)
Net proceeds from accounts receivable factoring ......................... -- 451,730
Net proceeds from private offerings of common stock ..................... 1,284,000 1,784,588
Net proceeds from exercise of common stock options and warrants ......... 1,120,506 163,756
------------ ------------
Net cash provided by financing activities ........................... 1,051,672 669,321
------------ ------------
Net increase in cash and cash equivalents ................................ (2,450,907) (376,334)
Cash and cash equivalents at beginning of period ......................... 3,736,517 1,128,380
------------ ------------
Cash and cash equivalents at end of period ............................... $ 1,285,610 $ 752,046
============ ============
Supplemental Cash Flow Information:
Interest paid ........................................................... $ 54,078 $ 364,091
Income taxes paid ....................................................... -- --
</TABLE>
G-6
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of FOCUS Enhancements, Inc. ("the
Company") as of September 30, 2000 and for the three and nine-month periods
ended September 30, 2000 and 1999 are unaudited and should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1999 included in the Company's Annual Report on Form
10-KSB/A for the year ended December 31, 1999.
In the opinion of management, the consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the results of the interim periods. The results of
operations for the three and nine month periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for any future
period.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary PC Video Conversion, Inc. The companies other
subsidiaries, Lapis Technologies, Inc., T-View, Inc and Focus Enhancements, B.V.
(Netherlands corporation) became inactive or were merged into Focus in 1999. All
intercompany accounts and transactions have been eliminated upon consolidation.
2. RESTATEMENT
Historically, the company provided a gross margin reserve for estimated
sales returns each quarter. In connection with its review of the impact of SAB
101, the Company found that certain transactions that were recorded as sales in
the second and third quarters of 1999 should not have been recorded as sales. As
a result, the company has restated the financial statements of the
aforementioned quarters to correct the amount of revenue previously reported in
those quarters. This was announced in the June 30,2000 10QSB filed August 21,
2000.
As indicated above, the Company has provided gross margin reserves for
estimated sales returns and the Company believes that such estimated reserves
were adequate to cover the gross margins on the restated sales and other sales
returns. Accordingly, the restatement of the financial statements for the second
and third quarters of 1999 did not have any impact on the previously reported
net income of those quarters.
In addition, in its quarterly financial statements for the year 2000, the
Company is providing a reserve for estimated sales returns based on the
estimated sales value of the sales returns rather than a gross margin reserve.
to be consistent with the quarterly financial statement presentation in 2000.
<TABLE>
The items in the financial statements that are affected by the restatement
are as follows:
<CAPTION>
(In Thousands)
----------------------------------------------------
6/30/99 6/30/99 9/30/99 9/30/99
Previously As Previously As
Reported Restated Reported Restated
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT
Revenue ..................... $ 4,440 $ 4,077 $ 4,106 $ 3,198
Cost of Goods Sold .......... 2,491 2,128 2,165 1,257
Net Income .................. 55 55 141 141
BALANCE SHEET
Accounts Receivable ......... $ 3,513 $ 3,296 $ 3,511 $ 2,996
Inventory ................... 4,406 4,622 3,515 4,030
Current Assets .............. 8,359 8,359 8,325 8,325
</TABLE>
The Company is in the process of amending the Form 10QSB for each of these
quarters to reflect this restatement
3. NET INCOME 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 weighted-average number of common shares outstanding during the period.
Diluted earnings per
G-7
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 nine months ended September 30, 2000 and 1999, options
and warrants applicable to 2,054,069 shares and 4,261,221 shares, respectively
were anti-dilutive and excluded from the diluted earnings per share computation.
4. INCOME TAXES
The Company has utilized its net operating loss carryforwards in estimating
its provision for income taxes in the nine-month period ended September 30, 2000
and 1999.
5. INVENTORIES
Inventories consist of the following:
September 30,2000 December 31,1999
------------------- -----------------
Finished goods ................... $ 782,850 $2,377,709
Work In Process .................. $ 19,067 $ 171,637
Raw Materials .................... $1,181,745 $1,039,356
---------- ----------
$1,983,662 $3,588,702
========== ==========
6. 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 September 30, 2000 are as follows:
Year Ended 12/31/00 ......... $317,367
Year Ended 12/31/01 ......... 63,560
--------
Total ....................... $380,927
On July 28, 2000, the Company entered into a Separation Agreement with
Steve Wood. Mr. Wood was the Vice President of Pro AV engineering, former sole
shareholder of PC Video Conversion, Inc., and leader of the Company's Morgan
Hill facility. On June 15, 2000, the Company closed the Morgan Hill facility. On
July 28, 1998, the Company purchased from PC Video Conversion, Inc., selected
assets and liabilities and, in return, issued a promissory note and entered an
employment agreement with Mr. Wood. As part of the Separation agreement which
terminated Mr. Wood's employment agreement, Mr. Wood remained a consultant until
an upgrade to one of the Companies Pro AV products is completed. In return, Mr.
Wood received a right to convert the promissory note into common stock of the
Company. Under terms of the Agreement, the election must be made within five
days following the shareholder meeting at which time the outstanding balance
would be converted at a price of ninety-three percent (93%) of the average
closing price of the Company common stock on the five trading days prior to the
conversion date, up to a maximum of 500,000 shares of common stock.
7. COMMON STOCK TRANSACTIONS
On January 18, 2000, the Company received gross proceeds of $990,000 from
the issuance of 330,000 shares of common stock resulting from the exercise of
common stock warrants issued pursuant to a private placement with an
unaffiliated investor.
G-8
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On February 22, 1999, the Company issued warrants to purchase 30,000 shares
of common stock as partial compensation to an unaffiliated investor relations
firm. The warrants are exercisable until February 22, 2002 at an exercise price
of $1.063 per share. These warrants were exercised on February 23, 2000 (15,000
shares) and March 2, 2000 (15,000 shares).
On May 1, 2000, the Board of Directors approved by unanimous written
consent, an increase in the authorized shares of common stock to 43,000,000
shares.
On May 1, 2000, the Board of Directors approved by unanimous written
consent, the establishment of the 2000 Non-Qualified Stock Option Plan, subject
to stockholder approval. In addition, the Board authorized 3,000,000 shares to
be reserved for the 2000 Plan. On May 5, 2000, the Company granted 2,473,375
Stock Options under the 2000 Plan.
On June 9, 2000, the Company entered into a financing agreement resulting
in $1,500,000 in gross proceeds from the sale of 1,400,000 shares of common
stock and the issuance of a warrant to purchase an additional 140,000 shares of
common stock in a private placement, to an unaffiliated accredited investor. The
warrant is exercisable until June 30, 2005 at a per-share exercise price of
$1.625. In addition, Union Atlantic received a warrant to purchase 45,000 shares
of common stock as compensation for brokering the private placement. The warrant
is exercisable until June 30, 2005 at a per-share exercise price of $1.625. The
Company intends to file a registration statement under the Securities Act of
1933 for the shares issued in connection with this transaction and for those to
be issued upon exercise of the warrants. The Company received proceeds from this
transaction on June 9, 2000. The fees and expenses associated with this offering
was $216,000 yielding net proceeds of $1,284,000.
During the quarter ended June 30, 2000, the Company issued at various
times, 11,667 shares of common stock resulting from other exercises of options
and warrants, receiving cash of approximately $12,700. Additional Paid-in
Capital of 1,282,584 ($1,270,000 for the private placement and $12,584 from the
exercise of stock options and warrants) for the quarter is net of $216,000 of
related legal expenses.
On July 28, 2000, the Company entered into an equity line of credit
agreement with Euston Investments Holdings Limited, a British Virgin Islands
Corporation, for the future issuance and purchase of shares of our common stock.
The equity line of credit agreement establishes what is sometimes termed an
equity drawdown facility.
In general, the investor, Euston Investments, has committed to provide the
Company up to $5 million as the Company requests it over a 24 month period, in
return for common stock the Company issues to Euston Investments. The number of
shares issued to Euston Investments in return for that money is determined by
dividing the contracted price per share into the amount of money requested by
the Company. The per share dollar amount Euston Investments is 10% less than the
average closing bid price of our common stock during a valuation period. A
"valuation period" is defined as the period of fifteen trading days beginning
seven trading days immediately before the Trading Day on which a drawdown is
requested and ending seven trading days immediately after such date. We will
receive the amount of the drawdown less an escrow agent fee of $750 and 7%
placement fee payable to the placement agent, Union Atlantic, LC, which
introduced Euston Investments to the Company. The aggregate total of all draws
cannot exceed $5 million. We are under no obligation to request a draw for any
period. In lieu of providing Euston Investments with a minimum aggregate
drawdown commitment, we have issued to Euston Investments a stock purchase
warrant to purchase 250,000 shares of our common stock with an exercise price of
$1.625. The warrant expires June 12, 2005.
During the quarter ended September 30, 2000, the Company issued at various
times, 42,332 shares of common stock resulting from exercises of options and
warrants, receiving cash of approximately $423, and additional Paid-in Capital
of $51,222.
For the nine month period ended September 30, 2000, the Company issued at
various times, 446,000 shares of common stock resulting from exercises of
options and warrants, receiving cash of approximately $1,120,507.
G-9
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Additional Paid-in Capital of 2,386,047($1,270,000 for the private placement and
$1,116,047 from the exercise of stock options and warrants) for this period is
net of $245,440 of related legal expenses.
8. SEPARATION AGREEMENTS AND CONSULTING AGREEMENTS
On September 6,2000, Mr. Chris Ricci resigned from his position as Senior
Vice President, General Counsel and Secretary. Mr. Ricci's employment agreement
was terminated on that date and replaced with a new agreement providing for his
employment by Focus as a part-time consultant terminating April 30, 2001, unless
sooner terminated by both parties. The part-time consulting agreement provides
that Mr. Ricci shall continue to hold all of the stock options previously
granted to him and requires the acceleration of vesting of all options held by
Mr. Ricci so as to be immediately exercisable if Mr. Ricci is terminated without
cause during the term of the contract.
9. LITIGATION
As noted in PART II-OTHER INFORMATION, ITEM 1., LEGAL PROCEEDINGS, the
Company has disclosed certain legal proceedings. The class action suits included
therein are in their early stages and it is not yet possible to estimate an
outcome.
CRA Litigation
On October 10, 2000, the court rendered a judgment on the verdict in favor
of CRA for actual damages, punitive damages, attorneys fees, costs and interest;
the judgment totaled approximately $2,000,000. Focus intends to file an
appropriate post-judgment motion requesting that this judgment be reduced
significantly, and will pursue an appeal to the United States Court of Appeals
for the Fifth Circuit in New Orleans, Louisiana. To suspend enforcement of the
judgment pending determination of its post-judgment motion and appeal, Focus is
required to post a bond in the approximate amount of $2.3 million (being the
approximate amount of the judgment plus 10% to cover interest and costs of CRA).
On October 27, 2000, Focus submitted a bond and filed its post-judgement motion.
In connection with this judgment, Focus has recorded a legal judgement expense
of approximately $2,147,000 in the period ended September 30, 2000.
10. SUBSEQUENT EVENTS
On October 26, 2000, in connection with the posting of a bond for the CRA
legal judgement, Focus borrowed approximately $2.3 million and issued a secured
promissory note in the principal amount of $2.3 million in favor of Carl Berg, a
shareholder and director of Videonics. In the event the Focus/Videonics
previously announced merger is not completed, the promissory note can be called
and become payable in full upon 90-days notice from Mr. Berg, at his sole
discretion. The promissory note is secured by a security agreement in favor of
Mr. Berg granting him a security interest in first priory over substantially all
of the assets of Focus. In the event that the merger is not completed, there is
no assurance that Mr. Berg will not seek repayment of the promissory note.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-KSB/A for the year ended December 31, 1999.
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
G-10
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
"forward looking" information that involves risks and uncertainties. In
particular, statements contained in this Form 10-QSB which are not historical
facts constitute forward looking statements and are made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Each
forward-looking statement should be read in conjunction with the consolidated
financial statements and notes thereto in Part I, Item 1, of this Quarterly
Report and with the information contained in Item 2, including, but not limited
to, "Certain Factors That May Affect Future Results" contained herein, together
with the Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in the Company's Annual Report on Form 10-KSB/A for the
year ended December 31, 1999, including, but not limited to, the section therein
entitled "Certain Factors That May Affect Future Results."
In its quarterly financial statements for the year 2000, the Company is
providing a reserve for estimated sales returns based on the estimated sales
value of the sales returns rather than only a gross margin reserve. The second
and third quarters of 1999 have been restated to reflect this change to be
consistent with the financial statement presentation in 2000. The financial
statement accounts for Q2 and Q3 of 1999 that have been changed to reflect these
changes for comparative purposes are Revenue, Cost, Accounts Receivable and
Inventory.
Historically, the company provided a gross margin reserve for estimated
sales returns each quarter. In connection with its review of the impact of SAB
101, the Company found that certain transactions that were recorded as sales in
the second and third quarters of 1999 should not have been recorded as sales. As
a result, the company has restated the financial statements of the
aforementioned quarters to correct the amount of revenue previously reported in
those quarters.
RESULTS OF OPERATIONS
Three-Month Period Ended September 30, 2000 As Compared With The
Three-Month Period Ended September 30, 1999
Net Revenues
Net revenues for the three-month period ended September 30, 2000 ("Q3 00")
were $4,116,181 as compared with $3,198,031 for the three-month period ended
September 30, 1999 ("Q3 99"), an increase of $918,149 or 29%. The increase in
sales is primarily attributed to OEM/Licensing and Professional Product
customers. Specifically, net revenues in Q3 00 to OEM product sales increased
351% to $1,102,000 in Q3 00 from $229,000 in Q3 99. Net Revenues in Q3 00 to
Professional Product customers increased 93% to $1,111,000 from $576,000 in Q3
99. The increases in net revenues were offset by a decrease in the consumer
video conversion product line of 7% to $2,539,000 in Q3 00 from $2,722,000 in Q3
99. As referenced herein, a restatement of Q3 99 financial information resulted
in a $908,000 reduction to net revenues for 1999 comparative purposes.
G-11
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Sales Backlog
As of September 30, 2000, the Company had a sales order backlog of
approximately $646,000.
Cost of Goods Sold
Cost of goods sold were $2,714,705 or 65% of net revenues, for the three-
month period ended September 30, 2000, as compared with $1,257,490 or 39% of net
revenues, for the three-month period ended September 30, 1999, an increase in
absolute dollars of $1,457,215 or 116%. The Company's gross profit margins for
Q3 00 and Q3 99 were 35% and 61%, respectively. The decrease in Q3 00 gross
margin is primarily due to a $908,000 decrease to cost of goods sold for 1999
comparative purposes,no licensing revenue in Q3 00 and an increase in OEM chip
revenue in Q3 00.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $760,721 or 18% of net revenues,
for the three-month period ended September 30, 2000, as compared with $886,620
or 28% of net revenues, for the three-month period ended September 30, 1999, a
decrease of $125,899. This was primarily due to a diminishment of expenditures
for mail order advertising and direct mail advertising.
General and Administrative Expenses
General and administrative expenses for the three-month period ended
September 30, 2000 were $523,779 or 13% of net revenues, as compared with
$387,942 or 12% of net revenues for the three-month period ended September 30,
1999, an increase of $135,837 or 35%. The increase in absolute dollars is due
primarily to increases in legal fees (approximately $87,000), consulting fees
(approximately $73,000), and banking fees (approximately $11,000). Payroll was
reduced by $44,000.
Research and Development Expenses
Research and development expenses for the three-month period ended
September 30, 2000 were $212,757, or 5% of net revenues, as compared to
$305,762, or 10% of net revenues, for three-month period ended September 30,
1999, a decrease of $93,005 or 30%.
Interest Expense, Net
Net interest expense for the three-month period ended September 30, 2000
was $3,628, or 0% of net revenues, as compared to $156,890, or 5% of net
revenues, for the three-month period ended September 30, 1999, a decrease of
$153,262, or 98%. The decrease is primarily attributable to decreases in
interest paying obligations for the quarter ended September 30, 2000 as compared
to the quarter ended September 30, 1999.
Other Income
Other Income for the three-month period ended September 30, 2000 was
$13,038 as compared to $82,760, for the three-month period ended September 30,
1999, a decrease of $69,632.
Legal Judgement Expense
On October 27, 2000, Focus submitted a bond and filed its post-judgement
motion in regard to the CRA litigation. In connection with this judgment, Focus
has recorded a Legal judgement expense of approximately $2,147,000 in the period
ended September 30, 2000.
Net Loss
For the quarter ended September 30, 2000, the Company reported a net loss
of ($2,516,846), or ($0.10) per share, as compared to net income of $141,359, or
$0.01 per share, for the quarter ended September 30, 1999. The net loss is
primarily due to the physical inventory adjustment, increased inventory reserves
and the recording of the CRA legal judgement expense of approximately
$2,147,000.
G-12
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
RESULTS OF OPERATIONS
Nine-Month Period Ended September 30, 2000 As Compared With The Nine-Month
Period Ended September 30, 1999
Net Revenues
Net revenues for the nine-month period ended September 30, 2000 ("Q3 00")
were $12,130,425 as compared with $12,342,413 for the nine-month period ended
September 30, 1999 ("Q3 99"), a decrease of $211,988 or 2%. The decrease in
sales is primarily attributed to the discontinuation of sales to certain
resellers of the Company's consumer video conversion product line. Net sales to
consumer video conversion customers through Q3 00 were $6,117,000, compared to
$9,596,000 for the same period in 1999. These sales decreased 36% or $3,478,000.
The decrease was offset by an increase in sales to the OEM/Licensing and
Professional Product customers. Specifically, net revenues through Q3 00 to the
Company's OEM/Licensing customers increased 66% to $2,498,000 from $1,501,000
for the same period in 1999. Net Revenues through Q3 00 to Professional Product
customers increased 54% to $2,410,000 from $1,568,000 through Q3 99.
Cost of Goods Sold
Cost of goods sold were $8,379,290 or 69% of net revenues, for the nine-
month period ended September 30, 2000, as compared with $6,322,656 or 51% of net
revenues, for the nine-month period ended September 30, 1999, an increase in
absolute dollars of $2,056,634 or 33%. The Company's gross profit margins
through Q3 00 and Q3 99 were 31% and 49%, respectively. The decrease in gross
margins is due principally to a $603,000 writedown of inventory as a result of a
physical inventory taken at the end of Q2 00. The Company also provided for
additional reserves of $207,000 for liquidation of the InVideo Conferencing
product line, the repair of returned products, and potential inventory
obsolescence in Q2 00. compared to $0 in Q2 99. Additionally, the Company is
selling slow moving inventory at cost, which has generated $400,000 in cash but
has eroded margins on the remainder of the consumer product line. In Q3 a
$180,000 writedown of inventory resulting from obsolesence and an increase of
marketing development funds of $25,000 occurred. As referenced herein, a
restatement of Q3 99 financial information resulted in a $908,000 decrease to
cost of goods sold for 1999 comparative purposes.
Sales, Marketing and Support Expenses
Sales, marketing and support expenses were $2,747,566 or 23% of net
revenues, for the nine-month period ended September 30, 2000, as compared with
$2,907,104 or 24% of net revenues, for the nine-month period ended September 30,
1999, a decrease of $159,538.This decrease was due primarily to a reduction in
marketing expenditures pertaining to direct mail and mail order advertising.
General and Administrative Expenses
General and administrative expenses for the nine-month period ended
September 30, 2000 were $2,377,417 or 20% of net revenues, as compared with
$1,169,112 or 9% of net revenues for the nine-month period ended September 30,
1999, an increase of $1,208,305 or 103%. The increase in absolute dollars is due
primarily to increases in accounting fees (approximately $302,000) and legal
fees (approximately $292,000) in conjunction with the completion of the 1999
annual audit and review of accounting practices and the special investigation
conducted by the Board of Directors with respect to the financial controls of
the Company, combined with increases in payroll (approximately $78,000),
accounts receivable reserves (approximately $118,000), consulting fees
(approximately $170,000), investor relations (approximately $59,000) and banking
fees (approximately $24,000).
G-13
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Research and Development Expenses
Research and development expenses for the nine-month period ended September
30, 2000 were $757,943, or 6% of net revenues, as compared to $1,068,568, or 9%
of net revenues, for nine-month period ended September 30, 1999, a decrease of
$310,625 or 29%.This reduction was promarily due to an increased capitalization
rate during Q1 00 and Q2 00 as well as a reduction in labor expense due to a
shortage of engineers in the tight northwest labor market.
Restructuring Expense
During Q2 00 the company successfully completed the closing of its Morgan
Hill facility. In conjunction with the closing and movement of materials , the
company wrote off an additional $40,000 worth of materials in Q2 00.
Interest Expense, Net
Net interest expense for the nine-month period ended September 30, 2000 was
$57,706, or 1% of net revenues, as compared to $323,751, or 3% of net revenues,
for the nine-month period ended September 30, 1999, a decrease of $266,045, or
82%. The decrease is primarily attributable to decreases in interest paying
obligations for the quarter ended September 30, 2000 as compared to the quarter
ended September 30, 1999.
Other Income
Other Income for the nine-month period ended September 30, 2000 was $57,706
as compared to $165,683, for the nine-month period ended September 30, 1999, a
decrease of $99,034. This was primarily due to a decrease in cash availability
for deposit purposes that would generate interest income.
Judgement Expense
On October 27, 2000, Focus submitted a bond and filed its post-judgement
motion in regard to the CRA litigation. In connection with this judgment, Focus
has recorded an expense of approximately $2,147,000 in the period ended
September 30, 2000.
Net Loss
For the nine-month period ended September 30, 2000, the Company reported a
net loss of ($5,208,394), or ($0.21) per share, as compared to net income of
$299,041, or $0.02 per share, for the nine-month period ended September 30,
1999. The net loss is primarily due to the physical inventory variance of
consigned goods, increased inventory reserves, discontinuation of sales to
certain resellers, one-time restructuring expenses for the closure of the Morgan
Hill, CA operation and significant non-recurring accounting and legal fees
pursuant to the 1999 annual audit and related review of accounting practices and
the special investigation of the Board of Directors. The CRA legal judgement
accounted for $2,147,000 of the to date loss.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided for (used in) operating activities for the nine-month
periods ended September 30, 2000 and 1999 was ($2,350,183) and $674,696,
respectively. In the year 2000 period, net cash used in operating activities
consisted primarily of increases in prepaid expenses and other assets of
$1,132,034 and a decrease in accounts payable of $551,530. This was offset by
decreases in inventory of $1,658,803 and accounts receivable of $111,177 and an
increase in accrued liabilities of $2,092,132 and depreciation and
amortization(non-cash charge) of $733,426. As of September 30, 2000 and 1999,
accounts receivable from a major distributor represented approximately 24% and
26%, respectively of total accounts receivable. In Q3 00, the Company continued
to record provisions for potential future uncollectable accounts and maintained
reserves for potential product returns.
G-14
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In the nine months ended September 30, 1999, net cash used in operations
consisted primarily of an increase in accounts receivable of $957,528 and
prepaid expense of $1,356,551 and a decrease in accrued liabilities of
$1,416,474 and accounts payable of $254,510. This was offset by a decrease in
inventory of $2,433,675 and securities available for sale of $248,983 and
depreciation and amortization (non-cash charge) of $417,864, and net income of
$299,041.
Net cash used in investing activities for the nine-month periods ended
September 30, 2000 and September 30,1999 was ($1,152,395) and ($370,959)
respectively. In 2000 and 1999 period, cash used in investing activities was
principally for the purchase of property and equipment. Additionally, Standby
Letters of Credit are currently utilized to establish credit facilities for a
manufacturer of the companies products.
Net cash provided by (used in) financing activities for the nine-month
periods ended September 30, 2000 and 1999 was $1,051,671 and $669,321,
respectively. In the 2000 period, the Company received $2,404,506 in net
proceeds from the exercise of common stock options and warrants and from private
offerings. The Company's financing proceeds were offset by payments on notes
payable and capital lease obligations. In the same period in 1999, the Company
received $1,948,344 in net proceeds from private offerings of common stock, and
$451,730 in net proceeds from the factoring of accounts receivable. The
Company's financing proceeds were offset by payments on notes payable, accounts
receivable financing and capital lease obligations.
As of September 30, 2000, the Company had working capital of $1,950,150, as
compared to $5,632,771 at December 31, 1999, a decrease of $3,682,621. The
Company's cash position at September 30, 2000 was $1,285,610, a decrease of
$2,450,907 over cash and equivalents at December 31, 1999. As noted herein, the
Company has disclosed a judgement in the litigation with CRA that will have a
significant impact on the cash requirements of the Company. Please reference the
following disclosure under PART II--OTHER INFORMATION, ITEM 1., LEGAL
PROCEEDINGS.
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.
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
The FASB issued a proposed interpretive release, Stock Compensation-
Interpretation of APB 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. Of the many questions addressed in the Interpretation, the
most significant is the clarification of the definition of the term "employee"
for the purposes of applying the opinion and the accounting for options that
have been repriced.
The Interpretation is generally effective beginning July 1, 2000. The
Interpretation applies prospectively at the date for repricings that occurs
after December 15, 1998. It also applies prospectively on July 1, 2000 to new
awards granted after December 15, 1998 for purposes of applying the definition
of "employee".
In December 1999, the Securities and Exchange Commission (the
"Commission") published Staff Accounting Bulleting ("SAB") No. 101, "Revenue
Recognition", which provides guidance for applying generally
G-15
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
accepted accounting principles to revenue recognition in financial statements
filed with the Commission, including income statement presentation and
disclosure. As originally issued SAB 101 was to be applied no later than the
first quarter of the fiscal year beginning after December 15, 1999. However, the
Commission has delayed the effective date of the SAB for companies with fiscal
years beginning between December 16, 1999 and March 15, 2000. For such entities,
the mandatory implementation date may now be no later than the fourth quarter of
the fiscal year beginning after December 15, 1999.
The company is in the process of reviewing and continuing its evaluation of
the pronouncements detailed above to determine the potential impact on the
financial statements of the company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of the future financial performance
of the Company. However, from time to time, information provided by the Company
or statements made by its employees may contain "forward looking" information
that involves risks and uncertainties. In particular, statements contained in
this Form 10-KSB/A 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.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Class Action Suits
The Company and certain of it's Officers and Directors have been named as
defendants in two alleged class-actions pending in United States District Court
for the District of Massachusetts, on or about November 9, 1999, on behalf of
Frank E. Ridel and other currently-unnamed person(s) who are alleged to have
purchased shares of our common stock from July 17, 1997 to February 19, 1999.
Consolidated amended complaints have been filed in each alleged class action.
The first complaint alleges a claim of shareholders who purchased Focus shares
during the July 17,1997 to February, 1999 period. The second complaint alleges a
class of shareholders who purchased shares between November 15, 1999 and March
1, 2000. The first complaint was initially filed in November of 1999: The second
complaint was initially filed in March of 2000. Both complaints purport to
allege violations of the federal securities laws. The Defendants have moved to
dismiss the amended complaint in the Ridel actions, and are in process of moving
to dismiss the amended complaint in the James actions,for,inter alia failure to
plead with the specificity required both by rule 9(b) of the Federal Rules of
Civil Procedure, and the Private Securities Litigation Reform Act of 1995.
G-16
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CRA Systems, Inc.
In 1996 CRA Systems, Inc., a Texas corporation, and Focus entered into an
agreement, the terms and nature of which were subsequently disputed by the
parties. Focus contended the transaction was simply a sale of inventory for
which Focus was never paid. CRA contended otherwise. CRA brought suit against
Focus for breach of contract contending that Focus grossly exaggerated the
demand for the product, and the margin of profit which was available to CRA
regarding this project. CRA sought to recover out-of-pocket losses exceeding
$100,000, and lost profits of $400,000 to $1,000,000. A jury trial in May 2000
in federal district court in Waco, Texas, resulted in a verdict in favor of CRA
for $848,000 actual damages and 1,000,000 punitive damages. On October 10, 2000,
the court rendered a judgment on the verdict in favor of CRA for actual damages,
punitive damages, attorneys fees, costs and interest; the judgment totaled
approximately $2,000,000. Focus intends to file an appropriate post-judgment
motion requesting that this judgment be reduced significantly, and will pursue
an appeal to the United States Court of Appeals for the Fifth Circuit in New
Orleans, Louisiana. To suspend enforcement of the judgment pending determination
of its post-judgment motion and appeal, Focus is required to post a bond in the
approximate amount of $2.3 million (being the approximate amount of the judgment
plus 10% to cover interest and costs of CRA).
On October 27, 2000, Focus submitted a bond and filed its post-judgement
motion. In connection with this judgment, Focus has recorded an expense of
approximately $2,147,000. in the period ended September 30, 2000.
From time to time, the Company is party to certain other claims and legal
proceedings that arise in the ordinary course of business of which, in the
opinion of management, has a material adverse effect on the Company's financial
position or results of operation.
ITEM 2. CHANGES IN SECURITIES
On June 9, 2000, the Company entered into a financing agreement resulting
in $1,500,000 in gross proceeds from the sale of 1,400,000 shares of common
stock and the issuance of a warrant to purchase an additional 140,000 shares of
common stock in a private placement, to an unaffiliated accredited investor. The
warrant is exercisable until June 30, 2005 at a per-share exercise price of
$1.625. In addition, Union Atlantic received a warrant to purchase 45,000 shares
of common stock as compensation for brokering the private placement. The warrant
is exercisable until June 30, 2005 at a per-share exercise price of $1.625. The
Company intends to file a registration statement under the Securities Act of
1933 for the shares issued in connection with this transaction and for those to
be issued upon exercise of the warrants. The Company received proceeds from this
transaction on June 9, 2000. The fees and expenses associated with this offering
was $216,000 yielding net proceeds of $1,284,000.
No person acted as an underwriter with respect to this transaction. The
Company relied on Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), for the exemption from the registration requirements of the
Securities Act, since no public offering was involved.
During the month of September,2000, 42,332 shares of stock available to
current and former employees thru their stock option plan were exercised for a
share price of $1.22 resulting in $51,221 of additional paid in Capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
None
ITEM 5. OTHER INFORMATION/SUBSEQUENT EVENTS
On October 30, 2000 the Company filed an S-4 Registration Statement with
the Securities and Exchange Commission relating to securities of the Registrant
exchangeable for shares of common stock of Videonics, Inc., a California
corporation, no par value, in the proposed merger of Videonics with and into a
wholly-owned subsidiary of the Registrant.
G-17
<PAGE>
FOCUS ENHANCEMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On October 26, 2000, in connection with the posting of a bond for the CRA
legal judgement, Focus borrowed approximately $2.3 million and issued a secured
promissory note in the principal amount of $2.3 million in favor of Carl Berg, a
shareholder and director of Videonics. In the event the Focus/Videonics
previously announced merger is not completed, the promissory note can be called
and become payable in full upon 90-days notice from Mr. Berg, at his sole
discretion. The promissory note is secured by a security agreement in favor of
Mr. Berg granting him a security interest in first priory over substantially all
of the assets of Focus. In the event that the merger is not completed, there is
no assurance that Mr. Berg will not seek repayment of the promissory note.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are filed herewith:
11.0 Statement Re: Computation of Per Share Earnings
27.0 Financial data schedule
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarters ended
March 31 and June 30, 2000.
The Company filed an 8k on October 31,2000 to announce the issuance of a
secured promissory note in the principal amount of $2,362,494 inorder to
collateralize a $2.3 million bond to be posted in connection with Focus'
litigation with CRA Systems Inc. Focus also announced that it had submitted
a supersedeas bond in the Federal District Court of Waco Texas to suspend
the enforcement of a $1.8 million judgement in favor of CRA Systems, Inc.
The Company filed an 8k/A on November 2,2000 to attach additional exhibits
to the previously filed Form 8K, filed on October 31, 2000.
G-18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
August 21, 2000 FOCUS ENHANCEMENTS, INC.
By: /s/ Brett A. Moyer
------------------------------
Brett A. Moyer
Executive Vice President
& Chief Operating Officer
August 21, 2000 By: /s/ Richard A. Nardella
------------------------------
Richard A. Nardella
Principal Accounting Officer
G-19
<PAGE>
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APPENDIX H
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999,
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 0-25036
Videonics, Inc.
(Exact name of Registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
1370 Dell Ave., Campbell, California
(Address of Principal Executive Offices)
77-0118151
(I.R.S. Employer Identification No.)
95008
(Zip Code)
Registrant's telephone number, including area code: (408) 866-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securitiesregistered pursuant to Section 12(g) of Act:
Title of each class
-------------------
Common Stock, without par value
Name of each exchange on which registered
-----------------------------------------
Nasdaq National Market System
Indicate by check mark whether the Registrant (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At March 1, 2000, the aggregate market value of Common Stock held by
non-affiliates of the Registrant was approximately $6,002,364.
As of March 1, 2000, there were 5,881,847 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Regisrant's definitive Proxy Statement relating to its
2000 Annual Meeting of Shareholders to be held on or about August 17, 2000 (the
"Proxy Statement") have been incorporated by reference into Part III, of this
Report.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART I
This Annual Report on Form 10-K contains forwarding-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
particularly statements regarding market opportunities, market share growth,
competitive growth, new product introductions, success of research and
development, research and development expenses, customer acceptance of new
products, gross margin and selling, general and administrative expenses. These
forward-looking statements involve risks and uncertainties, and the cautionary
statements set forth below identify important factors that could cause actual
results to differ materially form those predicted in any such forward looking
statements. Such factors include, but are not limited to, adverse changes in
general economic conditions, including adverse changes in the specific markets
for the Company's products, adverse business conditions, decreased or lack of
growth in the market for video post-production equipment, adverse changes in
customer order patterns, increased competition, lack of acceptance of new
products, pricing pressures, lack of success in technological advancement, risks
associated with foreign operations, and other factors, including those listed
below.
ITEM 1. BUSINESS
Videonics, Inc., a California corporation organized in 1986 (the "Company"
or "Videonics"), is a leader in the design, development, manufacture, and sale
of affordable, high quality, real time, digital video post-production equipment.
The Company's products process, edit, and mix raw video footage as well as
enhance such footage with audio, special effects, and titles, resulting in
professional quality video production. Videonics equipment is used throughout
the world in the production of videos. As of December 31, 1999, more than
550,000 units of Videonics equipment have been sold worldwide.
Videonics' products incorporate general-purpose computers, special-purpose
microprocessor-based systems, and internally developed application specific
integrated circuits ("ASICs") with digital signal processing ("DSP") and other
capabilities. The Company also implements much of its products' functionality in
software. The Company believes that its proprietary technologies provide the
infrastructure to develop a broad array of video post-production solutions. By
reducing the cost of high performance post-production equipment, Videonics is
making post-production capabilities available to an expanding market of
potential users.
The Video Production Process
The video production process consists of three steps: pre-production,
production, and post-production.
Pre-production is the planning of a video: writing a script, creating
storyboards (sketches which show how a scene will look and describing
transitions), planning shots, budgeting, obtaining props and locations, and
scheduling. Production is the shooting of the video scenes, with or without
sound. Post-production involves assembling and combining video footage with
titles, effects, and audio elements to create a master tape ready for
distribution.
The need for video post-production processing arises from the fact that it
is very difficult to make an original recording serve as the finished
production. Doing so would require that scenes be shot in the final order and
that no errors occur during the original recording session. Each time a mistake
is made, the user would have to position the tape precisely at the end of the
previous scene and reshoot the desired scene perfectly. Titles and effects must
be planned ahead of time and inserted exactly at the appropriate moments,
working from a complete, thorough script. Since this scenario is impractical in
most situations, the user instead shoots raw footage and assembles the final
video production by using post-production equipment to arrange the desired
scenes and add effects, titles, and other improvements. For video makers who
desire a polished product, the post-production process is essential.
Generally, post-production includes five major elements. Video editing is
the process of removing, rearranging, and recording video footage from one or
more video sources onto a single video output medium (e.g., videotape). Video
mixing allows video from multiple sources to be combined in many ways beyond a
simple cut or fade. Transition effects, such as dissolves or fades (one video
scene fades away as another appears), wipes and slides (a moving boundary sweeps
in new video as the old video is pushed away), and compression effects (videos
shrink away or expand to fill the screen) are all used as "fillers" between
scenes. Video special effects manipulate video images to add dramatic elements.
Special effects can be used to modify the video material,
H-2
<PAGE>
changing its color, flipping the image, and adding picture warping effects to
achieve a different mood or appearance such as those created by a picture within
a picture. A chroma key helps to superimpose one image over another (e.g.,
enabling a TV weather forecaster to stand in front of an animated weather map).
Video titling is the process of adding text, special characters, and basic
graphic elements to the video. Titles can be superimposed on the video or on
colored backgrounds. Titles help tell the story, identify people, places, and
objects, add credits, and the like. A variety of colors, patterns, fonts, sizes,
and effects (e.g., scrolls and crawls) can be used. Audio mixing is the process
of combining various sound elements such as native sound (the original sound
recorded with the video), narration, music, and sound effects (e.g., a crashing
window, a lion's roar, or an explosion).
The Markets For Video Post-Production Equipment
The Company believes that the market for video post-production equipment
generally can be separated into five segments, categorized by the users'
requirements and individual expertise: videographer; business and industry;
videophile; education; and broadcast professional. These markets for video
post-production equipment cover a wide range of users, price sensitivity,
expertise levels, applications, demographics, and objectives.
Videographer. Videographers are typically full-time or part-time
entrepreneurs producing videotapes on a commercial basis. They may record
special events such as weddings, birthdays, sporting competitions, religious
ceremonies, and other celebrations. Videographers also perform substantial work
on a commercial basis for business and industry. For instance, a videographer
may produce videos for customer instruction in the use of a product, create a
"home" or "commercial property" tour video for small residential and commercial
real estate brokerage concerns, or make videos of vacation destinations for
travel agents. Videographers want their videos to have the same appearance as
those produced by broadcast professionals.
Business and Industry. The business and industry category includes both
internal and external production facilities producing video for government,
corporate, institutional, and other large organizations. An internal user could
include the in-house production department of a large corporation or a
charitable organization. The external user could be an independent video
production facility marketing its expertise to large institutions which lack an
in-house video production department. A typical corporate user in this market
might produce videos for instruction in the use of the corporation's products
(e.g., how to install and use a cellular telephone or a new computer), employee
training manuals, sales or promotional aids for product presentation, video
informational brochures, or video newsletters from management to shareholders or
employees.
Videophile. The videophile is a video enthusiast or hobbyist whose interest
has led to the adoption of new video technology for personal use. The videophile
generally shoots a video for personal non-commercial purposes with the intention
of editing raw video footage into a finished video production. The videophile's
camcorders, VCRs, and editing equipment are affordable and high quality.
Occasionally, videophiles capitalize on their growing expertise by becoming
videographers. A typical videophile may belong to a "video club" along with
other video making enthusiasts or merely want to record entertainment events and
historical milestones for family and friends. Videophiles may create a tape
library in several different video formats and may want an easy method to
consolidate and edit tapes into a single, standard format. Videophiles require
affordable post-production equipment that works with different tape formats and
is easy to use.
Education. The education market consists of the audio-visual departments of
educational institutions, which use video internally to serve the needs of the
institution as well as teach students the art of video production. While some
uses in an educational setting may be no different than those of business and
industry, other uses include recording sporting events to improve a player's
performance, recording a debate or dramatic performance to teach speaking or
other acting skills, and replacing, as in the case of a video yearbook, still
photography with video.
Broadcast Professional. The broadcast professional is the most demanding
video post-production equipment user, requiring equipment to meet the highest
quality broadcast standards in order to create finished commercial video
productions. Industry analysts have estimated that there are more than 16,000
worldwide sites for equipment in this user category, including studio, cable,
network, and television broadcasters as well as independent post-production
facilities. Users in this market are generally less price-sensitive than those
in other categories, frequently paying from $100,000 to $2,000,000 for a
complete suite of video post-production equipment. This specialized equipment
also requires a large investment in user training and studio facilities.
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The Videonics Solution
The Company's solution is to design, develop, manufacture and market
products that incorporate advanced proprietary digital video technologies to
significantly reduce the cost and difficulty of creating high quality video. The
Company's current product line provides solutions for each stage of the
post-production process. The majority of the Company's products are
single-purpose microprocessor-based systems that utilize DSP algorithms in ASICs
and proprietary software, all developed by the Company. The Company also
provides post-production solutions which operate on general-purpose computers
and local area networks. These solutions are generally categorized as desktop
video. Company-developed software, incorporated in each Videonics product,
provides easy-to-use implementations of sophisticated video post-production
processes. By using proprietary ASICs and software to replace more costly video
post-production equipment, the Company has been able to significantly reduce the
cost of its digital video post-production products.
Strategy
Videonics' objective is to maintain and expand its position in the video
post-production market. The Company has implemented this strategy by means of
its acquisitions, as well as internally developed technologies, products, and
marketing programs. By reducing the cost of high performance post-production
equipment, the Company makes post-production capabilities available to an
expanding market of potential users. The Company's business strategy
incorporates the following elements:
Expand Proprietary Technology Base. The Company believes that its
proprietary digital video hardware and software technology provides a
competitive advantage in achieving the development of a broad array of video
post-production solutions. The Company intends to continue to devote significant
resources to expanding its library of circuits, proprietary ASICs and associated
software to develop products that incorporate higher levels of performance,
functionality, and integration.
Expand Worldwide Distribution. The Company intends to further develop its
United States market by targeting specific vertical distribution channels to
reach the broadcast professional and business and industry markets.
Internationally, the Company is expanding its distribution channels in emerging
markets. The Company believes that distributing products through domestic
dealers and international wholesalers is a cost-effective method of reaching
potential product users.
Heighten Brand Name Awareness. The Company believes that its brand name
awareness will remain an important factor in the distribution channels where its
products are sold, and it takes steps to heighten such recognition by selected
advertising, attendance at industry trade shows, and maintaining a focused
public relations campaign.
Leverage Manufacturing and Distribution. The Company's strategy is to use
its resources in a cost-effective manner. Wherever practical, the Company uses
third party services for activities such as manufacturing and accessing certain
sales channels. The Company contracts with third party manufacturers located in
Mexico for most product manufacturing.
Technology
Digital technology has been incorporated in all of the Company's products
developed in the 1990s. This technology is principally implemented by means of
Company-developed DSP ASICs and software. All of the Company's ASICs have been
developed by the Company's engineers or contract employees. The software is
proprietary and has been developed by the Company's software engineers or
contract employees.
The Company's engineers employ proprietary hardware and software libraries
in conjunction with other advances in technology, such as fast turn gate arrays
and VHDL design methodology, to prototype new products in an efficient manner.
One measure of the growth in the technical sophistication of the Company's
products is illustrated below in terms of the increasing numbers of complex gate
arrays in its proprietary ASICs and of lines of code in its proprietary software
algorithms in select products.
H-4
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PROPRIETARY ASIC AND SOFTWARE CONTENT OF SELECTED PRODUCTS
<TABLE>
<CAPTION>
Approximate Approximate Lines Year
Product ASIC Gate Count of Software Code Shipped
-------------------------------- ----------------- ------------------- --------
<S> <C> <C> <C>
Sound Effects Mixer ............ 0 1,000 1991
Thumbs Up Video Editor ......... 4,000 6,000 1992
Video TitleMaker 2000 .......... 20,000 25,000 1994
Digital Video Mixer ............ 62,000 15,000 1994
Edit Suite ..................... 8,000 28,000 1995
PowerScript .................... 142,000 100,000 1996
Effetto Pronto (1) ............. 250,000 600,000 1997
MXPro .......................... 118,000 107,000 1998
MXProDV ........................ 150,000 137,000 1999
<FN>
------------
(1) Beta version shipped in 1997 with production version shipped in 1998.
</FN>
</TABLE>
Selected Products
The Company offers a broad range of digital video products, each designed
to meet specific video post-production needs. The products work with most of the
commonly used broadcast standards, videotape formats, and with most brands and
models of video equipment. The Company's products range in price from under $179
for certain software products to more than $6,000 for certain hardware products.
Videographer
Digital Video Mixer. The Digital Video Mixer, first shipped in February
1994, provides a user with a portable video production facility. The Digital
Video Mixer has four video inputs and offers over 200 effects at any of ten
speeds. These effects include fades, wipes, slides, dissolves,
picture-in-picture, flips, luminance key, color generation, zooms, freeze
frames, color and negative reversals, rolls, the ability to superimpose one
video image over another, and a split screen. The Digital Video Mixer
incorporates four ASICs, including an ASIC with a time base corrector ("TBC")
feature that allows it to execute video mixing. A reduced view of all four video
inputs on a single "preview" monitor shows the action of all four sources
without the need for additional monitors. The Digital Video Mixer offers a
"picture-in-picture" which allows two moving video images to be placed on the
screen at once. A unique "compose" function allows the user to create a complex
image made up of any number of still images and colored rectangles, along with a
moving video or solid color background. The "chroma key" feature enables the
user to shoot a subject against a solid color background and replace that color
with a separate video source. This is the same technique used to place a weather
forecaster in front of a weather map. The product accepts S-video as well as
composite video signals. The Digital Video Mixer has won numerous awards,
including the Outstanding New Editing Equipment Award for 1994 by Video
Magazine, the European Video Editing Product of The Year for 1994-1995 by the
European Video Awards Panel, the Video Post-Production Product of The Year
1994-1995 by Video Camera Magazine U.K, and the 1997 Audio Video International
Product of The Year Award for Special Effects Generator. The Digital Video Mixer
has a U.S. suggested retail price of $999.
MXPro. The MXPro Digital Video Mixer first shipped in April of 1998.
Designed from the ground up, the MXPro is the only 4-input, 10-bit video mixer
in its price category. Over 500 different effects, including stars, hearts and
diamonds, hard edges, soft edges, colored borders and shadows provide a
multitude of options for the creative video professional. Thirty transitions can
be placed in a user-definable menu for easy access. Basic, trailing effects
shapes, edges and the user-definable effects are organized into transition
"banks" and can be easily accessed with the press of one button. MXPro's built
in color correction capability and TBC eliminate the need for dedicated,
specialized equipment providing a similar function. Color correction parameters
can be selected separately for each channel of video. MXPro boasts a
signal-to-noise ratio of greater than 60db and bandwidth of 5.5mhz. MXPro
incorporates upgradeable architecture to support the future addition of DV
(Digital Video) inputs and outputs. MXPro has won several awards including: Best
"Stand Alone Special Effects Generator" from VideoMaker and the 1998 A/V Video
Magazine Platinum Award. The MXPro has a U.S. suggested retail price of $1,799.
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<PAGE>
MXProDV. The MXProDV Digital Video Mixer is a real-time DV production tool
that preserves the DV signal from start to finish. The MXProDV combines a
switcher, mixer, frame synchronizer, TBC (Time Base Corrector), special effects
generator, 10-bit A to D converter and Firewire/iLink technology all in one. It
offers over 500 real-time transitions and effects to mix from both DV and analog
sources. The flexibility of MXProDV's feature set makes it the ideal solution
for live studio productions and presentations, broadcast streaming on the
Internet, and the perfect companion for a non-linear editing system. MXProDV
supports and mixes both DV (via IEEE 1394/FireWire/i.LINK) and analog video and
audio. The 500 digital effects include dissolves, transitions, shape wipes
(circles, hearts, etc.) with soft edges, colored borders, drop shadows, chroma
key, picture-in-picture, negative, flip, mosaic, and many other effects. Mixing
can be done between four sources at a time from a combination of ten different
video inputs including 2 DV, 4 S-video, and 4 composite. MXProDV supports the
enhanced audio mixing capability of the DV format including 32kHz 4 channel and
48kHz 2 channel digital audio sampling with a multitude of mixing options. The
MXProDV was awarded the 1999 Best Stand-Alone Special Effects Generator by
VideoMaker Magazine. MXProDV has a U.S. suggested retail price of $2,495.
Video TitleMaker 3000. First shipped in September 1996, the Video
TitleMaker 3000 is a step up from the TitleMaker 2000. Its two-piece design,
with a separate PC-style keyboard, makes it easier to type in text. User
productivity is also improved with the superior keyboard and more than three
times the processing speed of the TitleMaker 2000. The product offers more than
200 font-size combinations (compared to 92 in TitleMaker 2000) and doubles the
amount of user memory to store over 16,000 characters. A clock/calendar function
allows the user to display the time and date and permits the user to
automatically trigger a page of titles at a specified time and date, and to
repeat that action periodically. The product features the same video quality and
resolution as the TitleMaker 2000 and includes its other features: 1,000,000
colors; fades, rolls and crawls; bold, shadow, and outline; ability to
superimpose over video or colored or patterned backgrounds; full set of accented
and international characters; and storage as projects. The Video TitleMaker 3000
received the 1997 Consumer Electronics Show Innovations Award. TitleMaker 3000
has a U.S. suggested retail price of $799 and is available in other language
versions.
Personal TitleMaker. First shipped in November 1997, the Personal
TitleMaker is a character generator primarily aimed at the camcorder enthusiasts
looking for an entry-level titler. The Personal TitleMaker offers its users: a
choice of seven high-resolution fonts; over 1,000,000 colors for titles,
backgrounds and borders; fades, rolls and crawls; ability to superimpose over
video or colored or patterned backgrounds; full set of accented and
international characters and a GPI (General Purpose Interface) trigger input
allows remote triggering of titles from external controllers, such as Videonics'
Thumbs Up editor and Edit Suite. Personal TitleMaker has a U.S. suggested retail
price of $399. In 1998, Personal TitleMaker won the Best Production Accessory
Award from Camcorder User Magazine.
MediaMotion. MediaMotion is a machine-control plug-in software product for
non-linear (disk-based) video editing applications including Adobe Premiere.
MediaMotion adds the ability to control VCRs, camcorders and other GPI
triggerable devices from inside Adobe Premiere and Ulead's MediaStudio Pro. With
MediaMotion, a user can batch-digitize select portions of source tapes, allowing
unattended recording to disk. This saves time and disk space. MediaMotion 3.0
won the VideoMaker 1998 Accessory Product of the Year award. MediaMotion is
available for Windows operating systems and has a U.S. suggested retail price of
$179.
Python. First shipped in November 1997, Python captures, digitally
compresses, and plays back full-motion video from any video source including
camcorders, VCRs, and cameras. Python is an external MPEG video capture device
which allows PC and laptop users to send video e-mails, add streaming video to
Web pages, and add full-motion video to multimedia presentations. Python creates
highly compressed video files in real time, using the industry-standard MPEG-1
format. Python also captures high-resolution JPEG still pictures. Software for
viewing MPEG video and JPEG still pictures is widely available on most PCs.
Python has a U.S. suggested retail price of $199.
Broadcast
Effetto Pronto. Effetto Pronto, first shipped in 1997, consists of Effetto,
a QuickTime based compositing software component and Pronto, a dedicated
resolution independent PCI hardware accelerator card. The Pronto PCI accelerator
card can process almost one million pixels of film, video, graphics and
character generator
H-6
<PAGE>
elements in real-time. Effetto Pronto enables significant increases in
productivity and frees the creative process by allowing multiple iterations,
rapid re-edits and increased rendering speeds. Effetto Pronto offers virtually
unlimited creative control, with effects and functions previously unavailable in
an integrated compositing package. Features include: chrominance and luminance
keying; a full complement of special effects; a professional character generator
with complete animation control over every letter of text, the ability to design
in true three-dimensional workspace, instant feedback on a video monitor and
support for certain third-party Adobe After Effects plug-ins. In July of 1999,
software version 2.0 was released adding an Animatable Camera function, Dynamic
Effects Caching and a real-time chroma-keyer with edge control and spill
supression. Effetto Pronto has won several awards including: 1998 Video Systems
Vanguard Award, Digital Producer Magazine Best product of 1998, 1998 A/V Video
Magazine Platinum Award in the Compositing/DVE category, Top Tools of 1998 from
Interactivity Magazine and the Editors Choice Award from Videography Magazine
for NAB'97. The Videonics' Effetto Pronto system has a U.S. suggested retail
price of $1,999.
PowerScript. First shipped in September 1996, PowerScript is a standalone
character generator that generates images, characters, and graphics internally,
without the aid of an external computer. Rotation, sizing, stretching, outlines,
color, transparency, and other advanced functions are imaged by its internal
PostScript engine. It displays high quality (10-bit digital video) anti-aliased
titles and offers the character, graphics display, and formatting features
supported by the PostScript display technology. Two high-end versions of
PowerScript were added in 1997; PowerScript Studio has composite and Y/C video
inputs and outputs while PowerScript Studio Component offers analog component
inputs and outputs, in addition to composite and Y/C. Both models are available
in PAL (Phase Alternating Line) and NTSC (National Television Standards
Committee) versions. In 1998, two models of PowerScript Studio 4000 were
introduced and shipped. These models include enhanced version 4.0 software and
come bundled with PowerScript Communicator, a Windows based software product
that includes control and scheduling of up to 10 PowerScript from remote
locations. While PowerScript is a standalone product, it also includes extensive
networking capabilities that enables users to connect the product to a separate
computer or computer network. It supports industry-standard Internet protocols
(TCP/IP, FTP, PPP) and accepts serial or Ethernet connections. These enable
desktop computers, using standard software and hardware, to transfer projects,
fonts, graphics, and other files. PowerScript images EPS-format graphic files,
created using standard graphic applications like Adobe Illustrator, CorelDraw,
and Adobe Photoshop, on standard platforms, including Macintosh, Windows, DOS,
UNIX, and Amiga. A wide range of additional features include expandable PC Card
(PCMCIA) storage, TBC, user-definable styles, roll and crawl, transition
effects, clock/calendar, GPI trigger, and video test patterns. In 1999,
PowerScript 4000 Pro was added to the PowerScript product line. The Videonics
PowerScript product line has a U.S. suggested retail price range of $3,000 to
$6,000.
Marketing
The primary goal of the Company's marketing efforts is to increase
awareness of the Company's products and technology and of their advantages over
competing products or technologies. These objectives are accomplished through
advertising programs directed at users of post-production equipment, a targeted
public relations program, trade show exhibitions, and educational programs in
video making.
The Company advertises principally in magazines directed at broadcast
professionals, videographers, and video producers in the business, industrial,
and educational segments of the market. Videonics has received editorial mention
in many of these publications. The Company exhibited its products at 11
different U.S. trade shows during 1999, including the International Broadcasters
Convention, the National Association of Broadcasters, and INFOCOMM.
The Company's standalone products carry a standard two-year warranty on
both parts and labor. Each of the Company's computer based products carry either
a two-year warranty on hardware and a 90 day warranty on software or a one-year
warranty on both hardware and software. In 1995, the Company added a ProService
feature that enabled customers to receive their repaired units within 48-72
hours in exchange for payment of rush charges. The Company's HelpLine allows
customers to talk directly with support personnel equipped to answer user
questions. This support is free to the Company's customers except for the cost
of the phone call. The Company believes that it obtains valuable feedback from
offering this service, which it then uses in developing new products.
H-7
<PAGE>
Sales
Domestic Sales. The Company wholesales its products in the United States
through a direct sales organization, supported by independent manufacturers
representative organizations. In 1999, 1998, and 1997, respectively, sales in
the United States accounted for approximately 71%, 64%, and 67% of the Company's
total revenues. The Company sells to a variety of sales channels which in turn
sell to end-users. The Company's sales channels include Value Added Resellers
(VARs) who specialize in selling to the broadcast market, direct mail order
businesses, audio/visual specialty stores, camera and video shops, industrial
dealers which service business and industry, catalogs, and certain mass
merchants. The majority of the Company's sales channels specialize in
audio-visual or video products and have product knowledgeable sales personnel.
International Sales. The Company has addressed the international market
opportunity by selling its products through wholesale distributors and its
German subsidiary, which service 78 different countries, and by selling selected
products to international private label customers. In 1999, 1998, and 1997,
respectively, sales outside the United States accounted for approximately 29%,
36%, and 33% of the Company's total revenues As of December 31, 1999, the
Company had three employees who service and support its international private
label customers and country specific distributors. The Company's international
distributors also sell the Company's products under the Videonics brand name,
through channels similar to those used by the Company in the United States.
These distributors also provide dealers with marketing programs, such as
advertising and public relations, as well as customer service and technical
support.
Protectionist trade legislation in either the United States or other
countries, such as a change in the current tariff structures, export compliance
laws or other trade policies, could adversely affect the Company's ability to
sell in international markets. Furthermore, revenues from outside the United
States are subject to inherent risks related thereto, including the general
economic and political conditions in each country. There can be no assurance
that the economic crisis and currency issues currently being experienced in
certain parts of Asia and South America will not have a material adverse effect
on the Company's revenue or operating results in the future. Sales made by the
Company outside the United States are priced in U.S. dollars and are, therefore,
not subject to currency exchange fluctuations. The Company's primary exposure to
changes in exchange rates is related to its German subsidiary and changes in the
German mark. In 1999, 1998 and 1997 foreign currency fluctuations did not have a
material affect on the Company's operating results. In September of 1999, the
Company sold its German subsidiary, Videonics Vertrieb Deutschland GmbH.
Distribution channels. The Company sells to three categories of buyers,
both internationally and domestically: videographer, broadcast, and desktop
video.
Videographer products may be defined as free standing, easy to use,
inexpensive products that address a particular need, such as video mixing or
titling. These products are sold through direct mail order businesses,
e-commerce sites, audio/visual retailers, and industrial dealers.
Broadcast products may be defined as those which operate in a professional
edit studio and may be used in conjunction with a master control panel or a
switcher, or may also operate as stand alone units. These units must comply with
industry technical specifications for video quality. An example of this type of
product is the PowerScript Character Generator. Broadcast products are sold
principally through VARs and system houses that service the broadcast industry.
Desktop video products, such as Effetto Pronto, use a general-purpose
computer as their control element. These products are sold through VARs and
retailers who may also sell general-purpose computers, software, and
peripherals.
Localized marketing. The Company works with its private label customers and
international distributors to provide extensive support by adapting both its
products and accompanying publications for the local country of distribution.
Promotional materials, such as brochures, are produced in the local language.
Universal symbols, rather than language specific text, are used for many user
interface elements such as on-screen displays. All products are designed to meet
most local regulatory standards. In Europe, for example, products are
manufactured for the PAL television standard. The Company's products are further
designed to support local languages. The Company's character generator products
include special characters and accents to support French, German, Italian,
Spanish, Dutch, Russian, Hungarian, Polish, Greek, Romanian, Turkish, and the
Scandinavian
H-8
<PAGE>
languages. The Company's product architecture facilitates additional
localization by substituting one read only memory ("ROM") component for another
(e.g., a Czech/Slovak ROM for an English ROM) to become a local product.
Private label relationships. The Company believes that strategic alliances
are essential to compete successfully in certain large foreign markets,
particularly Japan. The Company therefore seeks to distribute through select
private label relationships with well-known electronics manufacturers having
highly developed distribution channels and substantial brand name recognition in
the country of distribution. This strategy enables the Company to concentrate
its efforts on technology and product development, rather than making the heavy
financial and time commitment required to build distribution channels in these
difficult-to-access markets. The Company's first private label relationship in
Japan was with Matsushita Electrical Industrial Co., Ltd. ("Matsushita.")
Matsushita purchased a custom version of the Company's EditMaker product that
was manufactured by the Company and is sold under the Panasonic brand name.
While the Company has discontinued this product, it has an ongoing support
obligation to Matsushita. The Company currently manufactures the Sony Titler, a
Japanese language character generator for sale in Japan known as the Sony
XV-J1000. Designed to Sony specifications by the Company's product development
team in Campbell, California, the Sony Titler is manufactured by the Company and
shipped to Sony from the United States. The Sony Titler includes a front-end
processor, which translates from a standard keyboard into 6,930 unique Kanji and
Kana (Japanese) characters for subsequent video display (up to 110,880 different
font/size character variations). This software-intensive product provides all
the functionality of its English language counterpart, plus some additional
functions required by the Japanese language. Such features include the ability
to present text (titles) in either a horizontal or a vertical format. The
Company's private label sales have decreased significantly over the past 3 years
and represent less than 1 percent of revenues for 1999.
For 1998 and 1997, no one customer accounted for more than 10% of revenues.
During 1999 sales to B&H Photo accounted for 13% of total revenues. Any
termination by a significant customer of its relationship with the Company or
material reduction in the amount of business such a customer does with the
Company could materially adversely effect the Company's business, financial
condition or operating results. Also, see Note 11 of Notes to Consolidated
Financial Statements for information concerning sales to foreign customers and
industry segments.
Backlog. The Company typically operates with a small amount of backlog.
Accordingly, the Company generally does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. Any significant weakening in customer demand would therefore
have and has had in the past an almost immediate adverse impact on the Company's
operating results and on the Company's ability to maintain profitability.
Manufacturing and Suppliers
Typically, the Company initiates small production runs of new products at
the Company's headquarters in Campbell, California before transferring
manufacturing to third party contract manufacturers located in Mexico. Final
configuration and testing ordinarily take place at the Company's headquarters.
Generally, when received in Campbell, each of the products undergoes testing and
inspection before final shipment to customers. The Company uses an integrated
materials management system for purchasing, inventory control, cost accounting,
and invoicing. As of December 31, 1999, the Company employed 21 persons directly
in manufacturing and operations management in Campbell and has a permanent
quality and test assurance program at its contract manufacturers' locations in
Mexico.
The Company is dependent on sole source suppliers for certain components
used in its products. These components include certain key integrated circuits,
which are utilized in the Company's products, ASICs or gate arrays,
microprocessors, filters, converters, and other parts. Although the Company has
generally been able to procure components on a timely basis, an extended
interruption in the supply of any of the components currently obtained from a
single source could have a material adverse effect on the Company's operating
results. While the Company believes alternative sourcing of these items could be
developed, this might result in additional cost in materials and overhead. In
addition, the Company buys most of its components from third party vendors on a
purchase order basis without any advance contractual commitments and does not
carry significant inventories of
H-9
<PAGE>
these items. A shortage of any one part such as ROM semiconductor devices, or an
increase in the price of a part, could adversely affect production of the
Company's products or reduce gross margins. There can be no assurance that
component supplies will be adequate at all times to ensure that customer product
orders will be manufactured or filled in a timely manner.
Research and Development
The Company places a high priority on research and development. Development
efforts focus on video quality, system performance, feature set expansion, user
productivity, improved processing, and storage. In 1999, 1998, and 1997, the
Company invested $2.9 million, $4.8 million, and $7.0 million, respectively,
constituting 20%, 24%, and 35% of its total net revenues in research and
development, respectively. Because digitized video consumes large amounts of
data and requires substantial computer power to process such data, the Company's
engineers constantly seek new methods to improve its products' capacity and
manipulation of video. Maximizing the processing of video information contained
in video random access memory ("VRAM"), through the development of ASICs, is a
focus of the Company's development staff, as are the compression and storage
issues necessitated when integrating and manipulating large amounts of video
data. As part of this ongoing effort, the Company has made significant
investments in advanced computer programming tools. The Company's engineers work
extensively with VHDL design methodology. Any new ASIC designs are maintained in
VHDL libraries, which product designers may then use to prototype subsequent new
products.
As of December 31, 1999, the Company employed 13 hardware and software
engineers with technical skills in design and development of ASICs, digital or
analog video signal generation-processing, or embedded software.
In 1999, the Company continued to experience substantial delays in
completing the successful development of products. The Company completed and
began shipping Effetto Pronto software version 2.0 in July 1999 and MXProDV in
August 1999. Effetto Pronto version 2.0, the Company's digital video effects and
compositing system, was originally scheduled to begin production shipments in
April 1999. MXProDV, the Company's advanced DV Digital Mixer, was originally
scheduled to be introduced in late in 1998, but due to delays was actually
introduced in April 1999 with production shipments beginning in August 1999.
Delays in shipments of Effetto Pronto version 2.0 and MXProDV contributed to the
revenue shortfall for 1999.
In 1998, 1997 and 1996, the Company also experienced substantial delays in
completing the successful development of products, which contributed to a
shortfall in revenues and significantly affected profitability during those
periods. The Company completed and began shipping MXPro and Effetto Pronto in
April 1998 and June 1998, respectively. MXPro, the Company's advanced Digital
Mixer, introduced in September of 1997 was originally scheduled to begin
shipments in the fourth quarter of 1997. Effetto Pronto, the Company's digital
video effects and compositing system, was originally scheduled to begin
production shipments in 1997. The Company completed and began shipping Python,
Personal TitleMaker and a beta version of Effetto Pronto in the fourth quarter
of 1997. Shipments of Python and beta shipments of Effetto Pronto occurred later
than originally planned. The PowerScript Character Generator in the NTSC video
format, introduced in 1995, was completed for shipment in September of 1996.
After extensive field use, major revisions of PowerScript's software were made
in 1997, with additional improvements being made in the first quarter of 1998.
As the complexity of the Company's product designs and feature sets
continues to increase, the Company may continue to experience similar product
development delays that would have an adverse effect on the profitability of its
operations. There can be no assurance that the Company will be successful in the
timely development of new products to replace or supplement existing products or
that the Company will be successful in integrating acquired products or
technologies with its current business. Delays in new product development have
had an adverse material impact on the Company's growth in 1999, 1998 and 1997.
Similar adverse effects on the Company's results of operations can be expected
until new products are successfully introduced and accepted by end users. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's success depends, in part, on its ability to anticipate new
technological developments, to develop expertise in such technologies, and to
develop and introduce in a timely and cost-effective manner additional features
and new products that satisfy customer needs and desires. As noted above, the
Company has been unable to ship new products in a timely fashion in recent
years, which has had a substantial adverse impact on the Company's results of
operations. Such results have, in any event, fluctuated widely on a quarterly
basis.
H-10
<PAGE>
There can be no assurance that any new products will be developed successfully,
that the Company will be able to introduce additional new products which will
gain acceptance in the marketplace, that the Company will successfully assess
new technological developments and incorporate them into future or current
products, or that the Company will be able to do so in a timely fashion. Any
future failure to develop or introduce new products in a timely manner, or
customer rejection of new products, may have a material adverse effect on the
Company's future results of operations.
Competition
The video production equipment market is highly competitive and is
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over the
life of a product. Competition is fragmented with several hundred manufacturers
supplying a variety of products to this market. The Company anticipates
increased competition in the video post-production equipment market from both
existing manufacturers and new market entrants. Increased competition could
result in price reductions, reduced margins and loss of market share, any of
which could materially and adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully against current and future competitors.
Competition for the Company's broadcast products (i.e. character generation
and desktop compositing) is generally based on product performance, breadth of
product line, service and support, market presence and price. The Company's
principal competitors in the character generation and graphics imaging systems
market include Chyron, For-A, Knox, and AVS. Competitors in the desktop
compositing and effects market include Adobe and Discreet Logic. Although viewed
as competition in some of the markets in which the Company competes, the
Company's desktop compositing and effects product requires the Company to
partner with other companies offering complementary products in order to provide
complete solutions to customers. These companies include Media 100, Artel,
Puffin Designs and ICE. Maintaining this compatibility, while enhancing its own
products, continues to put a tremendous burden on the Company's engineering
resources.
The Company's competition in the videographer market comes from a number of
groups of video companies, such as suppliers of traditional video equipment
including JVC, Matsushita and Sony, providers of desktop editing solutions,
video software application companies and others. Suppliers of desktop video
editing systems or components such as Avid, Pinnacle Systems, Matrox Electronics
Systems, Ltd., Media100, Inc., have established desktop video distribution
channels, experience in marketing video products and significant financial
resources.
Many of the Company's competitors have greater financial, technical,
marketing, sales and customer support resources, greater name recognition and
larger installed customer bases than the Company. In addition, some of the
Company's competitors also offer a wide variety of video equipment, including
professional video tape recorders, video cameras and other related equipment. In
some cases, these competitors may have a competitive advantage based upon their
ability to bundle their equipment in certain large system sales.
The Company believes that the markets for its products will remain highly
competitive. The Company believes that its ability to compete depends on factors
both within and outside its control, including the success and timing of new
product developments introduced by the Company and its competitors, product
performance and price, market presence and customer support. There can be no
assurance that the Company will be able to compete successfully with respect to
these factors. Maintaining any advantage that the Company may have over its
competitors will require continuing investments by the Company in research and
development, sales and marketing and customer service and support. In addition,
as the Company enters new markets, whether through acquisitions, alliances with
other companies or on its own, the Company may encounter distribution channels,
technical requirements and competitive factors that differ from those in the
markets in which it currently operates. There can be no assurance the Company
will be able to compete successfully in these new markets.
Proprietary Rights
The Company relies on a combination of trade secret, copyright and
trademark laws, and contractual agreements to safeguard its proprietary rights
in technology and products. The Company has registered the Videonics brand name
and certain product trademarks in the United States, as well as in some of its
international
H-11
<PAGE>
markets. There can be no assurance however, that the Company will have access to
the Videonics brand name and trademark in all countries. The inability to use
the Videonics brand name and trademark in a country, could materially and
adversely affect the Company's business in that country. The Company routinely
enters into confidentiality and assignment of invention agreements with each of
its employees and nondisclosure agreements with its key customers and vendors.
While the Company relies on these measures to protect its proprietary
rights, there can be no assurance that the Company's technology is adequately
protected by such measures or that the technology will not be reverse-engineered
by third parties without violation of the Company's proprietary rights. Such
protection may not preclude competitors from developing products with features
and prices similar to or even better than those of the Company. The Company
believes that its products and other proprietary rights do not infringe upon the
proprietary rights or products of third parties. In 1997, the Company reached an
agreement with a third party patent holder in which royalties are payable on
certain of the Company's products. Payment of these royalties will not have an
adverse material effect on the Company's financial condition or results of
operations. There can be no assurance, however, that other third parties will
not assert infringement claims against the Company in the future or that such
claims will not result in costly litigation or require the Company to license
intellectual property rights from third parties. There can be no assurance that
any such licenses would be available on terms acceptable to the Company, if at
all.
The Company believes that, because the pace of technological change is so
rapid in the digital video electronics industry, the best protection for its
proprietary rights is its continued substantial investment in research and
development to apply the latest advances in data storage and data compression to
the integration of video post-production functions. The Company believes that
any legal protection afforded by copyright, and trade secret laws will be less
of a factor on the Company's ability to compete than the ability and creativity
of its research and development staff to develop products which satisfy customer
needs. Moreover, the Company believes that market positioning and rapid market
entry are equally important to the success of its products.
Employees
As of March 1, 2000, the Company had 62 full-time employees, including 16
in research and development, 20 in sales and marketing, 21 in operations, and 5
in finance and administration. None of the Company's employees is represented by
a labor union or is covered by collective bargaining agreements. The Company
believes that its employee relations are good. The Company has never experienced
a work stoppage.
ITEM 2. PROPERTIES.
The Company's principal administrative, sales and marketing, research and
development, and operating facilities are located in Campbell, California and
consist of approximately 27,500 square feet under a lease which expires on July
31, 2002. The Company also has a research and development facility in Millis,
Massachusetts, which has 2,500 square feet under a lease which expires on
December 1, 2000.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended December 31, 1999.
H-12
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Effective May 20, 1999, the Company's Common Stock moved to the Nasdaq
SmallCap Market from the Nasdaq National Market System, where it had been listed
since its initial public offering was declared effective on December 15, 1994.
The Company's trading symbol on the Nasdaq SmallCap Market is "VDNX". Prior to
that date, there was no established public trading market for the Company's
Common Stock. The following table sets forth the quarterly high and low sales
price information of the Common Stock during the fiscal years ended December 31,
1999 and 1998.
Q1 Q2 Q3 Q4
---------- ---------- ---------- ----------
FY99 .......... High $ 3.25 $ 2.06 $ 1.50 $ 1.31
Low $ 0.38 $ 0.50 $ 0.25 $ 0.50
FY98 .......... High $ 4.50 $ 4.63 $ 2.13 $ 1.50
Low $ 1.50 $ 1.38 $ 0.75 $ 0.47
As of March 1, 2000, there were approximately 1,150 holders of the
Company's Common Stock. The closing sales price of the Company's Common Stock on
March 1, 2000 was $2.06 per share.
Other than the distributions to S corporation shareholders for certain
income tax liabilities associated with the Company's 1994 earnings through
December 14, 1994, the Company has never declared or paid dividends on its
Common Stock and does not anticipate paying any dividends in the foreseeable
future. The Company currently intends to retain its earnings, if any, for the
operation and development of its business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for each of the years in the five year period ended
December 31, 1999, and with respect to the balance sheets at December 31, 1999,
1998, 1997, 1996 and 1995 are derived from financial statements that have been
audited by PricewaterhouseCoopers LLP, independent accountants. The financial
data should be read in conjunction with the Company's Financial Statements and
related Notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Report. The
balance sheets as of December 31, 1999 and 1998, and the statement of operations
for each of the three years in the period ended December 31, 1999 and the
independent auditors' report thereon, are included in Item 8 of this Report.
H-13
<PAGE>
Statement of Operations Data:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December,
-----------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Net revenues ................................. $ 14,226 $ 19,672
Operating income (loss) ...................... (2,562)(1) (6,722)(2)
Net income (loss) ............................ (2,634)(1) (6,713)(2)
Net income (loss) per share--basic ........... (0.45)(1) (1.15)(2)
Shares used in per share
calculation--basic .......................... 5,866 5,833
Net income (loss) per share--diluted ......... (0.45)(1) (1.15)(2)
Shares used in per share
calculation--diluted ........................ 5,866 5,833
Balance Sheet Data:
Working capital .............................. $ 3,823 $ 4,404
Total assets ................................. 6,089 9,164
Shareholders' equity ......................... 3,346 5,927
Dividends declared per share ................. -- --
<CAPTION>
Year Ended December,
-------------------------------------------------
1997 1996 1995
------------------ ------------- ----------------
<S> <C> <C> <C>
Net revenues ................................. $ 19,955 $ 29,195 $ 33,561
Operating income (loss) ...................... (12,984)(3) 401 4,811 (4)
Net income (loss) ............................ (13,441)(3) 744 3,746 (4)
Net income (loss) per share--basic ........... (2.34)(3) 0.13 0.69 (4)
Shares used in per share
calculation--basic .......................... 5,744 5,616 5,413
Net income (loss) per share--diluted ......... (2.34)(3) 0.13 0.65
Shares used in per share
calculation--diluted ........................ 5,744 5,933 5,791
Balance Sheet Data:
Working capital .............................. $ 9,902 $ 21,412 $ 20,127
Total assets ................................. 15,694 27,958 27,350
Shareholders' equity ......................... 12,606 25,731 24,149
Dividends declared per share ................. -- -- --
<FN>
------------
(1) Results for 1999 include a $655,000 charge in the fourth quarter for the
write-down of the Company's inventory to its net realizable value
(2) Results for 1998 include a $1.3 million charge in the fourth quarter for the
write-down of the Company's open systems inventory to its net realizable
value.
(3) Results for 1997 include: a $1.9 million write-off of intangible assets
related to Nova Systems; a $1.6 million increase in inventory reserves for
components rendered obsolete by product revisions of which approximately
$608,000 related to PowerScript and $265,000 related to KUB Systems and
$700,000 related to excess and obsolete assets at Nova Systems; a $124,000
increase in warranty reserves for PowerScript hardware updates; a tax charge
of $5.9 million due to the establishment of a valuation allowance against
the Company's deferred tax assets; and a $100,000 charge for the reduction
of approximately 12 percent of the Company's work force. The total of these
charges equaled $9.6 million.
(4) Results for 1995 include a one-time charge of $1,965,000 for purchased
in-process research and development related to the acquisition of Nova.
Without this one-time charge, the net income of $3,746,000 would have been
$5,075,000 or $0.88 per share.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K, including the following sections, contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements regarding market
opportunities, market share growth, competitive growth, new product
introductions, success of research and development expenses, customer acceptance
of new products, gross margin and selling, general and administrative expenses.
These forward-looking statements involve risks and uncertainties, and the
cautionary statements set forth below, specifically those contained in "Factors
That May Affect Future Results of Operations," identify important factors that
could cause actual results to differ materially from those predicted in any such
forward-looking statements. Such factors include, but are not limited to,
adverse changes in general economic conditions, including adverse changes in the
specific markets for the Company's products, adverse business conditions,
decreased or lack of growth in the market for video post-production equipment,
adverse changes in customer order patterns, increased competition, lack of
acceptance of new products, pricing pressures, lack of success in technological
advancements, risks associated with foreign operations, and other factors,
including those listed below.
H-14
<PAGE>
Overview
Videonics is a designer of affordable, high-quality, digital video
post-production equipment. Videonics products are used by videographers,
business, industry, education and videophiles; they are also used in the
broadcast, cable, video presentation and video conferencing markets. The Company
manufactures standalone and personal-computer-based hardware and software
products that capture, edit and mix raw video footage and add special effects
and titles. Products include edit controllers, video and audio mixers, video
processors, character generators, multimedia software, computer-based animation
and video compositing systems.
1997
After shipping PowerScript to a wide base of customers in 1996,
deficiencies in the user interface and certain signal timing issues in specific
applications were discovered that made the product difficult to sell. Therefore,
in 1997, the Company released new versions of the operating software that
enhanced the user interface and operating speed of the Power Script Product.
Signal timing issues were addressed with the introduction of two new higher
priced versions of PowerScript (PowerScript Studio and PowerScript Studio
Component) targeted at higher end customers. In 1997, the Company announced four
major new products that were expected to ship in 1997: Effetto Pronto, MXPro,
Python and Personal TitleMaker. As of December 31, 1997, the Company had brought
Python and Personal TitleMaker to market in commercial quantities. Since Python
and Personal TitleMaker were shipped in the fourth quarter of 1997, the first
three quarters of 1997 did not contain revenues from any of the aforementioned
new products. To reduce expenses, the Company reduced its personnel by twelve
percent on January 15, 1998.
1998
In the second quarter of 1998, the Company began production shipments of
MXPro and Effetto Pronto. Sales of MXPro tracked closely to the Company's plan,
while sales of Effetto Pronto were significantly below plan. Effetto Pronto did
not generate meaningful revenues during 1998, as customer acceptance was slower
than expected. Effetto Pronto's lower than anticipated revenues, combined with
continued significant research and development and sales and marketing expenses
associated with the product, resulted in a significant operating loss for the
Company. In addition, sales of the Company's open system products decreased
significantly from their 1997 run rate, due primarily to increased competition.
As such, in the fourth quarter of 1998, the Company reduced its open systems
inventory to its net realizable value.
1999
To reduce the Company's expenses and focus its resources, the Company sold
its Nova Systems Division ("Nova") to a private company in Massachusetts on
January 29, 1999 (see the Notes to the Consolidated Financial Statements for
further details). In July 1999, the Company began shipments of Effetto 2.0, a
significant software upgrade to Effetto Pronto. Although Effetto Pronto 2.0
included numerous feature enhancements, sales of the product were significantly
below plan and failed to generate meaningful revenues in 1999. In August 1999,
the Company began shipments of its MXProDV product, which provided an
incremental increase to revenues. In the fourth quarter of 1999, the Company
reduced the carrying value of certain slow moving products and soon to be
discontinued products to their net realizable value. These factors combined with
declining sales of the Company's older Videographer products and delays in
shipment of the Company's new Videographer products, resulted in operating
losses in each quarter of 1999. Results for 2000 are highly dependent on planned
shipment and customer acceptance of new products.
H-15
<PAGE>
Results of Operations
<TABLE>
The following table sets forth certain items from the Company's
consolidated statements of operations as a percentage of net revenues for the
periods indicated:
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues ............................... 100.0% 100.0% 100.0%
Cost of revenues ........................... 62.0 69.1 69.7
Gross profit .............................. 38.0 30.9 30.3
Operating expenses
Research & development .................... 20.2 24.4 34.8
Selling & marketing ....................... 27.2 33.5 40.3
General & administrative .................. 8.6 7.2 8.9
Amortization of intangible assets ......... -- -- 2.0
Write-off of intangible assets ............ -- -- 9.4
----- ----- -----
Total operating expenses .................. 56.0 65.1 95.4
----- ----- -----
Operating loss ........................... (18.0) (34.2) (65.1)
Interest income (expense), net ............. ( 0.5) -- 1.3
----- ----- -----
Loss before income taxes .................. (18.5) (34.2) (63.8)
Provision for income taxes ................. -- -- 3.6
----- ----- -----
Net loss ................................. (18.5)% (34.2)% (67.4)%
===== ===== =====
</TABLE>
Comparison of Years Ended December 31, 1999 and 1998
Net Revenues. Net revenues decreased 28% to $14.2 million in 1999, from
$19.7 million in 1998. The decrease in revenue was due in part to the sale of
the Company's Nova Division, decreased sales of the Company's older videographer
products and decreased sales of the Company's Effetto Pronto product, offset
partially by sales of the MXProDV product which was introduced in late August,
1999. International revenues for 1999 were $4.1 million or 29% of net revenues
compared to $7.0 million or 36% of net revenues in 1998.
Gross Profit. Gross profit decreased to $5.4 million in 1999, from $6.1
million in 1998. Gross profit, as a percentage of net revenues, increased to 38%
in 1999 from 31% in 1998. In 1999, the Company recorded a $733,000 increase in
inventory reserves to reduce the carrying value of its slow moving and
discontinued products to their net realizable value. In 1998, the Company
recorded a $1.7 million increase in inventory reserves primarily to reduce the
carrying value of its open systems inventory. Charges to inventory reserves, as
a percentage of net revenues were 5% and 8% for 1999 and 1998, respectively.
Research and Development. Research and development expenses decreased 40%
to $2.9 million during 1999 compared to $4.8 million in 1998, and decreased as a
percentage of net revenues to 20% in 1999 from 24% in 1998. The decrease was due
to the Company's sale of Nova, a decrease in personnel and reduction in the use
of consultants. The Company anticipates that research and development expenses
will decrease slightly in 2000 when compared to 1999.
Selling and Marketing. Selling and marketing expenses decreased 41% to $3.9
million in 1999 compared to $6.6 million in 1998, and decreased to 27% in 1999
compared to 34% in 1998, as a percentage of net revenues. The decrease was
primarily due to the Company's sale of Nova, a decrease in personnel and reduced
advertising and promotional expenses as the Company brought advertising
expenditures in-line with current revenue levels. Included in expenses for 1999
was approximately $52,000 of closing costs associated with the sale of the
Company's German subsidiary. Revenue and assets employed by the Company's German
office, were not material to the consolidated financial statements. Since the
sale of its German subsidiary, the Company has utilized local distribution to
market and sell its products as it does throughout the rest of Europe.
General and Administrative. General and administrative expenses decreased
14% to $1.2 million in 1999 compared to $1.4 million in 1998. General and
administrative expenses increased as a percentage of net revenues to 9% in 1999
compared to 7% in 1998. The decrease in actual expenses between 1999 and 1998 is
primarily due to a decrease in personnel.
H-16
<PAGE>
Interest Expense, net. The Company recorded net interest expense of $72,000
in 1999 compared to net interest expense of $21,000 in 1998. The increase is
primarily due to interest expense incurred on higher borrowings between years
and amortization of warrants issued in August 1999, in connection with the
Company's line of credit.
Provision for Income Taxes. In 1999, Company recorded an income tax benefit
of $847,000 on its pretax loss, offset completely by a $847,000 increase in the
valuation allowance against the Company's deferred tax assets. As such, no tax
benefit was recognized during 1999. The Company maintained a 100% valuation
allowance against its deferred tax assets due to the uncertainty surrounding the
realization of such assets. If it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation allowance will be
reduced. During 1998, the Company recorded a tax benefit of $30,000 on a pretax
loss of $6.7 million. This benefit was primarily the result of a state tax
refund. In addition, the Company recorded in 1998 an income tax benefit of $3.7
million on its pretax loss, offset completely by a $3.7 million increase in the
valuation allowance against the Company's deferred tax assets.
Comparison of Years Ended December 31, 1998 and 1997
Net Revenues. Net revenues decreased 1% to $19.7 million in 1998, from
$20.0 million in 1997. This decrease is primarily attributable to reduced sales
of open systems products and older Videographer products offset by the
introduction of MXPro and Effetto Pronto. International revenues for 1998 were
$7.0 million or 36% of net revenues compared to $6.6 million or 33% of net
revenues in 1997.
Gross Profit. Gross profit remained at $6.1 million for both 1998 and 1997.
Gross profit, as a percentage of net revenues, increased to 31% in 1998 from 30%
in 1997. In 1998, the Company recorded a $1.3 million increase in inventory
reserves to reduce the carrying value of its open systems inventory. In 1997,
the Company recorded a $1.6 million increase in inventory reserves for
components rendered obsolete by product revisions of which approximately
$608,000 related to PowerScript, $265,000 related to KUB and $700,000 related to
excess and obsolete assets at Nova; and a $124,000 increase in warranty reserves
for PowerScript hardware updates.
Research and Development. Research and development expenses decreased 31%
to $4.8 million during 1998 compared to $7.0 million in 1997, and decreased as a
percentage of net revenues to 24% in 1998 from 35% in 1997. The decreased
expenses were primarily due to the reductions in personnel and decreased usage
of consultants as significant work on PowerScript and MXPro was completed in
1998.
Selling and Marketing. Selling and marketing expenses decreased 18% to $6.6
million in 1998 compared to $8.0 million in 1997, and decreased to 34% in 1998
compared to 40% in 1997, as a percentage of net revenues. This decrease in
selling and marketing expenses was primarily a result of decreased advertising
and promotional expenses as the Company brought advertising expenditures in-line
with current revenue levels.
General and Administrative. General and administrative expenses decreased
20% to $1.4 million in 1998 compared to $1.8 million in 1997, and decreased to
7% in 1998 compared to 9% in 1997 as a percentage of net revenues. This decrease
was primarily due to a charge of $375,000 in 1997 to bad debt reserves for
specific accounts.
Write-off of Intangibles. In 1997, the Company wrote-off the remaining
unamortized value of the purchased technology and goodwill established in
connection with the acquisition of Nova. The write-off totaled $1.9 million and
was primarily due to continued losses and lack of commercially successful new
product introductions.
Interest Expense, net. In 1998 the Company recorded net interest expense of
$21,000 compared to net interest income of $261,000 in 1997. The shift from
interest income to interest expense is primarily due to interest expense
calculated on shareholder loans offset only partially by interest income on
lower cash balances available for investment.
Provision for Income Taxes. At December 31, 1998 the Company recorded a tax
benefit of $30,000 on a pretax loss of $6.7 million. This benefit was primarily
the result of a state tax refund. In addition, the Company recorded an income
tax benefit of $3.7 million on its pretax loss offset completely by a $3.7
million increase in the valuation allowance against the Company's deferred tax
assets. The Company continued to maintain a 100% valuation allowance against its
deferred tax assets due to the uncertainty surrounding the realization of such
assets. At December 31, 1997 the Company incurred a tax charge of $718,000 on a
pretax loss of $12.7 million.
H-17
<PAGE>
This charge was the result of the establishment of a $5.9 million valuation
allowance against the Company's deferred tax assets offset partially by an
income tax benefit of $4.6 million the Company recorded on its pretax loss.
Quarterly Results of Operations
The following table sets forth certain quarterly financial information for
the periods indicated. This information has been derived from unaudited
financial statements that, in the opinion of management, have been prepared on
the same basis as the audited information, and includes all normal recurring
adjustments necessary for a fair presentation of such information. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future period.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- -------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
(in thousands, except per share data) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues and other
income ............................... $ 3,665 $ 3,394 $ 3,842 $ 3,326 $ 4,719 $ 5,907 $ 5,025 $ 4,021
Gross profit (loss) ................... 1,458 1,464 1,646 843 1,742 2,437 2,066 (161)
Operating loss ........................ (810) (806) (245) (701) (1,705) (883) (1,128) (3,006)
Net loss .............................. (823) (821) (261) (729) (1,706) (841) (1,137) (3,029)
Net loss per share--basic and
diluted .............................. (0.14) (0.14) (0.04) (0.12) (0.29) (0.14) (0.19) (0.52)
Shares used in computing per
share amounts--basic and
diluted .............................. 5,858 5,867 5,869 5,872 5,790 5,831 5,854 5,857
</TABLE>
The Company has experienced significant quarterly fluctuations in operating
results and anticipates that these fluctuations will continue in the future. The
fluctuation in revenues in the periods reflected above are attributable to
various factors, including the timing of new product introductions and
shipments, variations in product mix sold, and private label sales. In 1999 and
1998, the Company's delay in the sales of previously announced new products had
a significant effect on the Company's results of operations, and there can be no
assurance that the Company will be able to introduce and timely sell new
products on a basis which will avoid quarterly fluctuations in the future, or
even that such new products will be successful in the marketplace.
The Company typically operates with a small backlog. Therefore, quarterly
revenues and operating results have generally depended on the volume and timing
of orders received during the quarter. Backlog is not an accurate predictor of
what the Company's revenues will be in future periods, and there can be no
assurance that the Company will be profitable in any particular quarter.
Factors That May Affect Future Results of Operations
The Company believes its future results of operations will likely be
impacted by factors such as delays in development and shipment of the Company's
new products and new versions of existing products, market acceptance of new
products and upgrades, growth in the marketplace in which it operates,
competitive product offerings, and adverse changes in general economic
conditions in any of the countries in which the Company does business. The
Company's results in prior years have been affected by these factors,
particularly with respect to developing and introducing new products such as
PowerScript, Effetto Pronto, MXPro and Python.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts or anticipated by the Company based upon product development and
introduction schedules could have an immediate and significant adverse effect on
the trading price of the Company's Common Stock in any given period.
Additionally, the Company may not learn of such shortfalls until late in the
fiscal quarter, which could result in an even more immediate and adverse effect
on the trading price of the Company's Common Stock. Finally, the Company
participates in a highly dynamic industry, which often results in significant
volatility of the Company's Common Stock price. See "Business--Research and
Development".
Year 2000 Update
We believe that we have successfully rendered our product, internal
management and other administrative systems and external information systems
year 2000 compliant. Since January 1, 2000, we have experienced no
H-18
<PAGE>
disruptions in our business operations as a result of year 2000 compliance
problems or otherwise, and have received no reports of any year 2000 compliance
problems with our products. To date, the total cost of our efforts to address
year 2000 compliance has not been material.
Nonetheless, some problems related to the year 2000 risks may not appear
until several months after January 1, 2000. Year 2000 issues could include
problems with our own products or with third-party products or technology that
we use. Any problems that are not identified and corrected successfully and
completely could adversely affect our business.
Liquidity and Capital Resources
From the Company's inception until its initial public offering in December
1994, which resulted in net proceeds to the Company of $15.8 million, the
Company financed its operations through private sales of equity, shareholder
loans, and bank borrowings. At December 31, 1999, the Company's principal source
of liquidity is cash of approximately $715,000 and access to a $1.0 million
revolving, asset based line of credit. Throughout 1999, the Company maintained
borrowings from a major shareholder of $1.0 million at an interest rate of 8.0%,
terms that the Company considered more favorable than those it could obtain from
other commercial sources. At December 31, 1999, the Company had borrowings from
this shareholder totaling $1.0 million at an interest rate of 8.0% per year, due
January 16, 2001. On March 22, 2000, the maturity date of the $1.0 million loan
was extended from January 16, 2001 to January 16, 2002.
Operating Activities. In 1999, net cash used in operating activities was
$96,000 resulting primarily from an operating loss of $756,000 after adjusting
for non-cash items and a $524,000 decrease in accrued expenses, offset by a
decrease in inventories of $1.2 million. Inventories decreased as the Company
continued to better align its inventory with its current revenue levels. In
1998, net cash used in operating activities was $811,000, resulting primarily
from an operating loss of $3.7 million after adjusting for non-cash items,
offset by a decrease in accounts receivable of $414,000 and a decrease in
inventories of $2.4 million. Accounts receivable decreased because of lower
sales during the fourth quarter of 1998 compared to 1997 and improved
collections. Inventories decreased as the Company better aligned its inventory
with its current revenue levels. In 1997, net cash used in operating activities
was $5.6 million, resulting primarily from an operating loss of $6.6 million
after adjusting for non-cash items, an increase in inventories of $2.3 million,
offset by a decrease in accounts receivable of $1.7 million. Inventories
increased primarily in anticipation of new product shipments and lower than
expected shipments of new products in 1997. Receivables decreased primarily
because of decreased sales.
Investing Activities. Capital equipment expenditures in 1999, 1998 and 1997
were $120,000, $378,000, and $1.6 million respectively, primarily for computers,
software and engineering equipment used in research and development and other
activities. The Company currently anticipates that additions to property and
equipment will require capital expenditures of $320,000 through the end of 2000.
In 1999, the Company received proceeds of $52,000 in connection with the sale of
its Nova Systems division. In 1997, the Company had redemptions of $1.5 million
of marketable securities.
Financing Activities. In 1999, the Company received $7,000 from the
exercise of stock options under the Company's stock option plan and proceeds of
$35,000 from the issuance of notes payable to a shareholder. In 1998, the
Company received $34,000 from the exercise of stock options under the Company's
stock option plan and proceeds of $1.0 million from the issuance of notes
payable to a shareholder. Additionally in 1998, the Company repaid $19,000 of
the notes payable to a shareholder. In 1997, the Company received $154,000 from
the exercise of stock options under the Company's stock option plan
The Company has incurred losses and negative cash flows from operations for
each of the three years in the period ended December 31, 1999 and is dependent
upon support from a substantial shareholder and upon generating sufficient
revenues from existing and soon to be released products in order to fund
operations. During 1999, Management continued to take steps to further reduce
costs, including the sale of its Nova Systems division, and its German
subsidiary, both of which had incurred losses in the two years immediately
preceding their sale. The Company is assessing its product lines to identify how
to enhance existing or create new distribution channels. During 2000, the
Company is developing and expects to release more than two new products.
As described in the notes to the consolidated financial statements, the
Company has obtained a $1.0 million asset based line of credit from Venture
Banking Group, a division of Cupertino National Bank, secured by the
H-19
<PAGE>
Company's assets. Interest on any advances will be calculated at a rate of 1.5%
above prime. Under the terms of the agreement, the Company is required to
maintain certain financial ratios and meet other covenants, including those
related to net worth, profitability and indebtedness. The revolving maturity
date of this facility is August 25, 2001. As of the date of this filing, the
Company had not borrowed from this facility.
The Company believes that its current cash, borrowings from a shareholder,
together with its operating cash flows, will be sufficient to meet the Company's
requirements for working capital, and capital expenditures through the end of
2000.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures pursuant to item 7A are not material
and are therefore not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance sheets of the Company as of December 31, 1999 and 1998 and
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999, together with the related notes and
the report of PricewaterhouseCoopers LLP, independent accountants, are set forth
on pages 31 to 48. Other required financial information is set forth herein, on
page 58.
H-20
<PAGE>
Videonics, Inc.
Consolidated Financial Statements
as of December 31, 1999 and 1998
H-21
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Videonics, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholder's equity and of
cash flows present fairly, in all material respects, the financial position of
Videonics, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000
H-22
<PAGE>
Videonics, Inc.
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................................ $ 715 $ 837
Accounts receivable, net ................................................. 886 852
Inventories .............................................................. 3,785 5,830
Prepaids and other current assets ........................................ 145 122
--------- ---------
Total current assets ................................................... 5,531 7,641
Property and equipment, net ................................................. 513 1,507
Other assets ................................................................ 45 16
--------- ---------
Total assets ........................................................... $ 6,089 $ 9,164
--------- ---------
Liabilities and Shareholders' Equity
Current liabilities:
Loan payable to shareholder .............................................. $ -- $ 1,000
Accounts payable ......................................................... 974 947
Accrued expenses ......................................................... 734 1,290
--------- ---------
Total current liabilities .............................................. 1,708 3,237
--------- ---------
Long term liabilities
Loan payable to shareholder .............................................. 1,035 --
--------- ---------
Total liabilities ...................................................... 2,743 3,237
--------- ---------
Commitments and contingencies (Note 6) Shareholders' equity:
Preferred stock, no par value: Authorized: 10,000 shares in 1999 and 1998;
Issued and outstanding: None ............................................ -- --
Common stock, no par value: Authorized: 30,000 shares in 1999 and 1998;
Issued and outstanding: 5,874 shares in 1999 and 5,858 shares in 1998 ... 20,700 20,647
Accumulated deficit ...................................................... (17,354) (14,720)
--------- ---------
Total shareholders' equity ............................................. 3,346 5,927
--------- ---------
Total liabilities and shareholders' equity .......................... $ 6,089 $ 9,164
--------- ---------
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
H-23
<PAGE>
Videonics, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues and other income ......................... $ 14,226 $ 19,672 $ 19,955
Cost of revenues ...................................... 8,815 13,588 13,900
--------- --------- ---------
Gross profit ....................................... 5,411 6,084 6,055
--------- --------- ---------
Operating expenses:
Research and development ........................... 2,879 4,798 6,951
Selling and marketing .............................. 3,875 6,593 8,041
General and administrative ......................... 1,219 1,415 1,779
Amortization of intangible assets .................. -- -- 393
Write-off of intangible assets ..................... -- -- 1,875
--------- --------- ---------
7,973 12,806 19,039
--------- --------- ---------
Operating loss: ....................................... (2,562) (6,722) (12,984)
Interest (expense) income, net ........................ (72) (21) 261
--------- --------- ---------
Loss before income taxes .............................. (2,634) (6,743) (12,723)
Provision for (benefit from) income taxes ............. -- (30) 718
--------- --------- ---------
Net loss .............................................. $ (2,634) $ (6,713) $ (13,441)
--------- --------- ---------
Net loss per share--basic and diluted ................. $ (.45) $ (1.15) $ (2.34)
--------- --------- ---------
Shares used in per share calculation--basic ........... 5,866 5,833 5,744
--------- --------- ---------
Shares used in per share calculation--diluted ......... 5,866 5,833 5,744
--------- --------- ---------
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
H-24
<PAGE>
Videonics, Inc.
Consolidated Statements of Shareholders' Equity
For Each of the Three Years in the Period Ended December 31, 1999
(in thousands, except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Earnings
Common Stock
---------------------- (Accumulated Shareholders'
Shares Amount Deficit) Equity
-------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 ................................. 5,705 $ 20,297 $ 5,434 $ 25,731
Issuance of common stock from exercise of options ........... 80 154 -- 154
Amortization of deferred compensation ....................... -- 36 -- 36
Tax benefit from exercise of nonqualified stock options ..... -- 126 -- 126
Net loss .................................................... -- -- (13,441) (13,441)
----- -------- --------- ---------
Balances, December 31, 1997 ................................. 5,785 20,613 (8,007) 12,606
Issuance of common stock from exercise of options ........... 73 34 -- 34
Net loss .................................................... -- -- (6,713) (6,713)
----- -------- --------- ---------
Balances, December 31, 1998 ................................. 5,858 20,647 (14,720) 5,927
Issuance of common stock from exercise of options ........... 16 8 -- 8
Issuance of warrants in payment of loan fees ................ -- 45 -- 45
Net loss .................................................... -- -- (2,634) (2,634)
----- -------- --------- ---------
Balances, December 31, 1999 ................................. 5,874 $ 20,700 $ (17,354) $ 3,346
----- -------- --------- ---------
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
H-25
<PAGE>
Videonics, Inc.
Consolidated Statements of Cash Flows
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (2,634) $ (6,713) $ (13,441)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of property and equipment .............................. 7 5 76
Loss on sale of Nova Systems ............................................ 48 -- --
Loss on sale of German Subsidiary ....................................... 65 -- --
Depreciation and amortization ........................................... 1,025 1,304 1,563
Provision for doubtful accounts ......................................... -- 25 375
Provision for excess and obsolete inventories ........................... 733 1,661 1,641
Deferred income taxes ................................................... -- -- 1,299
Write-off of intangible assets .......................................... -- -- 1,875
Change in assets and liabilities:
Accounts receivable .................................................... (71) 414 1,740
Inventories ............................................................ 1,203 2,447 (2,270)
Prepaid income taxes ................................................... -- 550 670
Prepaid and other current assets ....................................... 46 97 274
Other .................................................................. (29) 250 (252)
Accounts payable ....................................................... 35 (495) 352
Accrued expenses ....................................................... (507) (356) 509
--------- --------- ---------
Net cash used in operating activities ................................. (79) (811) (5,589)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment ....................................... (120) (378) (1,611)
Proceeds from disposition of Nova Systems ................................. 52 -- --
Proceeds from sale of marketable securities ............................... -- -- 1,500
--------- --------- ---------
Net cash used in investing activities ................................. (68) (378) (111)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of loans payable to shareholder .................... 18 1,019 --
Repayment of notes payable ................................................ -- (19) --
Proceeds from issuance of common stock .................................... 7 34 154
--------- --------- ---------
Net cash provided by financing activities ............................. 25 1,034 154
--------- --------- ---------
Decrease in cash and cash equivalents ...................................... (122) (155) (5,546)
Cash and cash equivalents at beginning of year ............................. 837 992 6,538
--------- --------- ---------
Cash and cash equivalents at end of year ................................... $ 715 $ 837 $ 992
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 3 $ 43 $ --
Income taxes ............................................................ $ -- $ 2 $ 5
Supplement schedule of non-cash financing activities:
Tax benefit from exercise of nonqualified stock options ................... $ -- $ -- $ 126
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
H-26
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Videonics, Inc. (the "Company") was incorporated on July 3, 1986. The
Company is a designer of digital video post-production equipment. The Company's
products are used by videographers, business, industry, education and
videophiles; they are also used in the broadcast, cable, video presentation and
video conferencing markets. The Company manufactures stand-alone and
personal-computer based hardware and software products that edit and mix raw
video footage, add special effects and titles, and process audio and video
signals.
2. Summary of Significant Accounting Policies
Basis of preparation
The Company has incurred losses and negative cash flows from operations in
each of the three years in the period ended December 31, 1999 and is dependent
upon support from a substantial shareholder and upon generating sufficient
revenues from existing and soon to be released products in order to fund
operations. Management has taken steps to reduce costs, and in that regard sold
its Nova Systems division on January 29, 1999 and its German subsidiary on
September 29, 1999 which had incurred losses for each of the two years in the
period ended December 31, 1998. The Company is assessing its product lines to
identify how to enhance existing or create new distribution channels. During
2000, the Company is developing and expects to release more than two new
products. Management expects that the cost reductions together with revenue
generated from these products will be sufficient to meet the Company's
obligations as they become due. In the event that such cost reduction and
revenue from new products are not sufficient to meet the Company's obligations,
the Company may need to seek additional financing. There can be no assurance
that such additional financing will be available or will be available on terms
acceptable to the Company which, as a result, may have an adverse effect on the
Company.
Principles of consolidation
The consolidated financial statements include the accounts for Videonics,
Inc. and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company recognized revenues from gross sales, upon shipment of product,
provided all significant obligations have been met. A provision is made to
estimate customer returns and estimated warranty repair/replacement costs at the
time a sale is recorded.
Research and development expenditures
Research and development expenditures are charged to operations as
incurred.
Advertising
The Company expenses the production costs of advertising as the expenses
are incurred. The production costs of advertising consist primarily of magazine
advertisements, agency fees and other direct production costs. Advertising
expense for the period ended December 31, 1999, 1998, and 1997 was $232,000,
$721,000, and $1,412,000, respectively.
Income taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are
H-27
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
expected to reverse. The Company is required to adjust its deferred tax
liabilities in the period when tax rates or the provisions of the income tax
laws change. Valuations allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Cash and equivalents
Cash equivalents consist of highly liquid investments with original
maturities at time of purchase of three months or less.
Inventories
Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or net realizable value.
Property and equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets ranging from
two to five years. Leasehold improvements are amortized on a straight-line basis
over the lesser of the term of the lease or the estimated useful life of the
asset.
Comprehensive income
There were no differences between net income (loss) for each of the three
years ended in the period to December 31, 1999, and the comprehensive income
(loss) for those periods.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable.
The Company maintains its cash and cash equivalents with financial
institutions located in California and in high grade commercial paper with
original maturities of less than three months. As part of its cash management
process, the Company performs periodic evaluations of the relative credit
standing of these financial institutions.
The Company's customer base is dispersed across many different geographic
areas throughout the world and consists principally of distributors and dealers
in the electronics industry. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for potential credit losses. The
Company generally receives confirmed letters of credit or cash in advance of
shipping to distributors located outside North America.
Stock based compensation
The Company accounts for stock based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock. The Company
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
Net income (loss) per share
The Company calculates earnings per share in accordance with Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". Basic net
income (loss) per share is calculated by dividing income (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net income (loss) per share is calculated by dividing
net income (loss) available to common shareholders by the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of common stock issuable upon
the exercise of stock options.
H-28
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, payable and other
accrued liabilities approximate fair value due to their short maturities.
Estimated fair values for marketable securities, which are separately disclosed
elsewhere are based on quoted market prices of similar instruments.
Recent accounting pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. Management has evaluated the
effects of this standard and believes there will be no material impact on the
Company's financial position or results of operations. The Company will adopt
SFAS 133 as required for its first quarterly filing of the year 2000.
3. Disposal of subsidiary and business
Sale of Nova Systems
On January 29, 1999, the Company completed the sale of certain assets and
the assumption of certain liabilities related to its sale of Nova Systems
Division ("Nova") to a privately held company in Massachusetts. For the year
ended December 31, 1998, Nova recorded revenues of $1.9 million and a loss from
operations of $248,000. For the year ended December 31, 1997, Nova recorded
revenues of $2.8 million and a loss from operations of $1.4 million, which
included a write-off of $700,000 of non-performing assets. Additionally in 1997,
the Company wrote off $1.9 million of intangibles related to Nova. The sale of
Nova may provide the Company with net revenues from royalties of up to a maximum
of approximately $450,000, contingent upon future sales of Nova products by the
acquiring company. Royalties will be paid, to the extent due, by the acquiring
company on a monthly basis from March 1999 until receipt of approximately
$450,000. The sale of Nova resulted in a $48,000 loss to Videonics. As of
December 31, 1999, royalties of $207,000 have been received.
Sale of the German subsidiary
On September 29, 1999, the Company sold its wholly owned subsidiary in
Germany. The Company's German office was primarily a sales office. Revenue, net
loss and assets employed by the Company's foreign subsidiary were not material
to the consolidated financial statements. The Company recorded a loss of $65,000
in connection with the sale.
4. Balance Sheet Detail
Accounts receivable comprise (in thousands):
December 31,
---------------------
1999 1998
---------- --------
Trade accounts receivable .................... $ 1,016 $ 998
Less allowance for doubtful accounts ......... (130) (146)
------- ------
$ 886 $ 852
------- ------
H-29
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Inventories comprise (in thousands):
December 31,
---------------------
1999 1998
--------- ---------
Raw materials .................. $3,179 $4,381
Work in process ................ 302 375
Finished goods ................. 304 1,074
------ ------
$3,785 $5,830
------ ------
Property and equipment comprise (in thousands):
December 31,
----------------------
1999 1998
---------- ----------
Machinery and equipment ........................ $ 2,909 $ 3,248
Furniture and fixtures ......................... 74 86
Leasehold improvements ......................... 175 179
Tooling ........................................ 1,071 1,015
-------- --------
4,229 4,528
Less accumulated depreciation and amortization . (3,716) (3,021)
-------- --------
$ 513 $ 1,507
-------- --------
Accrued expenses comprise (in thousands):
December 31,
-------------------
1999 1998
-------- --------
Accrued advertising ................. $ 66 $ 163
Accrued vacation .................... 116 180
Salaries payable .................... 166 228
Accrued acquisition reserve ......... 29 239
Warranty reserve .................... 52 77
Interest payable .................... 79 17
Other accrued expenses .............. 226 386
----- ------
$ 734 $1,290
----- ------
5. Note Payable to Shareholder
On April 16, 1999, the Company replaced a $1,000,000 unsecured loan bearing
interest at 8% per year and due on October 16, 1999, with a new loan in the
amount of $1,035,000 bearing interest at a rate of 8% per year and due on
January 16, 2001. The new loan is unsecured and from the same director and
significant shareholder of the Company as the previous loan. Accrued interest
under the new loan is payable at maturity. On March 22, 2000, the April 16, 1999
loan in the amount of $1,035,000 was amended to adjust the maturity date from
January 16, 2001 to January 16, 2002.
H-30
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Commitments and Contingencies
The Company leases a building for its principal facility under an operating
lease which expires on July 31, 2002. Under the terms of the lease, the Company
is responsible for utilities, taxes, insurance and maintenance. At December 31,
1999, future minimum lease payments under all non-cancelable operating leases
were as follows (in thousands):
2000 ......... $ 458,099
2001 ......... $ 435,875
2002 ......... $ 259,875
Rent expense for the years ended December 31, 1999, 1998, and 1997 amounted
to $370,000, $448,000 and $423,000, respectively.
7. Line of Credit
In August 1999, the Company obtained a $1.0 million asset based line of
credit from Venture Banking Group, a division of Cupertino National Bank,
secured by the Company's assets. Interest on any advances will be calculated at
a rate of 1.5% above prime. Under the terms of the agreement, the Company is
required to maintain certain financial ratios and meet other covenants,
including those related to net worth, profitability and indebtedness. The
maturity date of this revolving facility is August 25, 2001. In connection with
this agreement the Company issued 95,000 fully vested warrants to purchase the
Company's common stock to the bank, at an exercise price of $0.65. These
warrants expire on September 15, 2002. The Company recognized $45,000 (the fair
value of the warrants issued using the Black-Scholes model) as prepaid financing
costs during the quarter ended September 1999. This amount is being amortized to
interest expense over the term of the loan. As of December 31, 1999, the Company
had not borrowed from this facility.
8. Income Taxes
The components of the provision for income taxes are as follows (in
thousands):
1999 1998 1997
------ ---------- ----------
Current:
Federal ......... $-- $ -- $ (380)
State ........... -- (30) --
Deferred:
Federal ......... -- -- 995
State ........... -- -- 103
--- ------ ------
$-- $ (30) $ 718
--- ------ ------
H-31
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
The Company's effective tax rate on loss before income tax differs from the
U.S. federal statutory regular tax rate as follows:
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory income tax rate ...................... (34.0)% (34.0)% (34.0)%
State income tax rate, net of federal benefit .......... 0.6 (7.3) (2.9)
Tax exempt interest .................................... -- -- --
Foreign net operating loss ............................. 4.1 (5.4) 1.3
Research tax credits ................................... (4.9) (4.8) (6.4)
Other .................................................. 2.2 (3.8) 1.6
Increase in valuation allowance ........................ 32.0 54.9 46.0
----- ----- -----
--% ( 0.4)% 5.6%
----- ----- -----
</TABLE>
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Intangible assets ............................... $ 1,469 $ 1,464
Inventory reserves .............................. 408 1,322
Depreciation .................................... 45 47
Net operating loss carryforward ................. 6,230 4,487
Tax credit carryforward ......................... 1,636 1,386
Deferred California research .................... 386 442
Other accrued liabilities and reserves .......... 226 405
--------- --------
Subtotal ........................................ 10,400 9,553
Less valuation allowance ........................ (10,400) (9,553)
--------- --------
Net deferred tax asset .......................... $ -- $ --
--------- --------
</TABLE>
At December 31, 1999, the Company has federal and state net operating
losses of $17,200,000 and $4,500,000, respectively, which expire in 2019 and
2014, respectively. The Company also has federal and state tax credit
carryforwards of $1,100,000 and $690,000, respectively, which expire in 2019.
H-32
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if its uncertain that a
tax benefit may be realized from the asset in the future. The Company has
established a valuation allowance to the extent of its deferred tax assets since
it is not certain that a benefit can be realized in the future due to the
Company's operating losses. The Company's valuation allowance increased from
$9,553,000 at December 31, 1998 to $10,400,000 at December 31, 1999.
9. Net Loss Per Share
<TABLE>
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted net income
(loss) per share is provided as follows (in thousands, except per share
amounts):
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Numerator--basic and diluted
Net loss .......................................... $ (2,634) $ (6,713) $ (13,441)
--------- --------- ---------
Net loss available to common stockholders ......... $ (2,634) $ (6,713) $ (13,441)
--------- --------- ---------
Denominator--basic
Weighted average common shares .................... 5,866 5,833 5,744
--------- --------- ---------
Basic net loss per share outstanding .............. $ (.45) $ (1.15) $ (2.34)
--------- --------- ---------
Denominator--diluted
Denominator--basic ................................ 5,866 5,833 5,744
Effect of dilutive securities:
Common stock options ............................. -- -- --
--------- --------- ---------
Diluted weighted average common shares ............... 5,866 5,833 5,744
--------- --------- ---------
Diluted net loss per share ........................ $ (.45) $ (1.15) $ (2.34)
--------- --------- ---------
</TABLE>
10. Shareholders' Equity
At December 31, 1999, the Company has reserved 1,000,000 shares of common
stock for issuance under its 1996 Amended Stock Option Plan. In addition, the
Company has reserved 900,000 shares of common stock for issuance under its 1987
Stock Option Plan ("1987 Plan"). The 1987 Plan had been set to terminate, in
accordance with its terms, on January 1, 1997. Effective May 1997, the Company's
Board of Directors authorized the amendment of the 1987 Plan to permit the grant
of non-statutory stock options previously granted under the 1987 Plan that have
expired or terminated. The Plans provide for the granting of incentive stock
options to officers and employees of the Company and non-qualified incentive
stock options to employees, officers and directors of the Company at prices not
less than the fair market value of the Company's' common stock. Options
generally vest over a four year period and are canceled 90 days after
termination of employment.
<TABLE>
A summary of stock option activity follows:
<CAPTION>
Weighted
Shares Average
Available Number of Number Exercise Exercise
for Grant Shares of Shares Price Total Price
------------- ------------- ------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 ......... 425,340 1,115,179 -- 0.33-14.75 $ 7,079,602 $ 6.38
Options granted .................... (929,534) 929,534 -- 3.81-5.00 4,536,769 4.88
Options canceled ................... 881,362 (881,362) -- 3.81-9.00 (6,987,932) 7.93
Options exercised .................. -- (80,149) -- 0.33-7.50 (154,128) 1.92
-------- --------- --- ------------
Balances, December 31, 1997 ......... 377,168 1,083,202 -- 0.33-8.88 4,474,311 4.17
Options granted .................... (871,354) 871,354 640,000 0.75-2.50 2,514,626 1.66
Options canceled ................... 925,657 (925,657) (320,000) 0.47-7.50 (4,978,895) 4.00
Options exercised .................. -- (73,250) 0.47 (34,183) 0.47
-------- --------- ------------
Balances, December 31, 1998 ......... 431,471 955,649 320,000 0.47-8.88 1,975,859 1.58
Options granted .................... (348,124) 348,124 -- 0.38-0.88 213,567 0.61
Options canceled ................... 422,609 (422,609) (200,000) 0.38-5.00 (985,131) 1.58
Options exercised .................. -- (15,950) -- 0.47-0.75 (7,656) 0.48
-------- --------- -------- ------------
Balances, December 31, 1999 ......... 505,956 865,214 120,000 $ 0.38-$8.88 $ 1,196,639 $ 1.21
-------- --------- -------- ------------
</TABLE>
H-33
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Compensation of approximately $114,000 had been attributed to stock options
granted after March 1994 and prior to the sale of the Company's common stock in
an initial public offering. The compensation was recognized as a charge to
income over the three-year vesting period commencing in October 1994 and
terminating in September 1997.
In March 1998, the Company granted a nonqualified stock option to an
officer of the Company to purchase a total of 320,000 shares of common stock.
The option was granted outside the Company's stock option plans, at an exercise
price of $2.13 per share, the fair market value of the Company's Common Stock on
the relevant date. On June 24, 1998, the Company offered employees the right to
cancel certain outstanding stock options at original exercise prices and receive
new options with a new exercise price. In accordance with this offer, the option
was canceled and reissued at an exercise price of $1.50 per share, the fair
market value of the stock on June 24, 1998. Vesting of the new option will
follow the original option vest schedule except the option will remain unvested
until June 24, 1999 at which time vesting of new option will vest according to
the original vest schedule. This option is exercisable for a term of ten years,
vests over a four-year period and is cancelled 90 days after termination of
employment. As of December 31, 1999, options to purchase 120,000 shares were
exercisable.
On August 19, 1997, the Company offered employees the right to cancel
certain outstanding stock options at original exercise prices and receive new
options with a new exercise price. Options to purchase a total of 733,072 shares
at original exercise prices ranging from $7.50 to $14.75 per share were canceled
and new options were issued at an exercise price of $5.00 per share, the fair
market value of the stock on August 19, 1997. Vesting under the new options
commenced on the date of the original options first vest date with an additional
year added to the new options vesting period, increasing their original vesting
period from three years to four years.
On June 24, 1998, the Company offered employees the right to cancel certain
outstanding stock options at original exercise prices and receive new options
with a new exercise price. Options to purchase a total of 669,222 shares at
original exercise prices ranging from $2.50 to $5.00 per share were canceled and
new options were issued at an exercise price of $1.50 per share, the fair market
value of the stock on June 24, 1998. Vesting of the new options will follow the
original options vest schedule except options will remain unvested until June
24, 1999 at which time vesting of new options will vest according to the
original options vest schedule.
<TABLE>
Had compensation cost for the years ended December 31, 1999, 1998 and 1997
been determined based on the fair value at the grant date, consistent with the
provisions of SFAS No. 123 and been included in the Company's operations, the
Company's net loss and net loss per share for the years ended December 31, 1999,
1998 and 1997 would have been reduced to the pro forma amounts indicated below:
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net loss--pro forma .............. $ (3,154) $ (7,802) $ (15,557)
--------- --------- ----------
Net loss per share--basic ........ $ (.54) $ (1.34) $ (2.71)
--------- --------- ----------
Net loss per share--diluted ...... $ (.54) $ (1.34) $ (2.71)
--------- --------- ----------
</TABLE>
The impact on pro forma loss and pro forma net loss per share in the table
above may not be indicative of the effect in the future years as options vest
over several years and the Company continues to grant stock options to
employees. This policy may or may not continue.
H-34
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997
was $0.58, $1.40 and $2.22, respectively. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option pricing model
with the following weighted average assumptions by subgroup:
<CAPTION>
1999 1998 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Risk-free interest rate ...... 5.36%-6.38% 4.45%-5.61% 5.71-6.09%
Expected life ................ 7 5 5
Expected dividends ........... -- -- --
Volatility ................... 1.41 1.19 0.75
</TABLE>
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of the Company's employees. The risk-free
interest rate was calculated in accordance with the grant date and estimated
expected life.
<TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<CAPTION>
Options Currently
Options Outstanding Exercisable
------------------------------------------- ----------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1999 Life Price 1999 Price
---------------- -------------- ------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$0.38-$0.47 216,968 6.91 $ 0.41 81,648 $ 0.47
$0.50-$1.13 193,170 9.09 $ 0.78 36,368 $ 0.78
$1.50-$1.50 536,018 8.48 $ 1.50 476,256 $ 1.50
$2.50-$8.88 39,058 7.70 $ 3.92 24,868 $ 4.58
------- -------
985,214 8.22 $ 1.21 619,140 $ 1.45
------- -------
</TABLE>
11. Segment Information
In 1998, Videonics adopted SFAS 131. Prior years segment information has
been restated to present Videonics' two reportable segments--(1) Video
Production and (2) Signal Processing.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Videonics evaluates the
performance of its segments based on revenue and operating income.
Videonics is organized primarily on the basis of three separate product
lines. Two of its product lines have been aggregated into the "Video Production"
segment. This segment manufactures and sells video post-production equipment
into broadcast, cable, industry and home producer markets. "Signal Processing"
represented the Company's Nova Division that manufactured and sold signal
conversion and processing equipment primarily into television and cable studios.
The Company sold its Nova Division on January 29, 1999.
The table below presents information about reported segments for the years
ending December 31, (in thousands):
1999 1998 1997
------------- ----------- -----------
Video Production
Sales ............................ $ 14,135 $ 17,750 $ 17,149
Operating loss ................... (2,527) (6,474) (9,339)
Signal Processing
Sales ............................ 91* 1,922 2,806
Operating loss ................... (36)* (248) (1,389)
Reconciling items ................ -- -- (2,256)
------------
*Results presented are through January 29, 1999, the date the Company completed
its sale of Nova.
H-35
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the year ended December 31, 1997, reconciling items of $2,256,000
relate to the amortization and write-off of intangible assets.
The Company markets and services it products in North America through its
own direct sales organization. The Company markets its products in foreign
countries outside North America through distributors.
<TABLE>
Geographic net export sales information is shown below (in thousands):
<CAPTION>
December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States ......................... $10,149 $12,665 $13,317
Europe ................................ 1,325 2,662 2,007
Asia .................................. 2,034 2,772 2,637
Americas (excluding the United States) 718 1,573 1,994
------- ------- -------
$14,226 $19,672 $19,955
------- ------- -------
</TABLE>
For the years ended December 31, 1998 and 1997, no one customer accounted
for more that 10% of revenues during the periods. For the year ended December
31, 1999, one customer accounted for 13% of annual revenue. The Company has no
significant assets in foreign countries.
12. 401(k) Plan
In August 1994, the Company adopted a 401(k) employee savings plan wherein
the employee can contribute up to specified Internal Revenue Code limits and the
Company matches, at a rate of 50%, the first $200 of the employee's contribution
per quarter. The employee's entitlement to the Company matching contributions is
fully vested on the date of contribution. The Company, at its sole discretion
and with the Board of Directors' approval, can make an additional discretionary
contribution. To date, the Company has not made discretionary contributions. The
Company's matching contributions charged against income totaled approximately
$26,000, $39,000 and $51,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
H-36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the directors and executive officers of the Company
is incorporated herein by reference from the information contained under the
caption "Election of Directors" with respect to directors and under the caption
"Management" with respect to executive officers, contained in the Company's
Proxy Statement (the "Proxy Statement") relating to its 2000 Annual Meeting of
Shareholders to be held on or about August 17, 2000. Information regarding
compliance with the reporting requirements under Section 16(a) of the Securities
and Exchange Act of 1934, as amended is incorporated herein by reference from
the information under the caption "Executive Compensation - Compliance with
Section 16(a) of the Securities and Exchange Act of 1934" in the Proxy
Statement. The Proxy Statement will be filed with the Securities and Exchange
Commission in accordance with Rule 14a-6(b) promulgated under the Securities
Exchange Act of 1934. With the exception of the foregoing information and other
information specifically incorporated by reference into this Report, the Proxy
Statement is not being filed as a part hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
from the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
from the information under the caption "Certain Transactions" contained in the
Proxy Statement.
H-37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are filed as part of this report:
-- Report of Independent Accountants
-- Balance Sheets at December 31, 1999 and 1998
-- Statements of Operations for the Years Ended December 31, 1999, 1998,
and 1997
-- Statement of Shareholders' Equity for the Years Ended December 31,
1999, 1998, and 1997
-- Statements of Cash Flows for the Years Ended December 31, 1999, 1998,
and 1997
-- Notes to Financial Statements
2. Financial Statement Schedules
The following financial statement schedule is included in Item 14(d):
Schedule Title
--------------- ----------------------------------
Schedule II Valuation and Qualifying Accounts
Schedules other than the one listed above have been omitted since the
required information is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the
financial statements or notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit No.
------------
<S> <C>
3.01 Amended and Restated Articles of Incorporation of Videonics, Inc., dated December 19, 1994. (3)
3.02 Amended and Restated Bylaws of Videonics, Inc. as Adopted by the Board of Directors on
October 27, 1994. (3)
4.01 Warrant to Purchase Stock between Venture Bank and Videonics Inc., dated September 15, 1999.
(11)
4.02 Holder Rights Agreement between Venture Bank and Videonics Inc., dated September 15, 1999.
(11)
10.01 Lease, dated July 6, 1994 between H-K Associates and Videonics, Inc. at 1370 Dell Avenue,
Campbell, California. (1)
10.02 Lease, dated September 27, 1995 between Canton Gateway Office Park and Videonics, Inc. at 50
Albany Turnpike, Canton, Connecticut. (4)
10.03 Sublease, dated July 11, 1996 between Diba, Inc. and Videonics, Inc. at 270 Harbor Boulevard,
Belmont, California. (4)
10.04 Stock Option Plan, and related agreements. (2)
10.05 Asset Purchase Agreement relating to the acquisition of Nova Systems, Inc., by Videonics, Inc.,
dated September 7, 1995. (5)
10.06 Asset Purchase Agreement relating to the acquisition of KUB Systems, Inc., by Videonics, Inc.,
dated May 24, 1996. (6)
10.07 Letter of Employment Agreement with Steve L. Peters. (4)
10.08 Promissory Note issued in connection with loan by Videonics, Inc. to Steve L. Peters. (4)
10.09+ Letter of Employment Agreement with Yeshwant Kamath dated November 17, 1997. (7)
10.10 Loan agreement issued in connection with a loan by Carl Berg to Videonics, Inc. dated
October 16, 1998. (8)
10.11 Key Employee Agreement between Jeffrey Burt and Videonics dated February 25, 1999. (9)
10.12 Key Employee Agreement between James McNeill and Videonics dated February 25, 1999. (9)
10.13 Key Employee Agreement between Gary Williams and Videonics dated February 25, 1999. (9)
10.14 Promissory Note between Carl Berg and Videonics Inc. dated April 16, 1999. (10)
10.15 Loan and Security Agreement between Venture Bank and Videonics dated August 25, 1999. (11)
</TABLE>
H-38
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
------------
<S> <C>
10.16 Intellectual Property Security Agreement between Venture Bank and Videonics dated August 25,
1999. (11)
10.17 Subordination Agreement between Venture Bank and Videonics dated August 25, 1999. (11)
10.18 Second Addendum to lease, dated July 6, 1994 between H-K Associates and Videonics, Inc. at
1370 Dell Avenue, Campbell, California dated April 27, 1999.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K with the Commission during the
fiscal quarter ended December 31, 1999.
<FN>
------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(No. 33-85734) as declared effective by the Commission on December 15,
1994, and incorporated herein by reference.
(2) Incorporated by reference to Registration Statement (No. 333-21003) on
Form S-8.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
September 7, 1995, and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Current Report on Form 8-K dated June
6, 1996, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1999, and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1999, and incorporated herein by reference.
+ Confidential treatment has been requested with respect to certain portions
of this Exhibit. Such portions have been omitted and have been filed
separately with the Securities and Exchange Commission.
</FN>
</TABLE>
H-39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 27th day of
March, 2000.
VIDEONICS, INC.
By: /s/ Michael L. D'Addio
---------------------------------------
Michael L. D'Addio
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signature Title Date
-------------------------------- ------------------------------------------- ---------------
<S> <C> <C>
/s/ Michael L. D'Addio Chairman of the Board and Chief Executive March 27, 2000
--------------------------- Officer (Principal Executive Officer)
Michael L. D'Addio
/s/ Gary L. Williams Vice President of Finance, and Chief March 27, 2000
--------------------------- Financial Officer (Principal Financial
Gary L. Williams Officer and Principal Accounting Officer)
/s/ Mark C. Hahn Director March 28, 2000
---------------------------
Mark C. Hahn
/s/ Carl E. Berg Director March 27, 2000
---------------------------
Carl E. Berg
/s/ N. William Jasper, Jr. Director March 27, 2000
---------------------------
N. William Jasper, Jr.
</TABLE>
H-40
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
APPENDIX I
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 0-25036
VIDEONICS, INC.
(Exact name of registrant as specified in its charter)
California
-----------------------------------
(State or other jurisdiction of
incorporation or organization)
77-0118151
-----------------------------------
(I.R.S. Employer
Identification No.)
1370 Dell Ave, Campbell, California 95008
-----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 866-8300
Indicate by check mark whether the registrant (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 shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2000, there were 5,902,550 shares of the Registrant's
Common Stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIDEONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net revenues ......................................... $ 3,096 $ 3,842 $ 9,087 $ 10,901
Cost of revenues ..................................... 1,885 2,196 5,538 6,333
-------- -------- --------- ---------
Gross profit .................................... 1,211 1,646 3,549 4,568
-------- -------- --------- ---------
Operating expenses:
Research and development .......................... 543 629 1,619 2,252
Selling and marketing ............................. 747 1,017 2,275 3,166
General and administrative ........................ 261 245 758 1,011
-------- -------- --------- ---------
1,551 1,891 4,652 6,429
-------- -------- --------- ---------
Operating loss .................................. (340) (245) (1,103) (1,861)
-------- -------- --------- ---------
Interest expense, net ................................ (38) (16) (91) (44)
-------- -------- --------- ---------
Net loss ........................................ $ (378) $ (261) $ (1,194) $ (1,905)
======== ======== ========= =========
Net loss per common share--basic and diluted ......... $ (0.06) $ (0.04) $ (0.20) $ (0.32)
======== ======== ========= =========
Shares used in computing net loss per common
share--basic and diluted ............................ 5,901 5,869 5,896 5,865
======== ======== ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
I-2
<PAGE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 474 $ 715
Accounts receivable, net .......................................... 975 886
Inventories ....................................................... 3,506 3,785
Prepaids and other current assets ................................. 176 145
--------- ---------
Total current assets ............................................ 5,131 5,531
Property and equipment, net .......................................... 299 513
Other assets ......................................................... 42 45
--------- ---------
Total assets .................................................... $ 5,472 $ 6,089
========= =========
LIABILITIES
Current liabilities:
Accounts payable .................................................. $ 1,177 $ 974
Accrued expenses .................................................. 683 734
Notes Payable ..................................................... 400 --
--------- ---------
Total current liabilities ....................................... 2,260 1,708
--------- ---------
Long term liabilities:
Loan payable to shareholder ....................................... 1,035 1,035
--------- ---------
Total liabilities ............................................... 3,295 2,743
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 30,000 shares Issued and outstanding: 5,903 shares at
September 30, 2000 and 5,874 shares at December 31, 1999 ......... 20,725 20,700
Accumulated deficit .................................................. (18,548) (17,354)
--------- ---------
Total shareholders' equity ...................................... 2,177 3,346
--------- ---------
Total liabilities and shareholders' equity ................... $ 5,472 $ 6,089
========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
I-3
<PAGE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities ........................ (499) (198)
------ ------
Cash flows from investing activities: .............................
Proceeds from disposition of Nova Systems ...................... -- 52
Purchase of property and equipment ............................. (167) (92)
------ ------
Net cash used in investing activities ........................ (167) (40)
------ ------
Cash flows from financing activities:
Proceeds from short term borrowings ............................ 400 --
Proceeds from issuance of loans payable to shareholder ......... -- 35
Proceeds from issuance of common stock ......................... 25 5
------ ------
Net cash provided by financing activities .................... 425 40
------ ------
Decrease in cash and cash equivalents ............................. (241) (198)
Cash and cash equivalents at beginning of year .................... 715 837
------ ------
Cash and cash equivalents at end of period ........................ $ 474 $ 639
====== ======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
I-4
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed financial statements at September 30, 2000 and for the nine
month period then ended for Videonics Inc. (the "Company") are unaudited
(except for the balance sheet information as of December 31, 1999, which is
derived from the Company's audited financial statements) and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
financial statements should be read in conjunction with the financial
statements and notes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The results of operations for this nine month period ended September 30, 2000
are not necessarily indicative of the results for the year ending December
31, 2000, or any future interim period.
2. On August 30, 2000 the Company entered into an Agreement and Plan of Merger
with Focus Enhancements, Inc., Wilmington, Massachusetts and its wholly owned
subsidiary PC Video Conversion (collectively, "Focus"), whereby Focus will
acquire all of the outstanding stock of the Company (the "Merger"). The
agreement is subject to, among other things, approval by the shareholders of
the Company and Focus. Upon completion of the Merger, each share of the
Company's common stock would be exchanged for .87 shares of Focus common
stock.
3. Inventories comprise (in thousands):
Sept. 30, Dec. 31,
2000 1999
------------ ---------
(unaudited)
Raw materials ........... $ 2,651 $3,179
Work in process ......... 687 302
Finished goods .......... 168 304
------- ------
$ 3,506 $3,785
======= ======
4. Note Payable to Shareholder:
On April 16, 1999, the Company replaced a $1,000,000 unsecured loan bearing
interest at 8% per year and due on October 16, 1999, with a new unsecured
loan in the amount of $1,035,000 bearing interest at a rate of 8% per year
and due on January 16, 2001. The new loan is from the same director and
significant shareholder of the Company as the previous loan. Accrued interest
under the new loan is payable at maturity. On March 22, 2000, the loan in the
amount of $1,035,000 was amended to change the maturity date from January 16,
2001 to January 16, 2002.
5. Disposal of Subsidiary and Business
Sale of Nova Systems
On January 29, 1999, the Company completed the sale of certain assets and the
assumption of certain liabilities related to the sale of its Nova Systems
Division ("Nova") to a privately held company in Massachusetts. For the year
ended December 31, 1998, Nova recorded revenues of $1.9 million and a loss
from operations of $248,000. The sale of Nova may provide the Company with
net revenues from royalties of up to a maximum of approximately $450,000,
contingent upon future sales of Nova products by the acquiring company.
Royalties will be paid, to the extent due, by the acquiring company on a
monthly basis from March 1999 until receipt of approximately $450,000. The
sale of Nova resulted in a $48,000 loss to the Company. As of September 30,
2000, royalties of $387,000 have been received.
Sale of the German Subsidiary
On September 29, 1999, the Company sold its wholly owned subsidiary in
Germany. The Company's German subsidiary was primarily a sales office.
Revenue, net loss and assets employed by the Company's foreign subsidiary
were not material to the consolidated financial statements. The Company
recorded a loss of $65,000 in connection with the sale.
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<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Segment Information:
In 1998, Videonics adopted SFAS 131. At December 31, 1998, Videonics
presented two reportable segments--(1) Video Production and (2) Signal
Processing.
The Company's "Video Production" segment manufactures and sells video
post-production equipment into broadcast, cable, industry and home producer
markets. The Company's "Signal Processing" segment, which was represented by
the Company's Nova Systems Division, manufactured and sold signal conversion
and processing equipment primarily into television and cable studios. As
described in Note 4, the Company's Nova Systems Division ("Signal Processing"
segment) was sold on January 29, 1999.
The table below presents information about reported segments for the nine
months ending September 30, 2000 and 1999 (in thousands):
2000 1999
----------- --------------
Video Production
Sales .................. $ 9,087 $10,810
Operating loss ......... (1,103) (1,825)
Signal Processing
Sales .................. -- 91 (1)
Operating loss ......... -- (36)(1)
----------------
(1) Results presented are through January 29, 2000, the date the Company
completed its sale of Nova.
7. Line of Credit
In August 1999, the Company obtained a $1.0 million asset based line of credit
from Venture Banking Group, a division of Cupertino National Bank, secured by
the Company's assets. Interest on any advances will be calculated at a rate
of 1.5% above prime. Under the terms of the line of credit, the Company is
required to maintain certain financial ratios and meet other covenants,
including those related to net worth, profitability and indebtedness. The
maturity date of the line of credit is August 25, 2001. In connection with
this agreement the Company issued to the Venture Banking Group a fully-vested
warrant to purchase 95,000 shares of the Company's common stock at an
exercise price of $0.65. This warrant expires on September 15, 2002. The
Company recognized $45,000 (the fair value of the warrant issued using the
Black-Scholes model) as prepaid financing costs during the quarter ended
September 1999. This amount is being amortized to interest expense over the
term of the loan. At September 30, 2000 Videonics was in default respect to
with a certain covenants under the line of credit with Venture Banking Group.
As of November 13, 2000, Videonics and Pacific Business Funding, an affiliate
of Venture Banking Group, had signed an agreement to repay Venture Banking
Group and in turn loan Videonics $400,000 on a fully secured basis. Interest
will be calculated at a rate of 12%. The loan will be due and payable at the
earlier of the completion of the proposed merger with Focus Enhancements,
Inc., or February 5, 2001. As of November 13, 2000, an aggregate of $400,000
is outstanding under the line of creidt with Venture Banking Group.
8. Comprehensive Loss
There are no differences between net loss for the three and nine months ended
September 30, 1999 and 2000 and the comprehensive loss for the these periods.
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<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Recent Accounting Pronouncement:
In June of 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
(SFAS 133) which establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management
has evaluated the effects of this standard and believes there will be no
material impact on the Company's financial position or results of operations.
The Company will adopt SFAS 133 as required for its first quarterly filing in
the year 2001.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB Opinion
No. 25 ("FIN 44"). FIN 44 establishes guidance for the accounting for stock
option grants or modifications to existing stock options awards and is
effective for option grants made after June 30, 2000. FIN 44 also establishes
guidance for the repricing of stock options and determining whether a grantee
is an employee, for which the guidance was effective after December 15, 1998
and modifying a fixed option to add a reload feature, for which the guidance
was effective after January 12, 2000. The Company does not expect that the
adoption of the remaining provisions will have a material effect on the
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of revenue
in financial statements filed with the Securities and Exchange Commission.
SAB 101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies.
SAB 101 is effective for the fiscal quarter beginning October 1, 2000,
however earlier adoption is permitted. Management has evaluated the effects
of this standard and believes there will be no material impact on the
Company's financial position or results of operations.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion in this section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements regarding market
opportunities, market share growth, competitive growth, new product
introductions, success of research and development expenses, customer acceptance
of new products, gross margin and selling, general and administrative expenses.
These forward-looking statements involve risks and uncertainties, and the
cautionary statements set forth below, specifically those contained in "Factors
That May Affect Future Results of Operations," identify important factors that
could cause actual results to differ materially from those predicted in any such
forward-looking statements. Such factors include, but are not limited to,
adverse changes in general economic conditions, including adverse changes in the
specific markets for the Company's products, adverse business conditions,
decreased or lack of growth in the market for video post-production equipment,
adverse changes in customer order patterns, increased competition, lack of
acceptance of new products, pricing pressures, lack of success in technological
advancements, risks associated with foreign operations, and other factors.
Recent Events
On August 30, 2000 the Company entered into an Agreement and Plan of Merger
with Focus Enhancements, Inc., Wilmington, Massachusetts and its wholly owned
subsidiary PC Video Conversion (collectively, "Focus"), whereby Focus will
acquire all of the outstanding stock of the Company (the "Merger"). The
agreement is subject to, among other things, approval by the shareholders of the
Company and Focus. Upon completion of the Merger, each share of the Company's
common stock would be exchanged for .87 shares of Focus common stock.
Results of Operations
Net Revenues. Net revenues decreased approximately 19% in the third quarter
of 2000 compared to the third quarter of 1999 and 17% in the first nine months
of 2000 compared to the first nine months of 1999. The decrease in revenue was
due primarily to a decrease in sales of the Company's older videographer
products offset slightly by shipments of CommandPost and StudioSketch, which
began shipping during the last days of March 2000.
Gross Profit. Gross profit decreased approximately 26% in the third quarter
of 2000 compared to the third quarter of 1999 and 22% in the first nine months
of 2000 compared to the first nine months of 1999. Gross profit, as a percentage
of net revenues, was approximately 39% in the third quarter of 2000 compared to
approximately 43% in the third quarter of 1999 and approximately 39% in the
first nine months of 2000 compared to approximately 42% in the first nine months
of 1999. The decrease in gross profit as a percentage of revenues is due
primarily to lower margins on some of the Company's older products and
manufacturing costs spread over lower revenues.
Research and Development. Research and development expenses decreased 14%
and 28%, respectively, between the quarterly and nine-month comparison periods
in fiscal years 1999 and 2000. The decrease is primarily due to a decrease in
personnel.
Selling and Marketing. Selling and marketing expenses decreased 27% between
the third quarter of 1999 and the third quarter of 2000 and decreased 28%
between the first nine months of 1999 and the first nine months of 2000. The
decrease is primarily due to a decrease in personnel and reduced advertising
expenses.
General and Administrative. General and administrative expenses increased
7% between the third quarter of 1999 and the third quarter of 2000 and decreased
25% between the first nine months of 1999 and the first nine months of 2000. The
increase between quarterly periods is primarily due to a legal expense related
to the merger. The decrease between nine month period is primarily due to a
decrease in personnel, a delay in the timing of the annual shareholders meeting
partially offset by an increase in legal expenses.
Other Income/Expense, net. The Company recorded interest expense of $38,000
in the third quarter of 2000 compared to interest expense of $16,000 in the
third quarter of 1999. The increase in expense is primarily due to interest
expense calculated on higher borrowings during the period.
I-8
<PAGE>
Income Taxes. During the first nine months of 2000 and 1999, the Company
maintained a 100% valuation allowance against its deferred tax assets due to the
uncertainty surrounding the realization of such assets. If it is determined that
it is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced.
Factors That May Affect Future Results of Operations: The Company believes
that in the future its results of operations could be impacted by factors such
as delays in development and shipment of the Company's new products and major
new versions of existing products, market acceptance of new products and
upgrades, growth in the marketplace in which it operates, competitive product
offerings, and adverse changes in general economic conditions in any of the
countries in which the Company does business. The Company's results in prior
years have been affected by these factors, particularly with respect to
developing and introducing new products such as MXPro, Effetto Pronto and
MXProDV in 1997, 1998 and 1999.
Due primarily to the factors noted above, the Company has experienced
substantial volatility in its operations. The Company's future earnings and
stock price may continue to be subject to significant volatility, particularly
on a quarterly basis. Any shortfall in revenue or earnings from levels expected
by securities analysts or anticipated by the Company based upon product
development and introduction schedules could have an immediate and significant
adverse effect on the trading price of the Company's common stock in any given
period. Additionally, the Company may not learn of such shortfalls until late in
the fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's common stock. The Company may also
require additional financing which may not be available at all or only upon
terms that are not acceptable to the Company. Finally, the Company participates
in a highly dynamic industry, which often results in significant volatility of
the Company's common stock price. See the Company's 1999 Form 10-K section
entitled "Business--Research and Development".
Liquidity and Capital Resources
Net cash used by operations was $499,000 for the nine months ended
September 30, 2000 compared to net cash used in operations of $198,000 for the
same period in 1999. The use of cash from operating activities during the first
nine months of 2000 is primarily due to a net loss before depreciation, offset
partially by a decrease in inventory and an increase in accounts payable. The
use of cash from operating activities during the first nine months of 1999 is
primarily due to a net loss before depreciation, an increase in accounts
receivable, offset partially by a decrease in inventory and an increase in
accounts payable. Net cash used by investing activities for the first nine
months ended September 30, 2000 was $167,000 due to property and equipment
expenditures, primarily for computers, software and engineering equipment used
in research and development and other activities. Net cash used by investing
activities for the first nine months ended September 30, 1999 was $40,000, as
the Company received $52,000 in connection with the sale of Nova, offset by
property and equipment expenditures, primarily for computers, software and
engineering equipment used in research and development and other activities. Net
cash provided by financing activities during the nine months of 2000 was
$425,000, as the Company borrowed $ 400,000 from its bank line of credit and
received cash of $25,000 from the exercise of stock options issued under the
Company's Stock Option Plans. Net cash provided by financing activities during
the nine months of 1999 was $40,000, primarily due to the receipt of cash from
the exercise of the stock options issued under the Company's Stock Option Plans
and an increase in shareholder loans.
Videonics has incurred losses and negative cash flows from operations for
each of the two years in the period ended June 30, 2000 and is dependent upon
support from a substantial shareholder, a line of credit from a bank and upon
generating sufficient revenues from existing and soon to be released products in
order to fund operations. During 1999, management took steps to further reduce
costs, including the sale of its Nova Systems Division, and its German
subsidiary, both of which had incurred losses in the two years immediately
preceding their sale. Videonics is assessing its product lines to identify how
to enhance existing or create new distribution channels. During the first
quarter of 2000, Videonics introduced three new products. Two of those products
began shipping late in the first quarter with the third product shipping in
July. Although there can be no assurances, Videonics is currently developing and
expects to introduce two more products during the first half of 2001.
As described in the notes to the consolidated financial statements, the
Company has obtained a $1.0 million asset based line of credit from Venture
Banking Group, a division of Cupertino National Bank, secured by
I-9
<PAGE>
substantially all of the Company's assets. Interest on any advances will be
calculated at a rate of 1.5% above prime. Under the terms of the credit
agreement, the Company is required to maintain certain financial ratios and meet
other covenants, including those related to net worth, profitability and
indebtedness. At September 30, 2000 Videonics was in default with respect to
certain covenants under the line of credit with Venture Banking Group. As of
November 13, 2000, Videonics and Pacific Business Funding, an affiliate of
Venture Banking Group, had signed an agreement to repay Venture Banking Group
and in turn loan Videonics $400,000 on a fully secured basis. Interest will be
calculated at a rate of 12%. The loan will be due and payable at the earlier of
the completion of the proposed merger with Focus Enhancements, Inc., or February
5, 2001. As of November 13, 2000, an aggregate of $400,000 is outstanding under
the line of creidt with Venture Banking Group.
The Company believes that its current cash, borrowings from both a
shareholder and its bank line of credit, together with its operating cash flows,
will be sufficient to meet the Company's requirements for working capital, and
capital expenditures through the end of 2000. However, if the Company does
require additional financing there can be no assurances that such additional
financing will be available at all or on terms that are acceptable to the
Company.
Item 3. Quantitative and Qualitative Disclosure about Market Risk The Company's
market risk disclosures pursuant to Item 3 are not material
and are therefore not required.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated August 30, 2000 with
respect to the announcement of its signing an Agreement and Plan of
Merger with Focus Enhancements, Inc., and its wholly-owned subsidiary,
PC Video Conversion.
I-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 13, 2000 VIDEONICS, INC.
--------------------- ---------------------------------
Date Registrant
By: /s/ Gary L. Williams
---------------------------------
Gary L. Williams
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting
Officer and Authorized Signer)
I-11
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The General Corporation Law of the State of Delaware permits a
corporation to indemnify its directors, officers, employees and agents for any
liability arising out of an action or threatened action, other than an action by
or in the right of the corporation, to which such person is a party due to his
or her service as a director, officer, employee or agent, provided that such
person acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation, and with respect
to any criminal action, which he or she had no reason to believe was unlawful.
The General Corporation Law of the State of Delaware permits a corporation to
indemnify its directors, officers, employees and agents for any liability
arising out of an action or threatened action by or in the right of the
corporation to which such person is a party due to his or her service as a
director, officer, employee or agent, provided that such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation, except that there may be no such
indemnification if the person is found liable to the corporation unless, in such
a case, the court determines that such person is entitled to indemnification.
Focus' Certificate of Incorporation provides for the indemnification of its
directors and officers.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
Item 21. Exhibits and Financial Statement Schedules
(a) The following documents have been previously filed as Exhibits and
are incorporated herein by reference except those exhibits indicated with an
asterisk which are filed herewith:
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger dated as of August 30, 2000 among
Focus, Videonics, and PC Video Conversion (included as
Appendix A to this Registration Statement) (19)
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<PAGE>
3.1 Second Restated certificate of incorporation of Focus (1)
3.2 Certificate of Amendment to Second Restated certificate of
Incorporation of Focus (3)
3.3 Restated By-laws of Focus (1)
4.1 Specimen certificate for Common Stock of Focus (1)
4.2 Specimen certificate for Redeemable Common Stock Purchase
Warrant (1)
4.3 Form of Warrant Agreement between Focus, Mellon Securities
Trust Company and Thomas James Associates, Inc. (1)
4.4 Form of Warrant issued to Thomas James Associates, Inc. (1)
5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC
regarding legality of shares of Focus common stock to be
registered under this Registration Statement on Form S-4*
8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC
regarding certain tax matters related to the merger*
10.1 Amended and Restated Employment Contract between Focus 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 Non-Qualified Stock Option Agreement, as amended,
under the 1992 Stock Option Plan, as amended (1)
10.5 1993 Non-Employee Director Stock Option Plan (4)
10.6 Form of Non-Qualified Stock Option Agreement under the 1993
Non-Employee director Stock Option Plan (4)
10.7 Credit Agreement between Focus, 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 Focus and Lapis to the order
of Silicon Valley Bank (4)
10.9 Security Agreement, dated as of January 20, 1994, by Focus 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 Focus in
favor of Silicon Valley Bank (4)
10.12 Purchase and Sale Agreement, dated as of May 25, 1994, between
Focus and Inline Software, Inc. (5)
10.13 Master Purchase Agreement, dated as of August 12, 1994,
between Focus and Apple Computer, Inc. (5)
10.14 Forbearance Letter, dated as of October 6, 1994, to Focus from
Silicon Valley Bank (5)
10.15 Note and Warrant Subscription Agreement, dated as of October
18,1994, between Focus and a Private Lender (5)
10.16 Security Agreement, dated as of October 18, 1994, between
Focus and a Private Lender (5)
10.17 Term Line of Credit Note, dated October 18, 1994, by Focus in
favor of a Private Lender (5)
10.18 Warrant W-K issued to a Private Lender, dated as of October
18, 1995 (5)
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<PAGE>
10.19 Intercreditor and Subordination Agreement, dated as of October
18, 1994, by and between Focus, a Private Lender and Silicon
Valley Bank (5)
10.20 Debt Extension Agreement, dated as of February 22, 1995, by
and between Focus and a Private Lender (5)
10.21 1995 Non-Employee Director Stock Plan (7)
10.22 Form of Non-Qualified Stock Option Agreement under the .995
Non-Employee Director Stock Plan (6)
10.23 Form of Settlement Agreement between Focus and Lapis
Technologies, Inc. Shareholders (7)
10.24 Manufacturing Agreement between Focus and a manufacturer (7)
10.25 Loan Document Modification Agreement dated as of April 5, 1996
by and between Focus, 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)
10.27 Amendment No. 2 to the Note and Warrant Subscription Agreement
dated as of June 28, 1996 between Focus 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 Focus 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 Focus and a
manufacturer (8)
10.32 Security Agreement dated as of June 28, 1996 between Focus and
a manufacturer (8)
10.33 Amendment to Master Purchase Agreement between Focus and TV
OEM. (10)
10.34 Lease Agreement between Focus 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 Focus, FOCUS Acquisition Corp., and Tview, Inc. (9)
10.36 Form of Stock Subscription Agreement between Focus and various
investors in the December 95 Offering (11)
10.37 Form of Amendment No. 1 to Stock Subscription Agreement dated
April 1996 between Focus 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 Focus and various
investors in the March 97 Offering (11)
10.40 Form of Warrant issued to the placement agent in the March 97
Offering (ii)
10.41 1997 Director Stock Option Plan (12)
10.42 Form of Director Stock Option Agreement (12)
10.43 Key Officer Non-Qualified Stock Option Agreement for a
Corporate Officer (12)
10.44 Key Officer Non-Qualified Stock Option Agreement for a
Corporate Officer (12)
10.45 Key Officer Non-Qualified Stock Option Agreement for a
Corporate Officer (12)
10.46 Subscription Agreement between Focus and Smith Barney
Fundamental Value Fund, Inc. dated September 8, 1997 (13)
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<PAGE>
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
10.49 Common Stock and Warrants Purchase Agreement with AMRO
International, S.A. (14)
10.50 Form of Stock Purchase Warrant issued to ANRO International,
S.A. (included as Exhibit A to the Common Stock and Warrants
Purchase Agreement). (14)
10.51 Form of Registration Rights Agreement with AMRO International,
S.A. (included as Exhibit B to the Common Stock and Warrants
Purchase Agreement. (14)
10.52 Registration Rights Agreement dated as of July 29, 1998
between Focus and PC Video Conversion, Inc. (15)
10.53 Form of Common Stock Purchase Warrant issued to Brian Swift
and Edward Price. (16)
10.54 Common Stock Purchase Warrant issued to Silicon Valley Bank.
(16)
10.55 Common Stock and Warrant Purchase Agreement, as amended, with
BNC Bach International Ltd., INC (17).
10.56 Form of Stock Purchase Warrant issued to BNC Bach
International, Inc. (included as Exhibit A to the Common Stock
and Warrant Agreement (17).
10.57 Form of Registration Rights Agreement with BNC Bach
International Ltd., Inc. (included as Exhibit B to the Common
Stock and Warrant Purchase Agreement (17).
10.58 Common Stock and Warrant Purchase Agreement with The Raptor
Global Portfolio Ltd., The Altar Rock Fund L.P. and Roseworth
Group, LTD (18)
10.59 Form of Stock Purchase Warrant issued to The Raptor Global
Portfolio Ltd. (for 87,150 shares), The Altar Rock Fund L.P.
(for 350 shares) and Roseworth Group, Ltd. (for 37,500 shares)
(included as Exhibit A to the Common Stock and Warrant
Purchase Agreement) (18).
10.60 Form of Registration Rights Agreement with The Raptor Global
Portfolio Ltd., The Altar Rock Fund L.P. and Roseworth Group,
Ltd. (included as Exhibit B to the Common Stock and Warrant
Purchase Agreement) (18).
10.61 Contract for services to be rendered to FOCUS Enhancements,
Inc. by R.J. Falkner & Company, INC (18).
10.62 Form of Stock Purchase Warrant issued to each of R. Jerry
Falkner and Richard W. West (18).
10.63 Agreement between Union Atlantic, L.C. and FOCUS Enhancements,
Inc. confirming agreement to issue warrant in exchange for fee
reduction (18)
10.64 Stock Purchase Warrant issued to Union Atlantic, L.C. (18)
10.65 Consulting Agreement dated March 1, 2000 between Focus and
William B. Coldrick (20)
10.66 Consulting Agreement dated May 1, 2000 between Focus and
Thomas L. Massie (20)
10.67 Consulting Agreement dated May 1, 2000 between Focus and Gary
M. Cebula (20)
10.68 Separation Agreement dated May 1, 2000 between Focus and
Thomas L. Massie (20)
10.69 Separation Agreement dated April 30, 2000 between Focus and
Gary M. Cebula (20)
10.70 Separation Agreement dated July 10, 2000 between Focus and J.
Stephen Wood (21)
10.71 Consulting Agreement dated July 10, 2000 between Focus and Red
& White Enterprises, Inc. (21)
10.72 Private Equity Line of Credit Agreement dated July 28, 2000
between Focus and Euston Investments Holdings Limited (21)
10.73 Registration Rights Agreement dated June 9, 2000 between the
investor and Focus (21)
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10.74 Registration Rights Agreement dated July 28, 2000 between
Euston Investments Holdings Limited and Focus (21)
10.75 Common Stock Warrant and Purchase Agreement dated June 9, 2000
(21)
10.76 Form of Stock Escrow Agreement (1)
10.77 Agreement of Merger, dated April 12, 1993, between Focus
Enhancement, Inc., a Massachusetts corporation, and Focus (1)
10.78 Certificate of Merger, as filed with the Delaware Secretary of
State on April 12, 1993 (1)
10.79 Articles of Merger, as filed with the Massachusetts Secretary
of State on April 14, 1993 (1)
10.80 Agreement and Plan of Reorganization and Merger between Focus,
Focus Acquisition corporation and Lapis Technologies, Inc.
dated as of November 29, 1993 (2)
10.81 Promissory Note issued by Focus to Carl Berg (22)
10.82 Security Agreement between Focus and Carl Berg (22)
11 Statement re Computation of Earnings (Loss) Per Share*
13.1 Annual Report of Focus on Form 10-KSBA (included in this
Registration Statement as Appendix F).
13.2 Quarterly Report of Focus on Form 10-QSB (included in this
Registration Statement as Appendix G).
23.1 Consent of Wolf & Company P.C., independent accountants of
Focus*
23.2 Consent of PricewaterhouseCoopers, L.L.P., independent
accountants of Videonics, Inc.*
23.3 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC,
counsel to Focus*
23.4 Consent of Union Atlantic Capital, L.C., financial advisors to
Focus*
24.1 Power of Attorney (included on signature page of Registration
Statement on Form S-4 dated October 30, 2000 and incorporated
herein by reference)
99.1 Focus Proxy*
99.2 Videonics Proxy*
-------------------------------------
1 Filed as an exhibit to Focus's Registration Statement on Form
SB-2, No. 33-60248-B, and incorporated herein by reference.
2 Filed as an exhibit to Focus's Current Report on Form 8-K
dated November 29, 1993, and incorporated herein by reference.
3 Filed as an exhibit to Focus's Form 10-QSB for the period
ended September 30, 1995, and incorporated herein by
reference.
4 Filed as an exhibit to Focus's Form 10-KSB for the year ended
December 31, 1993, and incorporated herein by reference.
5 Filed as an exhibit to Focus's Form 10-KSB for the year ended
December 31, 1994, and incorporated herein by reference.
6 Filed as an exhibit to Focus's Registration Statement on Form
5-8, No. 33-80651, filed with the Commission on December 19,
1995, and incorporated herein by reference.
7 Filed as an exhibit to Focus's Registration Statement on Form
SB-2, No. 33-80033, and incorporated herein by
reference.
8 Filed as an exhibit to Focus's Form 10-QSB for the period
ended June 30, 1995, and incorporated herein by reference.
9 Filed as an exhibit to Focus's Form 8-K dated November 4, 1996
10 Filed as an exhibit to Focus Form 10-KSB for the year ended
December 31, 1995 and incorporated herein by reference.
11 Filed as an exhibit to Focus's Registration Statement on Form
5-3, No. 333-26911, filed with the Commission on May 12, 1997,
and incorporated herein by reference.
II-5
<PAGE>
12 Filed as an exhibit to Focus's Registration Statement on Form
5-8, No. 333-33243, filed with the Commission on August 8,
1997, and incorporated herein by reference.
13 Filed as an exhibit to Focus's Form 8-K dated September 10,
1997
14 Filed as an exhibit to Focus's Registration Statement on Form
3-3, No. 333-81177, filed with the Commission on June 21,
1999, and incorporated herein by reference.
15 Filed as an exhibit to Focus's Form 10-QSB dated August 14,
1998 and incorporated herein by reference.
16 Filed as an exhibit to Focus's Form 10-QSB dated May 17, 1999
and incorporated herein by reference.
17 Filed as an exhibit to Focus's Registration Statement on Form
S-333, No. 333-82163, filed with the Commission on July 2,
1999, and incorporated herein by reference.
18 Filed as an exhibit to Focus's Registration Statements on From
S-333, No. 333-94621, filed with the Commission on January 13,
2000, and incorporated herein by reference.
19 Filed as an exhibit to Focus' Current Report on Form 8-K dated
September 8, 2000, and incorporated herein by reference.
20 Filed as an exhibit to Focus' Form 10-QSB dated May 22, 2000
and incorporated herein by reference.
21 Filed as an exhibit to Focus' Form 10-QSB dated August 21,
2000, and incorporated herein by reference.
22 Filed as an exhibit to Focus' Form 8-K/A dated November 2,
2000, and incorporated herein by reference.
II-6
<PAGE>
Item 22. Undertakings
Item 512 of Regulation S-B. Rule 415 Offering.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) reflect in
the joint proxy statement/prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range maybe reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 % change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and (iii) include any additional
or changed material information on the plan of distribution
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Request for Acceleration of Effective Date.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question to whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Instructions to Form S-4.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the joint proxy
statement/prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first-class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this registration statement when it became effective
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Wilmington, Commonwealth
of Massachusetts, on November 22, 2000.
FOCUS ENHANCEMENTS, INC.
By: /s/ Brett Moyer
--------------------------
Brett Moyer
Chief Operating Officer
POWER OF ATTORNEY
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Brett Moyer Chief Operating Officer November 22, 2000
--------------- (Principal Executive Officer)
Brett Moyer
/s/ Rick Nardella Controller and Chief Accounting Officer November 22, 2000
----------------- (Principal Financial and
Rick Nardella Accounting Officer)
/s/ Thomas L. Massie* Chairman of the Board of Directors November 22, 2000
--------------------
Thomas L. Massie
/s/ John C. Cavalier* Director November 22, 2000
--------------------
John C. Cavalier
/s/ William B. Coldrick* Director November 22, 2000
-----------------------
William B. Coldrick
/s/ Timothy E. Mahoney* Director November 22, 2000
-----------------------
Timothy E. Mahoney
/s/ William A. Dambrackas* Director November 22, 2000
-------------------------
William A. Dambrackas
*By Brett Moyer, Attorney-in-fact
</TABLE>
II-8
