-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DQbUPxa6GWBevBiXbzcRRY4Ny/WQBXU/GRQVxxPum6kvPpg+GPN+T5Tf9RB4rTxy w0QPpqGsmIqEhrTTHnbLuw== 0000950005-02-000047.txt : 20020414 0000950005-02-000047.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950005-02-000047 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 10 REFERENCES 429: gov.sec.edgar.dataobjects.object.PDSubFN429Data@f34f8250 FILED AS OF DATE: 20020123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOCUS ENHANCEMENTS INC CENTRAL INDEX KEY: 0000884719 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 043144936 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-55178 FILM NUMBER: 02514882 BUSINESS ADDRESS: STREET 1: 1370 DELL AVE CITY: CAMPBELL STATE: CA ZIP: 95008 BUSINESS PHONE: 4088668300 SB-2/A 1 p14863_sb2-a.txt AMENDMENT NO. 3 TO FROM SB-2 Registration No. 333-55178 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- Pre-EFFECTIVE amendment No. 3 to FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------------- FOCUS ENHANCEMENTS, INC. (Name of Small Business Issuer in its Charter) ----------------------------- Delaware 3576 04-3144936 (State or Other (Primary Standard Industrial (IRS Employer Jurisdiction of Classification Code Number) Identification No.) Incorporation or Organization) ----------------------------- 1370 Dell Avenue Campbell, California 95008 (408) 866-8300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Michael D'Addio President and Chief Executive Officer FOCUS Enhancements, Inc. 1370 Dell Avenue Campbell, California 95008 (408) 866-8300 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Jerry F. Petruzzelli, Esq. Gregory A. Gehlmann, Esq. Manatt Phelps & Phillips, LLP 1501 M Street, NW, Suite 700 Washington, DC 20005 (202) 463-4334 Approximate date of commencement of proposed sale to the public: From time to time or at one time after the effective date of the Registration Statement as determined by market conditions. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] 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(c) 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. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------------------------------------- CALCULATION OF REGISTRATION FEE
==================================================================================================================================== Proposed Maximum Proposed Maximum Amount to Offering Price Aggregate Offering Amount of Title of Each Class of Securities to be Registered Be Registered Per Share(1) Price Registration Fee - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share 367,140(2) $1.50(2) $550,710 $50.67 - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share 2,434,490(2) 1.50(2) 3,651,735 335.96 - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share 25,000(3) 1.54(3) 38,500 33.55 - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share 1,058,138(4)(5) (5) (5) (5) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share, underlying 435,000(5) (5) (5) (5) warrants - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per shares 468,322(5) (5) (5) (5) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share 370,332(5) (5) (5) (5) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share 150,000(5) (5) (5) (5) ------------ --- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL 5,308,422(6) $390.18 ====================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933. (2) Shares sold in a private placement, includes warrants to purchase 367,140 shares of common stock. Fee based on the average of the high ($1.59) and low ($1.41) price of Focus' common stock on the Nasdaq SmallCap Market on January 17, 2002. (3) Includes warrants to purchase 25,000 shares of common stock. Fee based on warrant exercise price of $1.54. (4) Represents 1,400,000 shares issued in a private placement at a price per share of $1.07 and up to 597,488 shares to be issued at fair market value as liquidated damages resulting from delays in the filing of this registration statement, less 939,350 shares sold pursuant to Rule 144 of the Securities Act of 1933, as amended. (5) Previously registered in initial or amended filings. Fees already paid. (6) A total of 2,481,792 shares were previously registered. An additional 2,826,630 shares are being registered by this Amendment No. 3. ---------- 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. PRELIMINARY REOFFER PROSPECTUS The information in this prospectus is not complete and may be changed. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not contain an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Up to 5,308,422 Shares FOCUS ENHANCEMENTS, INC. Common Stock This prospectus relates to up to 5,308,422 shares of common stock to be sold by selling stockholders. We will not receive any proceeds from the sale of the shares by the selling stockholders. However, we will receive the warrant exercise price upon the exercise for cash of the warrants held by the selling stockholders. The registration of shares of our common stock that may be offered pursuant to this prospectus does not necessarily mean that any of these shares will ultimately be offered and sold. The selling securityholders may offer shares of our common stock on the Nasdaq SmallCap Market in negotiated transactions or otherwise, or by a combination of these methods. The selling securityholders may sell the shares through broker-dealers who may receive compensation from the selling shareholders in the form of discounts or commissions. Our common stock is listed on The Nasdaq SmallCap Market under the ticker symbol: "FCSE". On January 16, 2002, the closing price of one share of our common stock on The Nasdaq SmallCap Market was $1.55. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. ----------------------------- Neither the Securities and Exchange Commission, nor any state securities commission, has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. ----------------------------- An investment in these securities involves a high degree of risk. See "risk factors" beginning on page 3. ----------------------------- The date of this prospectus is January __, 2002. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and financial statements and the notes to those statements appearing elsewhere in this prospectus. You should also carefully consider the risk factors relating to the purchase of our stock, which are described beginning at page 3 below. Our Company Founded in 1991, FOCUS Enhancements, Inc. develops and markets advanced, proprietary multimedia video scan conversion products for the rapidly converging, multi-billion dollar computer and television industries. Our products, which are sold globally through Original Equipment Manufacturers (OEMs) and resellers, merge computer generated graphics and television displays for presentations, training, education, video teleconferencing, Internet viewing and home gaming markets. In addition, we are developing a family of products that will enable the current installed base of televisions, VCRs, and camcorders to remain functional in upcoming HDTV environments. On January 16, 2001, we completed the acquisition of Videonics, Inc. In connection with the acquisition we issued approximately 5,135,000 shares of commons stock to Videonics shareholders. Videonics is a leading designer of affordable, high quality, digital-video equipment for the broadcast, cable, business, industrial, presentation, Internet, and home video production markets. Videonics products include application controllers, edit controllers, mixers, character generators, and video editing software solutions. Videonics began operations in July 1987. On April 6, 2001, Videonics was merged with and into Focus. Our main address is 1370 Dell Avenue, Campbell, California 95008 and our telephone number is (408) 866-8300. Our Web site is located at http://www.Focusinfo.com. Information contained in our Web site is not part of this prospectus. Selected Financial Data Set forth below are selected consolidated financial and other data of the Focus. The financial data is derived in part, and should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in the Prospectus. Operating results for the nine months ended September 30, 2001, are not necessarily indicative of the results that may be obtained for the entire year ending December 31, 2001 or any other period.
Nine Months Ended September 30, Year Ended December 31, 2001 2000 1999 ---- ---- ---- (Dollars in thousands, except per share data) Net Revenues $17,194 $15,233 $17,183 Gross Profit 6,915 3,446 6,639 Total Operating Expenses 11,243 13,138 7,806 Loss From Operations (4,328) (9,692) (1,167) Net Loss (4,657) (12,029) (1,480) Loss Per common Share: Basic (0.15) (0.48) (0.08) Diluted (0.15) (0.48) (0.08) Total Assets 19,536 9,780 15,015 Total Stockholders' Equity (Deficit) 7,248 (417) 9,207
We have experienced significant losses in the recent past and have been substantially dependent upon private offerings and option and current issuances, and other sources of financing, to fund our operations. 1 The Offering Cancellation of Equity Line of Credit. In an effort to meet our funding needs, we entered into a private equity line of credit agreement with Euston Investments. Under the equity line of credit agreement, we were to issue up to 4,000,000 shares of our common stock, subject to certain restrictions, to Euston at a 10% discount to raise additional money. We had sought to register such shares under a Registration Statement on Form SB-2. However, before the registration statement was declared effective, on January 11, 2002, we mutually agreed to terminate the agreement. As consideration for terminating the agreement, the exercise price of Euston's warrants to purchase 250,000 shares of Focus common stock was reduced from $1.625 to $0.75 per share. We then sold 2,434,490 shares of our common stock in a private placement to independent third parties, receiving net proceeds of approximately $2,450,000. The shares were sold at a 20% discount to the 20-day average closing bid prices of our common stock as of December 27, 2001, the date an agreement in principle was reached by the parties. In connection with the private placement, we also issued warrants to purchase 367,140 shares of our common stock at an exercise price of $1.36 per share. Selling Shareholders. This prospectus covers up to 5,308,422 shares of our common stock offered by various shareholders of Focus, including those who purchased our stock in the private placement discussed above. We issued these shares in various private transactions and have filed a registration statement to register these shares and allow the shareholders to sell their shares, should they determine to do so. We cannot determine how many or what shareholders will sell shares. We will not receive any proceeds from the sale of the shares by the selling stockholders. However, we will receive funds from any common stock issued upon the exercise for cash of the warrants held by the selling stockholders. See "The Offering," and "Selling Shareholders" for more detail beginning on pages 45 and 46 of this prospectus. Key Facts. Total shares outstanding prior to the offering (as of January 16, 2002)(1) 35,857,893 Shares being offered for resale to the public (1) 4,481,282 Total shares outstanding after the 36,685,033 offering (2) Price per share to the public Market price at time of resale Total proceeds raised by offering None, however, if all warrants are exercised for cash, we would receive approximately $1.0 million in net proceeds. There can, however, be no assurances when or whether any or all of such shares or warrants will be sold or exercised, or whether such holders utilize a cashless option whereby we would not receive any funds. Use of proceeds from the sale of the We plan to use the proceeds for shares to Euston and the exercise of working capital and general warrants corporate purposes. Nasdaq SmallCap Market Symbol FCSE - ---------- (1) Except for the shares underlying the 827,140 warrants issued to some of the selling shareholders, all shares being offered pursuant to this prospectus are already outstanding. (2) Assumes all warrants are exercised. 2 RISK FACTORS This offering involves a high degree of risk and should only be purchased by investors who can afford to lose their entire investment. You should carefully consider the following risks relating to our business and our common stock, together with the other information described elsewhere in this prospectus. If any of the following risks actually occur, our business, results of operations and financial condition could be materially affected, the trading price of our common stock could decline, and you might lose all or part of your investment. Risks Related to Our Business We have been named as a defendant in alleged class actions alleging violation of federal securities laws. We are subject to two class action lawsuits alleging that Focus and certain present and former officers violated federal securities laws in connection with a number of allegedly false or misleading statements. On May 10, 2001, the Federal District Court dismissed one of the alleged class action in its entirety. 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 and there can be no assurances as to whether the eventual outcome of the cases will have a material adverse effect on our financial condition or operations. We will need to raise additional capital which will result in further dilution of existing and future shareholders. Historically, we have met our short-and long-term extra cash needs through debt and the sale of common stock in private placements because cash flow from operations has been insufficient to fund its operations. Set forth below is information regarding net proceeds received in the last nine months and our last two fiscal years: Private Offerings Issuance Exercise of Stock Of Common Stock of Debt Options and Warrants Nine months ended September 30, 2001 -- $2,650,000 $123,000 Fiscal 2000 $1,284,000 $2,362,000 $1,121,000 Fiscal 1999 $4,414,000 -- $2,596,000 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 our ability to market our products successfully. If we require 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. On January 11, 2002, we sold in a private placement, 2,434,490 shares of our common stock to four investors for gross proceeds of $2,750,000. In connection with the private placement, we also issued warrants to purchase 367,140 shares of common stock at $1.36 per share. At January 16, 2002, we had 35,857,893 and 1,904 shares of common and preferred shares issued and outstanding, respectively, and 1,210,219 warrants and 6,144,456 options that are exercisable into shares of common stock. The 1,094 shares of preferred stock are convertible into 1,904,000 shares of our common stock. We also may issue additional shares in acquisitions and may grant 3,909,505 additional stock options to our employees, officers, directors and consultants under our current stock option plans. The issuance or even the potential issuance of shares, in connection with any other additional financing, and upon exercise of warrants, options or rights will have a dilutive impact on other stockholders and could have a negative effect on the market price of our common stock. In the event we are unable to raise additional capital, we may not be able to fund our operations which could result in the inability to execute our current business plan. We are dependent upon a significant shareholder to meet our interim financing needs. We have relied upon the ability of Carl Berg, a director and significant owner of our common stock for interim financing needs. As of September 30, 2001, we had an aggregate of approximately $4,012,000 in debt outstanding to Mr. Berg. There can be no assurances that Mr. Berg will continue to provide such interim financing should we need additional funds. 3 We have a long history of operating losses. As of September 30, 2001, Focus had an accumulated deficit of $53,365,000. Focus incurred net losses of $12,029,000 and $1,480,000 for the years ended December 31, 2000 and 1999. Additionally, Focus incurred a loss of $4,657,000 for the nine month period ended September 30, 2001. There can be no assurance that we will be profitable. Focus relies on four vendors for 90% of its product components. Over 90% of the components for our products are manufactured on a turnkey basis by four vendors, Furthertech Company, Ltd., Sicon International, Samsung Semiconductor Inc., and Asemtec Corporation. If these vendors experience 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. We are dependent on our suppliers. We purchase all of our parts from outside suppliers and from time to time experience delays in obtaining some components or peripheral devices. Additionally, we 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 rely on sales to a few major customers for a large part of our revenues. For the year ended December 31, 2000, approximately 15% of our revenues were derived from sales to a major distributor, and approximately 21% of our revenues were derived from sales to two major retailers. These figures were 11% and 4% respectively for the nine months ended September 30, 2001. We do not have long-term contracts requiring any customer to purchase any minimum amount of products. There can be no assurance that we 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. Our 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. 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 five 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. Delays in product development could adversely affect our market position or customer relationships. We have experienced delays in product development in the past and may experience similar delays in the future. Given the short product life cycles in the markets for our products, any delay or unanticipated difficulty associated with new product introductions or product enhancements could cause us to lose customers and damage our competition position. Prior delays have resulted from numerous factors, such as: o changing product specifications; o difficulties in hiring and retaining necessary personnel; o difficulties in reallocating engineering resources and other resource limitations; o difficulties with independent contractors; o changing market or competitive product requirements; unanticipated engineering complexity; o undetected errors or failures in software and hardware; and o delays in the acceptance or shipment of products by customers. 4 If we are unable to respond to rapid technological change in a timely manner, then we may lose customers to our competitors. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our products. Our industry is characterized by rapid technological change, changes in user and customer requirements and preferences and frequent new product and service introductions. If competitors introduce products and services embodying new technologies, or if new industry standards and practices emerge, then our existing proprietary technology and systems may become obsolete. Our future success will depend on our ability to do the following: o both license and internally develop leading technologies useful in our business; o enhance our existing technologies; o develop new services and technology that address the increasingly sophisticated and varied needs of our prospective customers; and o respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. To develop our proprietary technology entails significant technical and business risks. We may use new technologies ineffectively, or we may fail to adapt our proprietary technology and transaction processing systems to customer requirements or emerging industry standards. If we face material delays in introducing new services, products and enhancements, then our customers may forego the use of our services and use those of our competitors. We typically operate without a significant amount of backlog. We typically operate 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 our operating results. Our quarterly financial results are subject to significant fluctuations. We have been unable in the past to accurately forecast our operating expenses. Our revenues currently depend heavily on volatile customer purchasing patterns. If actual revenues are less than projected revenues, we may be unable to reduce expenses proportionately, and its operating results, cash flows and liquidity would likely be adversely affected. In the past, our common stock has not met the minimum levels to remain listed on the Nasdaq SmallCap Market. If we were to be delisted, it could make trading in our stock more difficult. Our common stock is traded on the Nasdaq SmallCap Market. There are various quantitative listing requirements for a company to remain listed on the Nasdaq SmallCap Market. o We must maintain stockholders' equity of $2,500,000. At September 30, 2001, we had total stockholders' equity of $7.2 million. To the extent we continue losing money and do not raise additional capital, our stockholders' equity will be reduced. o We are required to maintain a minimum bid price of $1.00 per share for our common stock. The closing price of our common stock on January 16, 2002 was $1.55. Between June 1, 2001 and December 31, 2001, our stock closed below $1.00 a share on 38 of 155 trading days. If we fail these Nasdaq SmallCap requirements in the future, our common stock could be delisted, eliminating the only established trading market for shares of our common stock. Any sales of our common stock at a discount to market may reduce the trading price of our common stock to a level below the Nasdaq minimum bid price requirement. In the event we are delisted from Nasdaq, we would be forced to list our shares on the OTC Electronic Bulletin Board or some other quotation medium, such as pink sheets, depending on our ability to meet the specific listing requirements of those quotation systems. As a result an investor might find it more difficult to dispose of, or to obtain accurate price quotations for, our shares. Delisting might also reduce the visibility, liquidity, and price of our common stock. Our common stock price is volatile. The market price for our common stock is volatile and has fluctuated significantly to date. For example, between January 1, 2001 and January 16, 2002, the per share price of our stock has fluctuated between $0.66 and $2.18 per share, closing at $1.55 at January 16, 2002. The trading price of our common stock is likely to continue to be highly volatile and subject to wide fluctuations in response to factors including the following: 5 o actual or anticipated variations in our quarterly operating results; o announcements of technological innovations, new sales formats or new products or services by us or our competitors; o changes in financial estimates by securities analysts; o changes in the economic performance and/or market valuations of other multi-media, video scan companies; o announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; o additions or departures of key personnel; and o sales of common stock. In addition, the securities markets have experienced extreme price and volume fluctuations, and the market prices of the securities of technology companies have been especially volatile. These broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of stock, many companies have been the object of securities class action litigation. If we are sued in a securities class action, then it could result in substantial costs and a diversion of management's attention and resources. Risks Related to Our Industry International sales are subject to significant risk. Our 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 revenue or operating results in the future. 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. We anticipate 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. Often our 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. The energy crisis in the State of California could adversely effect our operations. Various factors including the opening of new power plants, moderate weather, the national economic slowdown, and energy conservation contributed to the State of California's being able to meet electricity demand during the summer of 2001 with only minimal disruption. While the peak summer demand season is now over, longer term aspects of the California energy crisis remain, including uncertainty regarding the settlement of the various financial components of the crisis. These financial components include a potential adverse impact on the State of California's general fund, the determination of which energy customers will bear what cost burdens, and the resolution of the financial status of the two largest utilities in the State. 6 We remain concerned about the potential impact of the energy crisis upon Focus' operations and the financial condition of our customers and suppliers in California. Focus itself is not a particularly large user of energy. However, our California offices at this time do not have backup generators, and hence would need to curtail our operations in the event of an electricity brown-out or black-out. Recent terrorist attacks in the United States have affected the stock market and the general economy and could negatively affect our income. On September 11, 2001, the World Trade Center in New York was destroyed, the Pentagon outside Washington, DC was damaged and a jetliner crashed in central Pennsylvania as a result of terrorist attacks. Following these attacks, stock prices declined in general, and questions were raised concerning the impact that the terrorist attacks and the United States' response would have on the national economy. These uncertainties have contributed to the existing slowdown in economic activity in the United States. Continuing weakness in the economy could decrease demand for our products, increase delinquencies in payments and otherwise have an adverse impact on our business. 7 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS We make many statements in this prospectus under the captions "Prospectus Summary ," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Information About Focus," and elsewhere that are forward-looking and are not based on historical facts. These statements relate to our future plans, projections, objectives, expectations, assumptions, beliefs and intentions. In some cases you can identify these statements by the use of words such as "anticipate" "assume," "believe," "could," "estimates," "expect," "intend," "may," "plan, " "project," "should" and other similar expressions. These forward-looking statements involve a number of known and unknown risks and uncertainties. Our, and our industry's actual results could differ materially from those anticipated in these forwarded-looking statements as a result of various factors, including those we discuss in "Risk Factors" and elsewhere in this prospectus. These forward-looking statements speak only as of the date of this prospectus, and we caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. The forward-looking statements made in this prospectus relate only to events and assumptions as of the date on which the statements are made. Moreover, neither we or any other persons assumes responsibility for the accuracy and completeness of the forward-looking statements. DILUTION The issuance of further shares and the eligibility of issued shares for resale will dilute our common stock and may lower the price of our common stock. If you invest in our common stock, your interest will be diluted to the extent of the difference between the price per share you pay for the common stock and the pro forma as adjusted tangible book value per share of our common stock at the time of sale. We calculated net tangible book value per share by calculating the total assets less goodwill and total liabilities, and by dividing it by the number of outstanding shares of common stock. Historically, we have met our short-and long-term extra cash needs through debt and the sale of common stock in private placements because cash flow from operations has been insufficient to fund its operations. Set forth below is information regarding net proceeds received in our last two fiscal years: Private Offerings Issuance Exercise of Stock of Common Stock of Debt Options and Warrants Nine months ended September 30, 2001 -- $2,650,000 $123,000 Fiscal 2000 $1,284,000 $2,362,000 $1,121,000 Fiscal 1999 $4,414,000 -- $2,596,000 On January 11, 2002, we sold in a private placement, 2,434,490 shares of our common stock to four investors for gross proceeds of $2,750,000. In connection with the private placement, we also issued warrants to purchase 367,140 shares of common stock at $1.36 per share. Assuming all shares of stock covered by this prospectus are outstanding and the warrants to purchase 827,140 shares of common stock are exercised, stockholders would be diluted by approximately 2.3%. As of January 16, 2002, 4,481,262 shares being offered pursuant to this prospectus are already outstanding. These issuances diluted existing shareholders by approximately 12.5%. 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 our ability to market our products successfully. If we require 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. At January 16, 2002, we had 35,857,893 and 1,904 shares common and preferred shares issued and outstanding, respectively, and 1,210,219 warrants and 6,144,456 options that are exercisable into shares of common stock. The 1,904 shares of preferred stock are convertible into 1,904,000 shares of our common stock. We also may issue additional shares in acquisitions and may grant 3,909,505 additional stock options to our employees, officers, directors and consultants under our current stock option plans. 8 USE OF PROCEEDS We will not receive any of the proceeds from the sale of shares by many of the selling shareholders. However, we will receive funds from the exercise of warrants held by selling stockholders that pay the exercise price in cash. The table below sets forth our estimates with respect to the warrants. Funds from Net Proceeds to Focus(1) ---------- --------------------- Exercise of Warrants $1,025,000 - ---------- (1) Assumes 185,000, 250,000, 367,140 and 25,000 warrants are exercised for cash at $1.625, $0.75, $1.36 and $1.54 per share, respectively. There can, however, be no assurances when or whether any or all of such shares or warrants will be sold for cash or exercised, or whether such holders utilize a cashless option whereby we would not receive any funds. Furthermore, there can be no assurances all of the warrants will be exercised before they expire. At January 16, 2002, the closing price of our common stock was $1.55. We expect to use the proceeds of any such sales for general working capital purposes, including sales and marketing, product development and other corporate documents. We will have broad discretion in the use of the proceeds from the exercise of the warrants for cash. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the net proceeds. If we fail to apply the net proceeds effectively, our business could be negatively affected. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We anticipate that any earnings will be retained for development and expansion of our business and we do not anticipate paying any cash dividends in the near future. Our board of directors has sole discretion to pay cash dividends based on our financial condition, results of operation, capital requirements, contractual obligations and other relevant factors. 9 MARKET FOR OUR COMMON STOCK Since our initial public offering on May 25, 1993, our common stock has traded on The Nasdaq SmallCap Market under the symbol "FCSE." The following table provides the range of high and low sales prices of our common stock for the periods indicated: Fiscal Quarter High Low -------------- ---- --- 1st - 1999 $1.813 $0.906 2nd - 1999 1.750 1.125 3rd - 1999 1.688 0.938 4th - 1999 8.438 1.125 1st - 2000 9.219 2.313 2nd - 2000 2.906 1.094 3rd - 2000 1.938 1.000 4th - 2000 1.750 0.375 1st - 2001 2.000 0.656 2nd - 2001 1.480 0.810 3rd - 2001 1.210 0.820 4th - 2001 1.50 0.820 1st to 1/16/2002 2.18 1.55 Based on information supplied by our transfer agent, as of September 30, 2001, there were approximately 280 record holders of our common stock. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. As of January 16, 2002, the closing sale price of our common stock as quoted on The Nasdaq SmallCap Market was $1.55. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. Please refer to "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for additional information. Comparison of Operating Results for the Three and Nine Months Ended September 30, 2001 and 2000 Net Revenues Net revenues for the three-months ended September 30, 2001 were $6,717,000 as compared with $4,116,000 for the three-month period ended September 30, 2000 an increase of $2,601,000, or 63%. Net revenues for the nine-months ended September 30, 2001 were $18,215,000 as compared with $12,130,000 for the nine-month period ended September 30, 2000 an increase of $6,085,000, or 50%. For the three months ended September 30, 2001, net sales to Professional AV customers were approximately $3,716,000 compared to $1,345,000 for the same period in 2000, an increase of $2,371,000 or 176%. For the nine months ended September 30, 2001, net sales to Professional AV customers were approximately $10,783,000 compared to $3,424,000 for the same period in 2000, an increase of $7,359,000 or 215%. Such increase in net sales to Professional AV customers for the three and nine month periods ending September 30, 2001 primarily related to the inclusion of Videonics Inc. sales beginning on January 16, 2001 of $2,451,000 and $7,308,000, respectively. For the three months ended September 30, 2001, net sales to OEM customers were approximately $1,696,000 as compared to $1,073,000 for the same period in 2000, an increase of $623,000 or 58%. For the nine months ended September 30, 2001, net sales to OEM customers were approximately $3,208,000 as compared to $2,674,000 for the same period in 2000, an increase of $534,000 or 20%. The increase in both the three and nine month periods is primarily attributable to contract revenue of $693,000 and $1,021,000 in the three and nine months ended September 30, 2001, respectively. Sales of our current line of application specific integrated circuits ("ASIC") chips (FS400, FS450 and 460 families) increased by $478,000 (83%) and $1,619,000 (130%) over three and nine month prior year periods, respectively. For the three months ended September 30, 2001, net sales to Resellers consisting of Distributors, Retailers, VAR's and Education segments were approximately $1,305,000 as compared to $1,698,000 for the same period in 2000, a decrease of $393,000 or 23%. For the nine months ended September 30, 2001, net sales to Resellers were approximately $4,224,000 as compared to $6,032,000 for the same period in 2000, a decrease of $1,808,000 or 30%. The decrease is primarily the result a reduction of nationwide computer sales, decreased educational spending and a trend by certain customers to incorporate our scan conversion chips in televisions and video conferencing systems. As of September 30, 2001, the Company had a sales order backlog of approximately $150,000. Cost of Goods Sold Cost of goods sold were $4,387,000, or 65% of net sales, for the three-months ended September 30, 2001, as compared with $2,729,000, or 66% of net sales, for the three-months ended September 30, 2000. The Company's gross profit margin for the third quarters of 2001 and 2000 were 35% and 34%, respectively. Cost of goods sold were $11,300,000, or 62% of net sales, for the nine-months ended September 30, 2001, as compared with $8,420,000, or 69% of net sales, for the nine-months ended September 30, 2000. The Company's gross profit margin for the nine-month periods of 2001 and 2000 were 38% and 31%, respectively. The increase in gross margin for the three and nine month periods ended September 30, 2001, are primarily related to, increased sales and the efficiencies gained by consolidating the manufacturing operations into one facility following the merger with Videonics. Additionally, the nine month period ended September 30, 2000 included charges to cost of sales principally attributable to a physical inventory adjustment at Focus' Far East contract manufacturer of approximately $285,000 and the write-down of inventory to its net realizable value, including the InVideo product line of approximately $318,000. In addition, gross margin was lower due to customer mix and sales of certain slow moving product at carrying value. Sales, Marketing and Support Expenses Sales, marketing and support expenses were $1,425,000, or 21% of net revenues, for the three-months ended September 30, 2001, as compared with $797,000, or 19% of net revenues, for the three-months ended September 30, 2000, an increase of $628,000 or 79%. Sales, marketing and support expenses were $4,531,000, or 25% of net revenues, for the nine-months ended September 30, 2001, as compared with $2,857,000, or 24% of net revenues, for the nine-months ended September 30, 2000, an increase of $1,674,000 or 59%. 11 The increase in absolute dollars and as a percentage of net revenues for the three and nine month periods ending September 30, 2001 are primarily due to the addition of Videonics sales, marketing and support expenses following the merger on January 16, 2001. General and Administrative Expenses General and administrative expenses for the three-months ended September 30, 2001 were $467,000 or 7% of net revenues, as compared with $542,000 or 13% of net revenues for the three-months ended September 30, 2000, a decrease of $75,000 or 14%. General and administrative expenses for the nine-months ended September 30, 2001 were $1,683,000 or 9% of net revenues, as compared with $2,432,000 or 20% of net revenues for the nine-months ended September 30, 2000, a decrease of $749,000 or 31%. The decrease of general and administrative expenses in absolute dollars and as a percentage of net sales for the three and nine month periods ended September 30, 2001 is primarily a result of decreased payroll expenses and consulting fees. Additionally, the first quarter of 2000 included accounting and legal fees of approximately $302,000 relating to the Company's review of accounting practices and a special investigation conducted by the Board of Directors. Research and Development Expenses Research and development expenses for the three-months ended September 30, 2001 were approximately $617,000 or 9% of net revenues, as compared with $245,000 or 6% of net revenues, for the three-months ended September 30, 2000, an increase of $372,000 or 152%. Research and development expenses for the nine-months ended September 30, 2001 were approximately $2,515,000 or 14% of net revenues, as compared with $854,000 or 7% of net revenues, for the nine-months ended September 30, 2000, an increase of $1,661,000 or 194%. The increase in research and development expenses in both absolute dollars and as a percentage of revenues is due primarily to the addition of Videonics research and development expenses. Additionally, the Company did not capitalize any ASIC development costs during the three or nine-month periods ended September 30, 2001. In the three and nine month periods ended September 30, 2000 the Company capitalized ASIC development costs of $450,000 and $1,210,000, respectively. Partially offsetting the increases just described, were the allocation of research and development expenses to costs of sales during the three and nine month periods ended September 30, 2001, as the Company performed development work under contract. Amortization Amortization expenses for the three-month period ended September 30, 2001 were $700,000 or 10% of net revenues, as compared with $182,000 or 4% of net revenues, for the three-months ended September 30, 2000, an increase of $518,000 or 285%. Amortization expenses for the nine-month period ended September 30, 2001 were $1,976,000 or 11% of net revenues, as compared with $432,000 or 4% of net revenues, for the nine-months ended September 30, 2000, an increase of $1,544,000 or 357%. The increase in terms of absolute dollars and as a percentage of net revenues is primarily due to the Company recording and subsequently amortizing goodwill and intangibles associated with the Videonics merger. Amortization associated with the merger approximated $557,000 and $1,579,000, respectively, for the three and nine-month periods ended September 30, 2001. Excluding the increase associated with the Videonics merger, amortization expenses decreased as the Company wrote-off and adjusted down the carrying value of its goodwill amounts in the fourth quarter of 2000. See also Note 4 "Recent Accounting Pronouncements." Restructuring Expenses For the nine-month period ended September 30, 2001, the Company recorded restructuring expenses totaling $33,000 related to the closure of its Wilmington, MA, facility. For the nine-month period ended September 30, 2000, the Company recorded restructuring expenses of $202,000 in conjunction with the closure of its Morgan Hill, CA facility and operation. These direct expenses are comprised of inventory adjustments of approximately $118,000, payroll and benefits of approximately $57,000, travel of approximately $16,000 and lease cancellation charges of approximately $11,000. Write-off of In-Process Technology In connection with the acquisition of Videonics during the first quarter of 2001, the Company recorded a charge for purchased in-process technology of $505,000. 12 Interest Expense, Net Net interest expense for the three-month period ended September 30, 2001 was $44,000, or 1% of net revenues, as compared to $3,000 for the three-months ended September 30, 2000, an increase of $41,000. Net interest expense for the nine-month period ended September 30, 2001 was $267,000, or 1% of net revenues, as compared to $58,000 for the nine-months ended September 30, 2000, an increase of $209,000. The increase in interest expense is primarily attributable to an increase in debt of approximately $3.6 million between comparable periods ending September 30. Other Expense, Net Other income for the three-month period ended September 30, 2001 was $33,000, as compared to other income of $13,000 for the three-months ended September 30, 2000, a change of $20,000. Other expense for the nine-month period ended September 30, 2001 was $62,000, as compared to other income of $67,000 for the nine-months ended September 30, 2000, a change of $129,000. The increase in other income for the three month period ended September 30, 2001 is primarily attributable to gains of approximately $128,000 related to the settlement of debts for less than original amounts accrued, offset by charges of $69,000 associated with the untimely registering of AMRO Investment International's 1,400,000 shares which were issued in connection with a private placement in which the Company received gross proceeds of $1,500,000 in June 2000. The Company expects to incur these charges until the shares are registered. The increase in other expense for the nine month period ended September 30, 2001 are primarily attributable to charges of $374,000 associated with the untimely registering of AMRO Investment International's shares. Offsetting these charges were gains of approximately $328,000 related to the settlement of debts for less than original amounts accrued. Liquidity and Capital Resources Since inception, the Company has financed its operations primarily through the public and private sale of common stock, proceeds from the exercise of options and warrants, short-term borrowing from private lenders, and favorable credit arrangements with vendors and suppliers. Net cash used in operating activities for the nine-month periods ended September 30, 2001 and 2000 was $2,952,000 and $2,351,000, respectively. In first nine months of 2001, net cash used in operating activities consisted primarily of a net loss of $4,657,000 adjusted for depreciation and amortization of $2,328,000, the write-off of in-process technology related to the acquisition of Videonics totaling $505,000, deferred compensation expense of $209,000, a decrease in accrued expenses totaling $160,000 and an increase in accounts receivable of $1,260,000, partially offset by an increase in accounts payable of $78,000. In first nine months of 2000, net cash used in operating activities consisted primarily of a net loss of $5,208,000 adjusted for depreciation and amortization of $733,000 and an increase in prepaid expenses and other assets of $1,132,000 offset by an increase in accrued liabilities of $2,092,000 and a decrease in inventories of $1,605,000. As of September 30, 2001 and 2000, accounts receivable from a major distributor represented approximately 23% and 24%, respectively of total accounts receivable. Net cash provided by investing activities for the nine-months ended September 30, 2001 was $1,156,000 whereas net cash used by investing activities was $1,152,000 for the nine-months ended September 30, 2000. For the first nine months of 2001, cash was provided by a reduction in restricted certificates of deposit of approximately $965,000 and net cash provided through the acquisition of Videonics on January 16, 2001, of $360,000, offset by additions to property and equipment of $169,000. The acquisition of Videonics was accounted for as a purchase and made through the issuance of approximately 5,135,000 shares of the Company's common stock. In the first nine months of 2000, cash used in investing activities was for the purchase of property and equipment and capitalized software development costs of $406,000 and an increase in restricted certificates of deposit of approximately $746,000. Net cash provided by financing activities for the nine-month periods ended September 30, 2001 and 2000 was $2,150,000 and $1,052,000, respectively. In the first nine months of 2001, cash provided by financing activities occurred primarily from the issuance of notes payable to a stockholder and director of the Company of $2,650,000 offset by repayments of $400,000 to a bank. In the first nine months of 2000, the Company received $1,121,000 in net proceeds from the exercise of common stock options and warrants and received $1,284,000 from private offerings of common stock. Th Company's financing proceeds were offset by payments on notes payable and capital lease obligations totaling $1,353,000. 13 As of September 30, 2001, the Company had working capital of $3,147,000, as compared to $224,000 at December 31, 2000, an increase of $2,923,000. The Company has incurred losses and negative cash flows from operations for each of the two years in the period ended December 31, 2000 and for the period ending September 30, 2001 and as such has been dependent upon raising money for short and long-term cash needs through debt, proceeds from the exercise of options and warrants, and the sale of common stock in private placements. For the years ended December 31, 2000 and 1999, the Company received approximately $1,284,000 and $4,414,000, respectively, in net proceeds from private offerings of common stock and $1,121,000 and $2,596,000, respectively, from the exercise of common stock options and warrants. For the nine months ended September 30, 2001, the Company has received approximately $123,000 in net proceeds from the exercise of stock options. In addition, on February 28, 2001, and June 29, 2001, the Company and Carl Berg, a Focus director and shareholder entered into Secured Convertible Promissory Note agreements under which Mr. Berg loaned the Company a total of $2.7 million to support the Company's working capital needs. On May 7, 2001, the Company converted $2.3 million of outstanding debt under two separate promissory notes and accrued interest owed by Focus to Mr. Berg to Convertible Preferred Stock. See "Note 7 - Commitments - Conversion of Debt to Preferred Stock" for more information. At September 30, 2001, the Company owed Mr. Berg approximately $4.1 million in principal and accrued interest on various notes. See also "Prospectus Summary - The Offering" on page 2. Management has taken steps to reduce costs, including the closure of its PC Video facility in Morgan Hill, CA in the first quarter of 2000 and its Wilmington, MA facility on April 1, 2001. All operations, customer support and finance were moved into the Campbell, CA, facility. In connection with this restructuring, the Company has reduced overall personnel by approximately 20%. Management is assessing product lines in light of the recent merger with Videonics Inc., to identify how to enhance existing or create new distribution channels. In addition, the Company released three new products in the third quarter of 2001, which should provide the Company with incremental revenue. Even with the anticipated reduction in expenses related to the restructuring and an expected increase in sales, the Company anticipates that during the rest of 2001 it will need to raise over $500,000 to support its working capital needs and meet existing debt obligations In an effort to meet those needs, Focus entered into a Private Equity Line of Credit Agreement ("Equity Agreement") with Euston Investments ("Euston"). Under the Equity Agreement, the Company was to issue up to 4,000,000 shares of its common stock, subject to certain restrictions, to Euston at a 10% discount to raise additional money. The Company had sought to register such shares under a Registration Statement on Form SB-2. However, before the registration statement was declared effective, on January 11, 2002, Focus and Euston mutually agreed to terminate the agreement. As consideration for terminating the agreement, the exercise price of Euston's warrants to purchase 250,000 shares of Focus common stock was reduced from $1.625 to $0.75 per share. Focus then sold 2,434,490 shares of its common stock in a private placement to independent third parties, receiving net proceeds of approximately $2,450,000. The shares were sold at a 20% discount to the 20-day average closing bid prices of our common stock as of December 27, 2001, the date an agreement in principle was reached by the parties. In connection with the private placement, Focus also issued warrants to purchase 367,140 shares of its common stock at an exercise price of $1.36 per share. Ultimate 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 our ability to market our products successfully. As of the date of this prospectus, the Company has no commitments from any other sources to provide additional equity or debt financing. As such, 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. Although there can be no assurances, the Company believes that its current cash, its borrowings from a shareholder, and its recent private equity placement, together with its operating cash flows, will be sufficient to meet the Company's requirements for working capital, and capital expenditures for the next 12 months. 14 Comparison of Operating Results for the Years Ended December 31, 2000 and 1999. General The following table sets forth, for the periods indicated, income and expense items included in the Consolidated Statements of Operations, expressed as a percentage of net sales: Year Ended December 31, ----------------------- 2000 1999 ---- ---- Net sales.................................. 100% 98% Licensing fees............................. -- 2 Total revenues........................... 100 100 Cost of goods sold....................... 77 61 Gross profit............................. 23 39 Operating expenses: Sales, marketing and support............. 25 23 General and administrative............... 25 11 Research and development................. 9 8 Restructuring Expense.................... 5 -- Write-off of capitalized software 15 -- Depreciation and amortization............ 8 4 Impairment of goodwill................... -- -- Total operating expenses................. 87 46 Loss from operations....................... (64) (7) Interest expense, net...................... (2) (3) Other income............................... 1 1 Legal judgment expense..................... (14) Income (loss) before income taxes.......... (79) (9) Income tax expense......................... -- -- Net loss................................. (79) (9) Net Sales Net sales for the year ended December 31, 2000 were $15,233,000 as compared with $17,183,000 for the year ended December 31, 1999, a decrease of $1,950,000, or 11%. During the year ended December 31, 2000, the Company had net sales increases to Professional AV customers (36%), to international customers (15%), to OEM customers (18%) and to Internet customers (38%), while it had decreases in net sales to US Resellers (27%). In 2000, net sales to US Resellers consisting of Distributors, Retailers, VAR's and Education segments were approximately $8,375,000 as compared to $11,402,000 in 1999, a decrease of $3,027,000 or 27%. Net sales to a major distributor totaled approximately $2,242,000 or 15% as compared to 4,318,000 or 25% in 1999. The decrease is primarily the result of exiting a national office superstore in 1999 and a reduction in educational spending. During 2000, net sales to OEM customers were approximately $2,879,000 as compared to $2,442,000 in 1999, an increase of $437,000 or 18%. ASIC chip sales increased 234% as a result of the market acceptance of the FS400 chip family in the television conferencing industry. The FS400 began shipping in December 1999. Net sales to international customers in 2000 were approximately $868,000 compared to $758,000 in 1999, an increase of $110,000 or 15%. The increase is principally the result of the addition of professional AV sales to the international sector. In 2000, net sales to Professional AV customers were approximately $2,881,000 compared to $2,112,000 in 1999, an increase of $769,000 or 36%. Revenue grew as result of introducing two new product families: the Pro AV 1600 professional scan converter and the QuadScan Pro video scaler for the home theater market. In 2000, net sales to customers on-line via the internet were approximately $230,000 compared to $167,000 in 1999. The increase is principally the result of the Company establishing an e-commerce site which offers products direct to customers. There were no other net sales in 2000. In 1999, other net sales approximated $165,000. During the fourth quarter of 2000 and 1999, the Company reduced net sales by approximately $360,000 and $1,070,000, respectively, representing an estimate of product sales returns from major customers, including anticipated sales returns that would occur in the subsequent quarter. 15 Licensing Fees In 2000, the Company did not record any significant licensing fees. In 1999, the Company received licensing fees of $350,000. Licensing fees in 1999 were comprised of single source, non-recurring licensing revenues. Cost of Goods Sold Cost of goods sold was $11,787,000, or 77% of net sales, for the year ended December 31, 2000, as compared with $10,544,000, or 61% of net sales, for the year ended December 31, 1999, an increase of $1,243,000 or 12%. For the years ended December 31, 2000 and 1999, the Company recorded charges to inventory obsolescence of $1,532,000 and $906,000 respectively. These charges were to reserve for excess and obsolete inventory and to adjust the carrying value of inventory to its estimated net realizable value. In the fourth quarter of 2000, as a result of a detailed review of its inventories the Company charged approximately $668,000 to expense in the fourth quarter of 2000, thereby increasing its inventory reserves to approximately $753,000 at December 31, 2000. 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 $389,000 to expense in the fourth quarter of 1999 writing off certain items and increasing its inventory reserves to approximately $399,000. During the fourth quarter of 2000 and 1999, the Company reduced cost of sales by approximately $180,000 and $535,000, respectively, representing an estimate of the cost of product returns from major customers, including anticipated sales returns that would occur in the subsequent quarter. Sales, Marketing and Support Expenses Sales, marketing and support expenses were $3,822,000, or 25% of net revenues, for the year ended December 31, 2000, as compared with $3,970,000, or 23% of net revenues, for the year ended December 31, 1999, a decrease of $148,000 or 4%. The decrease in sales, marketing and support expenses in absolute dollars is primarily the result of reduced marketing and advertising expenses. General and Administrative Expenses General and administrative expenses for the year ended December 31, 2000 were $3,798,000 or 25% of net revenues, as compared with $1,878,000 or 11% of net revenues for the year ended December 31, 1999, an increase of $1,920,000 or 102%. The increase in terms of absolute dollars is primarily due to increases of $235,000 in consulting fees, $140,000 for the write-off of a note receivable, $621,000 in legal fees, $309,000 in accounting fees, and approximately $428,000 in provisions for bad debts. Consulting expenses are primarily related to consulting contracts the Company entered into with its former Chief Executive Officer and its former Vice President of Finance on May 1, 2000 and expired on April 30, 2001 and December 31, 2000, respectively. In December 2000, the Company determined that it no longer needed its former Chief Executive Officer to provide executive level consulting services. In connection with this action, the Company also wrote-off the outstanding balance of a note receivable due from its former Chief Executive Officer in the amount of $140,000 and reserved $40,000 for the remaining amount due under the consulting contract. The increase in legal fees primarily are related to a special investigation that occurred in the March - April 2000 time frame and totaled approximately $302,000 and year long litigation expenses associated with the two class action lawsuits which approximated $180,000. The Company met its insurance deductible in the first quarter of 2001 in regards to both class action suits. The increase in accounting fees is primarily related to the special investigation. See "Special Investigation" on page 18 and "Legal Proceedings" beginning on page 28 for more information. Research and Development Expenses Research and development expenses for the year ended December 31, 2000 were approximately $1,312,000 or 9% of net revenues, as compared with $1,401,000 or 8% of net revenues, for the year ended December 31, 1999, a decrease of $89,000 or 6%. The decrease in research and development expenses in both absolute dollars and as a percentage of revenues is due primarily to incremental increases in capitalized ASIC development costs of approximately $73,000 between years. Depreciation and Amortization Depreciation and amortization expenses for the year ended December 31, 2000 were $1,132,000 or 8% of net revenues, as compared with $557,000 or 4% of net revenues, for the year ended December 31, 1999, an increase of $575,000 or 103%. The increase in terms of absolute dollars and as a percentage of net revenues is primarily due to the Company beginning to amortize its capitalized software in January 2000. Amortization of capitalized software totaled $424,000 for the year ended December 31, 2000. 16 Restructuring Expense For the year ended December 31, 2000, the Company recorded restructuring expenses totaling $724,000 related to the closure of its Morgan Hill, CA, facility and the closure of its Wilmington, MA, facility. The closure of the Company's Morgan Hill facility occurred in the first quarter of 2000 and restructuring charges totaled approximately $202,000. Direct expenses were comprised of inventory adjustments of approximately $118,000, payroll and benefits of approximately $57,000, travel of approximately $16,000 and lease cancellation charges of approximately $11,000. At December 31, 2000 all restructuring accruals related to the Morgan Hill closure have been utilized. In December 2000, the Company's Board of Directors determined that to significantly reduce the Company's cost structure it would close its Wilmington, MA facility, reduce personnel and relocate to a significantly smaller facility during the first quarter of 2001. As such, restructuring charges of $522,000 were recorded in the forth quarter of 2000. Planned expenses are comprised of expenses related to the reduction of 16 employees in the areas of operations, customer support and finance of approximately $153,000 and equipment and lease abandonment charges of approximately $389,000. At December 31, 2000 $153,000 of restructuring reserves remained primarily related to personnel benefits associated with scheduled staffing reductions. Write-Down of Capitalized Software In the fourth quarter of 2000, the Company learned that both previously disclosed and undisclosed OEMs were significantly reducing their 2001 sales forecast for the set top box arena citing a slower than expected adoption of internet appliances for the home. The Company's recently developed ASICs, including the FS450 and a previously unannounced chip, both were designed for this market. To date, sales of ASICs for the internet appliance market have not been significant. In assessing the recoverability of its capitalized software, the Company considered anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Based on those factors, the Company reduced the carrying value of its capitalized software by $2,289,000. Impairment of Goodwill In the fourth quarter of 2000, the Company wrote-off $63,000 of the remaining goodwill associated with Digital Vision, Inc. ("Digital Vision".) The Company had 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, these products were not widely accepted by the Company's customer base due to significant competition, limited product features, and a cost structure that exceed many of the competing products. In addition, no proprietary technology was acquired with this acquisition. Focus wrote-off approximately $1,070,000 of impaired goodwill relating to Digital Vision in 1998. The determination was made to write-off the remaining balance as all product associated with this acquisition was completely liquidated in the fourth quarter. Interest Expense, Net Net interest expense for the year ended December 31, 2000 was $268,000, or 2% of net revenues, as compared to $531,000, or 3% of net revenues, for the year ended December 31, 1999, a decrease of $263,000 or 50%. The decrease in interest expense is primarily attributable to a decrease in interest bearing obligations. For the year ended December 31, 2000, the Company recorded interest expense of $150,000 as a result of delays in registering AMRO Investment International's 1,400,000 shares which were issued in connection with a private placement in which the Company received gross proceeds of $1,500,000. The Company expects to incur expenses of $30,000 per month until the shares are registered. Other Income For the year ended December 31, 2000, the Company had other income of $82,000 or 1% of net revenues as compared to other income of $138,000 or 1% of net revenues for the year ended December 31, 1999, a decrease of $56,000. Legal Judgment Expense In connection with a suit brought by CRA Systems, Inc., a Texas corporation, against the Company, 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 January 3, 2002, an appeals court upheld the judgment in favor of CRA for actual damages, punitive damages, attorney's fees, costs, and interest. In connection with this judgment, the Company recorded an expense of $2,147,722 in the period ended September 30, 2000. See "Legal Proceedings-CRA Systems, Inc." on page 29. 17 Gain on Securities Available for Sale 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. Focus had no such transactions in 2000. Special Investigation In March 2000, 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 was 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. As such, management believes that inventory has been properly presented as of December 31, 1999 and no adjustments appeared to be necessary to prior periods. The accounting manager in question has been discharged. As a result of the Committee's investigation, the Company incurred accounting fees of approximately $302,000 and legal fees of approximately $292,000 in conjunction with the completion of the 1999 annual audit, review of accounting practices and the special investigation conducted by the Board of Directors. Liquidity and Capital Resources Since inception, the Company has financed its operations primarily through the public and private sale of common stock, proceeds from the exercise of options and warrants, 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, 2000 and 1999 was $2,455,000 and $753,000, respectively. In 2000, net cash used in operating activities consisted primarily of the net loss of $12,029,000, adjusted for depreciation and amortization and the write-down of capitalized software offset by a decrease in accounts receivable of $1,134,000, a decrease in inventory of $1,494,000 and an increase in accrued liabilities of $1,163,000. The decrease in accounts receivable is primarily due to lower sales of $1,738,000 between the fourth quarter of 2000 and 1999. The increase in accrued liabilities is primarily related to an increase in legal and restructuring reserves as well as a reserve for a purchase commitment obligation. 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. Net cash used in investing activities for the years ended December 31, 2000 and 1999 was $2,081,000 and $2,110,000, respectively. In 2000, cash used in investing activities consisted primarily of the purchase of property and equipment of $159,000, additions to capitalized software of $1,193,000 and increases in certificate of deposits of $729,000. In 1999, cash used in investing activities consisted primarily of the purchase of property and equipment of $513,000 and additions to capitalized software of $1,644,000, increases in certificate of deposits of $281,000, offset by proceeds received from the sale of securities available for sale of $329,000 Net cash from financing activities for the years ended December 31, 2000 and 1999 was $1,152,000 and $5,471,000, respectively. In 2000, the Company received $1,284,000 in net proceeds from private offerings of Common Stock and $1,121,000 from the exercise of common stock options and warrants. The proceeds in 2000 were offset by $1,123,000 in payments on notes payable and payments made under capital lease obligations of $129,000. In 1999, the Company received $4,414,000 in net proceeds from private offerings of 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. As of December 31, 2000, the Company had working capital of $224,000 as compared to working capital of $5,633,000 at December 31, 1999, a decrease of $5,857,000. The Company's cash and certificates of deposit were $1,615,000 at December 31, 2000, compared to $4,271,000, at December 31, 1999. 18 See also "Comparison of Operating Results for the Three and Nine Months Ended September 30, 2001 and 2000 - Liquidity and Capital Resources" beginning on page 13. Common Stock Transactions The tables on pages 20 and 21 set forth equity issuances by Focus during the nine months ended September 30, 2001 and the two years ended December 31, 2000. On April 27, 2000, the Board of Directors approved the establishment of the 2000 Non-Qualified Stock Option Plan. The Focus shareholders approved the plan on January 11, 2001. A total of 5,000,000 shares are reserved for issuance under the 2000 Plan of which 3,011,915 had been granted as of January 16, 2002. In 2000, the Board of Directors approved, an increase in the authorized shares of common stock to 50,000,000 shares. The shareholders of Focus approved the increase on January 11, 2001. We maintain 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. Focus prices issued options at the closing of NASDAQ market price of its common stock on the date of the option issuance. On September 1, 1998, we 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 our common stock on September 1, 1998. Although we have been successful in the past in raising sufficient capital to fund its operations, there can be no assurance that we will achieve sustained profitability or obtain sufficient financing in the future to provide the liquidity necessary for us to continue operations. Private Placement On January 11, 2002, we sold in a private placement, 2,434,490 shares of our common stock to four investors for gross proceeds of $2,750,000. In connection with the private placement, we also issued warrants to purchase 367,140 shares of common stock at $1.36 per share. The tables on the next pages do not reflect such private placement. 19
Date Price per Date Issued Issued to/Reason Exercised/Sold Amount and Type of Security Security ----------- ---------------- -------------- --------------------------- ---------- January 19, 2001 Videonics, Inc. N/A 5,135,000 common stock N/A Shareholders/Merger(1) January 19, 2001(3) vFinance & vFinance (2)(3) 370,332 common stock $0.93 Capital/investment banking and consulting services January 24, 2001 Red & White Enterprises/purchase (2) 468,322 common stock $0.91 of PC Video Conversion 1/1/01- 9/30/01 Directors/employees (4) 1,038,415 options (4) May 7, 2001 Carl Berg N/A 1,904 preferred stock (5) $1,190.48 June 26, 2001 Advanced Electronic Support (2) 150,000 common stock - - Products/release of purchase obligations December 27, 2001 vFinance/financial advisory (6) 25,000 warrants $1.54 services June 9, 2000 AMRO International/financing (2) 1,400,000 common stock $1.07 agreement June 9, 2000 AMRO International/financing (2) 140,000 warrants (7) $1.625 June 9, 2000 Union Atlantic/financing (2) 45,000 warrants (7) $1.625 June 12, 2000 Euston Investments/equity line of (2) 250,000 warrants (8) $0.75(8) credit Various AMRO International/financing - (2) 597,488 common stock N/A penalty shares Fiscal 2000 Directors/employees (9) 2,611,875 options (9) N/A Gross Registered/ Proceeds to Net Proceeds Exempt Date Issued Focus to Focus Offering ----------- ----------- -------- -------- January 19, 2001 N/A N/A Registered January 19, 2001(3) - - - - (2) January 24, 2001 - - - - (2) 1/1/01- 9/30/01 (4) (4) Registered May 7, 2001 $2,300,000 $2,300,000 Exempt June 26, 2001 N/A N/A (2) December 27, 2001 -- -- (2) June 9, 2000 $1,500,000 $1,284,000 (2) June 9, 2000 -- -- (2) June 9, 2000 -- -- (2) June 12, 2000 -- -- (2) Various (2) (2) (2) Fiscal 2000 (9) (9) Registered
- ---------- (1) See also "Information about Focus - Acquisition of Videonics, Inc." on pages 24-25. (2) Issued in private placement. Securities are included in this prospectus. See "Selling Shareholders" on page 46. (3) Of these shares, 91,007 shares were issued on November 1, 2001 for payment and termination under a consulting agreement between the parties. See "Directors and Executive Officers - Certain Relationships and Related Transactions on page 37. (4) Options to purchase equal number of shares of common stock. Includes 1,134,249 outstanding options of Videonics employees and directors that were converted to Focus options in connection with our acquisition of Videonics. A total of 214,386 options were exercised during this period at a weighted average exercise price of $0.57 share. (5) On May 7, 2001, Carl Berg converted approximately $2.3 million of debt and accrued interest currently owed by Focus to Mr. Berg into 1,904 shares of convertible preferred stock based on the estimated fair value of the preferred stock as of May 1, 2001, the date on which the related subscription agreement was executed. Each share of preferred stock has a liquidation preference of $1,190.48 per share and is convertible into 1,000 shares of common stock. (6) Warrant to purchase common stock. Exercisable until December 27, 2004. (7) Warrant to purchase common stock. Exercisable until June 30, 2005. (8) Warrant to purchase common stock. Exercisable until June 12, 2005. In connection with the termination of the equity line of credit agreement, the per share exercise price was repriced from $1.625 to $0.75. (9) Options to purchase equal number of shares of common stock. Includes outstanding options of employees and directors of Videonics in connection with the acquisition of Videonics by Focus in January 2001. A total of 77,000 options were exercised during this period at a weighted average exercise price of $1.17 per share. 20
Date Amount and Price per Date Issued Issued to/Reason Exercised /Sold Type of Security Security ----------- ---------------- --------------- ---------------- -------- February 22, 1999 Unaffiliated individual/debt December 3, 1999 50,000 warrants $1.063 conversion February 22, 1999 Unaffiliated investor February 23, 2000 15,000 warrants $1.063 relations firm/partial March 2, 2000 15,000 warrants $1.063 comp. February 22, 1999 Unaffiliated investment December 10, 1999 100,000 warrants $1.063 advisor/partial comp. March 22, 1999 Unaffiliated commercial November 23, 1999 100,000 warrants $1.70 bank/partial fees for debt financing June 4, 1999 Unaffiliated investors/ August 18, 1999(3) 1,350,000 common -- financing stock June 4, 1999 Unaffiliated investors/ September 22, 1999 120,000 warrants $1.4781 financing June 4, 1999 Union Atlantic -- 25,000 warrants (4) $1.4781 Capital/financing September 17, 1999 Unaffiliated accredited September 17, 1999(5) 1,583,333 $0.9473 investors/financing common stock September 17, 1999 Unaffiliated accredited -- 150,000 warrants (6) $1.5375 Investor/private placement November 24, 1999 Unaffiliated commercial November 24, 1999 1,250,000 common stock -- bank/partial fees for debt financing November 24, 1999 Unaffiliated investors/ -- 125,000 warrants (7) $3.1969 Financing December 28,1999 Director (8) 171,000 options $1.88-$2.63 Fiscal 1999 Directors/employees (9) 1,191,340 options(9) (9) Gross Registered/ Proceeds Net Proceeds Exempt Date Issued to Focus to Focus Offering ----------- -------- -------- -------- February 22, 1999 $53,150 $38,117(1) Registered February 22, 1999 15,945 8,429(1) Registered 15,945 8,429(1) Registered February 22, 1999 106,300 56,189(1) Registered March 22, 1999 170,000 (2) 100,882(1) Registered June 4, 1999 1,200,000 1,080,881 Registered June 4, 1999 135,000 135,000 Registered June 4, 1999 -- -- Registered September 17, 1999 1,500,000 1,357,097 Registered September 17, 1999 -- -- Registered November 24, 1999 2,000,000 1,958,000 Registered November 24, 1999 -- -- Registered December 28,1999 352,000 352,000 -- Fiscal 1999 (9) (9) Registered
- ---------- (1) Focus recorded charges based on the fair market value of the warrant. (2) Net exercise provision resulting in issuance of 38,181 shares. (3) Funded in two tranches of $600,000 each on June 14, 1999 and August 8, 1999. (4) Warrant to purchase equal number of shares of common stock. Exercisable until June 30, 2004. (5) Funded in two tranches of $750,000 each on September 21, 1999 and November 17, 1999. (6) Warrant to purchase equal number of shares of common stock. Exercisable until September 17, 2002 (7) Warrant to purchase equal number of shares of common stock. Exercisable until December 1, 2004. (8) On June 1, 1998, we 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, we received $352,000 in full payment of this note, including accrued interest at 8%. (9) Options to purchase an equal number of shares of common stock. A total of 1,816,125 options were exercised during this period at a weighted average exercise price of $1.53 per share. 21 Effects of Inflation and Seasonality We believe that inflation has not had a significant impact on our sales or operating results. Our business does not experience substantial variations in revenues or operating income during the year due to seasonality. 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 prospectus 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. Recent Accounting Pronouncements Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires the recognition of all derivatives in the balance sheet as either an asset or a liability measured at fair value. The adoption of SFAS 133 did not have an impact on the Company's financial statements. The Company currently does not utilize derivative financial instruments in its operating activities nor does it use them for trading or speculative purposes. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." This statement amended the effective date of SFAS 133. SFAS 133 will now be effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this pronouncement is not expected to have a material impact on the Company's results of operations, financial position or liquidity. During the second quarter of 2000, the Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 provided guidance on the recognition, presentation, and disclosure of revenue in financial statements. The adoption of this pronouncement did not have a material impact on the Company's results of operations, financial position or liquidity for the years ended December 31, 2000 or 1999. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Focus will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS 142, the Company will stop the amortization of goodwill with an expected net carrying value of $4,380,962 at the date of adoption and annual amortization of approximately $1,568,400 that resulted from business combinations completed prior to the adoption of SFAS 141. In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends APB Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for the Company for all financial statements issued in 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial statements. 22 INFORMATION ABOUT FOCUS The Business Founded in 1991, Focus internally develops proprietary technology for the video scan 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. OEMs are entities that utilize our technology in developing their products. For example, Apple, Sony, Picturetel, Philips Consumer Electronics, and Thomson Consumer Electronics, as OEMs, will incorporate components from manufacturers such as us into their products. In a 1999 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". Frost & Sullivan's December 1999 survey gave Focus a 50% market share with the next competitor at 32%. Focus believes the smaller competitors such as Aitech and ADS Technologies have moved away from the scan conversion business to focus on USB peripherals. UMAX and Good Systems no longer distribute in the United States. In the scan conversion chip business, Focus has what it believes to be the two largest of three potential contracts with the US TV manufactures. It's FS400 chip is used by all but one major competitor for their products which are primarily distributed in the international market. These competitors include: Furthertech, Grandtec and Deltron. In the videoconferencing market, the two largest companies, Picturetel and Polycom, distribute our professional and consumer scan converters exclusively. Furthermore, Picturetel integrates our FS400 chip into their mid-range systems. We have sought to solidify our leadership position through: o Continued and development investment, resulting in additional patents being awarded to Focus, and in what be believe to be industry-wide recognition of the superior video quality of its products, o new licensing agreements with OEMs for use of FOCUS' proprietary TV video conversion ASIC chips in current and future product designs, and o new strategic alliances with major OEMs, resellers and national retail chains. Furthermore, some of our recent accomplishments include: o Focus introduced the FS400 chip family in December of 1999. o Focus introduced the FS400 internet chip family in May 2000 which is the first to support XGA and we believe has higher video quality than our two primary competitors: Chrontel and Conexant. The chip was designed under a confidential agreement with a major semiconductor manufacturer. o Focus completed a custom designed set-top box chip for a major semiconductor manufacturer under a confidential agreement. The FS461 chip was publicly released in May 2001. o Focus released more than 15 customer/partnership agreements in 2000 Some of our recent transactions include: o December 1993. Lapis Technologies, Inc. (`Lapis'), a developer of high-quality, low- cost Macintosh PC-to-TV video graphics products. o September 30, 1996. 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. o September 30, 1997. Focus sold its line of computer connectivity products. o March 31, 1998. Selected assets of Digital Vision, Inc., a manufacturer of both PC-to-TV and TV- to-PC products. o July 29, 1998. PC Video Conversion, Inc., a manufacturer of professional high-end video conversion products. In December 1998, Focus restructured this entity into a Professional Products Research & Development group and began to consolidate its operating activities to Focus' corporate headquarters. o January 16, 2001. Videonics, Inc. In connection with the acquisition we issued approximately 5,135,000 shares of common stock to Videonics shareholders and Videonics became a wholly-owned subsidiary of Focus. Videonics is a designer of high quality, digital-video equipment for the broadcast, cable, business, industrial, presentation, Internet, and home video production markets. Videonics products include application controllers, edit controllers, mixers, character generators, and video editing software solutions. 23 Focus' executive offices are located 1370 Dell Avenue, Campbell, CA 95008-6604. Its Research and Development center is located at 22867 Northwest Bennett Rd. Suite 120, Hillsboro, Oregon 97124. Focus' general telephone number is (408) 866-8300, and its Worldwide Web address is http://www.Focusinfo.com. Information contained on the Website is not part of this document. Business Strategy In 2000 we continued to concentrate on the OEM and Professional products groups. Our ASIC chip products are targeted for the scan conversion, commercial television, video conferencing and set top boxes for the cable, internet appliance, gaming, and home gateway industries. These are industries that require the best video conversion technology available in the market. The Focus FS400 series of ASICs has patented designs that dramatically improve video quality while reducing cost for these industries. We continue to design complete products for the professional audio video and home theater markets using our proprietary software and ASIC designs to deliver feature rich products to the market. During the year ended December 31, 2000, we only had operations in the United States. During the year ended December 31, 1999, we had operations in the United States and in the Netherlands. On July 1, 1999, Focus closed its foreign subsidiary and on August 15, 1999 dissolved this entity. Sales to a major distributor as of December 31, 2000 and 1999 represented approximately $2,242,000 or 15% and $4,318,000 or 25% of our revenues, respectively. The following table summarizes revenue by geographic area: For The Year Ended December 31, ------------------------------- 2000 1999 ---- ---- United States $14,365,000 $16,425,000 North America (excluding the United States) 39,000 54,000 Europe 738,000 396,000 Asia 91,000 308,000 ------ ------- Total $15,233,000 $17,183,000 =========== =========== Acquisition of Videonics Inc. On January 16, 2001, Focus Enhancements, Inc., acquired all the shares of Videonics in a transaction accounted for using the purchase method of accounting. Focus issued 0.87 shares of Focus common stock for each issued and outstanding share of Videonics common stock on the closing date. Based on the exchange ratio, a total of approximately 5,135,000 shares were issued. Focus incurred approximately $637,000 in acquisition expenses, including financial advisory and legal fees and other direct transaction costs, which were included as a component of the purchase price. Videonics was a California corporation organized in 1986 was, and now as part of Focus, is a leader in the design, development, 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. 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. It also implements much of its products' functionality in software. We believe that these 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 merger provides us with an opportunity to take advantage of the complementary strategic fit of the Focus and Videonics businesses, combining operations to create a unique commercial entity in the market for video products and technologies. In addition, certain new application specific integrated circuits ("ASICs") currently under development by our engineering team have integrated video mixing and switching technology. We believe that the combined engineering team scan capitalize on this chip technology to build attractively priced digital video solutions for an expanded customer base. 24 In accordance with Focus' restructuring plan, it has significantly reduced its post merger staffing in the areas of operations, customer support and finance as all the aforementioned functional areas have been consolidated into Videonics' Campbell, California facility. Focus negotiated an early release from its lease of a 22,000 square foot facility located in Wilmington, Massachusetts and has since moved its remaining Massachusetts' sales personnel into a 2,800 square foot facility located in Chelmsford, Massachusetts. Research And Development We continue to invest heavily in research and development. Of the $2.5 million invested on research and development in 2000, approximately 75% was in ASIC chip development and support activities, with the remainder to support new products for the professional and home theater markets. Marketing And Sales Strategy Focus believes it has vigorously pursued the OEM market for its technology in 2000, resulting in numerous agreements with some of what we believe to be the most significant names in the United States and global TV, PC, Video Conferencing, and Internet appliance markets. In 2001 we have continued to concentrate our marketing efforts toward those OEMs which we believe dominate their respective markets, and which we believe have the manufacturing, sales and distribution networks in place to capitalize on the growth forecasted for the TV-to-PC conversion products over the next decade. The Professional market continues to be a growing segment, and we believe we have made significant inroads into that market in 2000. In September 2000, Focus unveiled its new TView QuadScan Pro, a cost-effective, high- resolution line quadrupler/video scaler at the CEDIA Expo `00. 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 the introduction of the Pro AV 1600 product family. Furthermore, we recruited more than 250 dealers in 2000 to distribute these products. While Focus believes 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. We also continue 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. Distribution Focus has made investments over the last several years in creating a global reseller/VAR channel. In the United States and Canada, we market and sell our products through o national resellers such as CompUSA, Micro Center, Fry's Electronics, and J&R Music World; o national distributors such as Ingram Micro, D&H Distributing and Academic Distributing; and o third-party mail order resellers such as MicroWarehouse, Multiple Zones, PC Connection and CDW. In the rest of the world, our products are sold to resellers, independent mail order companies and distributors in Latin America, France, the United Kingdom, Scandinavia, Germany, Switzerland, Italy, Australia, Japan, China, Singapore, and the Republic of Korea. Products And Applications Focus develops internally all of its PC-to-TV video conversion products, both external boxes and ASICs, thereby allowing Focus to market and sell a proprietary group of products to the PC-to-TV video conversion marketplace. Focus' products are compatible with both Windows and Mac OS personal computers. Our 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. Our 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. We currently sell our PC-to-TV video conversion products under the TView brand. These products have a variety of features geared toward the needs of business, education and consumer customer groups. We have developed various proprietary enhancements for its PC- to-TV products including image stabilization, which eliminates all flicker, and TrueScale 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 External Set-Top Boxes. Focus currently offers four models of external set-top boxes under the TView brand. Focus sells the TView Micro XGA, the TView Silver, the TView Gold, and the iTView DV, all of which are compatible with both 25 Windows- and Mac OS-based personal computers. All the external set-top boxes weigh less than seven ounces, and are easily connected to the VGA video port of the computer and a television through the cables provided. Internal Card Focus. Focus 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. Commercial PC-to-TV Video Scan Conversion Products Internal Board Level Products for PCs and TVs. "Internal Board Level" products are printed circuit board products designed for each OEM's custom requirements. For those environments where portability is less important, such as classrooms or home entertainment systems, Focus offers board level products that can be installed directly into a personal computer or television. Focus currently offers board level products for OEM televisions and medical imaging. Professional PC-to-TV Video Scan Conversion Products Our TView Pro AV products are high-end video conversion devices marketed to professional broadcast studios, post production houses, video conferencing rooms and presentation markets. Focus 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) Focus currently offers three families of integrated circuits. The FS300 family of ASICs was developed for both consumer and commercial applications. The FS300 was Focus' third generation PC-to-TV video encoder designed to increase the video conversion capabilities of FOCUS' products while reducing the cost of manufacturing Focus' products. The FS300 supports resolutions of up to 1024 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, Focus 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. In December of 1999, Focus announced sale of its FS400 digital video coprocessor. 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 has replaced the FS310 in the year 2000. Focus also announced sale of its FS450 iNet TV ASIC in May 2000. The FS450 family of ASICs was specifically designed for the growing 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 Focus intends to concentrate 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Operating Results for the Years Ended December 31, 2000 and 1999 - Write-down of Capitalized Software" on page 17 for more information. 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. Focus' 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. 26 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. Focus' 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. Customer Support Management believes that its future success will depend, in part, upon the continued strength of customer relationships. In an effort to ensure customer satisfaction, Focus provides customer service and technical support through a five-days- per-week "hot line" telephone service. Focus uses 800 telephone numbers for customer service and a local telephone number for technical support (the customer pays for the phone charge on technical support). The customer service and support lines are currently staffed by technicians who provide advice free of charge to ensure customer satisfaction and obtain valuable feedback on new product concepts. In order to educate its own telephone support personnel, Focus also periodically conducts in-house training programs and seminars on new products and technology advances in the industry. Focus offers this same level of support for its entire domestic market including its direct market customers who purchase Focus' products through computer superstores or system integrators. Focus also provides technical support to its international resellers and distributors. Focus' international resellers and distributors also provide local support to the customers for their respective markets. Focus provides customers with a one- to three-year warranty on all products and will repair or replace a defective product still under warranty coverage. Returned products with defective components are returned by Focus to the component vendors for repair or replacement. Competition Focus currently competes with other developers of PC-to-TV conversion products and with developers of videographic integrated circuits. Although Focus believes that it is a leader in the PC-to-TV conversion product marketplace, the video graphic 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 scan converter market, Focus competes with one primary competitor AVerMedia. In the video graphic integrated circuits market, Focus competes with Averlogic, AI Tech, TVIA, Conexant and Chrontel. We believe some of our competitors have greater technical and capital resources, more marketing experience, and larger research and development staffs than Focus in the video graphic integrated circuits market. With an aggressive effort, we believe our competitors could severely affect our business. Management believes that it competes favorably on the basis of product quality and technical benefits and features. Focus also believes it provides competitive pricing, extended warranty coverage, and strong customer relationships, including selling, servicing and after-market support for the finished systems products. Furthermore, Focus believes it is the only company that addresses the full range of products with an intensive chip-development effort. However, there can be no assurance that Focus 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, Focus relies primarily on turnkey subcontractors who utilize components purchased or specified by Focus. The "turnkey" house is responsible for component procurement, board level assembly, product assembly, quality control testing, final pack-out. During 2000, Focus relied on four turnkey manufacturers for approximately 90% of Focus' product manufacturing. Two manufacturers, based in Taiwan, supply set top box finished products. One manufacturer in Korea provides 100% of the ASIC production. One manufacturer in California supplies the 27 Company's professional products. For certain commercial PC-to-TV video conversion products, Focus' turnkey manufacturers ship directly to the OEM customer and forward-shipping information to Focus for billing purposes. Quality control is maintained through standardized quality assurance practices at the build site and random testing of finished products as they arrive at Focus' 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 Focus in its fulfillment center. Upon receipt of a returned product, a trained testing technician at Focus 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 Focus and returned to the customer. The majority of Focus' defective returns are repaired or replaced and returned to customers within five business days. Intellectual Property And Proprietary Rights As of September 30, 2001, Focus had five patents pending and three patents issued. Focus has also filed applications to register eight trademarks to add to its two currently registered trademarks. Historically, Focus 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 Focus, 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 Focus. In addition, Focus 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 Focus' proprietary information or that others will not independently develop products or technology that are equivalent or superior to those of Focus. Because of the rapid pace of technological innovation in Focus' markets, management believes that in addition to the patents filed and issued, Focus' 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 September 30, 2001, the Company employed 93 people on a full-time basis, of which 29 are in research and development, 23 in marketing and sales, eight in customer support, 24 in operations, and nine in finance and administration. Backlog At September 30, 2001, the Company had a backlog of approximately $150,000 for products ordered by customers as compared to a backlog of $496,000 at December 31, 2000, an decrease of $346,000 or 70%. The Company expects to fill these orders in 2001. 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. Description of Property As of December 31, 2000, the Company leased approximately 30,000 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 control, packaging and shipping. This lease was scheduled to expire in February 2004. On March 31, 2001, the Company was released from its Wilmington lease obligation and entered into a new lease for 2,800 square feet of property in Chelmsford, Massachusetts. The new lease commenced on April 1, 2001 and is for a term of 36 months. Focus leases additional space in the following locations: Orinda, California and Beaverton, Oregon. The Orinda facility is mainly used for research and development with approximately 500 square feet at $950 per month. The Beaverton facility is mainly used for research and development, with approximately 7,400 square feet at $7,168 per month and expires October 31, 2005. 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. See "Note 17 - Subsequent Event - Acquisition of Videonics Inc." on page F-24. Legal Proceedings Class Action Suit. Focus and one of its directors have been named as defendants in a securities class action pending in United States District Court for the District of Massachusetts. The complaint alleges a class of shareholders who purchased Focus shares during the July 17, 1997 to February 19, 1999 period (C.A. No. 99-12344-DPW). The complaint was initially filed in November of 1999 and has been amended several times. The complaint purports to allege violations of the federal securities laws and seeks unspecified monetary damages. Defendants moved to dismiss the action. The Federal District 28 Court granted certain portions of the Company's motion to dismiss and denied other portions allowing the case to go forward into pretrial discovery as to certain matters. On or about December 7, 2001 the parties reached an agreement in principle to settle this case. The settlement is subject to the preparation of a settlement stipulation mutually satisfactory to all parties, and court approval, after notice to shareholders and a hearing. The settlement will be funded entirely by proceeds from defendants' insurance carrier. There can be no assurances, however, that the parties will eventually reach a settlement acceptable to all sides. 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 that the transaction was simply a sale of inventory for which Focus was never paid. CRA contended otherwise. CRA brought suit against Focus and on September 21, 1998, filed in the 170th Judicial District Court of McLennon County, Texas (Case No. 98-3151-4) for breach of contract and other claims, contending that Focus grossly exaggerated the demand for the product and the margin of profit that 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. The case was removed to the US District Court for the Western District of Texas, Waco, Texas (Civil No. W-99-CA-031). A jury trial in May 2000 in that court 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 in favor of CRA for actual damages, punitive damages, attorney's fees, costs, and interest. In connection with this judgment, we recorded an expense of $2,147,722 in the period ended September 30, 2000. The court overruled the motion for new trial that Focus filed, and Focus has appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit in New Orleans, Louisiana. On October 27, 2000, Focus submitted 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) and the U.S. District Court granted a stay of any enforcement of the judgment pending appeal. The court of appeals held oral argument on December 3, 2001. On January 3, 2002, the Court affirmed the judgment awarded to CRA virtually in its entirety. The Company had already recorded a charge to operations to establish a legal reserve for such amount during the third quarter of 2000. General. 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. 29 DIRECTORS AND EXECUTIVE OFFICERS Management Each member of our board of directors serves for a one-year term and until their successors are elected and qualified. Our executive officers and directors as of December 31, 2000 are as follows: Name Age Position - ---- --- -------- Thomas L. Massie 39 Chairman of the Board William B. Coldrick(2) 59 Vice Chairman of the Board Timothy E. Mahoney(1) 45 Director John C. Cavalier (1)(2) 59 Director William Dambrackas(2) 57 Director Brett A. Moyer 43 Executive Vice President & Chief Operating Officer Thomas Hamilton 52 Vice President of Research & Development William R. Schillhammer III 47 Vice President of OEM Sales - ---------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Directors Thomas L. Massie is Chairman of the Board and a co-founder of the Company 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 1986 to 1990, Mr. Massie was the Chairman of the Board, and founder of MASS Microsystems. From 1985 to 1986, Mr. Massie was the co-founder and Executive Vice President of Sales and Marketing for MacMemory, Inc. From 1979 to 1984, Mr. Massie was a Non-Commissioned Officer for the U.S. Army, 101st Airborne Division. 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. From 1982 to 1992, Mr. Coldrick served with Apple Computer Inc. in several senior executive positions including Senior Vice President of Apple USA from 1990 to 1992. Prior to joining Apple Computer Inc. Mr. Coldrick held several sales and marketing management positions with Honeywell Inc. from 1968 to 1982. Mr. Coldrick holds a Bachelor of Science degree in Marketing from Iona College in New Rochelle, New York. Mr. Coldrick's 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. He earned his undergraduate degree from the University of Notre Dame and an MBA from Michigan State University. Mr. Cavalier's term expires in 2002. Timothy E. Mahoney has served as Director of the Company since March 1997. He has more than 18 years of experience in the computing industry. Mr. Mahoney founded Union Atlantic LC, in 1994, a consulting company for emerging technologies and in 1999 became Chairman and COO of vFinance.com, Inc. (dong business as vFinance, Inc.), the parent company of Union Atlantic, LC and vFinance Capital LC (formerly Union Atlantic Capital LC.). . He earned his BA degree in computer science and business from West Virginia University and an MBA degree from George Washington University. Mr. Mahoney's term expires in 2001. 30 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 Delaware's "Entrepreneur of the Year" in 1984. Mr. Dambrackas' term expires in 2003. On March 6, 2001, Mr. Dambrackas resigned to allow for a seven member Board of Directors, pursuant to the terms of the merger agreement between Focus Enhancements Inc., and Videonics Inc., dated August 30, 2000. In accordance with the merger agreement, the new Board of Directors will consist of four directors of whom will be selected by the Board of Directors of Focus and three directors of whom will be selected by the Board of Directors of Videonics. Executive Officers Not Directors Brett A. Moyer joined the Company in May 1997, and has assumed the role of Executive Vice President of Sales & Marketing and Chief Operating Officer. 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). Thomas Hamilton joined the Company in September 1996 and has assumed the role of Chief Technology Officer. Mr. Hamilton joined the Company when the Company acquired TView, Inc. From 1992 to 1996, Mr. Hamilton was Executive Vice President and Co-Founder of TView, Inc. Mr. Hamilton grew TView from inception to a $5M 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 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 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. New Directors and Officers - Acquisition of Videonics Pursuant to the terms of the merger agreement between Focus Enhancements Inc., and Videonics Inc., dated August 30, 2000, it was agreed that the composition of the Board of Directors of Focus would be modified to consist of seven directors, four of whom will be selected by the Board of Directors of Focus and three of whom will be selected by the Board of Directors of Videonics. It was also agreed that Thomas L. Massie would remain as Chairman of the Board of Focus for the remainder of his current term. In connection with the acquisition of Videonics on January 16, 2001, the following individuals were appointed to serve as executive officers of Focus: o Michael L. D'Addio, the Chief Executive Officer of Videonics, became the President and Chief Executive Officer of Focus. o Jeffrey A. Burt, the Vice President of Operations of Videonics became the Vice President of Operations for Focus. o Gary L. Williams, the Vice President of Finance and Chief Financial Officer of Videonics, became the Vice President of Finance and Chief Financial Officer of Focus. 31 On March 6, 2001, Focus' director William Dambrackas resigned, to allow for the appointment of three Videonics directors in accordance with the merger agreement. In conjunction with the resignation, the following three Videonics directors were appointed to the Focus Board of Directors: Michel L. D'Addio Carl E. Berg N. William Jasper, Jr. New Directors Michael L. D'Addio, joined Focus to serve as its President and Chief Executive Officer on January 16, 2001 in connection with the acquisition of Videonics Inc. Mr. D'Addio was a co-founder of Videonics, and had 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. 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. 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. New Officers Jeffrey A. Burt joined Focus to serve as its Vice President of Operations on January 16, 2001 in connection with the acquisition of Videonics Inc. Mr. Burt had 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 joined Focus to serve as its Vice President of Finance & CFO on January 16, 2001 in connection with the acquisition of Videonics Inc. Mr. Williams had 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. Employment Agreements - New Officers Focus and Michael D'Addio are parties to an employment contract effective January 16, 2001. Pursuant to this employment contract, Mr. D'Addio serves as Chief Executive Officer and President. Mr. D'Addio's base salary shall be $190,000 per year. In addition, Mr. D'Addio was granted 500,000 stock options which vest over a three year period. Under the option plan, these options accelerate, so as to be immediately exercisable if Mr. D'Addio 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. The agreement terminates on December 31, 2003. Mr. Burt and Mr. Williams have entered into Key Employee Agreements to provide for the acceleration of option vesting under certain circumstances upon a change in control as defined in those agreements. 32 Executive Compensation The following table summarizes the compensation we paid or accrued for services rendered for the years ended December 31, 2000, 1999 and 1998, to our Chief Executive Officer and each of the four other most highly compensated executive officers who earned more than $100,000 in salary and bonus for the year ended December 31, 2000. Summary Compensation Table
Long-Term Compensation Annual Compensation(1)(2) Options/ ------------------------------------ ---------------- Name and Principal Position Year Salary ($) Bonus($) SARs(3) - ------------------ ---- ---------- -------- ------- Thomas L. Massie 2000 $ 85,929 -- 100,000 Chairman of the Board(4) 1999 $150,000 $69,154 100,000 1998 $150,000 $132,833 200,000 Christopher P. Ricci 2000 $134,503 $15,220 175,000 Sr. Vice President and General Counsel(5) 1999 $150,000 $15,200 45,000 1998 $150,000 $27,500 125,000 Brett Moyer 2000 $154,999 $23,521(6) 200,000 Executive Vice President & Chief 1999 $130,000 $63,724(6) 40,000 Operating Officer 1998 $130,000 $41,000(6) 100,000 Thomas Hamilton 2000 $135,000 $3,445 125,000 Vice President of Research 1999 $129,192 -- 175,000 1998 $110,000 $5,000 25,000 William Schillhammer 2000 $106,666 $29,369(6) 125,000 Vice President of OEM Sales 1999 $ 95,000 $52,900(6) 40,000 1998 $ 85,000 $22,204(6) 122,000
- ---------- (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. (4) During 1998, 1999 and through April of 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. Mr. Massie was paid $88,000 in consulting compensation in 2000. In addition, the Company agreed to forgive notes due the Company from Mr. Massie that totaled $140,000. For a discussion of these agreements, see "--Subsequent Separation and Consulting Agreements" on page 35. (5) On September 6, 2000, Mr. Ricci resigned from his position as Senior Vice President and General Counsel of Focus. He continued to work for the Company on a part time basis through April 30, 2001. (6) Includes compensation based on sales commissions. Stock Option Plans Focus maintains various qualified and non-qualified stock option plans for its officers and directors. As of December 31, 2000, 5,083,637 options to purchase common stock remained available for grant. These amounts include options that were approved under the 2000 Non-Qualified Stock Option Plan. 2000 Non-Qualified Stock Option Plan 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 33 from 3,000,000 to 5,000,000 in order to accommodate requirements in connection with the acquisition of Videonics. The plan was approved by the stockholders of Focus on December 28, 2000. 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 was approved by Focus shareholders (December 28, 2000.) Options granted under this plan generally vest over a period of three years. The five (5) members of the Board of Directors of Focus were each granted 100,000 options under this plan. Mr. Massie was granted a total of 100,000 options under the 2000 Plan for the year ended December 31, 2000. The following tables sets forth as to the Chairman 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, 2000. OPTION/SAR GRANTS IN 2000
Number of Securities % of Total Underlying Options/ SARs Options/ SARs Granted to Exercise Or Granted Employees in Base Price Name (#)(1) 2000(2) ($/per Share) Exp. Date - ---- ------ ------- ------------- --------- Thomas L. Massie 100,000 3.82% $0.5625 12/28/05 Christopher P. Ricci 175,000 6.70% $0.5625 12/28/05 Brett Moyer 200,000 7.65% $0.5625 12/28/05 Bill Schillhammer 125,000 4.79% $0.5625 12/28/05 Thomas Hamilton 125,000 4.79% $0.5625 12/28/05
- ---------- (1) The purpose of Focus' stock option plans, is to provide incentives to employees, directors and consultants who are in positions to make significant contributions to Focus. (2) Focus granted options to purchase a total of 2,611,875 shares of common stock to employees and directors in 2000. The following table sets forth information concerning options exercised during fiscal year 2000 and the value of unexercised options as of December 31, 2000 held by the executives named in the Summary Compensation Table above. AGGREGATED OPTION/SAR EXERCISES IN 2000 AND FISCAL YEAR-END OPTION/SAR VALUES
Value of Unexercised Number of Securities In-the-Money Shares Underlying Unexercised Options/SARs at Acquired on Value Options/SARs at Year-End Year-End(1) Exercise Realized ------------------------------- ------------------------------- (#) ($) Exercisable Unexercisable Exercisable Unexercisable --- --- ------------- ----------------- -------------- ---------------- Thomas L. Massie -- -- 438,891 211,109 $2,889 $10,111 Christopher P. Ricci -- -- 167,222 136,110 $5,056 $17,694 Brett Moyer -- -- 174,445 215,554 $5,778 $20,222 William Schillhammer -- -- 117,447 169,553 $3,611 $12,638 Thomas Hamilton -- -- 94,446 222,220 $3,611 $12,639
- ---------- (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, 2000 ($0.69) multiplied by the number of shares underlying the option. 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. In May 2000, Mr. Moyer's employment contract was amended to extend the term until May 1, 2002, which renews automatically after May 1, 2002 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 34 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. 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 on a part time basis, terminating April 30, 2001, unless sooner terminated by both parties. 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. 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. On December 28, 2000, the Compensation Committee of Focus agreed to forgive the remaining amount due under the two notes. 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. As of December 31, 2000, the Company had paid Mr. Massie a total of $88,000 under the agreement. Compensation of Directors Non-employee directors are reimbursed for out of pocket expenses incurred in attending the meetings. No director who is an employee receives separate compensation for services rendered as a director. Non-employee directors are eligible to participate in our stock option plan. 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. 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. Upon joining the Board of Directors, on April 22, 1999, Mr. Dambrackas was granted a stock option for 100,000 shares of common stock. 35 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 January 16, 2002 by (i) each person known to the Company who beneficially owns 5% or more of the 35,857,893 outstanding shares of its Common Stock, (ii) each director of the Company, (iii) each executive officer identified in the Summary Compensation Tables above, and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law.
Percentage of Number of Shares Outstanding Name Beneficially Owned Common Stock(1) ---- ------------------ --------------- Thomas L. Massie(2)......................................... 819,135 1.9% Michael L. D'Addio(3)....................................... 988,547 2.3 Carl E. Berg(4)............................................. 3,344,247 7.9 John C. Cavalier(5)......................................... 144,446 * William B. Coldrick(6)...................................... 226,112 * N. William Jasper, Jr.(7)................................... 70,174 * Timothy E. Mahoney(8)....................................... 97,222 * Brett A. Moyer(9)........................................... 338,989 * Jeffery Burt(10)............................................ 98,600 * Thomas Hamilton(11)......................................... 224,056 * Gary L. Williams(12)........................................ 130,986 * All executive officers and directors as a group (11 persons)(13)............................................ 6,482,514 15.3%
- ---------- * 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 577,779 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter. (3) Includes 794,103 shares of common stock held directly or indirectly by Mr. D'Addio. Includes 194,444 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter. (4) Includes 1,412,469 shares of common stock held directly or indirectly by Mr. Berg and 1,904 shares of preferred stock that are convertible into 1,904,000 shares of our common stock. Includes 27,778 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter (5) Includes 144,446 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002 or within 60 days thereafter. (6) Includes 226,112 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter (7) Includes 27,214 shares of common stock held directly or indirectly by Mr. Jasper. Includes 42,960 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter. (8) Includes 97,222 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter. Does not include 370,332 shares owned or 193,690 warrants held by vFinance.com, Inc. or any of its affiliates. See "- Certain Relationships and Related Transactions" and "Selling Shareholders - Services Rendered - vFinance Capital L.C." (9) Includes 40,100 shares of common stock held directly by Mr. Moyer. Includes 298,889 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter. (10) Includes 98,600 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter. (11) Includes 6,000 shares of common stock held directly by Mr. Hamilton. Includes 218,056 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter. (12) Includes 130,986 shares issuable pursuant to outstanding stock options that are exercisable at January 16, 2002, or within 60 days thereafter. (13) Includes 2,057,272 shares issuable pursuant to options to purchase common stock exercisable at January 16, 2002, or within 60 days thereafter. 36 Certain Relationships and Related Transactions vFinance.com, Inc. Timothy Mahoney, who is a Focus director, is a principle of vFinance.com, Inc., the parent of vFinance Capital L.C. and a partner of Union Atlantic L.C. For the years ended December 31, 2000 and 1999, Focus paid Union Atlantic L.C. $83,206 and $112,226, respectively in consulting fees in connection with equity financing agreements negotiated by Union Atlantic L.C. In addition, vFinance Capital L.C. was also issued 279,325 shares of Focus common stock in lieu of investment banking fees in connection with the acquisition of Videonics Inc in January 2001, including certain additional shares due to the change in the market price of the common stock of Focus. Additionally, 91,007 shares of Focus Common Stock were issued to vFinance.com, Inc. for payment under and settlement for the termination of a Management and Financial Consulting Agreement between Focus and Union Atlantic L.C. and vFinance Capital L.C., including certain additional shares due to the change in market price of the common stock of Focus. Pursuant to various agreements, in the event vFinance.com, Inc. or any of its affiliates publicly sell the shares of common stock in the market at a price below $1.03, we would be required to issue to vFinance.com, Inc. additional shares to make up any shortfalls, up to a maximum of 3,500,000. Such shares can be repurchased by Focus within five (5) business days from the date of issuance at the difference between the market price at the time the shares were sold by vFinance or its affiliates and $1.03. Such amount would not exceed $301,000. Of the 370,332 shares issued, 47,055 shares have been issued pursuant to the price protection provision. See also "Selling Shareholders - Services Rendered - vFinance Capital L.C." beginning on page 48 for a discussion of possible placement fees to be paid, and warrants issued, to vFinance Capital L.C. In addition, pursuant to an agreement dated December 27, 2001, vFinance received a warrant to purchase 25,000 shares of common stock of Focus at a per share exercise price of $1.54 per share. For such compensation, vFinance will provide non-exclusive financial advisory services for a period of 12 months. Furthermore, in connection with its efforts to find investors in the private placement completed on January 11, 2002, vFinance received $275,000 in cash and a warrant to purchase 123,690 shares of common stock of Focus at $1.36 per share. Carl Berg Carl Berg, a Focus director and shareholder as of March 6, 2001 and previous director and shareholder of Videonics Inc., had a $1,035,000 loan outstanding to Videonics Inc., that Focus assumed on January 16, 2001 in connection with the merger. This unsecured loan, bears interest at 8% per year, and is due on January 16, 2002. Accrued interest is payable at maturity. Additionally, Carl Berg loaned Focus $2.3 million to collateralize the $2.3 million bond posted in connection with the CRA litigation. 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. 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. On February 28, 2001, Carl Berg, loaned Focus $1.0 million and agreed to loan up to an additional $1.0 million to support the Company's working capital needs. The promissory note has a due date of September 25, 2003 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. 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. For a discussion of the conversion of the notes to convertible preferred stock, see "Note 8. Stockholders Equity - Series B Preferred Stock" on page S-10. On June 29, 2001, Carl Berg loaned Focus an additional $650,000 pursuant to a secured convertible promissory note. All material affiliate transactions and loans between Focus and its officers, directors, principal shareholders or other affiliates are made or entered into on terms that are no less favorable to such individuals than would be obtained from, or given to, unaffiliated third parties and are approved by a majority of the board of directors who do not have an interest in the transactions and who have access, at Focus' expense to Focus' or independent legal counsel. 37 PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION On January 16, 2001, Focus Enhancements, Inc., acquired all the shares of Videonics, Inc., in a transaction accounted for using the purchase method of accounting. Focus issued 0.87 shares of Focus common stock for each issued and outstanding share of Videonics common stock on the closing date. Based on the exchange ratio, a total of approximately 5,135,000 shares were issued. Focus also incurred approximately $637,000 in acquisition expenses, including financial advisory and legal fees and other direct transaction costs, which were included as a component of the purchase price. The aggregate purchase price totaled approximately $9.1 million. 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 December 31, 2000. The unaudited pro forma combined condensed balance sheet combines the consolidated balance sheet of Focus as of December 31, 2000, and the consolidated balance sheet of Videonics as of December 31, 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, 2000 combined with the statement of operations of Videonics for the year ended December 31, 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 based on management's estimates and an independent valuation of the intangible assets acquired. In December 2000, the Board of Directors of Focus approved a restructuring plan. The expenses included in the restructuring are associated with the integration of the two companies, incurred by the acquirer (Focus) and are primarily related to severance, lease abandonment and equipment disposal. These costs are direct and incidental to the merger. In accordance with generally accepted accounting principles, the acquirer must expense these costs and not include them as part of the purchase price. Estimated costs under the restructuring totaled $522,000 which have been included in the pro forma combined consolidated balance sheet as of December 31, 2000. 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. 38 Unaudited Pro Forma Condensed Consolidated Balance Sheet As of December 31, 2000 (in thousands)
Focus Videonics Pro Forma Pro Forma Actual Actual Adjustments Combined ------ ------ ----------- -------- Assets Current assets: Cash and cash equivalents $ 352 $ 357 -- $ 709 Certificate of deposit 1,263 -- -- 1,263 Legal bond 2,362 -- -- 2,362 Accounts receivable, net 1,778 550 -- 2,328 Inventories 2,095 2,250 -- 4,345 Prepaid expenses and other current assets 43 91 -- 134 --------- --------- --------- --------- Total current assets 7,893 3,248 11,141 Property and equipment, net 395 242 -- 637 Capitalized software development costs 728 -- -- 728 Intangible and other assets 490 43 $ 3,468 (A) (505) (F) (215) (B) 3,281 Goodwill 274 -- 5,376 (A) 5,650 --------- --------- --------- --------- Total assets $ 9,780 $ 3,533 $ 8,124 $ 21,437 ========= ========= ========= ========= Liabilities and Shareholders' Equity Current liabilities: Notes payable -- $ 400 -- $ 400 Obligations under capital lease $ 100 -- -- 100 Current portion of long-term debt 364 -- -- 364 Accounts payable 3,377 1,092 -- 4,469 Accrued liabilities 1,681 755 $ 422 (B) 2,858 Accrued legal judgement expense 2,148 -- -- 2,148 --------- --------- --------- --------- Total current liabilities 7,670 2,247 422 10,339 --------- --------- --------- --------- Convertible notes payable to shareholder 2,362 -- -- 2,362 Obligations under capital lease 102 -- -- 102 Long-term debt 64 1,035 -- 1,099 --------- --------- --------- --------- Total Liabilities 10,198 3,282 422 13,902 --------- --------- --------- --------- Shareholders' equity: Common stock 263 20,725 (20,725) (C) 51 (D) 314 Additional paid-in capital 48,727 -- 8,998 (D) 57,725 Accumulated deficit (48,708) (20,474) 20,474 (E) (505) (F) (49,213) Deferred compensation -- -- (591) (G) (591) Treasury stock (700) -- -- (700) --------- --------- --------- --------- Total shareholders' equity (418) 251 7,702 7,535 --------- --------- --------- --------- Total liabilities and shareholders' equity $ 9,780 $ 3,533 $ 8,124 $ 21,437 ========= ========= ========= =========
See accompanying notes to unaudited pro forma combined condensed consolidated financial information. 39 Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 2000 (in thousands, except per share data)
Focus Videonics Pro forma Pro forma Actual Actual Adjustments Combined ------ ------ ----------- -------- Net revenues $ 15,233 $ 11,869 -- $ 27,102 Cost of goods sold 11,836 8,456 $ 110 (I) 20,402 ---------- ---------- ---------- ---------- Gross profit 3,397 3,413 (110) 6,700 ---------- ---------- ---------- ---------- Operating expenses: Sales, marketing and support 3,951 3,098 90 (I) 7,139 General and administrative 3,887 1,148 30 (I) 5,065 Research and development 1,459 2,155 65 (I) 3,679 Amortization 717 -- 2,160 (H) 2,877 Restructuring expense 724 -- -- 724 Write-down of capitalized software 2,289 -- -- 2,289 Impairment of goodwill 63 63 ---------- ---------- ---------- ---------- Total operating expenses 13,090 6,401 2,345 21,836 ---------- ---------- ---------- ---------- Loss from operations (9,693) (2,988) (2,455) (15,136) Interest expense, net (268) (132) -- (400) Other income, net 82 -- -- 82 CRA judgement expense (2,148) -- -- (2,148) ---------- ---------- ---------- ---------- Loss before income taxes (12,027) (3,120) (2,455) (17,602) Income tax expense (2) -- -- (2) ---------- ---------- ---------- ---------- Net Loss $ (12,029) $ (3,120) $ (2,455) $ (17,604) ========== ========== ========== ========== Basic and diluted net loss per share $ (0.48) $ (0.53) $ (0.58) ========== ========== ========== Number of shares used in basic and diluted computation 25,225 5,898 30,360 ========== ========== ==========
See accompanying notes to unaudited pro forma combined condensed consolidated financial information. 40 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 1,134,249 Focus stock options valued at $1,089,879 in exchange for Videonics options and estimated direct transaction costs of $637,000. The merger was completed on January 16, 2001. 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 number of shares of Focus common stock issued were approximately 5,135,000 shares, adjusted for the cashing out of fractional shares. 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. In addition, pursuant to the terms of the merger agreement Focus issued options to purchase 1,134,249 shares of Focus common stock at a weighted average exercise price of $1.07. The fair value of options issued less the intrinsic value of the unvested options, as well as estimated direct transaction expenses of $637,000, 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.......................... $ 7,960 Assumption of Videonics options........................ 498 Estimated transaction costs and expenses............... 637 ------- Total purchase cost.................................... $ 9,095 ======= The purchase price allocation is as follows (in thousands):
Annual Useful Amount Amortization lives ------ ------------ ----- Purchase Price Allocation: Tangible Assets............................. $ 3,533 n/a n/a Intangible assets acquired: Existing technology........................ 1,888 $ 472 4 years Assembled workforce........................ 899 300 3 years Tradename.................................. 176 44 4 years Goodwill................................... 5,376 1,344 4 years In-process research and development........ 505 n/a n/a Long-term debt.............................. (1,035) n/a n/a Other liabilities........................... (2,247) n/a n/a --------- --------- Net estimated purchase price allocation..... $ 9,095 $ 2,160 ========= =========
The tangible net assets acquired represent the historical net assets of Videonics as of December 31, 2000, which approximated fair value. 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, $505,000 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. 41 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 by an independent appraiser 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 were 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. 42 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 Videonics' products will continue to be 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............... $ 1,888,000 Assembled workforce............... 899,000 Tradename......................... 176,000 Goodwill.......................... 3,450,000 ------------ Total....................... $ 6,413,000 ============ (B) To reflect estimated direct transaction expenses of $637,000. (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 $7,960,000 (reduced by the par value of such stock of $51,000) and the assumption of the outstanding Videonics options valued at approximately $1,089,000. (E) To eliminate the historical accumulated deficit account of Videonics. (F) To record the in-process research and development of $505,000, which is treated as an expense and therefore increases the accumulated deficit. (G) To record deferred compensation of $591,000 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, 2000. (I) To record the amortization expense associated with the deferred compensation related to unvested options totaling $295,000 for the twelve month period. 43 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF FOCUS AND VIDEONICS Deferred tax assets totaling $1.2 million associated with non-goodwill intangibles was recorded but was offset completely by a $1.2 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. See "Information About Focus - Legal Proceedings - 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. RECLASSIFICATIONS OF CERTAIN EXPENSES Certain expenses in the periods ending December 31, 2000, have been reclassified to conform to the current period presentation. These reclassifications did not change the net loss for the period ending December 31, 2000. 44 THE OFFERING Set forth below is a summary of the share of our common stock being offered by the selling shareholders discussed in this prospectus and the effect of the sale of such shares on the total number of our outstanding shares of common stock. o Common stock offered by Euston Investments that it may purchase by exercise of stock purchase warrant received in connection with the canceled equity line of credit. 250,000 shares o Common stock offered by AMRO International that it received in a private placement and for late registration. 1,058,138 shares o Common stock offered by AMRO International that it may purchase by exercise of stock purchase warrant received in connection with a private placement. 140,000 shares o Common stock offered by Red & White Enterprises that it received as partial payment for the sale of PC Video Conversion in 1998. 468,322 shares o Common stock offered by vFinance.com, Inc. or its affiliate Critical Infrastructure LP that vFinance Capital L.C. received for investment banking services and Union Atlantic L.C. received for consulting services to Focus. 370,332 shares o Common stock offered by vFinance Capital L.C. that it may purchase by exercise of stock purchase warrants received in connection with investment banking fees, the 2002 private placement and financial advisory services. 193,690 shares o Common stock offered by Advance Electronic Support Products, Inc. that it received in full release of Focus' purchase obligations. 150,000 shares o Common stock offered by four purchasers acquired in the 2002 private placement. 2,434,490 shares o Common stock offered by four purchasers that they may purchase by exercise of stock purchase warrants received in connection with the 2002 private placement. 243,450 shares o Total shares of common stock offered by this prospectus. 5,308,422 shares o Common stock issued and outstanding as of January 16, 2002: o Prior to the issuance of shares issuable to other securities held by selling shareholders identified in this prospectus (includes 4,481,282 shares being offered pursuant to this prospectus which are already outstanding). 35,857,893 shares o After shares issuable pursuant to the exercise of 827,140 warrants held by the selling securityholders identified in this prospectus. 36,685,033 shares o Trading symbol for Focus common stock FCSE 45 SELLING SHAREHOLDERS Overview The following shareholders of FOCUS Enhancements, Inc. and holders of outstanding warrants to purchase shares exercised of our common stock are offering to sell up to 5,308,422 shares of our common stock under this prospectus. Throughout this prospectus, we often refer to this entire group collectively as the selling shareholders. The selling shareholders acquired, or will acquire, their shares and/or warrants through privately negotiated purchases or other transactions directly from Focus. Except as disclosed below, none of the selling stockholders has had a material relationship with us or any of our affiliates within the past three years. Common Stock Issued or to be Issued for Resale:
Date Shareholder Gross Number of Shares of Received/ Currently Proceeds to Percent of Name of Shareholder Common Stock Purchased Shares Outstanding* Company Outstanding* - ------------------- ------------ ----------------- ----------- ------- ----------- AMRO International 460,650 June 9, 2000(a) Yes $1,500,000 1.3% 597,488 Various (b) Yes None 1.7 Red & White Enterprises 468,322 June 27, 2001 Yes None 1.3 vFinance.com, Inc. (c) 370,332 June 27, 2001 Yes None 1.0 Advance Electronic Support Products 150,000 June 27, 2001 Yes None 0.4 Stone Street Limited Partnership 221,317 January 11, 2002 Yes $230,000 0.6 Folkinburg Investments 995,928 January 11, 2002 Yes $1,125,000 2.8 Boat Basin Investments 88,527 January 11, 2002 Yes $100,000 0.2 Papell Holdings Limited 1,128,718 January 11, 2002 Yes $1,275,000 3.1 --------- --- Total 4,481,282 12.5% ========= ====
Common Stock to be Issued Upon Exercise of Warrants:
Date Shareholder Proceeds to Percent of Current Name of Shareholder Number of Shares was Issued Warrants Company Outstanding* - ------------------- ---------------- ------------------- ------- ----------- AMRO International 140,000 June 9, 2000 (d) 0.4% Euston Investments 250,000 July 28, 2000 (e) 0.7 vFinance Capital, L.C. (c) 193,690 Various (f) 0.1 Stone Street Limited Partnership 22,132 January 11, 2002 (g) 0.1 Folkinburg Investments 99,593 January 11, 2002 (g) 0.3 Boat Basin Investments 8,853 January 11, 2002 (g) 0.1 Papell Holdings Limited 112,872 January 11, 2002 (g) 0.3 ------- --- Total 827,140 2.3% ======= ===
- ---------- * Does not include the conversion of any shares of preferred stock. See "Note 8. Stockholders Equity - Series B Preferred Stock" on page S-10. As of January 16, 2002 there were 35,857,893 shares of our common stock issued and outstanding. The percentage calculation assumes all shares offered in this prospectus and set forth in the table (except the 827,140 shares issuable upon the exercise of warrants set forth in the table) are issued and outstanding. (a) AMRO purchased 1,400,000 shares from Focus in a private placement on June 9, 2000. AMRO has sold a total of 939,350 shares pursuant to pursuant to applicable securities rules and holding period requirements. (b) Issued to satisfy obligations under common stock and warrant purchase agreement regarding timely registration of shares purchased by AMRO. (c) vFinance Capital L.C. received 279,325 shares of our common stock in lieu of investment banking fees in connection with the acquisition of Videonics, and vFinance.com. Inc. received 91,007 shares as settlement for payment and termination of a Management and Financial Agreement with Focus and due to the change in market price of the common stock of Focus. vFinance also received 193,690 warrants as described in (f) below. Timothy Mahoney, who is a Focus director, is a principle in shareholder vFinance.com, Inc. the parent company to vFinance Capital L.C., and a partner of Union Atlantic L.C. vFinance Capital transferred all 370,332 shares of our common stock to vFinance.com, Inc. who in turn transferred 121,952 of the shares to Critical Infrastructure LP, an affiliate of vFinance.com, Inc. See also "Directors 46 and Executive Officers - Certain Relationships and Related Transactions - vFinance.com, Inc." on page 37 of this prospectus. (d) Warrants expire on June 9, 2005 and have a per share exercise price of $1.625. We will receive the proceeds upon the exercise for cash of the stock purchase warrants held by the selling stockholders. There can be no assurances if or when or if such warrants will be exercised. (e) Warrants expire on June 9, 2005 and have a per share exercise price of $0.75. We will receive the proceeds upon the exercise for cash of the stock purchase warrants held by the selling stockholders. There can be no assurances if or when or if such warrants will be exercised. (f) Warrants to purchase 123,690 shares expire on January 11, 2005 and have a per share exercise price of $1.36. Warrants to purchase 45,000 shares expire June 9, 2005 and have a per share exercise price of $1.36. Warrants to purchase 25,000 shares expire on December 27, 2004 and have a per share exercise price of $1.54. We will receive the proceeds upon the exercise for cash of the stock purchase warrants held by the selling stockholders. There can be no assurances if or when or if such warrants will be exercised. (g) Warrants expire on January 11, 2005 and have a per share exercise price of $1.36. We will receive the proceeds upon the exercise for cash of the stock purchase warrants held by the selling stockholders. There can be no assurances if or when or if such warrants will be exercised. The selling stockholders may offer shares of our common stock on The Nasdaq SmallCap Market, in negotiated transactions or otherwise, or by a combination of these methods. The selling stockholders may sell the shares through broker-dealers who may receive compensation from the selling shareholders in the form of discounts or commissions. The selling shareholders may be deemed to be an "underwriter", within the meaning of the Securities Act of 1933 in connection with its sales. We will pay the costs of registering the shares under this prospectus, including legal fees. Investors AMRO Investments International, S.A. AMRO obtained its shares of Focus stock in a private placement transaction. On June 9, 1999, we entered into a Common Stock and Warrant Purchase Agreement with AMRO International, S.A. for the private placement of 1,400,000 shares of Focus common stock. This Agreement also required the issuance of a common stock purchase warrant, under the terms of which AMRO may purchase up to 140,000 additional shares of FOCUS common stock. In return, AMRO paid to Focus $1,500,000 at the closing. In addition, we will be required to issue AMRO an additional 585,000 shares of Focus common stock to satisfy our obligations under the common stock and warrant purchase agreement regarding the timely registration of the shares purchased by AMRO. AMRO Investments International is engaged in the business of investing in publicly traded equity securities for its own account. AMRO's principal offices are located at c/o Ultra Finanz, Grossmuensterplotz 6, Zurich, (H-8022, Switzerland. Investment decisions for ARMO Investments are made by its board of directors. The directors of AMRO are Ruth Streitenberger, Michael Klee and H.U. Bachofen. Other than the 1,400,000 shares discussed in this prospectus and the warrants we issued to ARMO Investments in connection with closing the common stock purchase agreement, AMRO does not currently own any of our securities as of the date of this prospectus. Other than its obligation to purchase common shares under the common stock purchase agreement, it has no other commitments or arrangements to purchase or sell any of our securities. There are no business relationships between AMRO and us other than the common stock purchase agreement. Euston Investments Holdings Limited. Euston Investments Holdings Limited is engaged in the business of investing in publicly traded equity securities for its own account. Euston Investments' principal offices are located at 21 South Hampton Row, London WC1B 5HS England. Investment decisions for Euston Investments are made by its board of directors. The directors of Euston are David Sims and Lamberto Banchetti. Other than the warrants we issued to Euston Investments in connection with the terminated private equity line of credit agreement, Euston Investments does not currently own any of our securities as of the date of this prospectus and it has no other commitments or arrangements to purchase or sell any of our securities. There are no business relationships between Euston Investments and us other than as discussed in this document. Investors - 2002 Private Placement. On January 11, 2002, we sold in a private placement, 2,434,490 shares of our common stock to four investors for gross proceeds of $2,750,000. In connection with the private placement, we also issued warrants to purchase 367,140 shares of common stock at $1.36 per share. The four investors, which are involved in the investment business, include: o Stone Street Limited. Stone Street is an Ontario Limited Partnership organization whose principals are Michael Finkelstein, Elizabeth Leonard, Hartley Zwingerman. o Folkinburg Investments. Folkinburg Investments in a British Virgin Island Corporation and is controlled by David Sims. 47 o Boat Basin Investments LLC. Boat Basin is a St. Kitts and Nevis limited liability company. o Papell Holdings Limited. Papell Holdings is a Turks and Caicos corporation and is controlled by C.B. Williams. Services Rendered vFinance Capital L.C. vFinance Capital L.C. has acted as placement agent in connection with the private equity line of credit agreement. vFinance Capital introduced us to Euston Investments and assisted us with structuring the equity line of credit with Euston Investments. vFinance Capital's duties as placement agent were undertaken on a reasonable best efforts basis only. It made no commitment to purchase shares from us and did not ensure us of the successful placement of any securities. vFinance Capital is a wholly-owned subsidiary of vFinance.com, Inc., Boca Raton, Florida. Tim Mahoney, a member of Focus Enhancements, Inc.'s Board of Directors is the Chairman and COO of vFinance.com, Inc., the parent company of vFinance Capital LC. Mr. Mahoney and another principal each own approximately 15% of the shares of vFinance.com, Inc. This prospectus covers 25,000, 45,000 and 123,690 shares of common stock issuable upon exercise of warrants we have issued to vFinance for financial advisory services as a placement fee for introducing us to Euston Investments and for the 2002 private placement, respectively. The financial advisory warrants are exercisable at $1.54 per share and expire on December 27, 2004; the Euston warrants are exercisable at $1.625 per share and expire June 9, 2005; and the 2002 private placement warrants are exercisable at $1.36 per share and expire on January 11, 2005. The decision to exercise any warrants issued, and the decision to sell the common stock issued pursuant to the warrants, will be made by vFinance Capital's officers. In addition, this prospectus covers 279,325 shares of common stock issued to vFinance Capital for investment banking services rendered to Focus in connection with Focus' acquisition of Videonics and 91,007 shares of common stock issued as settlement for payment and termination of a Management and Financial Consulting Agreement with Focus, of which 121,952 shares have been transferred to Critical Infrastructure LP, a limited partnership in which a wholly owned company of vFinance.com, Inc. is the managing partner. The shares were issued in lieu of cash fees of $228,538 and $71,500 for such services. See also - Directors and Executive Officers - Certain Relationships and Related Transactions on page 37. At the time vFinance Capital or its affiliates acquired the shares to be resold pursuant to this prospectus, vFinance Capital, vFinance.com, Inc. and their affiliates did not have any agreements or understandings, directly or indirectly, with any person to distribute these shares. Debt Conversion Red & White Enterprises. On July 19, 2000, we entered into a Separation Agreement with Steve Wood and Red & White Enterprises. Mr. Wood was the Vice President of Pro AV engineering, former sole shareholder of PC Video Conversion, Inc., and leader of our Morgan Hill facility. On June 15, 2000, Focus closed the Morgan Hill facility. On July 28, 1998, Focus 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 our Pro AV products is completed. We signed a debt conversion agreement with Steve Wood and Red & White Enterprises, Inc., a California corporation, on July 17, 2000, for the issuance of our common stock in lieu of cash payment under a secured promissory note held by Red & White Enterprises. Steve Wood is the sole stockholder of Red & White Enterprises and a former employee of Focus. Red & White Enterprises, f/k/a PC Video Conversion, Inc., obtained the promissory note from Focus in exchange for certain assets and liabilities of PC Video Conversion, which Focus purchased in July 1998. In connection with the separation agreement, on January 24, 2001, Red & White Enterprises exercised its right to convert approximately $427,437, the remaining balance of the note was converted into 468,322 shares of Focus common stock. These shares are covered by this prospectus. The conversion price was 93% of the average closing prices for the five day period after stockholder approval of an increase in authorized shares of Focus (January 11, 2001). Purchase Commitment Electronic Support Products. Focus entered into a master purchase agreement with Advanced Electronic Support Products, Inc. ("AESP") whereby Focus agreed to purchase a minimum of $2,500,000 of cables and other products from AESP by March 29, 2001. In return, Focus received certain pricing commitments over the term of the master purchase agreement. The agreement provided that in the event Focus did not purchase at least $2,500,000 of cables and other products during the term of the master purchase agreement, Focus would pay AESP an amount equal to 20% of the difference between $2,500,000 and the aggregate amount of purchases. The agreement allowed Focus and its 48 subcontractors, to purchase product from other sources if AESP's pricing or quality do not meet certain competitive levels and that such purchases shall reduce the minimum requirements under the agreement. Focus failed to meet the minimum purchase requirements and there were some disputes between the parties under the agreement. At March 31, 2001, Focus had accrued expenses of $225,000 for the agreement. As settlement, in exchange for a release from AESP of Focus from further liability under the contract, Focus issued 150,000 shares of its common stock to AESP on June 27, 2001. AESP is a public company whose shares trade in the Nasdaq Small Cap Market under the symbol "AESP." According to filings made with the SEC, Messrs. Slav Stein (CEO of AESP) and Roman Briskin (Executive VP of AESP) each own 29.3% of AESP. Material Relationships Except as discussed in this prospectus, the selling stockholders have not held any positions or offices or had material relationships with us or any of our affiliates within the past three years other than as a result of the ownership of our common stock. Timothy Mahoney, a partner with vFinance Capital, LC, is on Focus' Board of Directors, and Steve Wood was formerly employed by Focus as Vice President of Pro A/V. See "Directors and Executive Officers - Certain Relationships and Related Transactions" on page 37. PLAN OF DISTRIBUTION General All selling shareholders are offering the common shares for their own account, and not for our account. We will not receive any proceeds from the sale of common shares by the selling shareholders except for: o funds received in the cash exercise of warrants. The selling shareholders may be offering for sale up to 5,308,422 common shares acquired by it pursuant to the terms of the various agreements more fully described under the sections above entitled "The Offering" and "Selling Shareholders." The selling shareholders have, prior to any sales, agreed not to effect any offers or sales of the common shares in any manner other than as specified in the prospectus and not to purchase or induce others to purchase common shares in violation of any applicable state and federal securities laws, rules and regulations and the rules and regulations of The Nasdaq SmallCap Market. To permit the selling shareholders to resell the common shares issued to them pursuant to their agreements, we agreed to register those shares and to maintain that registration. To that end, we have agreed with the selling shareholders that we will prepare and file such amendments and supplements to the registration statement and the prospectus as may be necessary in accordance with the Securities Act and the rules and regulations promulgated thereunder, to keep it effective until the earliest of any of the following dates: o the date after which all of the common shares held by the selling shareholders or its transferees that are covered by the registration statement of which this prospectus is a part have been sold under the provisions of Rule 144 under the Securities Act of 1933; o the date after which all of the common shares held by the selling shareholders or its transferees that are covered by the registration statement have been transferred to persons who may trade such shares without restriction under the Securities Act of 1933 and we have delivered new certificates or other evidences of ownership of such common shares without any restrictive legend; o the date after which all of the common shares held by the selling shareholders or its transferees that are covered by the registration statement have been sold by the selling shareholders or its transferees pursuant to such registration statement; the date after which all of the common shares held by the selling shareholders or its transferees that are covered by the registration statement may be sold, in the opinion of our counsel, under Rule 144 under the Securities Act of 1933 irrespective of any applicable volume limitations; o the date after which all of the common shares held by the selling shareholders or its transferees that are covered by the registration statement may be sold, in the opinion of our counsel, without any time, volume or manner limitations under Rule 144(k) or similar provision then in effect under the Securities Act of 1933; or o the date after which none of the common shares held by the selling shareholders that are covered by the registration statement are or may become issued and outstanding. 49 Shares of common stock offered through this prospectus may be sold from time to time by vFinance Capital and the other selling stockholders or by pledgees, donees, transferees or other successors in interest to the other selling stockholders. We will supplement this prospectus to disclose the names of any pledges, donees, transferees or other successors in interest that intend to offer common stock through this prospectus. Sales may be made on The Nasdaq SmallCap Market, on the over-the-counter market or otherwise at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated private transactions, or in a combination of these methods. The selling stockholders will act independently of us in making decisions with respect to the form, timing, manner and size of each sale. We have been informed by the selling stockholders that there are no existing arrangements between any selling stockholder and any other stockholder, broker, dealer, underwriter or agent relating to the sale or distribution of shares of common stock which may be sold by selling stockholders through this prospectus. Euston is an underwriter under the federal securities laws and the selling stockholders may be deemed underwriters in connection with resales of their shares. The common shares may be sold in one or more of the following manners: o a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker or dealer for its account under this prospectus; or o ordinary brokerage transactions and transactions in which the broker solicits purchases. In effecting sales, brokers or dealers engaged by the selling stockholders may arrange for other brokers or dealers to participate. Except as disclosed in a supplement to this prospectus, no broker-dealer will be paid more than a customary brokerage commission in connection with any sale of the common shares by the selling stockholders. Brokers or dealers may receive commissions, discounts or other concessions from the selling stockholders in amounts to be negotiated immediately prior to the sale. The compensation to a particular broker-dealer may be in excess of customary commissions. Profits on any resale of the common shares as a principal by such broker-dealers and any commissions received by such broker-dealers may be deemed to be underwriting discounts and commissions under the Securities Act of 1933. Any broker-dealer participating in such transactions as agent may receive commissions from the selling stockholders (and, if they act as agent for the purchaser of such common shares, from such purchaser). Broker-dealers may agree with the selling stockholders to sell a specified number of common shares at a stipulated price per share, and, to the extent a broker dealer is unable to do so acting as agent for the selling stockholders, to purchase as principal any unsold common shares at a price required to fulfill the broker-dealer commitment to the selling stockholders. Broker-dealers who acquire common shares as principal may thereafter resell such common shares from time to time in transactions (which may involve crosses and block transactions and which may involve sales to and through other broker-dealers, including transactions of the nature described above) in the over-the-counter market, in negotiated transactions or otherwise at market prices prevailing at the time of sale or at negotiated prices, and in connection with such resales may pay to or receive from the purchasers of such common shares commissions computed as described above. Brokers or dealers who acquire common shares as principal and any other participating brokers or dealers may be deemed to be underwriters in connection with resales of the common shares. In addition, any common shares covered by this prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. We will not receive any of the proceeds from the sale of these common shares, although we have paid the expenses of preparing this prospectus and the related registration statement of which it is a part, and have reimbursed AMRO International $10,000 and Euston Investments $15,000 for their legal, administrative and escrow costs. In order to comply with certain state securities laws, if applicable, the common stock offered in this prospectus will not be sold in a particular state unless such securities have been registered or qualified of sale in such state or an exemption from registration or qualification is available and complied with. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of the common shares may not simultaneously engage in market making activities with respect to such securities for a period beginning when such person becomes a distribution participant and ending upon such person's completion of participation in a distribution, including stabilization activities in the common shares to effect covering transactions, to impose penalty bids or to effect passive market making bids. In addition, in connection with the transactions in the common shares, some of the selling shareholders and we will be subject to applicable provisions of the Exchange Act and the rules and regulations under that Act, including, without limitation, the rules set forth above. These restrictions may affect the marketability of the common shares. 50 The selling stockholders will pay all commissions and their own expenses, if any, associated with the sale of the common shares, other than the expenses associated with preparing this prospectus and the registration statement of which it is a part. Limited Grant of Registration Rights We granted registration rights to the selling shareholders to enable them to sell the common stock they previously purchased. In connection with any such registration, we will have no obligation: o to assist or cooperate with the selling shareholders in the offering or disposition of such shares; o to obtain a commitment from an underwriter relative to the sale of any such shares; or o to include such shares within any underwritten offering we do. We will assume no obligation or responsibility whatsoever to determine a method of disposition for such shares or to otherwise include such shares within the confines of any registered offering other than the registration statement of which this prospectus is a part. We will use our best efforts to file, during any period during which we are required to do so under our registration rights agreement with the selling shareholders, one or more post-effective amendments to the registration statement of which this prospectus is a part to describe any material information with respect to the plan of distribution not previously disclosed in this prospectus or any material change to such information in this prospectus. This obligation may include, to the extent required under the Securities Act of 1933, that a supplemental prospectus be filed, disclosing: o the name of any broker-dealers; o the number of common shares involved; o the price at which the common shares are to be sold; o the commissions paid or discounts or concessions allowed to broker-dealers, where applicable; o that broker-dealers did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, as supplemented; and o any other facts material to the transaction. Our registration rights agreement with the selling shareholders permits us to restrict the resale of the shares the selling shareholders have purchased from us for a period of time sufficient to permit us to amend or supplement this prospectus to include material information. With respect to the 2002 private placement, if we restrict the selling shareholders within 90 days of the effective date of the registration statement, we are required to pay to the selling shareholders cash to compensate the selling shareholders for their inability to sell shares during the restriction period. The amount we would be required to pay would be one and one-half percent of the price they paid for our stock, less any shares sold. DESCRIPTION OF CAPITAL STOCK General We are authorized to issue up to 50,000,000 shares of common stock, $.01 par value per share, and 3,000,000 shares of preferred stock, $.01 par value per share. As of January 16, 2002, 35,857,893 shares of common stock and 1,904 shares of convertible preferred stock were issued and outstanding. All of the outstanding capital stock is and will be, fully paid and non-assessable. Common Stock Holders of common stock are entitled to one vote per share. All actions submitted to a vote of stockholders are voted on by holders of common stock voting together as a single class. Holders of common stock are not entitled to cumulative voting in the election of directors. Holders of common stock are entitled to receive dividends in cash or in property on an equal basis, if and when dividends are declared on the common stock by our board of directors, subject to any preference in favor of outstanding shares of preferred stock, if there are any. In the event of liquidation of our company, all holders of common stock will participate on an equal basis with each other in our net assets available for distribution after payment of our liabilities and payment of any liquidation preferences in favor of outstanding shares of preferred stock, if there are any. Holders of common stock are not entitled to preemptive rights and the common stock is not subject to redemption. 51 The rights of holders of common stock are subject to the rights of holders of any preferred stock that we designate or have designated. The rights of preferred stockholders may adversely affect the rights of the common stockholders. Preferred Stock Our board of directors has the ability to issue up to 3,000,000 shares of preferred stock in one or more series, without stockholder approval. The board of directors may designate for the series: o the number of shares and name of the series, o the voting powers of the series, including the right to elect directors, if any, o the dividend rights and preferences, if any, o redemption terms, if any, o liquidation preferences and the amounts payable on liquidation or dissolution, o the terms upon which such series may be converted into any other series or class of our stock, including the common stock and any other terms that are not prohibited by law. It is impossible for us to state the actual effect it will have on common stock holders if the board of directors designates a new series of preferred stock. The effects of such a designation will not be determinable until the rights accompanying the series have been designated. The issuance of preferred stock could adversely affect the voting power, liquidation rights or other rights held by owners of common stock or other series of preferred stock. The board of directors' authority to issue preferred stock without shareholder approval could make it more difficult for a third party to acquire control of our company, and could discourage any such attempt. We have no present plans to issue any additional shares of preferred stock. Series B Preferred Stock On May 1, 2001, Carl Berg converted approximately $2.3 million of debt and accrued interest currently owed by Focus to Mr. Berg into approximately 1,900 shares of convertible preferred stock based on the estimated fair value of the preferred stock as of May 1, 2001, the date on which the related subscription agreement was executed. Each share of preferred stock has a liquidation preference of $1,190.48 per share and is convertible into 1,000 shares of common stock. On April 24, 2001, the board of directors of Focus adopted a Certificate of Designation whereby a total of 2,000 shares of Series B Preferred Stock, $0.01 par value per share, are reserved for issuance. Each share has a liquidation preferred in the amount of $1,190.48 plus all accrued or declared but unpaid. Cash dividends on the stock are non-cumulative and are paid at the option of the board of directors. If paid, the rate shall be seven percent per annum. The board does not presently intend to pay dividends on the stock. At the option of the holder, each share is convertible into 1,000 shares of common stock of Focus. Options and Warrants As of January 16, 2002, 6,144,456 options for shares were outstanding under our approved stock option plans and 3,909,505 shares were available for future grants under our stock option plans. Focus has also issued or is required to issue warrants totaling 1,210,219. Of that number of warrants 827,140 are covered by this prospectus and are described elsewhere herein. Holders of options and warrants do not have any of the rights or privileges of our stockholders, including voting rights, prior to exercise of the options and warrants. We have reserved sufficient shares of authorized common stock to cover the issuance of common stock subject to the options and warrants. PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS The following provisions of the Delaware General Corporation Law and our articles of incorporation and bylaws could have the effect of preventing or delaying a person from acquiring or seeking to acquire a substantial equity interest in, or control of, our company. Indemnification and Limitation of Liability The Delaware General Corporation Law authorizes Delaware corporations to indemnify any person who was or is a party to any proceeding other than an action by, or in the right of, the corporation, by reason of the fact that he is or was a director, officer, employee, or agent of the corporation. The indemnity also applies to any person who is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation or other entity. The indemnification applies against liability incurred in connection with such a proceeding, including any appeal thereof, if the person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation. To be eligible for indemnity with respect to any criminal action or proceeding, the person must have had no reasonable cause to believe his conduct was unlawful. 52 In the case of an action by or on behalf of a corporation, indemnification may not be made if the person seeking indemnification is found liable, unless the court in which the action was brought determines such person is fairly and reasonably entitled to indemnification. The indemnification provisions of the Delaware General Corporation Law require indemnification if a director, officer, employee or agent has been successful in defending any action, suit or proceeding to which he was a party by reason of the fact that he is or was a director, officer, employee or agent of the corporation. The indemnity covers expenses actually and reasonably incurred in defending the action. The indemnification authorized under Delaware law is not exclusive and is in addition to any other rights granted to officers and directors under the articles of incorporation or bylaws of the corporation or any agreement between officers and directors and the corporation. Each of our executive officers has signed employment agreements that include indemnification. The employment agreements provide for full indemnification under Delaware law. The employment agreements also provide that we will indemnify the officer or director against liabilities and expenses incurred in a proceeding to which the officer or director is a party or is threatened to be made a party, or in which the officer or director is called upon to testify as a witness or deponent, in each case arising out of actions of the officer in his official capacity. Our bylaws provide for the indemnification of directors, former directors and officers to the maximum extent permitted by Delaware law and for the advancement of expenses incurred in connection with the defense of any action, suit or proceeding that the director or officer was a party to by reason of the fact that he is or was a director or officer of our corporation, or at our request, a director, officer, employee or agent of another corporation. Our bylaws also provide that we may purchase and maintain insurance on behalf of any director against liability asserted against the director in such capacity. Transfer Agent and Registrar The transfer agent for our common stock is American Stock Transfer & Trust Company, New York, New York. LEGAL MATTERS The validity of the shares of common stock issued in this offering will be passed upon for us by the law firm of Manatt Phelps & Phillips, LLP, Los Angeles, California. EXPERTS Our financial statements as of December 31, 1999 and 2000, and for each of the two years in the period ended December 31, 2000, have been included in this prospectus and in the Registration Statement filed with the Securities and Exchange Commission in reliance upon the report of Wolf & Company, P.C., independent certified public accountants, upon its authority as experts in accounting and auditing. Wolf & Company, P.C.'s report on the financial statements can be found on page F-1 of this prospectus and in the Registration Statement. The consolidated financial statements of Videonics as of December 31, 1999 and for the year then ended included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. Their report can be found on page V-1 of this prospectus and in the Registration Statement. The consolidated financial statements of Videonics, Inc. as of December 31, 2000 and for the year then ended, included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 53 CHANGE IN ACCOUNTANT Effective May 3, 2001, Focus replaced its independent auditors, Wolf & Company, P.C. ("Wolf & Co.") with Deloitte & Touche, LLP ("Deloitte"). Wolf & Co.'s report on the Company's financial statements during the two most recent fiscal years preceding the date hereof contained no adverse opinion or a disclaimer of opinions, and was not qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the Company's Audit Committee. During the last two fiscal years and the subsequent interim period to the date hereof, there were no disagreements between the Company and Wolf & Co. On any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Wolf & Co., would have caused it to make a reference to the subject matter of the disagreement(s) in connection with its reports. None of the "reportable events" described in Item 304(a)(1)(v) of Regulation S-B occurred with respect to the Company within the last two fiscal years and the subsequent interim period to the date hereof. Effective May 3, 2001, the Company engaged Deloitte as its independent auditors for the fiscal year ending December 31, 2001. During the last two fiscal years and the subsequent interim period to the date hereof, the Company did not consult Deloitte regarding any of the matters or events set forth in Item 304(a)(2)(v) and (ii) of Regulation S-B. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement (of which this prospectus is a part) under the Securities Act of 1933, as amended, relating to the common stock we are offering. This prospectus does not contain all the information that is in the Registration Statement. Portions of the Registration Statement have been omitted as allowed by the rules and regulations of the Securities and Exchange Commission. Statements in this prospectus that summarize documents are not necessarily complete, and in each case you should refer to the copy of the document filed as an exhibit to the Registration Statement. For further information regarding our company and our common stock, please see the Registration Statement and its exhibits and schedules. You may examine the Registration Statement free of charge at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of the Registration Statement may also be obtained from the Commission at 1-800-SEC-0330, at prescribed rates. In addition, the Registration Statement and other public filings can be obtained from the Commission's Web site at http://www.sec.gov. We intend to furnish our stockholders written annual reports containing audited financial statements certified by an independent public accounting firm. 54 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements filed herein are as follows: Focus Enhancements, Inc. Pages ----- Report of Independent Accountants F-1 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2 Consolidated Statements of Operations for the Years Ended December 31, 2000 and 1999 F-3 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000 and 1999 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000 and 1999 F-5 Notes to Consolidated Financial Statements F-6 to F-26 Consolidated Balance Sheet as of September 30, 2001 S-1 Consolidated Statements of Operations for the Three Months Ended September 30, 2001 and 2000 S-2 Consolidated Statements of Operations for the Nine Months Ended September 30, 2001 and 2000 S-3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 S-4 Notes to Consolidated Financial Statements S-5 to S-10 Videonics, Inc. Report of Independent Accountants - PricewaterhouseCoopers LLP V-1 Report of Independent Accountants - Deloitte & Touche LLP V-2 Consolidated Balance Sheets as of December 31, 2000 and 1999 V-3 Consolidated Statements of Operations for the Years Ended December 31, 2000 and 1999 V-4 Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 2000 and 1999 V-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000 and 1999 V-6 Notes to Consolidated Financial Statements V-7 to V-15 55 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of FOCUS Enhancements, Inc. Campbell, California We have audited the accompanying consolidated balance sheets of FOCUS Enhancements, Inc. and subsidiaries as of December 31, 2000 and 1999, 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the consolidated results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. As indicated in Note 10, the Company has been previously named in two consolidated class action lawsuits. The complaints allege that the Company, its Chairman, 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 continues to contest this litigation vigorously. /s/ WOLF & COMPANY, P.C. Wolf & Company, P.C. Boston, Massachusetts April 27, 2001 F-1 FOCUS ENHANCEMENTS, INC. CONSOLIDATED BALANCE SHEETS
December 31, ------------ 2000 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 352,072 $ 3,736,517 Certificates of deposit 1,263,153 534,091 Restricted collateral deposit 2,362,494 -- Accounts receivable, net of allowances of $1,042,000 and $1,402,000 at December 31, 2000 and 1999, respectively 1,778,056 2,913,005 Inventories 2,094,869 3,588,702 Prepaid expenses and other current assets 43,354 240,732 ------------ ------------ Total current assets 7,893,998 11,013,047 Property and equipment, net 394,830 968,594 Capitalized software development costs 727,574 2,122,450 Other assets, net 489,972 287,116 Goodwill, net 274,245 624,277 ------------ ------------ Total assets $ 9,780,619 $ 15,015,484 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable $ -- $ 1,006,258 Current portion of long-term debt 363,877 312,556 Obligations under capital leases, current portion 100,018 129,451 Accounts payable 3,376,653 3,413,285 Accrued liabilities 1,681,528 518,726 Accrued legal judgement 2,147,722 -- ------------ ------------ Total current liabilities 7,669,798 5,380,276 Convertible notes payable to shareholder 2,362,494 -- Obligations under capital leases, non-current 101,984 202,002 Long-term debt, net of current portion 63,560 226,041 ------------ ------------ Total liabilities 10,197,836 5,808,319 ------------ ------------ Commitments and contingencies Stockholders' equity (deficit) Preferred stock, $.01 par value; authorized 3,000,000 shares; none issued -- -- Common stock, $.01 par value; 30,000,000 shares authorized, 26,350,203 and 24,504,203 shares issued at December 31, 2000 and 1999, respectively 263,502 245,042 Additional paid-in capital 48,726,937 46,340,891 Accumulated deficit (48,707,526) (36,678,638) Treasury stock at cost, 450,000 shares (700,130) (700,130) ------------ ------------ Total stockholders' equity (deficit): (417,217) 9,207,165 ------------ ------------ Total liabilities and stockholders' equity (deficit): $ 9,780,619 $ 15,015,484 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-2 FOCUS ENHANCEMENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, ------------------------ 2000 1999 ------------ ------------ Net sales $ 15,232,856 $ 16,832,985 Licensing fees -- 350,000 ------------ ------------ Net revenues 15,232,856 17,182,985 Cost of goods sold (includes inventory write-offs of $1,532,000 and $906,000 in 2000 and 1999, respectively) 11,786,570 10,543,997 ------------ ------------ Gross profit 3,446,286 6,638,988 ------------ ------------ Operating expenses: Sales, marketing and support 3,821,516 3,969,705 General and administrative (includes provision for doubtful accounts of $624,000 and $556,000 in 2000 and 1999, respectively) 3,798,049 1,878,045 Research and development 1,311,556 1,400,732 Depreciation and amortization expense 1,131,898 557,303 Restructuring expense 723,580 -- Write-down of capitalized software 2,289,113 -- Impairment of goodwill 62,899 -- ------------ ------------ Total operating expenses 13,138,611 7,805,785 ------------ ------------ Loss from operations (9,692,325) (1,166,797) Interest expense, net (268,390) (531,023) Legal judgement expense (2,147,722) -- Other income, net 81,694 138,002 Gain on securities available for sale -- 80,115 ------------ ------------ Loss before income taxes (12,026,743) (1,479,703) Income tax expense 2,145 -- ------------ ------------ Net loss $(12,028,888) $ (1,479,703) ============ ============ Loss per common share: Basic $ (0.48) $ (0.08) ============ ============ Diluted $ (0.48) $ (0.08) ============ ============ Weighted average common shares outstanding: Basic 25,224,698 18,743,698 ============ ============ Diluted 25,224,698 18,743,698 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 FOCUS ENHANCEMENTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock Note Total ------------ Additional Accumulated Receivable Treasury Stockholders' Shares Amount Paid-in Capital Deficit Common Stock Stock Equity ----------- ---------- ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1998 18,005,090 $ 180,051 $ 38,913,304 $(35,198,935) $ (316,418) $ (700,130) $ 2,877,872 Issuance of common stock upon exercise of stock options and warrants 2,215,780 22,158 2,573,865 -- -- -- 2,596,023 Issuance of common stock from private offerings, net of issuance costs of $286,022 4,183,333 41,833 4,372,145 -- -- -- 4,413,978 Common stock issued in Settlement of accounts payable 100,000 1,000 322,260 -- -- -- 323,260 Common stock warrants issued for services and debt -- -- 159,317 -- -- -- 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 24,504,203 $ 245,042 $ 46,340,891 $(36,678,638) $ -- $ (700,130) $ 9,207,165 ----------- ---------- ------------ ------------ ------------ ------------ ------------ Issuance of common stock upon exercise of stock options and warrants 446,000 4,460 1,116,046 -- -- -- 1,120,506 Issuance of common stock from private offerings, net of issuance costs of $216,000 1,400,000 14,000 1,270,000 -- -- -- 1,284,000 Net loss -- -- -- (12,028,888) -- -- (12,028,888) ----------- ---------- ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2000 26,350,203 $ 263,502 $ 48,726,937 $(48,707,526) $ -- $ (700,130) $ (417,217) =========== ========== ============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-4 FOCUS ENHANCEMENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------ 2000 1999 ---- ---- Cash flows from operating activities: Net loss $(12,028,888) $ (1,479,703) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,131,898 557,303 Amortization of discount on note payable 5,563 42,344 Common stock warrants issued for service or debt -- 159,317 Deferred income -- (84,212) Gain on securities available for sale -- (80,115) Write-down of capitalized software 2,289,113 -- Loss on disposal of fixed assets 308,354 -- Accrued legal judgement 2,147,722 -- Write-down of impaired goodwill 62,899 -- Changes in operating assets and liabilities, net of the effects of acquisitions; Decrease (increase) in accounts receivable 1,134,949 (359,866) Decrease in inventories 1,493,833 2,359,922 Decrease (increase) in prepaid expenses and other assets (126,730) (13,458) Decrease in accounts payable (36,632) (563,149) Increase (decrease) in accrued liabilities 1,162,802 (1,291,299) ------------ ------------ Net cash used in operating activities (2,455,117) (752,916) ------------ ------------ Cash flows from investing activities: Proceeds from sale of securities available for sale -- 329,098 Increase in certificates of deposit (729,063) (281,024) Additions to property and equipment (158,936) (512,934) Additions to capitalized software development costs (1,193,402) (1,644,689) ------------ ------------ Net cash used in investing activities (2,081,401) (2,109,549) ------------ ------------ Cash flows from financing activities: Payments on notes payable and long-term debt (1,122,982) (1,721,323) Payments under capital lease obligations (129,451) (134,494) Repayment of note receivable-common stock -- 316,418 Net proceeds from private offerings of common stock 1,284,000 4,413,978 Net proceeds from exercise of common stock options and warrants 1,120,506 2,596,023 ------------ ------------ Net cash provided by financing activities 1,152,073 5,470,602 ------------ ------------ Net increase (decrease) in cash and cash equivalents (3,384,445) 2,608,137 Cash and cash equivalents at beginning of year 3,736,517 1,128,380 ------------ ------------ Cash and cash equivalents at end of year $ 352,072 $ 3,736,517 ============ ============ Supplemental Cash Flow Information: Interest paid $ 92,261 $ 441,558 Income taxes paid 4,165 -- Equipment acquired under capital leases -- 24,651 Common stock issued in settlement of accounts payable -- 323,260 Note payable issued in settlement of accounts payable -- 1,700,000 Convertible note payable issued to secure restricted collateral deposit 2,362,494 --
F-5 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 compete in the PC-to-TV convergence industry. Over 90% of the components for the Company's products are manufactured on a turnkey basis by four vendors, Furthertech Company, Ltd., Samsung Semiconductor Inc., Sicon International 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 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 subsidiary 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. All intercompany accounts and transactions have been eliminated upon consolidation. 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, recoverability of capitalized software development costs, 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. Financial Instruments. The carrying amounts reflected in the consolidated balance sheets for cash, certificates of deposit, receivables and accounts payable approximate the respective fair values due to the short-term maturity of these instruments. Notes payable, capital leases 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. 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. Revenue Recognition. Revenue consists primarily of sales of products to original equipment manufacturers ("OEMs"), dealers and distributors. Revenues are recognized upon shipment. However, a limited number of distributor agreements do contain rights to return slow moving inventory or discontinued products held in inventory by the distributor which have not sold through to an end user. Revenue, less reserves for returns, is generally recognized upon shipment to the customer. The Company has established reserves for estimated returns, which are reflected as a reduction in trade receivables in the accompanying consolidated balance sheets. The Company sells software that is embedded with some of its products. Revenue from the software with products less reserves for returns, is generally recognized upon shipment to the customer. Revenue from post delivery customer support, which consists primarily of telephone support, is recognized upon shipment of the software, as the support is included in the selling price of the software, is not offered separately, and the cost of the support is insignificant F-6 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company defers revenue recognition relating to consigned sales until such products are sold through to the end customer by the distributor, or if sell through information is not available from the distributor, when cash is received from the distributors. Receipt of cash from those distributors which do not provide sell through information has historically been indicative of sell through to an end user by that distributor. Management is not aware of any circumstances that would require the return of cash to a distributor, once payment from a distributor has been received. Consignment inventory at December 31, 2000 and 1999 was not material. Price Protection and Rebates. The Company has agreements with certain of its customers which, in the event of a price decrease, allow those customers (subject to certain limitations) credit equal to the difference between the price originally paid and the new decreased price on units either in the customers' inventories on the date of the price decrease, or on the number of units shipped to the customer for a specified time period prior to the price decrease. When a price decrease is anticipated, the Company establishes reserves against gross trade receivables for estimated amounts to be reimbursed to qualifying customers. In addition, the Company records reserves at the time of shipment for rebates. Concentration of Credit Risk. As of December 31, 2000, a major distributor represented approximately 27% of the Company's accounts receivable, a major retailer represented approximately 7% of the Company's accounts receivable and a second major distributor represented approximately 14% of the Company's accounts receivable. 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. 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. The Company recognizes an impairment loss to the extent the carrying value of asset exceeds the fair value of the asset. In certain circumstances the "fair value" of the asset is estimated by management, if quoted market prices are not available. 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. Certain software development costs are capitalized when incurred under Statement of Financial Accounting Standards No. 86. Capitalization of software development costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are amortized based on the greater of the ratio of the current gross revenues for a product to the total current and anticipated future gross revenues for the product or the straight-line basis over the estimated useful life of the asset commencing on the date the product is released. The Company capitalized $1,193,402 and $1,644,689 of software development costs in 2000 and 1999, respectively. Amortization of capitalized software began in January 2000 and for the year ended December 31, 2000 accumulated amortization totaled $420,419. F-7 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the fourth quarter of 2000, the Company learned that both previously disclosed and undisclosed OEMs were significantly reducing their 2001 sales forecast for the internet set top box market citing a slower than expected adoption of internet appliances for the home. The Company's recently developed ASICs, including the FS450 and a previously unannounced chip, both were designed for this market. To date, sales of ASICs for the internet appliance market have been insignificant. In assessing the recoverability of its capitalized software development costs, the Company considered anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Based on those factors, the Company reduced the carrying value of its capitalized software by $2,289,000. Goodwill. Goodwill resulting from business combinations is amortized on a straight-line basis over periods ranging from three to seven years. The Company evaluates the net realizable value of goodwill periodically based on a number of factors including discounted cash flow analysis, 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. Adjustments to the carrying value of goodwill are made whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Goodwill amortization for the year ended December 31, 2000 and 1999 totaled $287,000 and $171,000, respectively. Advertising and Sales Promotion Costs. Advertising and sales promotion costs are expensed as incurred. Advertising expense was approximately $1,718,000 and $1,756,000 for the years ended December 31, 2000 and 1999, 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. The Company accrues for warranty costs based on estimated warranty return rates and costs to repair. 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 Guilder. 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. F-8 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 to convertible debt and outstanding stock options and warrants. The number of common shares that would be issued under outstanding options and warrants is 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, 2000 and 1999, options and warrants applicable to 487,780 shares and 4,240,655 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 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, 2000 and 1999. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." This statement amended the effective date of SFAS 133. SFAS 133 will now be effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this pronouncement is not expected to have a material impact on the Company's results of operations, financial position or liquidity. During the second quarter of 2000, the Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 provided guidance on the recognition, presentation, and disclosure of revenue in financial statements. The adoption of this pronouncement did not have a material impact on the Company's results of operations, financial position or liquidity for the years ended December 31, 2000 or 1999. 2. Management's Plans The Company has incurred significant losses for the last two years and has a limited history of profitability. At December 31, 2000, the Company reported a stockholder deficit of $417,217. To date we have met our short-and long-term cash needs from the proceeds of debt, the sale of common stock in private placements and the exercise of stock options and warrants because cash flow from operations has been insufficient to fund operations. Management is assessing product lines in light of the recent merger with Videonics Inc., to identify how to enhance existing or create new distribution channels. In addition, the Company is developing and expects to release at least three new products for the year 2001. Although there can be no assurances, Management expects the Company's sales for 2001 to increase over combined pro forma revenues for 2000, as the Company begins shipments of its new products and expected synergies in its sales channels solidify. During 2000, management took steps to reduce costs, including the closure of its PC Video facility in Morgan Hill, CA and planning for the closure of its Wilmington, MA facility in connection with its recent acquisition of Videonics Inc., located in Campbell, CA. The Wilmington, MA facility was in fact closed on April 1, 2001 and operations, customer support and finance were moved into the Campbell, CA, facility. The remaining sales personnel relocated into a 2,800 square foot facility. In connection with this restructuring the Company expects to reduce overall personnel by 20%. F-9 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Even with the anticipated reduction in expenses related to the restructuring and an expected increase in sales, the Company anticipates that during 2001 it will need to raise over $3.0 million to support its working capital needs and meet existing debt obligations. In an effort to meet those needs, the Company has entered into a Private Equity Line of Credit Agreement ("Equity Agreement") with Euston Investments ("Euston"). Under the Euston Equity Agreement the Company can issue up to 4,000,000 shares of its common stock, subject to certain restrictions, to Euston at a 10% discount to raise additional money. In addition, on February 28, 2001, the Company and Carl Berg, a Focus director and shareholder entered into an Secured Convertible Promissory Note agreement under which Mr. Berg loaned the Company $1.0 million and agreed to loan up to an additional $1.0 million to support the Company's working capital needs. (See Notes 11 and 17 to the Consolidated Financial Statements - "Stockholders' Equity - Common Stock" and "Subsequent Events - Loan from Shareholder" for more information.) On April 25, 2001, Mr. Berg agreed that within 30 days he would convert $2.0 million of outstanding debt of Focus owed to Mr. Berg to equity. As noted above, the Company reported a Stockholders' Deficit of $417,217 for the year ended December 31, 2000. After recording the merger with Videonics on January 16, 2001, on an unaudited pro forma basis, the Company is expected to report an estimated Stockholders' Equity of approximately $7,535,000. (See "Note 17 to Consolidated Financial Statements - Subsequent Events" for more information.) Although there can be no assurances, the Company believes that its current cash, anticipated proceeds from the Euston Equity Agreement, its 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 2001. 3. Fourth Quarter Adjustments In the fourth quarters of 2000 and 1999, the Company sustained net losses of $6,818,000 and $1,779,000, respectively. A summary of the effect on net income of sales returns and other significant expenses follows: Description 2000 1999 ----------- ---- ---- Sales returns reserve $ 180,000 $ 535,000 Inventory reserve 668,000 389,000 Accounts receivable reserve 428,000 373,000 Stock compensation -- 284,000 Purchase commitment obligation 225,000 -- Write-off of loan to director 140,000 -- Write-down of capitalized software 2,289,000 -- Restructuring reserve 522,000 -- Impairment of goodwill 63,000 -- 4. Significant Reserves A summary of the activity in the significant reserves relating to doubtful accounts receivable, sales returns and inventory valuation is as follows: Accounts Receivable Reserve Year Ending Beginning Ending December 31, Balance Additions Reductions Balance ------------ ------- --------- ---------- ------- 2000 $295,000 624,000 397,000 $522,000 1999 $650,000 556,000 911,000 $295,000 F-10 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sales Returns Reserve Year Ending Beginning Ending December 31, Balance Additions Reductions Balance ------------ ------- --------- ---------- ------- 2000 $1,107,000 2,310,000 2,897,000 $520,000 1999 $4,910,000 1,070,000 4,873,000 $1,107,000 Inventory Reserve Year Ending Beginning Ending December 31, Balance Additions Reductions Balance ------------ ------- --------- ---------- ------- 2000 $399,000 1,532,000 1,178,000 $753,000 1999 $2,168,000 906,000 2,675,000 $399,000 5. Inventories Inventories at December 31, consist of the following: 2000 1999 ---- ---- Raw materials $ 825,984 $1,039,356 Work in process -- 171,637 Finished goods 1,268,885 2,377,709 --------- --------- Totals $2,094,869 $3,588,702 ========= ========= 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 2000, 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 $668,000 to expense in the fourth quarter of 2000, thereby increasing its inventory reserves to approximately $753,000 at December 31, 2000. In the fourth quarter of 1999, 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 $389,000 to expense in the fourth quarter of 1999, thereby increasing its inventory reserves to approximately $399,000 at December 31, 1999. 6. Property and Equipment Property and equipment consist of the following at: December 31, ------------ 2000 1999 ---- ---- Equipment $ 382,207 $1,062,443 Furniture and fixtures 114,184 107,530 Leasehold improvements -- 295,249 Purchased software 366,061 246,980 ---------- ---------- 862,452 1,712,202 Less accumulated depreciation and amortization 467,622 743,608 ---------- ---------- Property and equipment, net $ 394,830 $ 968,594 ========== ========== Depreciation and amortization expense related to property and equipment for the years ended December 31, 2000 and 1999 totaled $424,346 and $363,707, respectively. In the fourth quarter of 2000, in connection with its closure of its Wilmington, MA facility, the Company recorded restructuring expenses associated with the abandonment of certain assets and capital leases. The total loss associated with the abandonment of its property and equipment totaled $369,000. F-11 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Other Assets Note Receivable In December 2000, the Company wrote-off a $140,000 note receivable from a current director and previous officer of the Company as management and the Company's Board of Directors agreed that the Company no longer needed non Board level executive services from this individual. 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 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, 2000 and 1999 is $41,666. 8. Notes Payable Line of Credit, Bank During 2000, the Company did not maintain or utilize a commercial line of credit. 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 During 2000, the Company did not initiate any borrowings with commercial lenders. 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 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. On December 31, 1999, the Company and the holder of the note reached an agreement as to the settlement of the note and additional accounts payable amounts. The total agreed upon obligation was $1,669,000. On January 5, 2000, the Company repaid $1,000,000 of these obligations and on January 28, 2000, escrowed $669,000 that was paid to the holder in three equal installments on February 5, March 5, and April 5, 2000. Long-term Debt Purchase of PC Video Conversion, Inc. On July 29, 1998, the Company issued a $1,000,000 note payable to Steve Wood 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. At December 31, 2000, the balance was $ 427,437. 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, CA facility. On June 15, 2000, the Company closed the Morgan Hill facility. 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 Company's Pro AV products is completed. In return, Mr. Wood received a right to convert the promissory note into common stock of the Company following approval of the increase to the authorized common stock of the Company. The Company's stockholders approved the increase to the authorized common stock on January 12, 2001 and shortly thereafter, Mr. Wood agreed to convert the promissory note into 468,322 shares of the Company's common stock. F-12 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Convertible Note Carl Berg, a Focus director and shareholder loaned Focus $2,362,494 to collateralize a $2,362,494 bond posted in connection with the CRA litigation (see Note 10.) The promissory note has a term of three years and bears interest at a rate of prime plus 1%. The interest earned on the collateral is payable to Mr. Berg. The interest payable by the Company to Mr. Berg is reduced by the amount of interest earned on the collateral. 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. 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. As of December 31, 2000 the Company had accrued interest due under the note totaling $52,061. 9. 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. 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. A director of the Company is also a director of AESP. In 1998 the Company recorded a loss of $346,017 on the securities available for sale 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. Similar income for the year ended December 31, 2000 was not significant. 10. 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, 2000 and 1999 was approximately $284,000 and $400,000, respectively. The Company leases certain computer and office equipment under capital leases with three to five-year terms. Capitalized leased assets are included in property and equipment. In connection with the Company's restructuring, the net book value of all abandoned capital leases have been written-off against the restructuring reserve. This charge approximated $179,000. The cost of assets under capital leases at December 31, 1999 was $443,874 with accumulated amortization of $135,832. F-13 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Minimum lease commitments at December 31, 2000 are as follows: Capital Leases Operating Leases -------------- ---------------- 2001 $121,289 $184,374 2002 69,078 147,834 2003 47,140 147,834 2004 1,115 111,206 2005 -- 89,000 -------- -------- Total minimum lease payments 238,622 680,248 ======== Less amounts representing interest 36,620 -------- Present value of minimum obligations 202,002 Less current portion 100,018 -------- Non-current portion $101,984 ======== 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 During 2000, the Company entered into agreements with subcontractors to manufacture partially and fully completed products. As part of these agreements the Company was required to obtain from its banks an irrevocable sight letter of credit to secure payment of each order placed with these vendors. The Company was required to secure these letters of credit by depositing cash in an interest bearing account with the bank. At December 31, 2000 and 1999, respectively, the Company maintained interest bearing accounts collateralizing sight letters of credit in the amount of $1,263,153 and $534,091, respectively. These amounts are recorded in current assets as they relate to the procurement of inventory and are outstanding for periods of less than one year. Restricted Collateral Deposit In connection with the CRA Systems judgement, the Company posted a bond in the amount of $2,362,494 to suspend any enforcement of the judgment pending appeal. Carl Berg, a director and shareholder of the Company obtained the bond on Focus' behalf in exchange for a secured convertible note in the same amount. (See Note 8 "Convertible Note".) The bond is irrevocable and is collateralized by a certificate of deposit in the amount of $2,365,000. In the event the case is settled for less than the bond amount, the Company has agreed to utilize the proceeds to pay down any outstanding debt owed to Mr. Berg. Purchase Commitment The Company 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 received certain pricing commitments over the term of the master purchase agreement. 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. The agreement allows the Company and its subcontractors, to purchase product from other sources if AESP's pricing or quality do not meet certain competitive levels and that such purchases shall reduce the minimum requirements under the agreement. As of December 31, 2000 the Company has purchased a total of $1,316,000 from AESP or from other sources which apply against the $2,500,000 obligation. The Company believes that the AESP has defaulted on certain of its obligations and is in the process of renegotiating the contract. As of April 26, 2001 the Company had not reached an agreement with AESP. As such, after reducing the minimum obligation for additional purchases made between January 1, 2001 and March 29, 2001 the Company recorded a purchasing obligation liability in the amount of $225,000 at December 31, 2000. F-14 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restructuring Expenses For the year ended December 31, 2000, the Company recorded restructuring expenses totaling $724,000 related to the closure of its Morgan Hill, CA, facility and the closure of its Wilmington, MA, facility. The closure of the Company's Morgan Hill facility occurred in the first quarter of 2000 and restructuring charges totaled approximately $202,000. Direct expenses were comprised of inventory adjustments of approximately $118,000, payroll and benefits of approximately $57,000, travel of approximately $16,000 and lease cancellation charges of approximately $11,000. At December 31, 2000 all restructuring accruals related to the Morgan Hill closure have been utilized. In December 2000, the Company's Board of Directors determined that to significantly reduce the Company's cost structure it would close its Wilmington, MA facility, reduce personnel and relocate to a significantly smaller facility during the first quarter of 2001. As such, restructuring charges of $522,000 were recorded in the fourth quarter of 2000. Planned expenses are comprised of expenses related to the reduction of 16 employees in the areas of operations, customer support and finance of approximately $153,000 and equipment and lease abandonment charges of approximately $369,000. At December 31, 2000 $153,000 of restructuring reserves remained primarily related to personnel benefits associated with scheduled staffing reductions. Litigation Focus has been named as a defendant in an alleged class action alleging violation of federal securities laws. Focus has been named as a defendant in two consolidated alleged class actions alleging violations 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 of two classes, one on behalf of persons who purchased stock from July 17, 1997 to February 19, 1999 and the other on behalf of persons who purchased stock between November 15, 1999 to March 1, 2000, respectively. Defendants moved to dismiss both actions. At a March 2, 2001 hearing, the Federal District Court allowed limited discovery to occur relating to certain limited allegations as to the earlier alleged class. Focus believes that the remaining allegations will be dismissed. As to the later alleged class, the Court has taken the motion to dismiss under advisement. 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 that 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 that 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 in favor of CRA for actual damages, punitive damages, attorney's fees, costs, and interest, for a total award of approximately $2,000,000. In connection with this judgment, we recorded an expense of $2.1 million in the period ended September 30, 2000. The court overruled the motion for new trial that Focus filed, and Focus has appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit in New Orleans, Louisiana. The case has not yet been submitted to the appeals court for decision. The trial court has granted a stay of any enforcement of the judgment pending appeal, based on the posting of 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). F-15 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Special Investigation In March 2000, 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 was 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 revised inventory figures were included in the December 31, 1999 financial statements. As such, management believes that inventory has been properly presented as of December 31, 1999 and no adjustments appeared to be necessary to prior periods. The accounting manager in question has been discharged. As a result of the Committee's investigation, the Company incurred accounting fees of approximately $302,000 and legal fees of approximately $292,000. These fees and expenses which were charged to earnings in the quarter ended March 31, 2000. General 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. 11. Stockholders' Equity Common Stock General During the course of the years described below, the Company raised additional capital through private financing arrangements with unaffiliated investors. Under these arrangements, the Company issued bulk sales of its common stock at prices below quoted market values. The sales of these shares were made below quoted market values because the shares were unregistered and sold in bulk. Transactions On January 18, 2000, the Company received net proceeds of $960,560 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. The Company received proceeds of $31,890 from the issuance of 30,000 shares of common stock resulting from the exercise of common stock warrants issued as partial compensation to an unaffiliated investor relations firm. These warrants were exercised on February 23, 2000 (15,000 shares) and March 2, 2000 (15,000 shares). 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 Capital, L.C. 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. On February 7, 2001, the Company filed a preliminary registration statement under the Securities Act of 1933 to register those shares issued in connection with this transaction and for those to be issued upon exercise of the warrants. The Securities and Exchange Commission has requested that December 31, 2000 information be included in the registration statement and as such the registration statement has not yet been refilled as of April 26, 2001. 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. In accordance with our obligations under the agreement, the company is incurring damages of 2% per month of the gross proceeds until its registration of the shares purchased by the investor. At December 31, 2000, the Company recorded interest expense of $150,000. The investor has agreed to exchange the gross amount of calculated damages for additional common stock of F-16 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Focus based on an exchange rate of 0.68. As of December 31, 2000, the Company is required to issue to the investor additional 220,000 shares of Focus common stock, to extinguish this accrued liability. 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 purchase up to 4,000,000 shares of our common stock, as requested by us, at a discount to the market price over a 24 month period. 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 to 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 Capital, L.C., which introduced Euston Investments to the Company. 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. For the year ended December 31, 2000, the Company issued at various times, an additional 86,000 shares of common stock resulting from other exercises of options and warrants, receiving cash of approximately $128,056. For the year ended December 31, 2000, the Company was obligated to issue the following additional shares of common stock pursuant to derivative securities, instruments or agreements: December 31, 2000 ----------------- Warrants to purchase common stock 910,429 Options to purchase common stock 5,110,977 Notes payable convertible into common stock 1,889,995 AMRO's shares for untimely registration 220,000 --------- Total shares of common stock obligated, under certain circumstances, to issue 8,131,401 ========= 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. 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 F-17 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. The aggregate fair value of all warrants issued in connection with debt financing and in connection with compensation for services in 1999 was calculated at approximately $159,000. The Company has calculated the fair value of the warrants using the Black-Scholes model and the following assumptions: Risk-free rate of interest 6.0% Average computed life of warrants 3 - 7 years Dividend yield 0.0% Volatility of common stock 35.0% - 45.0% Common Stock Purchase Warrants Common stock warrant activity is summarized as follows:
2000 1999 --------------------------------- -------------------------------- Grant Price Grant Price Shares Range Shares Range ------ ----- ------ ----- Warrants outstanding at beginning of year 1,323,329 $1.06 - $9.11 1,018,329 $0.90 - $9.11 Warrants granted 435,000 $1.63 700,000 $1.06-$3.20 Warrants exercised (369,000) $1.06 - $4.21 (370,000) $1.06-$1.70 Warrants canceled (478,900) $1.54 - $9.11 (25,000) $1.48 -------- --------- Warrants outstanding at end of year 910,429 $1.25 - $4.21 1,323,329 $1.06 - $9.11 ======= ============= ========= ============= Warrants exercisable at end of year 475,429 $1.06 - $4.21 1,323,329 $1.06 - $9.11 ------- ------------- --------- ------------- Weighted average fair value of warrants Granted during the year $1.30 $0.68
F-18 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2000, options under the Plan to purchase 1,005,207 shares of the Company's common stock were outstanding with exercise prices of $1.00 to $1.34 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, 2000, 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, 2000, options under the 1997 Director Plan to purchase 302,692 shares of the Company's common stock were outstanding with an exercise price between $ 1.00 and $1.28 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 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, 2000, 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 $1.28 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, 2000, options under the 1998 NQSO Plan to purchase 741,203 shares of the Company's common stock were outstanding with an exercise price between $1.06 and $1.41. F-19 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2000 Non-Qualified Option Plan On April 27, 2000, the Board of Directors of Focus adopted the 2000 Non-Qualified Stock Option Plan (the "2000 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. On December 28, 2000 the Company's stockholder's approved the 2000 Plan. Options under the Plan may be granted to employees, directors or consultants of the Company. The exercise price per share of options granted under the 2000 Plan is 100% of the market value of the common stock of the Company on the date of grant. The 2000 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. As of December 31, 2000, options under the 2000 Plan to purchase 2,561,875 shares of the Company's common stock were outstanding with an exercise price of $0.56 per share. A summary of the status of the Company's outstanding stock options as of December 31, 2000 and 1999, and the changes during the years then ended, is presented below:
2000 1999 -------------------------------- ------------------------------ Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Options outstanding at beginning of year 2,891,114 $1.21 3,919,396 $1.22 Options granted 2,611,875 $0.56 1,191,340 $1.17 Options exercised (77,000) $1.17 (1,816,125) $1.53 Options canceled (315,012) $1.28 (403,497) $1.23 --------- --------- Options outstanding at end of year 5,110,977 $0.88 2,891,114 $1.21 ========= ========= Options exercisable at end of year 1,995,123 $1.05 393,391 $1.21 ========= =========
Information pertaining to options outstanding at December 31, 2000 is as follows:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Range of Outstanding Weighted Average Exercise Exercisable Average Exercise Prices 12/31/00 Remaining Life Price 12/31/00 Exercise Price - --------------- -------- -------------- ----- -------- -------------- $0.56 - $0.56 2,561,875 5.0 yrs. $0.56 487,780 $0.56 $1.00 - $1.41 2,549,102 3.0 yrs. $1.21 1,507,343 $1.21 --------- --------- Outstanding at December 31, 2000 5,110,977 4.0 yrs. $0.88 1,995,123 $1.05 ========= =========
F-20 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-based Compensation. At December 31, 2000, 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 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: Years ended December 31, ------------------------ 2000 1999 ---- ---- Net loss As reported $(12,028,888) $(1,479,703) Pro forma $(12,865,186) $(2,587,558) Basic loss per share As reported $(0.48) $(.08) Pro forma $(0.51) $(.14) Diluted loss per share As reported $(0.48) $(.08) Pro forma $(0.51) $(.14) Common stock equivalents have been excluded from all calculations of loss per share and pro forma loss per share in 2000 and 1999 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 2000 and 1999, respectively; dividend yield of 0.0%; expected volatility of 100% and 50%, risk-free interest rates of 6.2% and 6.0% and expected lives of 4.0 and 5.0 years. 12. 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, ------------ 2000 1999 ---- ---- Current: Federal income taxes $ -- $ -- State income taxes 2,145 -- ------ ------ Deferred: Federal income taxes -- -- State income taxes -- -- ------ ------ $2,145 $ -- ====== ====== The differences between the provisions for income taxes from the benefits computed by applying the statutory Federal income tax rate are as follows:
Years Ended December 31, ------------------------ 2000 1999 ---- ---- Benefit computed at statutory rate (34%) $(4,081,000) (503,000) State income tax benefit, net of federal tax (753,000) (92,000) Increase in valuation allowance on deferred tax asset 4,642,000 546,000 Non-deductible goodwill 49,000 49,000 Other 145,145 0 ----------- -------- $ 2,145 $ -- =========== =========
F-21 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net deferred tax asset consists of the following: December 31, 2000 1999 ---- ---- Deferred tax asset $17,369,000 $12,727,000 Valuation allowance on deferred tax asset (17,369,000) (12,727,000) ---------- ---------- Net deferred tax asset $ -- $ -- ========== ========== The tax effects of each type of income and expense item that give rise to deferred taxes are as follows: December 31, ------------ 2000 1999 ---- ---- Net operating loss carry forward $ 15,273,000 $ 11,526,000 Income tax credit carry forward 204,000 185,000 Tax basis in excess of book basis of fixed assets 166,000 157,000 Book inventory cost less than tax basis 301,000 160,000 Reserve for bad debts 209,000 118,000 Tax basis in excess of book basis of other assets 466,000 466,000 Tax basis in subsidiaries in excess of book value 936,000 964,000 Capitalized research costs (291,000) (849,000) Other 105,000 0 ------------ ------------ 17,369,000 12,727,000 Valuation allowance on deferred tax asset (17,369,000) (12,727,000) ------------ ------------ Net deferred tax asset $ -- $ -- ============ ============ A summary of the change in the valuation allowance on deferred tax assets is as follows: Years Ended December 31, ------------------------ 2000 1999 ---- ---- Balance at beginning of year $12,727,000 $12,181,000 Addition to the allowance for the benefit of net operating loss carry forwards not Recognized 4,642,000 546,000 ----------- ----------- Balance at end of year $17,369,000 $12,727,000 =========== =========== At December 31, 2000, the Company has the following carry forwards available for income tax purposes: Federal net operating loss carry forwards expiring in various Amounts through 2021 $38,182,000 =========== State net operating loss carry forwards expiring in various Amounts through 2005 $29,196,000 =========== Credit for research activities $ 204,000 =========== Due to the uncertainty surrounding the realization of these favorable tax attributes, the Company has placed a valuation allowance against its otherwise recognizable net deferred tax assets. The net operating loss carry forwards 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-22 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Business Combinations Effective September 30, 1996, FOCUS acquired all of the capital stock of TView, Inc. ("TView"). The business combination was 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, 2000, the remaining goodwill balance was $244,000. On March 31, 1998, the Company acquired certain of the assets of Digital Vision, Inc. ("Digital Vision"). In accordance with this transaction, the Company recorded goodwill of approximately $1,322,000. After completion of the merger a further evaluation of the acquired product lines indicated that only two products warranted inclusion in the Company's family of products. By December 31, 1998, the expected revenue stream from this product line, which had been based on pre merger results, had declined significantly. Sales for the product dropped due to an influx of competition in this category in the fourth quarter of 1998, as the product line suffered from a limited feature set and a higher selling price when compared to the competition. The Company was hampered in meeting the competition's selling price as the Company learned that the product line was based on a bill of materials which included certain end of life components. The Company did not acquire any proprietary technology and the customer base proved to be limited. As a result of foregoing, the Company performed 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. As a result, the Company wrote-down goodwill by approximately $1,070,000. In the fourth quarter of 2000, the Company wrote-off the remaining goodwill balance, of $63,000 as the Company discontinued its sales efforts related to the Digital Vision product line. On July 29, 1998, the Company acquired certain assets and assumed certain liabilities of PC Video Conversion, Inc. ("PC Video"). The acquisition was accounted for as a purchase and resulted in goodwill of approximately $1,657,000. After the merger the Company determined that its sales efforts would be concentrated on PC Video's products and away from the custom engineering side of the business. By December 31, 1998, the Company determined that PC Video custom engineering accounted for a greater portion of PC Video's business than had originally been estimated and revenues dropped dramatically. The Company determined that PC Video had only a limited dealer network and that the majority of its customers would not repeat buy. In addition, PC Video lacked proprietary technology and that certain of its products had a feature set that made sales into the professional market difficult. As a result of foregoing, the Company performed a discounted cash flow analysis in December 31, 1998 and based on this analysis, the Company determined that goodwill should be written down to $195,000. As a result, the Company wrote-down goodwill by approximately $1,441,000. At December 31, 2000, the unamortized goodwill balance is $30,000. 14. Segment Information SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," establishes standards for disclosures about operating segments, products and services, geographic areas and major customers. The Company is organized and operates in one reportable segment which the development, manufacturing, marketing and sale of computer enhancement devices for personal computers and televisions. During the year ended December 31, 2000, the Company only had operations in the United States. During the year ended December 31, 1999 the Company had operations in the United States and in The Netherlands. On July 1, 1999, the Company closed its foreign subsidiary and on August 15, 1999 dissolved this entity. Sales to a major distributor as of December 31, 2000 and 1999 represented approximately $2,242,000 or 15% and $4,318,000 or 25% of the Company's revenues, respectively. F-23 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes revenue by geographic area: For The Year Ended ------------------ December 31, December 31, ------------ ------------ 2000 1999 ---- ---- United States $14,365,000 $16,425,000 North America (excluding the United States) 39,000 54,000 Europe 738,000 396,000 Asia 91,000 308,000 ----------- ----------- Total $15,233,000 $17,183,000 =========== =========== 15. 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, 2000. 16. Related Party Transactions Timothy Mahoney, who is a Focus director, is a principal vFinance.com, Inc., the parent company to Union Atlantic Capital L.C., and a partner of Union Atlantic L.C. For the years ended December 31, 2000 and 1999, Focus paid Union Atlantic L.C. $83,206 and $112,226, respectively in consulting fees in connection with equity financing agreements negotiated by Union Atlantic L.C. In addition, Union Atlantic Capital L.C. was also issued 243,833 shares of Focus common stock in lieu of investment banking fees in connection with the acquisition of Videonics, Inc. in January 2001. 17. Subsequent Events Increase to Authorized Common Shares On January 12, 2001, the stockholders of the Company approved an increase to the authorized common shares from 30,000,000 to 50,000,000. This increase was recommended and approved by the Company's Board of Directors, in part to issue approximately 5,135,000 shares in connection with the merger of Videonics Inc., and to ensure that sufficient shares are available for issuance under the Company's 2000 Non Qualified Stock Option Plan (5,000,000 shares) and for a Private Equity Line of Credit (4,000,000 shares). Acquisition of Videonics, Inc. On January 16, 2001, Focus Enhancements, Inc., acquired all the shares of Videonics, Inc., ("Videonics") in a transaction accounted for using the purchase method of accounting. Focus issued 0.87 shares of Focus common stock for each issued and outstanding share of Videonics common stock on the closing date. Based on the exchange ratio, a total of approximately 5,135,000 shares were issued. Focus incurred approximately $675,000 in acquisition expenses, including financial advisory and legal fees and other direct transaction costs, which were included as a component of the purchase price. Following the merger, the companies believe that they have a opportunity to take advantage of the complementary strategic fit of the businesses, combining their operations to create a unique commercial entity in the market for video products and technologies. In addition, certain new application specific integrated circuits ("ASICs") currently under development by the FOCUS engineering team have integrated video mixing and switching technology. We believe that the Videonics engineering team can capitalize on this chip technology to build attractively priced digital video solutions for an expanded customer base. In accordance with the Company's restructuring plan, it has significantly reduced it post merger staffing in the areas of operations, customer support and finance as all the aforementioned functional areas have been consolidated into the company's Campbell, California facility. The company negotiated an early release from its lease of a 22,000 square foot facility located in Wilmington, Massachusetts and has since moved its remaining Massachusetts' sales personnel into a 2,800 square foot facility located in Chelmsford, Massachusetts. F-24 FOCUS ENHANCEMENTS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited Pro Forma Purchase Price Allocation of Videonics December 31, 2000 Value of common shares issued $ 7,960,000 Assumption of Videonics options 498,000 Estimated transaction costs 637,000 ----------- Total purchase cost $ 9,095,000 ----------- Tangible assets acquired $ 3,533,000 Intangible assets acquired 2,963,000 In-process research and development 505,000 Liabilities assumed (3,282,000) ----------- Excess of cost over fair value (goodwill) $ 5,376,000 =========== The following summary selected unaudited pro forma combined condensed consolidated financial information shows the results of operations and the financial position of the combined businesses of Focus and Videonics had the merger occurred on January 1, 2000 for statement of operations purposes and on December 31, 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. Unaudited Pro Forma Condensed Consolidated Year Ended Statement of Operations Data: December 31, 2000 ----------------- Net Sales $27,102,000 =========== Loss from operations (15,136,000) =========== Net Loss (17,604,000) =========== Net loss per common shares: Basic $ (0.58) =========== Diluted $ (0.58) =========== Unaudited Pro Forma Combined Condensed December 31, 2000 Consolidated Balance Sheet Data: ----------------- Cash and cash equivalents $1,972,000 Working capital 802,000 Total assets 21,437,000 Long Term obligations 3,563,000 Shareholder's equity 7,535,000 ========== Loan from Shareholder On February 28, 2001, Carl Berg, a Focus director and shareholder loaned Focus $1.0 million and agreed to loan up to an additional $1.0 million to support the Company's working capital needs. The promissory note has a due date of September 25, 2003 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. 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. Potential Nasdaq Delisting On April 25, 2001, the Company received notice from Nasdaq that it was subject to potential delisting for failure to file its Annual Report of Form 10-KSB in a timely manner. In addition, the Company's stock has recently traded below the $1.00 minimum bid price as required by Nasdaq SmallCap regulations. If the Company is unable to meet the Nasdaq SmallCap requirements, the Company's stock could be delisted. The Company is making every effort to comply with the Nasdaq SmallCap requirements. If the Company is unable to meet these requirements, the Company will request a hearing before the Listing Qualifications Panel. There can be no assurance that the Panel will grant the Company's request for continued listing. F-25 FOCUS ENHANCEMENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except shares) September 30, 2001 ---- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 706 Restricted certificates of deposit 298 Restricted collateral deposit 2,363 Accounts receivable, net of allowances of $1,005 and $1,042 at September 30, 2001 and December 31, 2000, respectively 3,181 Inventories 4,543 Prepaid expenses and other current assets 272 ------- Total current assets 11,363 Property and equipment, net 410 Capitalized software development costs 482 Other assets, net 123 Intangibles, net 2,385 Goodwill, net 4,773 ------- Total assets $19,536 ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ -- Obligations under capital leases, current portion 36 Accounts payable 4,616 Accrued liabilities 1,416 Accrued legal judgment 2,148 ------- Total current liabilities 8,216 Convertible notes payable to stockholder 4,012 Obligations under capital leases, non-current 60 Long-term debt, net of current portion -- ------- Total liabilities 12,288 ------- Commitments and contingencies Stockholders' equity (deficit) Preferred stock, $.01 par value; authorized 3,000,000 shares; 1,904 shares issued at -- September 30, 2001, none at December 31, 2000. (Aggregate liquidation preference $2,266,674) Common stock, $.01 par value; 50,000,000 shares authorized, 32,671,250 and 26,350,203 shares issued at September 30, 2001 and December 31, 2000, respectively 326 Deferred compensation (382) Additional paid-in capital 61,369 Accumulated deficit (53,365) Treasury stock at cost, 450,000 shares (700) -------- Total stockholders' equity (deficit) 7,248 -------- Total liabilities and stockholders' equity (deficit) $ 19,536 ======== The accompanying notes are an integral part of the consolidated financial statements. S-1 FOCUS ENHANCEMENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) Three Months ended September 30, -------------------------------- 2001 2000 -------- -------- Net product revenues $ 6,024 $ 4,116 Contract revenues 693 -- -------- -------- Total net revenues 6,717 4,116 Cost of goods sold 4,387 2,729 -------- -------- Gross profit 2,330 1,387 -------- -------- Operating expenses: Sales, marketing and support 1,425 797 General and administrative 467 542 Research and development 617 245 Amortization expense 700 182 -------- -------- Total operating expenses 3,209 1,766 -------- -------- Loss from operations (879) (379) Legal judgement expense (CRA) -- (2,148) Interest expense, net (44) (3) Other income, net 33 13 -------- -------- Loss before income taxes (890) (2,517) Income tax benefit -- -- -------- -------- Net loss $ (890) $ (2,517) ======== ======== Loss per common share: Basic $ (0.03) $ (0.10) ======== ======== Diluted $ (0.03) $ (0.10) ======== ======== Weighted average common shares outstanding: Basic 32,520 25,863 ======== ======== Diluted 32,520 25,863 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. S-2 FOCUS ENHANCEMENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) Nine Months ended September 30, ------------------------------- 2001 2000 -------- -------- Net product revenues $ 17,194 $ 12,130 Contract revenues 1,021 -- -------- -------- Total net revenues 18,215 12,130 Cost of goods sold 11,300 8,420 -------- -------- Gross profit 6,915 3,710 -------- -------- Operating expenses: Sales, marketing and support 4,531 2,857 General and administrative 1,683 2,432 Research and development 2,515 854 Amortization expense 1,976 432 Restructuring expense 33 202 Write-off of in-process technology 505 -- -------- -------- Total operating expenses 11,243 6,777 -------- -------- Loss from operations (4,328) (3,067) Legal judgement expense (CRA) -- (2,148) Interest expense, net (267) (58) Other (expense) income , net (62) 67 -------- -------- Loss before income taxes (4,657) (5,206) Income tax expense -- 2 -------- -------- Net loss $ (4,657) $ (5,208) ======== ======== Loss per common share: Basic $ (0.15) $ (0.21) ======== ======== Diluted $ (0.15) $ (0.21) ======== ======== Weighted average common shares outstanding: Basic 31,329 25,003 ======== ======== Diluted 31,329 25,003 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. S-3 FOCUS ENHANCEMENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, ------------------------------- 2001 2000 ------- ------- Cash flows from operating activities: Net loss $(4,657) $(5,208) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,328 733 Deferred compensation expense 209 -- Write-off of in process technology 505 -- Inventory obsolescence 136 -- Allowance for doubtful accounts 15 -- Changes in operating assets and liabilities, net of the effects of acquisitions; Decrease (increase) in accounts receivable (1,260) 111 Decrease (increase) in inventories (80) 1,605 Increase in prepaid expenses and other assets (66) (1,132) Increase (decrease) in accounts payable 78 (552) Increase (decrease) in accrued liabilities (160) 2,092 ------- ------- Net cash used in operating activities (2,952) (2,351) ------- ------- Cash flows from investing activities: Decrease (increase) in restricted certificates of deposit 965 (746) Additions to property and equipment (169) (406) Net cash from acquisition of Videonics 360 -- ------- ------- Net cash provided by (used in) investing activities 1,156 (1,152) ------- ------- Cash flows from financing activities: Payments on notes payable and long-term debt (400) (1,101) Proceeds from stockholder loans 2,650 -- Payments under capital lease obligations (106) (252) Net proceeds from private offerings of common stock -- 1,284 Costs related to registration of common stock (117) -- Net proceeds from exercise of common stock options and warrants 123 1,121 ------- ------- Net cash provided by financing activities 2,150 1,052 ------- ------- Net increase (decrease) in cash and cash equivalents 354 (2,451) Cash and cash equivalents at beginning of year 352 3,737 ------- ------- Cash and cash equivalents at end of period $ 706 $ 1,286 ======= ======= Supplement schedule of non-cash financing activities: Acquisition of Videonics, Inc., for common stock 7,960 -- Conversion of relates party note payable to preferred stock 2,266 -- Conversion of accrued liabilities and notes payable to common stock 1,294 --
The accompanying notes are an integral part of the consolidated financial statements. S-4 Focus Enhancements, Inc. Notes to Consolidated Financial Statements 1. Basis of Presentation The consolidated financial statements of Focus Enhancements, Inc. ("the Company") as of September 30, 2001 and for the three and nine month periods ended September 30, 2001 and 2000 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000. 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, 2001 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, as of the January 16, 2001 acquisition date (see "Note 3"), Videonics Inc. ("Videonics"). 2. Management's Plans The Company has incurred significant losses for the last two years. At September 30, 2001, the Company reported stockholder's equity of $7,248,000 and an accumulated deficit of $53,365,000. To date we have met our short-and long-term cash needs from the proceeds of debt, the sale of common stock in private placements and the exercise of stock options and warrants because cash flow from operations has been insufficient to fund operations. Management is assessing product lines in light of the recent merger with Videonics Inc., (see "Note 3") to identify how to enhance existing or create new distribution channels. In addition, the Company released three new products in the third quarter of 2001, which should provide the Company with incremental revenue. Management has taken steps to reduce costs, including the closure of its PC Video facility in Morgan Hill, CA in the second quarter of 2000 and its Wilmington, MA facility on April 1, 2001. All operations, customer support and finance were moved into the Campbell, CA, facility. The remaining sales personnel relocated into a 2,800 square foot facility in Chelmsford, Massachusetts. In connection with this restructuring the Company reduced overall personnel by 20%. In addition, in January 2002, the Company terminated its Private Equity Line of Credit Agreement ("Equity Agreement") with Euston Investments ("Euston") and sold 2,434,490 shares of its common stock in a private placement to independent third parties, receiving net proceeds of approximately $2,450,000. The shares were sold at a 20% discount to the 20-day average closing bid prices of our common stock as of December 27, 2001, the date an agreement in principle was reached by the parties. In connection with the private placement, Focus also issued warrants to purchase 367,140 shares of its common stock at an exercise price of $1.36 per share. Under the Equity Agreement, the Company was to have issued up to 4,000,000 shares of its common stock, subject to certain restrictions, to Euston at a 10% discount to raise additional money. The Company had sought to register such shares under a Registration Statement on Form SB-2. However, before the registration statement was declared effective, on January 11, 2002, Focus and Euston mutually agreed to terminate the agreement. As consideration for terminating the agreement, the exercise price of Euston's warrants to purchase 250,000 shares of Focus common stock was reduced from $1.625 to $0.75 per share. 3. Acquisition of Videonics Inc. On January 16, 2001, Focus acquired all of the outstanding shares of Videonics in a transaction accounted for using the purchase method of accounting. Focus issued 0.87 shares of its common stock for each issued and outstanding share of Videonics common stock on the closing date. Based on the exchange ratio, a total of approximately 5,135,000 shares were issued. Focus incurred approximately $637,000 in acquisition expenses, including financial advisory and legal fees and other direct transaction costs, which were included as a component of the purchase price. S-5 Focus Enhancements, Inc. Notes to Consolidated Financial Statements Unaudited Pro Forma Purchase Price Allocation of Videonics January 16, 2001 ----------------------- ---------------- Value of common shares issued $7,960,000 Assumption of Videonics options 498,000 Estimated transaction costs 637,000 --------- Total purchase cost $9,095,000 --------- Tangible assets acquired $3,384,000 Intangible assets acquired 2,963,000 In-process research and development 505,000 Liabilities assumed (3,373,000) --------- Excess of cost over fair value (goodwill) $5,616,000 ========= The intangibles and goodwill acquired in this acquisition will be amortized on a straight-line basis over a period of three to four years. See "Note 4. - Recent Accounting Pronouncements," for further discussion of goodwill. 4. Recent Accounting Pronouncements Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137. SFAS No. 133 requires the recognition of all derivatives in the balance sheet as either an asset or a liability measured at fair value. The adoption of SFAS No. 133 did not have an impact on the Company's financial statements. The Company currently does not utilize derivative financial instruments in its operating activities nor does it use them for trading or speculative purposes. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The Company will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS 142, the Company will stop the amortization of goodwill, expected to have a net carrying value of $4,380,962 at the date of adoption, resulting in an expected reduction of annual amortization of approximately $1,568,400 resulting from business combinations completed prior to the adoption of SFAS 141. In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends APB Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for the Company for all financial statements issued in 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial statements. S-6 Focus Enhancements, Inc. Notes to Consolidated Financial Statements 5. Reclassification of Certain Expenses Certain expenses in the three and nine month periods ending September 30, 2000, have been reclassified to conform to the current period presentation. These reclassifications did not change the net loss for those periods ended September 30, 2000. 6. Inventories Inventories at September 30, 2001 and December 31, 2000, consist of the following: 2001 2000 ---- ---- Raw materials $2,148,000 $ 826,000 Work in process 520,000 -- Finished goods 1,875,000 1,269,000 ---------- ---------- Totals $4,543,000 $2,095,000 ========== ========== 7. Commitments Bank Loan On November 13, 2000, Pacific Business Funding loaned Videonics $400,000. On January 16, 2001, in connection with the merger, the loan was assumed by Focus. The loan was fully secured by a senior lien on the Company's assets. Interest is calculated at a rate of 15%. The loan was repaid in full on July 16, 2001. Purchase of PC Video Conversion, Inc. On July 29, 1998, the Company issued a $1,000,000 note payable to Steve Wood in conjunction with the acquisition of PC Video Conversion, Inc. ("PC Video") providing for the payment of principal and interest at 3.5 % over a period of 36 months. 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 and manager of the Company's Morgan Hill, CA facility. On June 15, 2000, the Company closed the Morgan Hill facility. 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 Company's Pro AV products was completed. In return, Mr. Wood received a right to convert the outstanding balance of $427,000 due under the promissory note into common stock of the Company following approval of the increase to the number of shares of authorized common stock of the Company. The Company's stockholders approved the increase to the authorized common stock on January 12, 2001 and shortly thereafter, Mr. Wood agreed to convert the promissory note into 468,322 shares of the Company's common stock based on the average trading price of the common stock for the five day period preceding January 12, 2001. On June 27, 2001, the Company issued 468,322 shares of common stock to Mr. Wood. Convertible Notes On October 26, 2000, Carl Berg, a Focus director and shareholder, loaned Focus $2,362,494 to collateralize a $2,362,494 bond posted in connection with the CRA litigation (see below "Litigation - Focus is involved as a defendant in litigation with CRA Systems, Inc."). The promissory note has a term of three years and bears interest at a rate of prime plus 1%. The interest earned on the collateral is payable to Mr. Berg. The interest payable by the Company to Mr. Berg is reduced by the amount of interest earned on the collateral. 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 and any accrued and unpaid interest is convertible into shares of Focus common stock at a conversion price of $1.25 which represented the average closing bid and ask price of the Company's common stock on the day preceding the agreement. The promissory note is secured by a security agreement in favor of Mr. Berg granting him a security interest, in first priority, over substantially all of the assets of Focus. On May 7, 2001, $46,000 of outstanding interest due under the note was converted into 38 shares of Preferred Stock. See "Note 8. Stockholders Equity - Series B Preferred Stock" for more information. As of September 30, 2001 the Company had unpaid principal and accrued interest due under the note totaling approximately $2,388,000. S-7 Focus Enhancements, Inc. Notes to Consolidated Financial Statements On February 28, 2001, Carl Berg agreed to loan Focus $2.0 million to support the Company's working capital needs. The promissory note has a due date of September 25, 2003 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. On April 24, 2001, the note was amended to provide that under certain circumstances, including at the election of Mr. Berg and Focus, the promissory note and any accrued and unpaid interest is convertible into shares of Focus preferred stock at a conversion price of $1.19 which represented 125% of the trailing 30-day average of the Company's common stock ending April 23, 2001. The promissory note is secured by a security agreement in favor of Mr. Berg granting him a security interest in first priority over substantially all of the assets of Focus. On May 7, 2001, the Company and Mr. Berg agreed to the conversion of $1.0 million of debt and all accrued interest due under the note into 854 shares of Preferred Stock. See "Note 8. Stockholders Equity - Series B Preferred Stock" for more information. As of September 30, 2001 the Company had principal and accrued interest due under the note totaling approximately $1,033,000. On June 29, 2001, the Company issued a convertible promissory note to Mr. Berg in the amount up to $650,000 to support the Company's working capital needs. The promissory note has a due date of January 3, 2003 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. The note provides that at the election of Mr. Berg and Focus, the promissory note and any accrued and unpaid interest is convertible into shares of Focus preferred stock at a conversion price of $1.56 which represented 125% of the trailing 30-day average of the Company's common stock ending June 28, 2001. The promissory note is secured by a security agreement in favor of Mr. Berg granting him a security interest in first priority over substantially all of the assets of Focus. As of September 30, 2001 the Company had principal and accrued interest due under the note totaling approximately $661,000. Note Payable to Stockholder On January 16, 2001 in connection with the Videonics merger, Focus assumed an unsecured note payable to Carl Berg in the amount of $1,035,000. The note earned interest at 8% per year and was due on January 16, 2002. On May 7, 2001, the $1,035,000 and approximately $169,000 of accrued interest due under the note were converted into 1,012 shares of Preferred Stock. See "Note 8. Stockholders Equity - Series B Preferred Stock" for more information. Letters of Credit During 2000, the Company entered into agreements with subcontractors to manufacture partially and fully completed products. As part of these agreements the Company was required to obtain from its banks an irrevocable letter of credit to secure payment of each order placed with these vendors. The Company was required to secure these letters of credit by depositing cash in an interest bearing account with the bank. At September 30, 2001 and December 31, 2000, the Company maintained interest bearing accounts collateralizing letters of credit in the amount of $298,000 and $1,263,000, respectively. These restricted amounts are recorded in current assets as they relate to the procurement of inventory and are outstanding for periods of less than one year. Restricted Collateral Deposit In connection the CRA Systems judgment discussed below, the Company posted a bond in the amount of $2,362,494 to suspend any enforcement of the judgment pending appeal. Carl Berg, a director and shareholder of the Company obtained the bond on Focus' behalf in exchange for a secured convertible note in the same amount as described in "Convertible Notes" above. The bond is irrevocable and is collateralized by a certificate of deposit in the amount of $2,363,000. In the event the case is settled for less than the bond amount, the Company has agreed to utilize the proceeds to pay down any outstanding debt owed to Mr. Berg. This restricted amount is recorded in current assets as it relates to an accrued legal judgment in the amount of $2,148,000. Restructuring Expenses In December 2000, the Company's Board of Directors determined that to significantly reduce the Company's cost structure it would close its Wilmington, MA facility, reduce personnel and relocate to a significantly smaller facility during the first quarter of 2001. As such, restructuring charges of $522,000 were recorded in the fourth quarter of 2000. In addition, restructuring charges of $33,000 were incurred in the first quarter of 2001. Restructuring expenses were related to the reduction of 16 employees in the areas of operations, customer support and finance of approximately $153,000 and equipment and lease abandonment charges of approximately $402,000. At September 30, 2001 $41,000 of restructuring reserves remained, primarily relating to ongoing lease charges for abandoned equipment and personnel benefits associated with scheduled staffing reductions. The closure of the Company's Morgan Hill facility occurred in the first quarter of 2000 and restructuring charges totaled approximately $202,000. Direct expenses were comprised of inventory adjustments of approximately $118,000, S-8 Focus Enhancements, Inc. Notes to Consolidated Financial Statements payroll and benefits of approximately $57,000, travel of approximately $16,000 and lease cancellation charges of approximately $11,000. At September 30, 2001 all restructuring costs related to the Morgan Hill closure have been paid. Litigation Focus has been named as a defendant in an alleged class action alleging violation of federal securities laws. Focus and one of its directors have been named as defendants in a securities class action pending in United States District Court for the District of Massachusetts. The complaint alleges a class of shareholders who purchased Focus shares during the July 17, 1997 to February 19, 1999 period. The complaint was initially filed in November of 1999 and has been amended several times. The complaint purports to allege violations of the federal securities laws and seeks unspecified monetary damages. Defendants moved to dismiss the action. The Federal District Court granted certain portions of the Company's motion to dismiss and denied other portions allowing the case to go forward into pretrial discovery as to certain matters. 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 that the transaction was simply a sale of inventory for which Focus was never paid. CRA contended otherwise. CRA brought suit against Focus and on September 21, 1998, for breach of contract contending that Focus grossly exaggerated the demand for the product and the margin of profit that 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. The case was removed to the US District Court for the Western District of Texas, Waco, Texas. A jury trial in May 2000 in that court 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 in favor of CRA for actual damages, punitive damages, attorney's fees, costs, and interest. In connection with this judgment, we recorded an expense of $2,147,722 in the period ended September 30, 2000. The court overruled the motion for new trial that Focus filed, and Focus has appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit in New Orleans, Louisiana. On October 27, 2000, Focus submitted 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) and the U.S. District Court granted a stay of any enforcement of the judgment pending appeal. On January 3, 2002, the Circuit Court affirmed the judgment awarded to CRA virtually in its entirety. The Company had already recorded a charge to operations during the third quarter of 2000. District Court granted a stay of any enforcement of the judgment pending appeal. The court of appeals has tentatively set the appeal for oral argument during the week of December 3, 2001. General 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 operations. 8. Stockholders' Equity Increase to Authorized Common Shares On January 12, 2001, the stockholders of the Company approved an increase to the authorized common shares from 30,000,000 to 50,000,000. This increase was recommended and approved by the Company's Board of Directors, in part to issue approximately 5,135,000 shares in connection with the merger of Videonics Inc., and to ensure that sufficient shares are available for issuance under the Company's 2000 Non Qualified Stock Option Plan (5,000,000 shares) and for a Private Equity Line of Credit (4,000,000 shares). Private Placement 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. In accordance with our obligations under the agreement, the Company is incurring charges of 2% per month of the gross proceeds until its registration of the shares purchased by the investor. During the three and nine months ended September 30, 2001, the Company recorded expenses of $52,000 and $231,000, respectively, related to such charges (included in Other Expense, Net). The investor agreed to exchange the gross amount of calculated charges for additional common stock of Focus based on an exchange rate of 0.68. Through September 30, 2001, the Company has issued 485,295 shares of Focus common stock to extinguish this accrued liability. In connection with the issuance of common stock under this agreement, the Company recorded charges of $17,000 and $142,000 for the three and nine months ended September 30, 2001 (included in Other Expense, Net). S-9 Focus Enhancements, Inc. Notes to Consolidated Financial Statements On February 7, 2001, the Company filed a preliminary registration statement under the Securities Act of 1933, as amended, to register those shares and the underlying warrants. On August 9, 2001 an amended SB-2 was filed with the Securities and Exchange Commission. As of November 12, 2001 the registration statement had not been deemed effective. This document is neither an offer to sell nor a solicitation for an offer to buy securities. The offering with respect to the proposed equity line of credit will be made only by a prospectus or an exemption therefrom. Series B Preferred Stock On April 24, 2001, the board of directors of Focus adopted a Certificate of Designation whereby a total of 2,000 shares of Series B Preferred Stock, $0.01 par value per share, are reserved for issuance. Each share has a liquidation preference in the amount of $1,190.48 plus all accrued or declared but unpaid dividends. Cash dividends on the stock are non-cumulative and are paid at the option of the board of directors. If paid, the rate shall be seven percent per annum. The board does not presently intend to pay dividends on the stock. At the option of the holder, each share is convertible into 1,000 shares of common stock of Focus. On May 7, 2001, Carl Berg converted approximately $2.3 million of debt and accrued interest currently owed by Focus to Mr. Berg into 1,904 shares of Series B convertible preferred stock based on the estimated fair value of the preferred stock the date on which the related subscription agreement was executed. 9. Related Party Transactions Timothy Mahoney, who is a Focus director, is a principal of vFinance.com, Inc., the parent company to Union Atlantic Capital L.C., and a partner of Union Atlantic L.C. For the years ended December 31, 2000 and 1999, Focus paid Union Atlantic L.C. $83,206 and $112,226, respectively in consulting fees in connection with equity financing agreements negotiated by Union Atlantic L.C. In addition, on June 27, 2001, vFinance Capital L.C. was issued 243,833 shares of Focus common stock in lieu of investment banking fees in connection with the acquisition of Videonics Inc in January 2001. In connection with the merger, the Company accrued $251,000 for such investment banking fees, which was included within the transaction costs associated with the acquisition of Videonics. Such amount was converted into the 243,833 shares of common stock based on the trading price of the common stock as of January 12, 2001, the date on which the stockholders approved the merger. Pursuant to an agreement, in the event vFinance.com, Inc. or any of its affiliates publicly sell the shares of common stock in the market at a price below $1.03, the Company would be required to issue to vFinance.com, Inc. additional shares to make up any shortfalls, up to a maximum of 3,500,000. Such shares can be repurchased by Focus within five (5) business days from the date of issuance at the difference between the market price at the time the shares were sold by vFinance or its affiliates and $1.03. Such amount would not exceed $227,000. See also "Note 7 - Commitments - Convertible Notes," "- Note Payable to Stockholder," and "Note 8 - Series B Preferred Stock." S-10 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 the results of their operations and their cash flows for the year then ended, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California January 28, 2000, except for Note 14 as to which the date is January 30, 2001 V-1 Report of Deloitte & Touche LLP, Independent Auditors To the Board of Directors and Shareholders of Videonics, Inc.: We have audited the accompanying consolidated balance sheet of Videonics, Inc. and subsidiaries (the Company) as of December 31, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP San Jose, California October 5, 2001 V-2 Videonics, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2000 and 1999 (in thousands)
2000 1999 ----------- ---------- Assets Current assets: Cash and cash equivalents.............................................................. $ 357 $ 715 Accounts receivable, net............................................................... 550 886 Inventories............................................................................ 2,250 3,785 Prepaids and other current assets...................................................... 91 145 ---------- ---------- Total current assets................................................................. 3,248 5,531 Property and equipment, net............................................................... 242 513 Other assets.............................................................................. 43 45 ---------- ---------- Total assets......................................................................... $ 3,533 $ 6,089 ---------- ---------- Liabilities and Shareholders' Equity Current liabilities: Loan payable to bank................................................................... $ 400 $ -- Accounts payable....................................................................... 1,092 974 Accrued expenses....................................................................... 755 734 ---------- ---------- Total current liabilities............................................................ 2,247 1,708 ---------- ---------- Long term liabilities: Loan payable to shareholder............................................................ 1,035 1,035 ---------- ---------- Total liabilities.................................................................... 3,282 2,743 ---------- ---------- Commitments and contingencies (Note 7) Shareholders' equity: Preferred stock, no par value: Authorized: 10,000 shares in 2000 and 1999; Issued and outstanding: None.......................................................... -- -- Common stock, no par value: Authorized: 30,000 shares in 2000 and 1999; Issued and outstanding: 5,902 shares in 2000 and 5,874 shares in 1999................. 20,725 20,700 Accumulated deficit.................................................................... (20,474) (17,354) ---------- ---------- Total shareholders' equity........................................................... 251 3,346 ---------- ---------- Total liabilities and shareholders' equity........................................ $ 3,533 $ 6,089 ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. V-3 Videonics, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data)
Year Ended December 31, ----------------------- 2000 1999 ---- ---- Net revenues and royalty income............................... $ 11,869 $ 14,226 Cost of revenues (includes write-off of inventory of $1,037 and $733 for 2000 and 1999, respectively)................. 8,456 8,815 -------- -------- Gross profit................................................ 3,413 5,411 -------- -------- Operating expenses: Research and development.................................... 2,155 2,879 Selling and marketing....................................... 3,098 3,875 General and administrative.................................. 1,148 1,219 ------ ------ 6,401 7,973 ------ ------ Operating loss................................................ (2,988) (2,562) Interest income............................................... 14 25 Interest expense.............................................. (146) (97) -------- -------- Net loss...................................................... $ (3,120) $ (2,634) -------- -------- Net loss per share--basic and diluted.......................... $ (.53) $ (.45) -------- -------- Shares used in per share calculation--basic................... 5,898 5,866 -------- -------- Shares used in per share calculation--diluted................. 5,898 5,866 -------- --------
The accompanying notes are an integral part of these consolidated financial statements. V-4 Videonics, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity For the Two Years Ended December 31, 2000 (in thousands)
Common Stock Total ------------------- Accumulated Shareholders' Shares Amount Deficit Equity -------- -------- -------- -------- 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 Issuance of common stock from exercise of options 28 25 -- 25 Net loss ........................................ -- -- (3,120) (3,120) -------- -------- -------- -------- Balances, December 31, 2000 ..................... 5,902 $ 20,725 $(20,474) $ 251 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. V-5 Videonics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, ----------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net loss ............................................... $(3,120) $(2,634) Adjustments to reconcile net loss to net cash used in operating activities: Loss on disposal of property and equipment ........... -- 7 Loss on sale of Nova Systems ......................... -- 48 Loss on sale of German subsidiary .................... -- 65 Depreciation and amortization ........................ 499 1,025 Provision for doubtful accounts ...................... 25 -- Provision for excess and obsolete inventories ........ 1,037 733 Change in assets and liabilities: Accounts receivable ................................. 311 (71) Inventories ......................................... 498 1,203 Prepaid and other current assets .................... 17 46 Other ............................................... 2 (29) Accounts payable .................................... 118 35 Accrued expenses .................................... 21 (507) ------- ------- Net cash used in operating activities .............. (592) (79) ------- ------- Cash flows from investing activities: Purchases of property and equipment .................... (191) (120) Proceeds from disposition of Nova Systems .............. -- 52 ------- ------- Net cash used in investing activities .............. (191) (68) ------- ------- Cash flows from financing activities: Proceeds from issuance of loans payable to bank ........ 400 -- Proceeds from issuance of loans payable to shareholder . -- 18 Proceeds from issuance of common stock ................. 25 7 ------- ------- Net cash provided by financing activities .......... 425 25 ------- ------- Decrease in cash and cash equivalents ................... (358) (122) Cash and cash equivalents at beginning of year .......... 715 837 ------- ------- Cash and cash equivalents at end of year ................ $ 357 $ 715 ------- ------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest ............................................. $ 25 $ 3 Income taxes ......................................... $ -- $ -- The accompanying notes are an integral part of these consolidated financial statements. V-6 Videonics, Inc. and Subsidiaries 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. On January 16, 2001, the Company was acquired by Focus Enhancements, Inc. (see Note 14). 2. Summary of Significant Accounting Policies 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 accounting principles generally accepted in the United States of America 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 recognizes revenues, net of discounts, upon shipment of product, when a purchase order has been received, the sales price is fixed and determinable, collection of the resulting receivable is probable, and 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 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, 2000 and 1999 was $293,000 and $232,000, 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 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 amounts that more likely than not are 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. V-7 Videonics, Inc. and Subsidiaries Notes To Consolidated Financial Statements Impairment of Long-Lived Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount, an impairment loss would be measured based on the discounted cash flows compared to the carrying amount. No impairment charge has been recorded in 2000 or 1999. Comprehensive income There were no differences between net income (loss) and comprehensive income (loss) for each of the two years in the period ended December 31, 2000. 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 (SFAS ) No. 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. Fair value of financial instruments Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities, and loans payable to bank and shareholder, approximate fair value due to their short maturities Recent accounting pronouncements Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137. SFAS No. 133 requires the recognition of all derivatives in the balance sheet as either an asset or a liability measured at fair value. The adoption of SFAS No. 133 did not have an impact on the Company's financial statements. The Company currently does not utilize derivative financial instruments in its operating activities nor does it use them for trading or speculative purposes. V-8 Videonics, Inc. and Subsidiaries Notes To Consolidated Financial Statements- (Continued) In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The Company will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. The Company does not currently have goodwill recorded on its books and as such there will be no impact on the Company's financial statements in accordance with the adoption of this pronouncement. 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. 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 Company received royalties of $144,000 and $207,000 for the years ended December 31, 2000 and 1999 respectively. The sale of Nova resulted in a $48,000 loss to Videonics. 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, ---------------------- 2000 1999 -------- -------- Trade accounts receivable.......................... $ 667 $ 1,016 Less allowance for doubtful accounts.............. (117) (130) -------- -------- $ 550 $ 886 -------- -------- Inventories comprise (in thousands): December 31, ---------------------- 2000 1999 -------- -------- Raw materials...................................... $ 1,525 $ 3,179 Work in process.................................... 210 302 Finished goods..................................... 515 304 -------- -------- $ 2,250 $ 3,785 -------- -------- V-9 Videonics, Inc. and Subsidiaries Notes To Consolidated Financial Statements- (Continued) Property and equipment comprise (in thousands): December 31, ----------------------- 2000 1999 --------- --------- Machinery and equipment.............................. $ 2,003 $ 2,909 Furniture and fixtures............................... 74 74 Leasehold improvements............................... 167 175 Tooling.............................................. 841 1,071 --------- --------- 3,085 4,229 Less accumulated depreciation and amortization . (2,843) (3,716) --------- --------- $ 242 $ 513 --------- --------- Accrued expenses comprise (in thousands): December 31, ------------------- 2000 1999 ------ ------ Accrued advertising.................................. $ 86 $ 66 Accrued vacation..................................... 145 116 Salaries payable..................................... 143 166 Interest payable..................................... 163 79 Other accrued expenses............................... 218 307 ------ ------ $ 755 $ 734 ------ ------ 5. Note Payable to Bank On November 13, 2000, Pacific Business Funding assumed a $400,000 loan from Venture Banking issued to Videonics. The loan was secured by all the Company's assets and interest was calculated at a rate of 15% per year. At December 31, 2000, an aggregate of $400,000 was outstanding under the loan. The loan was repaid in full on July 16, 2001. See Note 8 "Line of Credit" for information regarding Venture Banking Group. 6. Note Payable to Shareholder Note payable to shareholder of $1,035,000 at December 31, 2000 and 1999, is unsecured, bears interest at 8% per year, and was originally due on January 16, 2002. On May 7, 2001, the $1,035,000 and approximately $169,000 of accrued interest due under the note were converted into 1,012 shares of Focus Enhancements, Inc. preferred stock (see Note 14). 7. 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, 2000, future minimum lease payments under all non-cancelable operating leases were as follows (in thousands): 2001.......... $ 435,875 2002.......... $ 259,875 Rent expense for the years ended December 31, 2000 and 1999 amounted to $458,000 and $370,000 respectively. V-10 Videonics, Inc. and Subsidiaries Notes To Consolidated Financial Statements- (Continued) 8. 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 was 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. In November 2000, Venture Banking Group transferred the loan to Pacific Business Funding, another division of Cupertino National Bank, and the outstanding line of credit was terminated. Accordingly, the remaining unamortized value of the warrants was charged to interest expense. Interest expense associated with the amortization of warrants totaled $37,000 for the year ended December 31, 2000. See Note 5, "Loan Payable to Bank" for further detail on the loan with Pacific Business Funding. 9. Income Taxes The components of the provision for income taxes are as follows (in thousands): 2000 1999 ---- ---- Current: Federal.......... $ -- $ -- State............ -- -- Deferred: Federal.......... -- -- State............ -- -- ------ ------ $ -- $ -- ------ ------ The Company's effective tax rate on loss before income tax differs from the U.S. federal statutory regular tax rate as follows: 2000 1999 ---- ---- Federal statutory income tax rate................... (34.0)% (34.0)% State income tax rate, net of federal benefit....... (2.1) 0.6 Foreign net operating loss.......................... -- 4.1 Research tax credits................................ -- (4.9) Other............................................... 6.4 2.2 Increase in valuation allowance..................... 29.7 32.0 ------ ------ --% --% ------ ------ The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below (in thousands): 2000 1999 ---- ---- Intangible assets............................ $ 520 $ 1,469 Inventory reserves............................. 581 408 Depreciation................................... 128 45 Net operating loss carryforward................ 7,962 6,230 Tax credit carryforward........................ 1,574 1,636 Deferred California research................... 363 386 Other accrued liabilities and reserves......... 197 226 ---------- ---------- Subtotal....................................... 11,325 10,400 Less valuation allowance....................... (11,325) (10,400) ---------- ---------- Net deferred tax asset......................... $ -- $ -- ---------- ---------- V-11 Videonics, Inc. and Subsidiaries Notes To Consolidated Financial Statements- (Continued) At December 31, 2000, the Company has federal and state net operating losses of approximately $22,000,000 and $8,000,000, respectively, which expire in 2020 and 2015, respectively. The Company also has federal and state tax credit carryforwards of $1,100,000 and $700,000, respectively, which expire in 2019. In accordance with generally accepted accounting principles, a valuation allowance must be established for a deferred tax asset if it's more likely than not that a tax benefit will not 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 $10,400,000 at December 31, 1999 to $11,325,000 at December 31, 2000. Current tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an "ownership" change, as defined under Internal Revenue Code Section 382. In the event of an ownership change, the Company's ability to utilize its carryforwards could be limited. 10. Net Loss Per Share 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): 2000 1999 --------- --------- Numerator - basic and diluted Net loss....................................... $ (3,120) $ (2,634) --------- --------- Net loss available to common stockholders...... $ (3,120) $ (2,634) --------- --------- Denominator - basic and diluted Weighted average common shares................. 5,898 5,866 --------- --------- Basic and diluted net loss per share outstanding................................... $ (.53) $ (.45) --------- --------- The following table summarizes common stock equivalents that are not included in the denominator used in the diluted net loss per share calculation because to do so would be antidilutive for the years ended December 31, 2000 and 1999 (in thousands): 2000 1999 ------- ------ Options to purchase common stock 116,735 57,209 Warrants to purchase common stock 26,444 5,157 ------- ------ Total common stock equivalents 143,179 62,366 ------- ------ 11. Shareholders' Equity At December 31, 2000, the Company has reserved 1,000,000 shares of common stock for issuance under its 1996 Amended Stock Option Plan and reserved 900,000 shares of common stock for issuance under its 1987 Stock Option Plan (collectively "the Plans"). 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. V-12 Videonics, Inc. and Subsidiaries Notes To Consolidated Financial Statements- (Continued) A summary of stock option activity follows:
Options Outstanding ------------------------------------------------------------- Number of Number Shares Shares of Shares Weighted Available Under the To an Exercise Average for Grant Plans Officer Price Exercise Price --------- ----- ------- ----- -------------- Balances, December 31, 1998............ 431,471 955,649 320,000 0.47-8.88 $ 1.58 Options granted....................... (348,124) 348,124 -- 0.38-0.88 0.61 Options canceled...................... 422,609 (422,609) (200,000) 0.38-5.00 1.58 Options exercised..................... -- (15,950) -- 0.47-0.75 0.48 ------- ------- ------- Balances, December 31, 1999............ 505,956 865,214 120,000 $0.38-$8.88 1.21 ------- ------- ------- Options granted....................... (120,300) 120,300 -- 0.88-1.63 1.04 Options canceled...................... 142,128 (142,128) (120,000) 0.38-3.33 1.26 Options exercised..................... -- (28,451) -- 0.38-1.50 0.87 ------- ------- ------- Balances, December 31, 2000............ 527,784 814,935 -- $0.38-$8.88 $ 1.19 ------- ------- -------
Had compensation cost for the years ended December 31, 2000 and 1999 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, 2000 and 1999 would have been increased to the pro forma amounts indicated below: 2000 1999 ---- ---- Net loss--pro forma................. $(3,263) $(3,154) ------- ------- Net loss per share--basic........... $(.55) $(.54) ----- ----- Net loss per share--diluted......... $(.55) $(.54) ----- ----- 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. The weighted average fair value of options granted in 2000 and 1999 was $1.10 and $0.58 per share 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: 2000 1999 ---- ---- Risk-free interest rate....... 5.43%-6.65% 5.36%-6.38% Expected life................. 7 7 Expected dividends............ -- -- Volatility.................... 1.40 1.41 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. V-13 Videonics, Inc. and Subsidiaries Notes To Consolidated Financial Statements- (Continued) The options outstanding and currently exercisable by exercise price at December 31, 2000 are as follows:
Options Currently Exercisable Options Outstanding -------------- Number Outstanding --------------------------- Weighted Average Number Exercisable Weighted Average Exercise December 31, Weighted Average Remaining Exercise December 31, Exercise Price 2000 Contractual Life Price 2000 Price -------- ---- ---------------- ----- ---- ----- $0.38-$0.78 298,778 6.75 $0.57 154,290 $0.56 $0.78-$1.25 129,779 8.97 $0.95 24,427 $0.91 $1.50-$1.50 336,670 7.48 $1.50 324,170 $1.50 $1.63-$8.88 49,708 7.26 $3.42 33,232 $4.13 -------- -------- 814,935 7.44 $1.19 536,119 $1.37 -------- --------
12. Segment Information In 1998, Videonics adopted SFAS 131 " Disclosures About Segments of an Enterprise and Related Information." At that time it identified two reportable segments--(1) Video Production and (2) Signal Processing. The accounting policies of the segments were the same as those described in the "Summary of Significant Accounting Policies." Videonics evaluated the performance of its segments based on revenue and operating income. Videonics was organized primarily on the basis of three separate product lines. Two of its product lines were aggregated into the "Video Production" segment. This segment manufactures and sells video post-production equipment into broadcast, cable, industry and home producer markets. The other segment, "Signal Processing" represented the Company's Nova Division that manufactured and sold signal conversion and processing equipment primarily into television and cable studios. On January 29, 1999 the Company sold its Nova Division and, since that time, operates in only one reportable segment. As such, segment information is not presented for the year ended December 31, 2000. The table below presents information about reported segments for the year ended December 31, 1999 (in thousands): Video Production Sales......................................... $14,135 Operating loss................................................. (2,527) Signal Processing Sales........................................ 91* Operating loss................................................. (36)* - ------------------ *Results presented are through January 29, 1999, the date the Company completed its sale of Nova. The Company markets and services its products in North America through its own direct sales organization. The Company markets its products in foreign countries outside North America through distributors. Geographic net export sales information is shown below (in thousands): December 31, -------------------- 2000 1999 ------- ------- Revenues from unaffiliated customers: United States...................................... $ 8,580 $10,149 Europe............................................. 1,081 1,325 Asia............................................... 1,690 2,034 Americas (excluding the United States)............. 518 718 ------- ------- $11,869 $14,226 ------- ------- For the years ended December 31, 2000 and 1999, one customer accounted for 12% and 13% of annual revenue, respectively. The Company has no significant assets in foreign countries. V-14 Videonics, Inc. and Subsidiaries Notes To Consolidated Financial Statements- (Continued) 13. 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 $22,000 and $26,000 for the years ended December 31, 2000 and 1999 respectively. 14. Merger with Focus Enhancements Inc. on January 16, 2001 The shareholders of Focus Enhancements Inc. ("Focus") approved the acquisition of Videonics Inc. and effective January 16, 2001, Videonics Inc. became a wholly-owned subsidiary of Focus Enhancements Inc. Focus issued 0.87 shares of Focus common stock for each issued and outstanding share of Videonics common stock on the closing date. Based on the exchange ratio, a total of approximately 5,135,000 shares were issued. V-15 No dealer, salesman or other person has been authorized to give any information or to make any representations not contained in this prospectus in connection with the offering made hereby, and, if given or made, such information or representations must not be relied upon s having been authorized by the Focus. This prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. Neither the delivery of this prospectus by the Focus nor any sale made hereunder shall in any circumstances create an implication that there has been no change in the affairs of the Focus since any of the dates as of which information is furnished herein or since the date hereof. TABLE OF CONTENTS Prospectus Summary ........................................................ 1 Risk Factors .............................................................. 3 Special Note Regarding Forward-Looking Statements .............................................................. 8 Dilution .................................................................. 8 Use of Proceeds ........................................................... 9 Dividend Policy ........................................................... 9 Market for Our Common Stock ............................................... 10 Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 11 Information About Focus ................................................... 23 Directors and Executive Officers .......................................... 30 Pro Forma Combined Condensed Consolidated Financial Information ................................................... 38 The Offering .............................................................. 45 Selling Shareholders ...................................................... 46 Plan of Distribution ...................................................... 49 Description of Capital Stock .............................................. 51 Provisions of Our Articles of Incorporation and Bylaws .................................................................. 52 Legal Matters ............................................................. 53 Experts ................................................................... 53 Change in Accountant ...................................................... 54 Additional Information .................................................... 54 Index to Consolidated Financial Statements ................................ 55 Until _____________, 2002 (90 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Up to 5,308,422 Shares Common Stock FOCUS Enhancements, Inc. ---------- PROSPECTUS ---------- Date: _____________, 2002 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. Section 607.0850 of the Delaware General Corporation Law authorizes a court to award, or permits a Delaware corporation to grant, indemnity to present or former directors and officers, as well as certain other persons serving at the request of the corporation in related capacities. This permitted indemnity is sufficiently broad to permit indemnification for liabilities arising under the Securities Act of 1933, including reimbursement for expenses incurred. The indemnification authorized under Delaware law is not exclusive and is in addition to any other rights granted to officers and directors under the Articles of Incorporation or Bylaws of the corporation or any agreement between officers and directors and the corporation. The registrant's Bylaws provide for the indemnification of directors, former directors and officer to the maximum extent permitted by Delaware law. The registrant's Bylaws also provide that it may purchase and maintain insurance on behalf of a director or officer against liability asserted against the director or officer in such capacity. In addition, the registrant has entered into Indemnification. 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 25. Other Expenses of Issuance and Distribution. The following table provides the costs and expenses, other than the underwriting discount, payable by the registrant in connection with the securities being registered. All amounts are estimates, except the Securities and Exchange Commission registration fee. All of these costs and expenses will be borne by the registrant. Securities and Exchange Commission filing fee $ 2,460 Accountants' fees and expenses 45,000 Legal fees and expenses 135,000 Blue Sky fees and expenses 35,000 Miscellaneous 23,000 -------- Total $240,460 ======== We have agreed to bear all expenses, other than selling commissions and fees, in connection with this registration and sale of the shares of common stock being offered by the selling stockholders in this offering. Item 26. Recent Sales of Unregistered Securities. Within the past three years, the registrant has sold the following securities that were not registered under the Securities Act. 1. On February 22, 1999, Focus 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). 2. On February 22, 1999, Focus 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. 3. On February 22, 1999, Focus 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. 4. On March 22, 1999, Focus 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. 5. On June 4, 1999, Focus 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 Capital, L.C. 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. Focus 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. Focus 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. 6. On September 17, 1999, Focus 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. Focus 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. Focus 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. 7. On September 22, 1999, Focus 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. 8. In November 1999, Focus 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 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. 9. On June 1, 1998, Focus 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, Focus received $352,000 in full payment of this note, including accrued interest at 8%. 10. On January 18, 2000, Focus 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. 11. On June 9, 2000, Focus 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 Capital, L.C. 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. Focus 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. Focus is also required to issue additional shares due to a requirement to timely file a registration statement. This Registration Statement covers the securities issued or to be issued in those transactions. 12. On July 28, 2000, Focus 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 lieu of providing Euston Investments with a minimum aggregate drawdown commitment, Focus issued to Euston 2 Investments a stock purchase warrant to purchase 250,000 shares of its common stock with an exercise price of $1.625. The warrant expires June 12, 2005. On January 11, 2002, Focus and Euston mutually agreed to terminate the agreement. As consideration for terminating the agreement, the exercise price of Euston's warrants to purchase 250,000 shares of Focus common stock was reduced from $1.625 to $0.75 per share. This Registration Statement covers the securities issued in this transaction. 13. Focus signed a debt conversion agreement with Steve Wood and Red & White Enterprises, Inc., a California corporation, on July 17, 2000, for the issuance of our common stock in lieu of cash payment under a secured promissory note held by Red & White Enterprises. Steve Wood is the sole stockholder of Red & White Enterprises and a former employee of Focus. Red & White Enterprises, f/k/a PC Video Conversion, Inc., obtained the promissory note from Focus in exchange for certain assets and liabilities of PC Video Conversion, which Focus purchased in July 1998. In connection with the separation agreement, on January 24, 2001, Red & White Enterprises exercised its right to convert the remaining balance of the note. Approximately $427,437 was converted into 468,322 shares of Focus common stock. The conversion price was 93% of the average closing prices for the five day period after stockholder approval of an increase in authorized shares of Focus (January 11, 2001). These shares are covered by this Registration Statement. 14. On June 28, 2001 vFinance Capital L.C. was issued 243,833 shares of Focus common stock in lieu of investment banking fees in connection with the acquisition of Videonics Inc in January 2001. Pursuant to various agreements, in the event vFinance.com or any of its affiliates publicly sell the shares of common stock in the market at a price below $1.03, we will issue vFinance additional shares to make up any shortfall. The securities issued in these transactions are covered by this Registration Statement. 15. On May 7, 2001, Carl Berg, a director of Focus, converted approximately $2.3 million of debt and accrued interest currently owed by Focus to Mr. Berg into 1,904 shares of convertible preferred stock based on the estimated fair value of the preferred stock as of May 1, 2001, the date on which the related subscription agreement was executed. Each share of preferred stock has a liquidation preference of $1,190.48 per share and is convertible into 1,000 shares of common stock. 16. Focus entered into a master purchase agreement with Advanced Electronic Support Products, Inc. ("AESP") whereby Focus agreed to purchase a minimum of $2,500,000 of cables and other products from AESP by March 29, 2001. In return, Focus received certain pricing commitments over the term of the master purchase agreement. The agreement provided that in the event Focus did not purchase at least $2,500,000 of cables and other products during the term of the master purchase agreement, Focus would pay AESP an amount equal to 20% of the difference between $2,500,000 and the aggregate amount of purchases. The agreement allowed Focus and its subcontractors, to purchase product from other sources if AESP's pricing or quality do not meet certain competitive levels and that such purchases shall reduce the minimum requirements under the agreement. Focus failed to meet the minimum purchase requirements and there were some disputes between the parties under the agreement. On June 26, 2001, as settlement, in exchange for a release from AESP of Focus from further liability under the contract, Focus agreed to issue 150,000 shares of its common stock to AESP. The securities issued in this transaction are covered by this Registration Statement. 17. On November 1, 2001 vFinance.com, Inc. was issued 126,499 shares of Focus common stock in lieu of payment under and settlement for the termination of a Management and Financial Consulting Agreement with Focus, including certain additional shares due to the change in market price of the common stock of Focus. Pursuant to various agreements, in the event vFinance or any of its affiliates sells the shares of common stock in the market at a price below $1.03, we will issue vFinance additional shares to make up any shortfall. Of the 126,499 shares issued, 47,055 shares have been issued pursuant to the price protection provision. The securities issued in these transactions are covered by this Registration Statement. 18. Pursuant to an agreement dated December 27, 2001, vFinance received a warrant to purchase 25,000 shares of common stock of Focus at a per share exercise price of $1.54 per share. For such compensation, vFinance will provide non-exclusive financial advisory services for a period of 12 months. The securities issued in this transaction are covered by the registration statement. 19. On January 11, 2002, we sold in a private placement, 2,434,490 shares of our common stock to four investors for gross proceeds of $2,750,000. In connection with the private placement, we also issued warrants to 3 purchase 367,140 shares of common stock at $1.36 per share. The securities issued in this transaction are covered by the registration statement. The issuance of the securities described above were exempt either pursuant to Rule 701 under the Securities Act, as a transaction pursuant to a compensatory benefit plan, or pursuant to Section 4(2) as a transaction by an issuer not involving a public offering. The recipients in such transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. No underwriters were employed in any of the above transactions. Appropriate legends were affixed to the share certificates and warrants issued in the transactions. Item 27. 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 (21) 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) 3.4 Certificate of Designation - Series B Preferred Stock (25) 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 Form of Opinion of Manatt Phelps & Phillips, LLP, regarding legality of shares of Focus common stock to be registered under this Registration Statement on Form SB-2* 10.1 1992 Stock Option Plan, as amended (4) 10.2 1993 Non-Employee Director Stock Option Plan (4) 10.3 Purchase and Sale Agreement, dated as of May 25, 1994, between Focus and Inline Software, Inc. (5) 10.4 Master Purchase Agreement, dated as of August 12, 1994, between Focus and Apple Computer, Inc. (5) 10.5 1995 Non-Employee Director Stock Plan (7) 10.6 Form of Settlement Agreement between Focus and Lapis Technologies, Inc. Shareholders (7) 10.7 Manufacturing Agreement between Focus and a manufacturer (7) 10.8 Warrant W96/6, dated June 28, 1996, issued to a Private Lender (8) 10.9 Agreement dated as of June 28, 1996 between Focus and a manufacturer (8) 10.10 Security Agreement dated as of June 28, 1996 between Focus and a manufacturer (8) 10.11 Amendment to Master Purchase Agreement between Focus and TV OEM. (10) 10.12 Lease Agreement between Focus and Cummings Properties for the facility at 142 North Road, Sudbury, Massachusetts (10) 10.13 Agreement of Plan of Merger dated September 30, 1996, by and among Focus, FOCUS Acquisition Corp., and TView, Inc. (9) 10.14 Form of Warrant issued to various investors pursuant to Amendment No. 1 (11) 10.15 Form of Subscription Agreement between Focus and various investors in the March 97 Offering (11) 10.16 Form of Warrant issued to the placement agent in the March 97 Offering (ii) 10.17 1997 Director Stock Option Plan (12) 10.18 Form of Director Stock Option Agreement (12) 10.19 Key Officer Non-Qualified Stock Option Agreement for a Corporate Officer (12) 10.20 Key Officer Non-Qualified Stock Option Agreement for a Corporate Officer (12) 4 10.21 Key Officer Non-Qualified Stock Option Agreement for a Corporate Officer (12) 10.22 Subscription Agreement between Focus and Smith Barney Fundamental Value Fund, Inc. dated September 8, 1997 (13) 10.23 Form of Warrant dated September 10, 1997 issued to designees of the placement agent (13) 10.24 Lease by Wakefield Ready Mixed Concrete Co., Inc. to FOCUS Enhancements, Inc. dated December 1, 1998 10.25 Common Stock and Warrants Purchase Agreement with AMRO International, S.A. (14) 10.26 Form of Stock Purchase Warrant issued to AMRO International, S.A. (included as Exhibit A to the Common Stock and Warrants Purchase Agreement) (14) 10.27 Form of Registration Rights Agreement with AMRO International, S.A. (included as Exhibit B to the Common Stock and Warrants Purchase Agreement (14) 10.28 Registration Rights Agreement dated as of July 29, 1998 between Focus and PC Video Conversion, Inc. (15) 10.29 Form of Common Stock Purchase Warrant issued to Brian Swift and Edward Price. (16) 10.30 Common Stock Purchase Warrant issued to Silicon Valley Bank. (16) 10.31 Common Stock and Warrant Purchase Agreement, as amended, with BNC Bach International Ltd., Inc. (17) 10.32 Form of Stock Purchase warrant issued to BNC Bach International, Inc. (included as Exhibit A to the Common Stock and Warrant Agreement (17). 10.33 Form of Registration Rights Agreement with BNC Bach International Ltd., Inc. (included as Exhibit B to the Common Stock and Warrant Purchase Agreement (17). 10.34 Common Stock and Warrant Purchase Agreement with The Raptor Global Portfolio Ltd., The Altar Rock Fund L.P. and Roseworth Group, LTD (18) 10.35 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). 10.36 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) 10.37 Contract for services to be rendered to FOCUS Enhancements, Inc. by R.J. Falkner & Company, INC (18). 10.38 Form of Stock Purchase Warrant issued to each of R. Jerry Falkner and Richard W. West (18). 10.39 Agreement between Union Atlantic, L.C. and FOCUS Enhancements, Inc. confirming agreement to issue warrant in exchange for fee reduction (18) 10.40 Stock Purchase Warrant issued to Union Atlantic, L.C. (18) 10.41 Consulting Agreement dated March 1, 2000 between Focus and William B. Coldrick (20) 10.42 Consulting Agreement dated May 1, 2000 between Focus and Thomas L. Massie (20) 10.43 Consulting Agreement dated May 1, 2000 between Focus and Gary M. Cebula (20) 10.44 Separation Agreement dated May 1, 2000 between Focus and Thomas L. Massie (20) 10.45 Separation Agreement dated April 30, 2000 between Focus and Gary M. Cebula (20) 10.46 Separation Agreement dated July 10, 2000 between Focus and J. Stephen Wood (21) 10.47 Consulting Agreement dated July 10, 2000 between Focus and Red & White Enterprises, Inc. (21) 10.48 Private Equity Line of Credit Agreement dated July 28, 2000 between Focus and Euston Investments Holdings Limited (21) 10.49 Registration Rights Agreement dated June 9, 2000 between the investor and Focus (21) 10.50 Registration Rights Agreement dated July 28, 2000 between Euston Investments Holdings Limited and Focus (21) 10.51 Common Stock Warrant and Purchase Agreement dated June 9, 2000 (21) 10.52 Form of Stock Escrow Agreement (1) 10.53 Agreement and Plan of Merger, dated as of August 30, 2000, among Focus Enhancements, Inc., PC Video Conversion, Inc. and Videonics, Inc. (21) 10.54 Promissory Note, dated October 26, 2000, from Focus Enhancements, Inc. to Carl Berg (22) 10.55 Security Agreement dated October 26, 2000, between Focus Enhancements, Inc. and Carl Berg (22) 5 10.56 2000 Stock Option Plan (23) 10.57 Employment agreement between Focus Enhancements and Michael L. D'Addio (24) 10.58 Amendment to Private Equity Line of Credit between Focus and Euston Investments Holdings Limited (24) 10.59 Amendment No. 1 to Secured Promissory Note dated April 24, 2001 issue by Focus to Carl Berg (excludes exhibits B and C) (25) 10.60 Registration Rights Agreement dated May 1, 2001 between Focus and Carl Berg (25) 10.61 Promissory note issued to Carl Berg dated June 29, 2001 (26) 10.62 Termination Agreement between Focus and Euston dated January 11, 2002* 10.63 Common Stock and Warrant Purchase Agreement dated January 11, 2002* 10.64 Form of Common Stock Purchase Warrant dated January 11, 2002 issued by Focus to 5 Investors* 10.65 Common Stock Purchase Warrant dated December 27, 2001 issued by Focus to vFinance* 10.66 Registration Rights Agreement dated January 11, 2002* 23.1 Consent of Wolf & Company P.C., independent accountants of Focus* 23.2 Consent of PricewaterhouseCoopers, LLP* 23.3 Consent of Deloitte & Touche, LLP* 23.4 Consent of Manatt Phelps & Phillips, LLP, counsel to Focus (included with Exhibit 5.1 hereof)* 24.1 Power of Attorney (25) - ---------- * Included. 1. Filed as an exhibit to Focus' Registration Statement on Form SB-2, No. 33-60248-B, and incorporated herein by reference. 2. Filed as an exhibit to Focus' Current Report on Form 8-K dated November 29, 1993, and incorporated herein by reference. 3. Filed as an exhibit to Focus' Form 10-QSB for the period ended September 30, 1995, and incorporated herein by reference. 4. Filed as an exhibit to Focus' Form 10-KSB for the year ended December 31, 1993, and incorporated herein by reference. 5. Filed as an exhibit to Focus' Form 10-KSB for the year ended December 31, 1994, and incorporated herein by reference. 6. Filed, as an exhibit to Focus' 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 Focus' Registration Statement on Form SB-2, No. 33-80033, and incorporated herein by reference. 8. Filed as an exhibit to Focus' Form 10-QSB for the period ended June 30, 1995, and incorporated herein by reference. 9. Filed as an exhibit to Focus' 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' 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 Focus' 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 Focus' Form 8-K dated September 10, 1997 14. Filed as an exhibit to Focus' 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 Focus' Form 10-QSB dated August 14, 1998 and incorporated herein by reference. 16. Filed as an exhibit to Focus' Form 10-QSB dated May 17, 1999 and incorporated herein by reference. 17. Filed as an exhibit to Focus' Registration Statement on Form S-3, No. 333-82163, filed with the Commission on July 2, 1999, and incorporated herein by reference. 18. Filed as an exhibit to Focus' Registration Statements on Form S-3, No. 333-94621, filed with the Commission on January 13, 2000, and incorporated herein by reference. 6 19. Filed as an exhibit to Focus' Form 10-QSB dated May 22, 2000 and incorporated herein by reference. 20. Filed as an exhibit to Focus' Form l0-QSB dated August 21, 2000, and incorporated herein by reference. 21. Filed as an exhibit to Focus' Current Report on Form 8-K dated September 8, 2000, and incorporated herein by reference. 22. Filed as an exhibit to Focus' Current Report on Form 8-K dated October 31, 2000, as amended by Focus' Current Report on Form 8-K/A dated November 2, 2000, and incorporated herein by reference. 23. Filed as an exhibit to Focus' Registration Statement on Form S-4 filed on October 30, 2000 as amended, incorporated herein by reference. 24. Filed as an exhibit to Focus' Registration Statement on Form SB-2 filed on February 7, 2001. 25. Filed as an exhibit the Focus' Amendment No. 1 to Registration Statement on Form SB-2 filed on August 9, 2001. 26. Filed as an exhibit to Focus' Form l0-QSB dated November 14, 2001, and incorporated herein by reference Item 28. Undertakings Item 512 of Regulation S-B. Rule 415 Offering. (a) 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 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. (b) The undersigned Registrant hereby undertakes that, for the purpose of determining liability under the Securities Act of 1933, as amended, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Act of 1934, as amended (and where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement 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. 7 (c) 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. 8 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 Campbell, State of California, on January 18, 2002. FOCUS ENHANCEMENTS, INC. By: /s/ Michael L. D'Addio ---------------------- Michael L. D'Addio President and Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY Pursuant to the requirements of the Securities Act, this amendment to the registrant's registration statement has been signed by the following persons in the capacities and on the dates indicated. 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/ Michael L. D'Addio President, Chief Executive January 18, 2002 - --------------------------- Officer and Director Michael L. D'Addio /s/ Gary L. Williams Vice President of Finance January 18, 2002 - --------------------------- & Chief Financial Officer Gary L. Williams (Principal Accounting Officer) /s/ Thomas L. Massie* Chairman of the Board January 18, 2002 - --------------------------- of Directors Thomas L. Massie /s/ John C. Cavalier* Director January 18, 2002 - --------------------------- John C. Cavalier /s/ William B. Coldrick* Director January 18, 2002 - --------------------------- William B. Coldrick /s/ Timothy E. Mahoney* Director January 18, 2002 - --------------------------- Timothy E. Mahoney /s/ Carl E. Berg* Director January 18, 2002 - --------------------------- Carl E. Berg /s/ N William Jasper, Jr.* Director January 18, 2002 - --------------------------- N William Jasper, Jr. - ---------- * Signed pursuant to power of attorney 9 EX-5.1 3 p14863_ex5-1.txt FORM OF OPINION OF MANATT PHELPS & PHILLIPS, LLP Exhibit 5.1 MANATT, PHELPS & PHILLIPS, LLP 11355 West Olympic Boulevard Los Angeles, California 90064 (310) 312-4000 FAX: (310) 312-4224 January 22, 2002 Board of Directors Focus Enhancements, Inc. 600 Research Drive Wilmington, Massachusetts 01887 Re: Form SB-2 Registration Statement Under the Securities Act of 1933 Ladies and Gentlemen: This opinion is rendered in connection with the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, (the "Act") relating to the offer and sale (the "Offering") of up to 5,308,422 shares of common stock, par value $.01 per share (the "Common Stock"), of Focus Enhancements, Inc. (the "Company"). As special counsel to Focus, we have reviewed such legal matters as we have deemed appropriate for the purpose of rendering this opinion. Based on the foregoing, we are of the opinion that the shares of Common Stock of Focus covered by the aforesaid Registration Statement will, when issued in accordance with the terms of the Warrants, the Private Equity Line of Credit Agreement or such other agreements, against full payment therefor, be validly issued, fully paid, and non-assessable shares of Common Stock of Focus. We hereby consent to the use of this opinion and to the reference to our firm appearing in Focus' Prospectus under the heading "Legal Matters." In giving this consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission adopted under the Act. This opinion is given as of the effective date of the Registration Statement and we assume no obligation to advise you of changes that may hereafter be brought to our attention. Sincerely, /s/ MANATT, PHELPS & PHILLIPS, LLP EX-10.62 4 p14863_ex10-62.txt TERMINATION AGREEMENT BETWEEN FOCUS AND EUSTON TERMINATION AGREEMENT AGREEMENT (this "Agreement") dated January 4, 2002, between Euston Investments Holdings Limited ("Euston") and FOCUS Enhancements, Inc. ("FOCUS"). In consideration of the mutual covenants and agreements of the parties hereto, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. Termination. (a) (i) that the exercise price of that certain warrant, issued to Euston on June 9, 2000, representing the right to purchase up to 250,000 shares of FOCUS's common stock (the "Warrant"), is hereby reduced from $1.625 to $0.75 (subject to adjustment in the Warrant), for the remainder of the term of the Warrant and Euston shall have until June 12, 2003 to exercise the Warrant into such shares of common stock, (ii) that, except as otherwise set forth herein, the Private Equity Line of Credit Agreement, dated July 28, 2000 (as amended on February 6, 2001) between Euston and FOCUS, the agreements entered into in connection therewith (except the Warrant) and any amendments thereto (collectively, the "Purchase Agreement") are hereby terminated, whereupon the Purchase Agreement shall become null and void and of no further force or effect whatsoever, (iii) that no party shall have any further or continuing obligations under the Purchase Agreement, except for any registration rights with respect to the Warrants thereunder, and (iv) that, except as otherwise set forth herein, each party shall be irrevocably, unconditionally and generally released and forever discharged (each, a "Releasee") from any and all debts, obligations, reckonings, promises, covenants, agreements, contracts, endorsements, bonds, suits, actions, specialties, claims, controversies, causes of action, defaults, demands or judgments, at law or in equity, which any of such parties ever had, now has or hereafter can, shall or may have, against such Releasee under or in connection with the transactions contemplated by the Purchase Agreement; provided, however, that this termination and release shall have no force or effect whatsoever with respect to Euston's rights and FOCUS's obligations under the Warrants, including any registration rights under the Purchase Agreement. Euston shall not exercise the Warrant by means of a "cashless exercise" until after March 31, 2002 and thereafter only if there is no effective registration statement registering for resale by Euston the shares underlying the Warrant. The Warrants are and remain duly authorized by all necessary corporate action, including the reduction in the exercise price of the Warrants hereunder, and, when paid for or issued in accordance with the terms thereof, the shares of common stock underlying the warrants shall be validly issued and outstanding, fully paid and non-assessable, and Euston shall be entitled to all rights accorded to a holder of such common stock. (b) The parties mutually agree not to make any defamatory or derogatory statements to any third party, whether written or oral, concerning one another from the beginning of the world to the end of time. 2. Miscellaneous. (a) Entire Agreement. This Agreement embodies the entire agreement and understanding among the parties hereto relating to the subject matter hereof and supersedes any prior agreements and undertakings among the parties which relate to such subject matter. (b) Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective successors, representatives and permitted assigns. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (d) Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of all other provisions hereof shall in no way be affected thereby. (e) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which taken together shall constitute one instrument. Execution may be made by delivery by facsimile. *************************** 2 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. FOCUS ENHANCEMENTS, INC. By: /s/ Gary Williams ------------------------------- Gary Williams V.P. of Finance & CFO EUSTON INVESTMENTS HOLDINGS LIMITED By: /s/ David Sims ------------------------------- David Sims Director 3 EX-10.63 5 p14863_ex10-63.txt COMMON STOCK AND WARRANT PURCHASE AGREEMENT COMMON STOCK AND WARRANT PURCHASE AGREEMENT THIS COMMON STOCK AND WARRANT PURCHASE AGREEMENT is dated as of January 11, 2002 (this "Purchase Agreement" or "Agreement"), by and between FOCUS ENHANCEMENTS, INC., a Delaware corporation, having its principal place of business located at 1370 Dell Avenue, Campbell, California 95008 (the "Company"), and each of the Investors listed on Schedule A hereto (the "Investor", and collectively the "Investors"). W I T N E S S E T H WHEREAS, the Company wishes to sell to the respective Investors, and such respective Investors are willing to buy from the Company, subject to the terms and conditions set forth herein, Two Million Four Hundred Thirty-Four Thousand Four Hundred Ninety (2,434,490) shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company. NOW, THEREFORE, for and in consideration of the premises and the mutual agreement contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: A. Definitions. As used herein, each of the following terms has the meaning set forth below, unless the context otherwise requires: (i) "Closing Date" means the date of the closing of the purchase and sale of the Shares, as provided herein. (ii) "Company Control Person" means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Company pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act (as hereinafter defined). (iii) "Effective Date" means the effective date of the Registration Statement covering the Registrable Securities (as those terms are defined in the Registration Rights Agreement) relating to the Shares. (iv) "Escrow Funds" means the Purchase Price delivered to the Escrow Agent as contemplated by Sections 5(b) and (c) hereof. (v) "Last Audited Date" means December 31, 2000. (vi) "Investor Control Person" means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Investor pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act. (vii) "Majority In Interest" means Investors owning in excess of 51% of the Common Stock on the relevant date. (viii) "Material Adverse Effect" means an event or combination of events, which individually or in the aggregate, would reasonably be expected to (w) adversely affect the legality, validity or enforceability of the Shares or any of the Transaction Agreements, (x) have or result in a material adverse effect on the results of operations, assets, or financial condition of the Company and its subsidiaries, taken as a whole, (y) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Agreements or the transactions contemplated thereby, or (z) materially and adversely affect the value of the rights granted to the Investors in the Transaction Agreements. (ix) "Principal Trading Market" means the NASDAQ SmallCap Market. (x) "Registration Rights Agreement" means the Registration Rights Agreement in the form annexed hereto as Annex IV, as executed by each Investor and the Company simultaneously with the execution of this Agreement. (xi) "Shares" means the shares of Common Stock. (xii) "Transaction Agreements" means this Purchase Agreement, the Joint Escrow Instructions, the Registration Rights Agreement, and the Common Stock Purchase Warrants (as defined below) and includes all ancillary documents referred to in those agreements. (xiii) "1933 Act" or "Securities Act" means the Securities Act of 1933, as amended. (xiv) "1934 Act" or "Exchange Act" means the Securities Exchange Act of 1934, as amended. 1. PURCHASE AND SALE; MUTUAL DELIVERIES. (a) Upon the following terms and conditions, the Company shall issue and sell to the Investors and the Investors shall purchase from the Company that number of shares of Common Stock equal to Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000.00) (the "Aggregate Amount") divided by the Purchase Price (as hereinafter defined), resulting in an aggregate of 2,434,490 shares (the "Shares") to be issued upon the payment of the Purchase Price by the respective Investors in the amounts and denominations set forth in Annex I. The Shares are part of an aggregate issuance of 2,434,490 shares of Common Stock on substantially similar terms. The Purchase Price is $1.1296 per share. The Company's obligation to sell the Shares to each Investor and each Investor's obligation to purchase Shares from the Company is several and represents a separate agreement. Upon receipt of the Purchase Price, the Company shall deliver to the Investor one or more certificates representing the Shares, bearing substantially the following legend: THE SECURITIES REPRESENTED HEREBY (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE 2 IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. (b) (i) The Investor acknowledges that (1) the Shares have not been and are not being registered under the provisions of the 1933 Act and, except as provided in the Registration Rights Agreement or otherwise included in an effective registration statement, the Shares have not been and are not being registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Investor shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the Shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Shares made in reliance on Rule 144 promulgated under the 1933 Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such Shares under circumstances in which the seller, or the Person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the Securities and Exchange Commission ("Commission" or the "SEC") thereunder; and (3) neither the Company nor any other Person is under any obligation to register the Shares (other than pursuant to the Registration Rights Agreement) under the 1933 Act or to comply with the terms and conditions of any exemption thereunder. (ii) Within three (3) business days (such third business day, the "Delivery Date") after the business day on which the Company has received both the notice of sale (by facsimile or other delivery) and the original Common Stock certificate (and if the same are not delivered to the Company on the same date, the date of delivery of the second of such items) from a given Investor, the Company at its expense, (i) shall deliver, and shall cause legal counsel selected by the Company to deliver, to its transfer agent (with copies to Investor) an appropriate instruction and opinion of such counsel, for the delivery of unlegended Shares issuable pursuant to the registration statement for the Shares; provided that such registration statement at the time of sale has been declared effective by the Commission and is current (the "Unlegended Shares"); and (ii) transmit the certificates representing the Unlegended Shares (together, unless otherwise instructed by the Investor, with Common Stock not sold), to the Investor at the address specified in a notice of sale (which address may be the Investor's address for notices as contemplated by Section 9 hereof or a different address) via express courier, by electronic transfer or otherwise. (iii) In lieu of delivering physical certificates representing the Unlegended Shares, if the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of an Investor and its compliance with the provisions contained in this paragraph, so long as the certificates therefor do not bear a legend and the Investor thereof is not obligated to return such certificate for the placement of a legend thereon, the Company shall use its best efforts to cause its transfer agent to 3 electronically transmit the Unlegended Shares by crediting the account of such Investor's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system. (c) The Company shall also deliver, or cause to be delivered, the original or execution copies of this Purchase Agreement. (d) There are no preemptive rights of any shareholder of the Company, as such, to acquire the Warrants or the Shares. No party has a currently exercisable right of first refusal which would be applicable to any or all of the transactions contemplated by the Transaction Agreements. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each respective Investor that: (a) The Company has the corporate power and authority to enter into this Purchase Agreement, and to perform its obligations hereunder. The execution and delivery by the Company of this Purchase Agreement and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Purchase Agreement has been duly executed and delivered by the Company and constitute the valid and binding obligation of the Company enforceable against it in accordance with its respective terms, subject to the effects of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and to general equitable principles. (b) Except as set forth in the SEC Documents (as hereinafter defined), there is no pending, or to the knowledge of the Company, threatened, judicial, administrative or arbitral action, claim, suit, proceeding or investigation which might affect the validity or enforceability of this Purchase Agreement or which involves the Company and which if adversely determined, could reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole. (c) No consent or approval of, or exemption by, or filing with, any party or governmental or public body or authority is required in connection with the execution, delivery and performance under this Purchase Agreement or the taking of any action contemplated hereunder or thereunder. (d) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation. (e) The execution, delivery and performance of this Purchase Agreement by the Company, and the consummation of the transactions contemplated hereby, will not (i) violate any provision of the Company's certificate of incorporation or bylaws, (ii) violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise, give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, any contract or other agreement to which the Company is a party or by or to which the Company or any of the Company's assets or properties 4 may be bound or subject, (iii) violate any order, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory body by which the Company, or the assets or properties of the Company are bound and (iv) to the Company's knowledge, violate any statute, law or regulation. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby represents and warrants to the Company that: (a) The Investor has the corporate power and authority to enter into this Purchase Agreement and to perform its obligations hereunder. The execution and delivery by the Investor of this Purchase Agreement, and the consummation by the Investor of the transactions contemplated hereby, have been duly authorized by all necessary corporate action on the part of the Investor. This Purchase Agreement has been duly executed and delivered by the Investor and constitutes the valid and binding obligation of the Investor, enforceable against it in accordance with its respective terms, subject to the effects of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and to general equitable principles. (b) The execution, delivery and performance by the Investor of this Purchase Agreement, and the consummation of the transactions contemplated hereby, do not and will not breach or constitute a default under any applicable law or regulation or of any agreement, judgment, order, decree or other instrument binding on the Investor. (c) The Investor has such knowledge and prior substantial investment experience in financial and business matters, including investment in non-listed and non-registered securities, and has had the opportunity to engage the services of an investment advisor, attorney or accountant to read the SEC Documents and to evaluate the merits and risks of investment in the Company and the Shares. (d) The Investor is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D promulgated under the 1933 Act. (e) [RESERVED] (f) The Investor is acquiring the Shares, the Warrants (as defined in Section 4(n)) and the shares of Common Stock issuable upon exercise of the Investor Warrants (the "Warrant Shares") solely for the Investor's own account for investment and not with a view to or for sale in connection with a distribution of any of the Shares or the Warrant Shares (the Shares, Warrants and Warrant Shares collectively, the "Shares"). (g) The Investor does not have a present intention to sell the Shares, nor a present arrangement or intention to effect any distribution of any of the Shares to or through any person or entity for purposes of selling, offering, distributing or otherwise disposing of any of the Shares. 5 (h) The Investor may be required to bear the economic risk of the investment indefinitely because none of the Shares may be sold, hypothecated or otherwise disposed of unless subsequently registered under the Securities Act and applicable state securities laws or an exemption from registration is available. Any resale of any of the Shares can be made only pursuant to (i) a registration statement under the Securities Act which is effective and current at the time of sale or (ii) a specific exemption from the registration requirements of the Securities Act. In claiming any such exemption, the Investor will, prior to any offer or sale or distribution of any Shares advise the Company and, if requested, provide the Company with a favorable written opinion of counsel, in form and substance satisfactory to counsel to the Company, as to the applicability of such exemption to the proposed sale or distribution. (i) The Investor understands that the exemption afforded by Rule 144 promulgated by the Commission under the Securities Act ("Rule 144") will not become available for at least one year from the date of payment for the Shares and any sales in reliance on Rule 144, if then available, can be made only in accordance with the terms and conditions of that rule, including, among other things, a requirement that the Company then be subject to, and current, in its periodic filing requirements under the Exchange Act, and, among other things, a limitation on the amount of shares of Common Stock that may be sold in specified time periods and the manner in which the sale can be made; that, while the Company's Common Stock is registered under the Exchange Act and the Company is presently subject to the periodic reporting requirements of the Exchange Act, there can be no assurance that the Company will remain subject to such reporting obligations or current in its filing obligations; and that, in case Rule 144 is not applicable to a disposition of the Shares, compliance with the registration provisions of the Securities Act or some other exemption from such registration provisions will be required. (j) The Investor understands that legends shall be placed on the certificates evidencing the Shares to the effect that the Shares have not been registered under the Securities Act or applicable state securities laws and appropriate notations thereof will be made in the Company's stock books. Stop transfer instructions will be placed with the transfer agent of the Shares. (k) Except as set forth in the Term Sheet between the Company and Vfinance, Investments, Inc. dated December 27, 2001, the Investor has taken no action which would give rise to any claim by any person for brokerage commission, finder's fees or similar payments by Investor relating to this Purchase Agreement or the transactions contemplated hereby. The Company shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other persons for fees of a type contemplated in this Section 3(k) that may be due in connection with the transactions contemplated hereby. The Investor shall indemnify and hold harmless the Company, its employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as and when incurred. 6 4. COVENANTS OF THE COMPANY. (a) The Company covenants and agrees to enter into a Registration Rights Agreement governing the registration of the Shares with the Investors dated as of the date hereof. (b) Current Public Information. The Company has furnished or made available to each Investor true and correct copies of all registration statements, reports and documents, including proxy statements (other than preliminary proxy statements), filed with the Commission by or with respect to the Company since December 31, 2000 and prior to the date of this Agreement, pursuant to the Securities Act or the Exchange Act (collectively, the "SEC Documents"). The SEC Documents are the only filings made by or with respect to the Company since December 31, 2000 pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act or pursuant to the Securities Act. The Company has filed all reports, schedules, forms, statements and other documents required to be filed under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act since December 31, 2000 and prior to the date of this Agreement. (c) SEC Documents. The Company has not provided to the Investor any information which according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company but which has not been so disclosed. As of their respective dates or their restated dates (if so restated), the SEC Documents complied, and all similar documents filed with the SEC prior to the Closing Date will comply, in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and rules and regulations of the SEC promulgated thereunder and other federal, state and local laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained, nor will any similar document filed with the SEC prior to the Closing Date 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 light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents, as of the dates thereof (or the restated dates, if so restated), complied, and all similar documents filed with the SEC prior to the Closing Date will comply, as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC and other applicable rules and regulations with respect thereto. Such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements as permitted by Form 10-QSB of the SEC) and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). (d) Absence of Certain Changes. Since the Last Audited Date, there has been no material adverse change and no Material Adverse Effect, except as disclosed in the Company's SEC Documents. Since the Last Audited Date, except as provided in the Company's SEC Documents or disclosed in the Transaction Documents, the Company has not (i) incurred or become subject to any material liabilities (absolute or contingent) except liabilities incurred in 7 the ordinary course of business consistent with past practices; (ii) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business consistent with past practices; (iii) declared or made any payment or distribution of cash or other property to shareholders with respect to its capital stock, or purchased or redeemed, or made any agreements to purchase or redeem, any shares of its capital stock; (iv) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business consistent with past practices; (v) suffered any substantial losses or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of existing business; (vi) made any changes in employee compensation, except in the ordinary course of business consistent with past practices; or (vii) experienced any material problems with labor or management in connection with the terms and conditions of their employment. (e) Absence of Litigation. Except as disclosed in the Company's SEC Documents, (i) there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company before or by any governmental authority or nongovernmental department, commission, board, bureau, agency or instrumentality or any other Person, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, any of the Transaction Agreements; (ii) the Company is not aware of any valid basis for any such claim that (either individually or in the aggregate with all other such events and circumstances) could reasonably be expected to have a Material Adverse Effect; or (iii) there are no outstanding or unsatisfied judgments, orders, decrees, writs, injunctions or stipulations to which the Company is a party or by which it or any of its properties is bound, that involve the transaction contemplated herein or that, alone or in the aggregate, could reasonably be expect to have a Material Adverse Effect. (f) [RESERVED] (g) [RESERVED] (h) No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Transaction Agreements or the Company's SEC Documents or those incurred in the ordinary course of the Company's business since the Last Audited Date, or which individually or in the aggregate, do not or would not have a Material Adverse Effect. No event or circumstances has occurred or exists with respect to the Company or its properties, business, operations, financial condition, or results of operations, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. There are no proposals currently under consideration or currently anticipated to be under consideration by the Board of Directors or the executive officers of the Company which proposal would (x) change the certificate of incorporation or other charter document or by-laws of the Company, each as currently in effect, with or without shareholder approval, which change would reduce or otherwise adversely affect the rights and powers of the shareholders of the Common Stock or (y) 8 materially or substantially change the business, assets or capital of the Company, including its interests in subsidiaries. (i) Trading in Securities. The Company specifically acknowledges that, except to the extent specifically provided herein or in any of the other Transaction Agreements (but limited in each instance to the extent so specified), and subject to applicable state and federal securities laws, the Investor retains the right (but is not otherwise obligated) to buy, sell, engage in hedging transactions or otherwise trade in the Shares of the Company, including, but not necessarily limited to, the Shares, at any time before, contemporaneous with or after the execution of this Purchase Agreement or from time to time and in any manner whatsoever permitted by applicable federal and state securities laws. (j) Fees to Brokers, Finders and Others. Except as set forth in the Term Sheet between the Company and vFinance, Investments, Inc. dated December 27, 2001, the Company has taken no action which would give rise to any claim by any person for brokerage commission, finder's fees or similar payments by the Company relating to this Purchase Agreement or the transactions contemplated hereby. Investor shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other persons for fees of a type contemplated in this Section 4(j) that may be due in connection with the transactions contemplated hereby. The Company shall indemnify and hold harmless each of Investor, its employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as and when incurred. (k) Use of Proceeds. The Company will use the proceeds received hereunder (excluding amounts paid by the Company for legal fees, finder's fees and escrow fees in connection with the sale of the Shares) for the purposes contemplated by the schedule attached hereto as Annex VII, and, unless specifically consented to in advance in each instance by a majority in interest of the Investors, the Company shall not, directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership enterprise or other Person, including any of its Affiliates, or for the repayment of any outstanding loan by the Company to any other party or for any purpose constituting a material change from such schedule. (l) [RESERVED] (m) [RESERVED] (n) Warrants. The Company agrees to issue to the respective Investors at the Closing, transferable divisible warrants (the "Investor Warrants") to purchase up to 243,449 shares of Common Stock in the form attached as Annex VI hereto. Such Investor Warrants shall bear an exercise price per share of Common Stock equal to $1.36 and shall be exercisable, immediately upon issuance, and for a period of four (4) years thereafter. (o) [RESERVED] 9 (p) [RESERVED] 5. DELIVERY OF SHARES. (a) In accordance with the Joint Escrow Instructions, attached hereto as Annex II and made a part hereof, promptly following the delivery by the respective Investor of the respective Purchase Price for the Shares in accordance with Section 1 hereof, the Company will irrevocably instruct its transfer agent to issue to such Investor legended certificates representing the Shares. (b) Form of Payment; Delivery of Certificates: (i) The respective Investor shall pay the Purchase Price for the Shares by delivering immediately available good funds in United States Dollars to the Escrow Agent no later than the date prior to the Closing Date. (ii) No later than the Closing Date, but in any event promptly following payment by the respective Investor to the Escrow Agent of the Purchase Price, the Company shall deliver the Shares, each duly executed on behalf of the Company and issued in the name of the respective Investor, to the Escrow Agent. (iii) By signing this Agreement, each respective Investor and the Company, subject to acceptance by the Escrow Agent, agrees to all of the terms and conditions of, and becomes a party to, the Joint Escrow Instructions, all of the provisions of which are incorporated herein by this reference as if set forth in full. (c) Method of Payment. Payment into escrow of the Purchase Price shall be made by wire transfer of funds to: Bank of New York 350 Fifth Avenue New York, New York 10001 ABA# 021000018 For credit to the account of Krieger & Prager LLP Account No.: 637-2993136 Re: FOCUS Transaction (d) [RESERVED] (e) [RESERVED] 6. CLOSING DATE. (a) The Closing Date shall occur on the date which is the first NYSE trading day after each of the conditions contemplated by Sections 7 and 8 hereof shall have either been satisfied or been waived by the party in whose favor such conditions run. 10 (b) The closing of the purchase and issuance of the Shares shall occur on the Closing Date at the offices of the Escrow Agent and shall take place no later than 3:00 P.M., New York time, on such day or such other time as is mutually agreed upon by the Company and a majority in interest of the Investors. (c) Notwithstanding anything to the contrary contained herein, the Escrow Agent will be authorized to release the Escrow Funds to the Company and to others and to release the other Escrow Property on the Closing Date upon satisfaction of the conditions set forth in Sections 7 and 8 hereof and as provided in the Joint Escrow Instructions. 7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. Each Investor understands that the Company's obligation to sell the Shares to such Investor pursuant to this Agreement on the Closing Date is conditioned upon: (a) The execution and delivery of this Purchase Agreement and the Registration Rights Agreement by such Investor; (b) Delivery by such Investor to the Escrow Agent of good funds as payment in full of an amount equal to the Purchase Price for the Shares in accordance with this Purchase Agreement; (c) The accuracy on such Closing Date of the representations and warranties of such Investor contained in this Purchase Agreement, each as if made on such date, and the performance by such Investor on or before such date of all covenants and agreements of the Investor required to be performed on or before such date; and (d) There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained. 8. CONDITIONS TO THE INVESTORS' OBLIGATION TO PURCHASE. The Company understands that the respective Investor's obligation to purchase the Shares on the Closing Date is conditioned upon: (a) The execution and delivery of this Purchase Agreement and the other Transaction Agreements by the Company; (b) Delivery by the Company to the Escrow Agent of the Certificates in accordance with this Purchase Agreement; (c) The accuracy in all material respects on such Closing Date of the representations and warranties of the Company contained in this Purchase Agreement, each as if made on such date, and the performance by the Company on or before such date of all covenants and agreements of the Company required to be performed on or before such date; 11 (d) On such Closing Date, the Registration Rights Agreement shall be in full force and effect and the Company shall not be in default thereunder; (e) On such Closing Date, the respective Investor shall have received an opinion of counsel for the Company (and delivered to the Escrow Agent), dated the Closing Date, in form, scope and substance reasonably satisfactory to the Investor, substantially to the effect set forth in Annex III attached hereto; (f) There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained; and (g) From and after the date hereof to and including such Closing Date, each of the following conditions will remain in effect: (i) the trading of the Common Stock shall not have been suspended by the SEC or on the Principal Trading Market; (ii) no minimum prices shall been established for Shares traded on the Principal Trading Market; and (iii) there shall not have been any material adverse change in any financial market that, in the reasonable judgment of the Investor, makes it impracticable or inadvisable to purchase the Shares. In addition, on the Closing Date, trading in Common Stock or in securities generally on the Principal Trading Market shall not have been suspended or limited. 9. NOTICES. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given upon personal delivery or seven (7) business days after deposit in the United States Postal Service, by (a) advance copy by fax, and/or (b) mailing or delivery by express courier or registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days advance written notice to each of the other parties hereto. COMPANY: FOCUS ENHANCEMENTS, INC. 1370 Dell Avenue Campbell, California 95008 ATTN: Michael D'Addio, President Telephone No.: (408) 866-8300 Facsimile No.: (408) 866-1748 with a copy to: Manatt, Phelps & Phillips, LLP 1001 Page Mill Road, Bldg. 2 Palo Alto, California 94304 Attn: Jerrold F. Petruzzelli, Esq. Telephone No.: (650) 812-1335 Telecopier No.: (650) 213-0260 Investor: As set forth on the execution page hereto. 12 with a copy to: Krieger & Prager, LLP 39 Broadway, Suite 1440 New York, New York 10006 ATTN: Samuel Krieger, Esq. Telephone No.: (212) 363-2900 Facsimile No.: (212) 363-2999 10. SEVERABILITY. If a court of competent jurisdiction determines that any provision of this Purchase Agreement is invalid, unenforceable or illegal for any reason, such determination shall not affect or impair the validity, legality and enforceability of the other provisions of this Purchase Agreement in any other jurisdiction. If any such invalidity, unenforceability or illegality of a provision of this Purchase Agreement becomes known or apparent to any of the parties hereto, the parties shall negotiate promptly and in good faith in an attempt to make appropriate changes and adjustments to such provision specifically and this Purchase Agreement generally to achieve as closely as possible, consistent with applicable law, the intent and spirit of such provision specifically and this Purchase Agreement generally. 11. EXECUTION IN COUNTERPARTS. This Purchase Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute the same Purchase Agreement. A facsimile signature of this Agreement shall be legal and binding on all parties hereto. 12. JURY TRIAL WAIVER. The Company and the Investors hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the Parties hereto against any of the others in respect of any matter arising out or in connection with the Transaction Agreements. 13. GOVERNING LAW: MISCELLANEOUS. (a) This Purchase Agreement shall be deemed to be a contract made under the laws of the State of Delaware for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California, Santa Clara County in connection with any dispute arising under this Purchase Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (b) Failure of any party to exercise any right or remedy under this Purchase Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (c) This Purchase Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (d) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 13 (e) The headings of this Purchase Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Purchase Agreement. (f) This Agreement may be amended only by an instrument in writing signed by both parties; no waiver shall be effective unless signed by the person charged with making such waiver. (g) This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and each Investor's representations and warranties herein shall survive the execution and delivery of this Purchase Agreement and the delivery of the Certificates and the payment of the Purchase Price, and shall inure to the benefit of each respective Investor and the Company and their respective successors and assigns. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 14 IN WITNESS WHEREOF, this Agreement has been duly executed by the respective Investor (if an entity, by one of its officers thereunto duly authorized) as of the date set forth below. AMOUNT AND PURCHASE PRICE OF COMMON STOCK: $ * SHARES: * -------------- SIGNATURES FOR ENTITIES IN WITNESS WHEREOF, the undersigned represents that the foregoing statements are true and correct and that it has caused this Common Stock and Warrant Purchase Agreement to be duly executed on its behalf this * day of January, 2002. Address for Notices * ------------------------------ -------------------------------- Address Printed Name of Investor By: * ------------------------------ ----------------------------- Telecopier No. (Signature of Authorized Person) ---------------- ------------------------------ Printed Name and Title If Investor is a partnership, corporation, limited liability company or other entity: I. Jurisdiction where Investor's investment decision was made: _ Jurisdiction of mailing address listed above _ Other: ____________________________ II. Jurisdiction of Incorporation or Organization: _______________ - ---------------------- * Purchaser Shares Price --------- ------ ----- Stone Street Limited Partnership 221,317 $ 250,000 Folkinburg Investments 995,928 1,125,000 Boat Basin Investments LLC 88,527 100,000 Papell Holdings Limited 1,128,718 1,275,000 --------- --------- Total 2,434,490 $2,750,000 15 As of the date set forth below, the undersigned hereby accepts this Purchase Agreement and represents that the foregoing statements are true and correct and that it has caused this Purchase Agreement to be duly executed on its behalf. FOCUS ENHANCEMENTS, INC. By: /s/ Michael D'Addio -------------------------------------------------- Name: Michael D'Addio Title: President and Chief Executive Officer Date: January 11, 2002 16 EX-10.64 6 p14863_ex10-64.txt FORM OF COMMON STOCK PURCHASE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. FOCUS ENHANCEMENTS, INC. FORM OF COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. In consideration of good and valuable consideration, the receipt of which is hereby acknowledged by FOCUS ENHANCEMENTS, INC., a Delaware corporation (the "Company"), *, or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on January 11, 2006 (the "Expiration Date"), * fully paid and nonassessable shares of the Company's Common Stock, $0.01 par value per share (the "Common Stock"), at an initial exercise price per share (the "Exercise Price") of $1.36 per share, subject to further adjustment as set forth herein. This Warrant is being issued pursuant to the terms of that certain Common Stock and Warrant Purchase Agreement, dated as of January 11, 2002 (the "Agreement"), to which the Company and Holder (or Holder's predecessor in interest) are parties. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. 2. Exercise of Warrants. (a) This Warrant is exercisable in whole or in part at any time and from time to time. Such exercise shall be effectuated by submitting to the Company (either by delivery to the Company or by facsimile transmission as provided in Section 8 hereof) a completed and duly executed Notice of Exercise (substantially in the form attached to this Warrant) as provided in this paragraph. The date such Notice of Exercise is faxed to the Company shall be the "Exercise Date," provided that the Holder of this Warrant tenders this Warrant Certificate to the Company within five (5) business days thereafter. The Notice of Exercise shall be executed by the Holder of this Warrant and shall indicate the number of shares then being purchased pursuant to such exercise. Upon surrender of this Warrant Certificate, together with appropriate payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. (b) The Exercise Price per share of Common Stock for the shares then being exercised shall be payable in cash or by certified or official bank check. - -------- * Stone Street Limited Partnership - 22,132 shares. Folkinburg Investments - 99,593 shares. Boat Basin Investments - 8,853 shares. Papell Holdings Limited - 112,872 shares. (c) In no event shall Holder exercise Warrants for less than one thousand (1,000) Warrant Shares. In the event the Holder has Warrants for less than one thousand (1,000) Warrant Shares, Holder shall be required to exercise Warrants for all remaining Warrant Shares on the Exercise Date. (d) The Holder shall be deemed to be the holder of the shares issuable to it in accordance with the provisions of this Section 2 on the Exercise Date. 3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. Protection Against Dilution and Other Adjustments. 6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted Exercise Price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment multiplied by the total Exercise Price immediately before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company prior to the exercise of this Warrant or its applicable portion, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the exercise date of this Warrant and the original Exercise Price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. 6.3 Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes 2 all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity to be issued to security holders of the Company, then the Company shall notify the Holder at least thirty (30) days prior to the record date with respect to such Spin-Off. 7. Transfer to Comply with the Securities Act; Registration Rights. 7.1 Transfer. This Warrant has not been registered under the Securities Act of 1933, as amended, (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 7.2 Registration Rights. Reference is made to the Registration Rights Agreement. The Company's obligations under the Registration Rights Agreement and the other terms and conditions thereof with respect to the Warrant Shares, including, but not necessarily limited to, the Company's commitment to file a registration statement including the Warrant Shares, to have the registration of the Warrant Shares completed and effective, and to maintain such registration, are incorporated herein by reference. (b) In addition to the registration rights referred to in the preceding provisions of Section 7.2(a), effective after the expiration of the effectiveness of the Registration Statement as contemplated by the Registration Rights Agreement, the Holder shall have piggy-back registration rights with respect to the Warrant Shares then held by the Holder or then subject to issuance upon exercise of this Warrant (collectively, the "Remaining Warrant Shares"), subject to the conditions set forth below. If, at any time after the Registration Statement has ceased to be effective, the Company participates (whether voluntarily or by reason of an obligation to a third party) in the registration of any shares of the Company's stock (other than a registration on Form S-8 or on Form S-4), the Company shall give written notice thereof to the Holder and the Holder shall have the right, exercisable within ten (10) business days after receipt of such notice, to demand inclusion of all or a portion of the Holder's Remaining Warrant Shares in such registration statement. If the Holder exercises such election, the Remaining Warrant Shares so designated shall be included in the registration statement at no cost or expense to the Holder (other than any costs or commissions which would be borne by the Holder under the terms of the Registration Rights Agreement); provided, however, that if there is a managing underwriter of the offering of shares referred to in the registration statement and such managing underwriter advises the Company in writing that the number of shares proposed to be included in the offering will have an adverse effect on its ability to successfully conclude the offering and, as a result, the number of shares to be included in the offering is to be reduced, the number of Remaining Warrant Shares of the Holder which were to be included in the registration (before 3 such reduction) will be reduced pro rata with the number of shares included for all other parties whose shares are being registered. The Holder's rights under this Section 7 shall expire at such time as the Holder can sell all of the Remaining Warrant Shares under Rule 144 without volume or other restrictions or limit. 8. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, four days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: FOCUS ENHANCEMENTS, INC. 1370 Dell Avenue Campbell, California 95008 ATTN: Michael D'Addio, President & Chief Executive Officer Telephone No.: (408) 866-8300 Facsimile No.: (408) 866-1748 with a copy to: Manatt, Phelps & Phillips, LLP 1001 Page Mill Road, Bldg. 2 Palo Alto, California 94304 Attn: Jerrold F. Petruzzelli, Esq. Telephone No.: (650) 812-1335 Telecopier No.: (650) 213-0260 (ii) if to the Holder, to: [INVESTOR'S ADDRESS] with a copy to: Krieger & Prager LLP, Esqs. 39 Broadway Suite 1440 New York, NY 10006 Attn: Samuel M. Krieger, Esq. Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 Any party may give notice in accordance with this Section to the other parties designate to another address or person for receipt of notices hereunder. 4 9. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 10. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of Delaware for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California, Santa Clara County in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. 11. JURY TRIAL WAIVER. The Company and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out or in connection with this Warrant. 12. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 13. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 11th day of January, 2002. FOCUS ENHANCEMENTS, INC. By: /s/ Michael D'Addio -------------------------------------- Michael D'Addio (Print Name) President & Chief Executive Officer (Title) 5 NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate dated as of ____________ , ________ , to purchase ________________ shares of the Common Stock, $0.01 par value, of FOCUS ENHANCEMENTS, INC., and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. _______ CASH:$_________________________ = (Exercise Price x Exercise Shares) Payment is being made by: _______ enclosed check _______ wire transfer _______ other Please deliver the stock certificate to: Dated: ------------------------------------------ [Name of Holder] By: ----------------------------------------------- EX-10.65 7 p14863_ex10-65.txt COMMON STOCK PURCHASE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. FOCUS ENHANCEMENTS, INC. COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. In consideration of good and valuable consideration, the receipt of which is hereby acknowledged by FOCUS ENHANCEMENTS, INC., a Delaware corporation (the "Company"), VFINANCE INVESTMENTS, INC., or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on December 27, 2004 (the "Expiration Date"), TWENTY-FIVE THOUSAND (25,000) fully paid and nonassessable shares of the Company's Common Stock, $0.01 par value per share (the "Common Stock"), at an initial exercise price per share (the "Exercise Price") of $1.54 per share, subject to further adjustment as set forth herein. This Warrant is being issued pursuant to the terms of that certain Financial Advisory and Investment Banking Agreement, dated as of , 2001 (the "Agreement"), to which the Company and Holder (or Holder's predecessor in interest) are parties. 2. Exercise of Warrants. (a) This Warrant is exercisable in whole or in part at any time and from time to time. Such exercise shall be effectuated by submitting to the Company (either by delivery to the Company or by facsimile transmission as provided in Section 8 hereof) a completed and duly executed Notice of Exercise (substantially in the form attached to this Warrant) as provided in this paragraph. The date such Notice of Exercise is faxed to the Company shall be the "Exercise Date," provided that the Holder of this Warrant tenders this Warrant Certificate to the Company within five (5) business days thereafter. The Notice of Exercise shall be executed by the Holder of this Warrant and shall indicate the number of shares then being purchased pursuant to such exercise. Upon surrender of this Warrant Certificate, together with appropriate payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. (b) The Exercise Price per share of Common Stock for the shares then being exercised shall be payable in cash or by certified or official bank check. (c) In no event shall Holder exercise Warrants for less than one thousand (1,000) Warrant Shares. In the event the Holder has Warrants for less than one thousand (1,000) Warrant Shares, Holder shall be required to exercise Warrants for all remaining Warrant Shares on the Exercise Date. (d) The Holder shall be deemed to be the holder of the shares issuable to it in accordance with the provisions of this Section 2 on the Exercise Date. 3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. Protection Against Dilution and Other Adjustments. 6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted Exercise Price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment multiplied by the total Exercise Price immediately before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company prior to the exercise of this Warrant or its applicable portion, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the exercise date of this Warrant and the original Exercise Price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. 6.3 Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity to be issued to security holders of the Company, then the Company shall notify the Holder at least thirty (30) days prior to the record date with respect to such Spin-Off. 2 7. Transfer to Comply with the Securities Act; Registration Rights. 7.1 Transfer. This Warrant has not been registered under the Securities Act of 1933, as amended, (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 7.2 Registration Rights. Reference is made to the Registration Rights Agreement. The Company's obligations under the Registration Rights Agreement and the other terms and conditions thereof with respect to the Warrant Shares, including, but not necessarily limited to, the Company's commitment to file a registration statement including the Warrant Shares, to have the registration of the Warrant Shares completed and effective, and to maintain such registration, are incorporated herein by reference. (b) In addition to the registration rights referred to in the preceding provisions of Section 7.2(a), effective after the expiration of the effectiveness of the Registration Statement as contemplated by the Registration Rights Agreement, the Holder shall have piggy-back registration rights with respect to the Warrant Shares then held by the Holder or then subject to issuance upon exercise of this Warrant (collectively, the "Remaining Warrant Shares"), subject to the conditions set forth below. If, at any time after the Registration Statement has ceased to be effective, the Company participates (whether voluntarily or by reason of an obligation to a third party) in the registration of any shares of the Company's stock (other than a registration on Form S-8 or on Form S-4), the Company shall give written notice thereof to the Holder and the Holder shall have the right, exercisable within ten (10) business days after receipt of such notice, to demand inclusion of all or a portion of the Holder's Remaining Warrant Shares in such registration statement. If the Holder exercises such election, the Remaining Warrant Shares so designated shall be included in the registration statement at no cost or expense to the Holder (other than any costs or commissions which would be borne by the Holder under the terms of the Registration Rights Agreement); provided, however, that if there is a managing underwriter of the offering of shares referred to in the registration statement and such managing underwriter advises the Company in writing that the number of shares proposed to be included in the offering will have an adverse effect on its ability to successfully conclude the offering and, as a result, the number of shares to be included in the offering is to be reduced, the number of Remaining Warrant Shares of the Holder which were to be included in the registration (before such reduction) will be reduced pro rata with the number of shares included for all other parties whose shares are being registered. The Holder's rights under this Section 7 shall expire at such time as the Holder can sell all of the Remaining Warrant Shares under Rule 144 without volume or other restrictions or limit. 3 8. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, four days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: FOCUS ENHANCEMENTS, INC. 1370 Dell Avenue Campbell, California 95008 ATTN: Michael D'Addio, President & Chief Executive Officer Telephone No.: (408) 866-8300 Facsimile No.: (408) 866-1748 with a copy to: Manatt, Phelps & Phillips, LLP 1001 Page Mill Road, Bldg. 2 Palo Alto, California 94304 Attn: Jerrold F. Petruzzelli, Esq. Telephone No.: (650) 812-1335 Telecopier No.: (650) 213-0260 (ii) if to the Holder, to: VFINANCE INVESTMENTS, INC. 3010 N. Military Trail, Suite 300 Boca Ratan, Florida 33431 Attn: Leonard J. Sokolow Telephone No.: (954) 384-7800 Telecopier No.: (954) 252-4513 Any party may give notice in accordance with this Section to the other parties designate to another address or person for receipt of notices hereunder. 9. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 10. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of Delaware for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California, 4 Santa Clara County in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. 11. JURY TRIAL WAIVER. The Company and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out or in connection with this Warrant. 12. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 13. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 27th day of December, 2001. FOCUS ENHANCEMENTS, INC. By: /s/ Michael D'Addio ----------------------------------- Michael D'Addio President & Chief Executive Officer 5 NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate dated as of , _____________ , ______ to purchase shares ________________ of the Common Stock, $0.01 par value, of FOCUS ENHANCEMENTS, INC., and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. _______ CASH:$_________________________ = (Exercise Price x Exercise Shares) Payment is being made by: _______ enclosed check _______ wire transfer _______ other Please deliver the stock certificate to: Dated: ------------------------------------------ [Name of Holder] By: ----------------------------------------------- EX-10.66 8 p14863_ex10-66.txt REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of January 11, 2002 (this "Agreement"), is made by and between FOCUS ENHANCEMENTS, INC., a Delaware corporation, with headquarters located at 1370 Dell Avenue, Campbell, California 95008 (the "Company"), and each entity named on a signature page hereto (each, an "Investor"), and vFINANCE INVESTMENTS, INC. ("VFIN") (each agreement with an Investor being deemed a separate and independent agreement between the Company and such Investor, except that each Investor acknowledges and consents to the rights granted to each other Investor under such agreement). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of the Common Stock and Warrant Purchase Agreement, dated as of January 11, 2002, between the Investor and the Company (the " Purchase Agreement"; terms not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement), the Company has agreed to issue and sell to the Investors the Common Stock of the Company (the "Common Stock"); and WHEREAS, the Company has agreed to issue the Warrants to the Investor and VFIN in connection with the issuance of the Common Stock, and the Warrants may be exercised for the purchase of shares of Common Stock (the "Warrant Shares") upon the terms and conditions of the Warrants; and WHEREAS, to induce the Investor to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following meanings: (a) "Effective Date" means the date the SEC declares a Registration Statement covering Registrable Securities and otherwise meeting the conditions contemplated hereby to be effective. (b) "Held Shares Value" means the Purchase Price for shares of Common Stock acquired by the Investor and not yet sold. (c) "Investor" means the Investor any permitted transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof and who holds Registrable Securities and VFIN, as the context may require. (d) "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a registration statement, which shall be evidenced by a determination in good faith by the Board of Directors of the Company that disclosure of such information in the registration statement would be detrimental to the business and affairs of the Company or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a registration statement at such time; in each case where such determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the registration statement would be materially misleading absent the inclusion of such information. (e) "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the Commission. (f) "Registrable Securities" means the Common Stock, the Warrants, and the Warrant Shares. (g) "Registration Statement" means a registration statement of the Company under the Securities Act covering Registrable Securities on Form S-3, if the Company is then eligible to file using such form, and if not eligible, on Form SB-2 or other appropriate form. (h) "Required Effective Date" means June 1, 2002. (i) "Restricted Sale Date" means the first date, other than a date during a Permitted Suspension Period (as defined below), on which the Investor is restricted from making sales of Registrable Securities covered by any previously effective Registration Statement. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Common Stock and Warrant Purchase Agreement or in the Rules of the SEC. 2. Registration. (a) Mandatory Registration. (i) The Company shall prepare and file with the SEC, as soon as practicable after the Closing Date, an amendment to an existing Registration Statement, or a Registration Statement in either event registering for resale by the Investor a sufficient number of shares of Common Stock for the Investors and VFIN to sell all of the Registrable Securities. The Registration Statement shall also state that, in accordance with Rules 416 and 457 under the Securities Act, it also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Debentures or exercise of the Warrants to prevent dilution resulting from stock splits, or stock dividends. The Company will use its reasonable best efforts to cause such Registration Statement to be declared effective on a date (the "Initial Required Effective Date") which is no later than the earlier of (Y) five (5) days after oral or written notice by the SEC that it may be declared effective or (Z) June 1, 2002. (ii) The aggregate number of shares registered for the Investors in each Registration Statement or amendment thereto shall be allocated among the Investors on a pro rata basis among them according to their relative Registrable Shares included in such Registration Statement. (b) Payments by the Company. 2 (i) [RESERVED] (ii) If the Registration Statement covering the Registrable Securities is not declared effective by the relevant Required Effective Date or if there is a Restricted Sale Date within ninety (90) days after the effective date of the Registration Statement, then the Company will make payments to the Investor in such amounts and at such times as shall be determined pursuant to this Section 2(b). (iii) The amount (the "Periodic Amount") to be paid by the Company to the Investor shall be determined as of each Computation Date (as defined below) and such amount shall be equal to the Periodic Amount Percentage (as defined below) of the Purchase Price for the Common Stock for the period from the date following the Required Effective Date or a Restricted Sale Date, as the case may be, to the first relevant Computation Date, and thereafter to each subsequent Computation Date. The "Periodic Amount Percentage" means (A) with respect to the Required Effective Date, two percent (2%) of the Purchase Price of the Common Stock for the first, second and third Computation Dates and three percent (3%) of the Purchase Price of the Common Stock to each Computation Date thereafter, and (b) with respect to a Restricted Sale Date, one and one-half (1 1/2%) percent of the Purchase Price of the Common Stock not previously sold by the Investor after the Restricted Sale Date to each Computation Date thereafter. Anything in the preceding provisions of this paragraph (iii) to the contrary notwithstanding, after the relevant Effective Date the Purchase Price shall be deemed to refer to the sum of the Held Shares Value. By way of illustration and not in limitation of the foregoing, if the Registration Statement is not declared effective by July 15, 2002, the Periodic Amount will aggregate three (3%) percent of the Purchase Price. (iv) Each Periodic Amount will be payable by the Company, except as provided in the other provisions of this subparagraph (iv), in cash or other immediately available funds to the Investor (1) on the day after the Required Effective Date or a Restricted Sale Date, as the case may be, and (2) on the earlier of (A) each thirtieth day thereafter, (B) the third business day after the date the Registration Statement is filed or is declared effective, or (C) the third business day after the Registration Statement has its restrictions removed after the relevant Effective Date, in each case without requiring demand therefor by the Investor. Notwithstanding the provisions of the first sentence of this subparagraph (iv), at the mutual agreement of the Company and the Investor, any time before the Periodic Amount is paid, all or a portion of the Periodic Amount can be paid by the issuance of additional shares of Common Stock to the Investor ("Periodic Amount Shares") in an amount equal to the Periodic Amount being paid thereby divided by 90% of the average Closing Bid Price for the last five (5) trading days prior to the Computation Date. (v) The parties acknowledge that the damages which may be incurred by the Investor if the Registration Statement has not been declared effective by the Required Effective Date, including if the right to sell Registrable Securities under a previously effective Registration Statement is suspended or the shares of the Company's stock are not listed on the Principal Trading Market, may be difficult to ascertain. The parties agree that the Periodic Amounts represent a reasonable estimate on the part of the parties, as of the date of this Agreement, of the amount of such damages. (vi) Notwithstanding the foregoing, the amounts payable by the Company pursuant to this provision shall not be payable to the extent any delay in the effectiveness of the Registration Statement occurs because of an act of, or a failure to act or to act timely by the Investor or its counsel. 3 (vii) "Computation Date" means (A) the date which is the earlier of thirty (30) days after the Required Effective Date or a Restricted Sale Date, or when the shares of Common Stock are listed on the Principal Trading Market (with respect to payments due as contemplated by Section 2(b)(ii) hereof), as the case may be, and (B) each date which is the earlier of (1) thirty (30) days after the previous Computation Date or (2) the date after the previous Computation Date on which the Registration Statement is declared effective or has its restrictions removed or the shares ofCommon Stock are listed on the Principal Trading Market (with respect to payments due as contemplated by Section 2(b)(ii) hereof), as the case may be. 3. Obligations of the Company. In connection with the registration of the Registrable Securities, the Company shall do each of the following: (a) Prepare and file, with the SEC a Registration Statement with respect to not less than the number of Registrable Securities provided in Section 2(a) above, and thereafter use its reasonable best efforts to cause such Registration Statement relating to Registrable Securities to become effective by the Required Effective Date and keep the Registration Statement effective at all times during the period (the "Registration Period") continuing until the earlier of (i) the date when the Investors may sell all Registrable Securities under Rule 144(k) without volume or other restrictions or limits, (ii) the date the Investors no longer own any of the Registrable Securities, which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or (iii) one (1) year after the Effective Date of the Registration Statement. (b) Prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during the Registration Period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement; (c) Permit a single firm of counsel designated by the Investors (which, until further notice, shall be deemed to be Krieger & Prager LLP, Attn: Samuel Krieger, Esq., which firm has requested to receive such notification; each, an "Investor's Counsel") to review the Registration Statement and all amendments and supplements thereto for a reasonable period of time (but not less than three (3) business days) prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects; (d) Notify the Investor's Counsel and any managing underwriters immediately (and, in the case of (i)(A) below, not less than three (3) business days prior to such filing) and (if requested by any such person) confirm such notice in writing no later than one (1) business day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) whenever the SEC notifies the Company whether there will be a "review" of such Registration Statement; (C) whenever the Company receives (or a representative of the Company receives on its behalf) any oral or written comments from the SEC in respect of a Registration Statement (copies or, in the case of oral comments, summaries of such comments (as such comments relate to the Investor) shall be 4 promptly furnished by the Company to the Investors); and (D) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the SEC or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any proceedings for that purpose; (iv) if at any time any of the representations or warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose; and (vi) of the occurrence of any event that to the best knowledge of the Company makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not 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 light of the circumstances under which they were made, not misleading. In addition, the Company shall furnish the Investor's Counsel with copies of all intended written responses to the comments contemplated in clause (C) of this Section 3(d) that relate to Investors not later than one (1) business day in advance of the filing of such responses with the SEC so that the Investors shall have the opportunity to comment thereon; (e) Furnish to Investor's Counsel (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one (1) copy of the Registration Statement, each preliminary prospectus and prospectus, and each amendment or supplement thereto, all correspondence to, with, or from the SEC, and (ii) such number of copies of a prospectus, and all amendments and supplements thereto (as contemplated in Section 3(d) above) and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (f) As promptly as practicable after becoming aware thereof, notify each Investor of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement or other appropriate filing with the SEC to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (g) As promptly as practicable after becoming aware thereof, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of a Notice of Effectiveness or any notice of effectiveness or any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time; (h) Notwithstanding the foregoing, if at any time or from time to time after the date of effectiveness of the Registration Statement, the Company notifies the Investors in writing 5 of the existence of a Potential Material Event, the Investors shall not offer or sell any Registrable Securities, or engage in any other transaction involving or relating to the Registrable Securities, from the time of the giving of notice with respect to a Potential Material Event until such Investor receives written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that the Company may not so suspend the right to such holders of Registrable Securities during the periods the Registration Statement is required to be in effect other than during a Permitted Suspension Period (and the applicable provisions of Section 2(b) shall apply with respect to any such suspension other than during a Permitted Suspension Period) . The term "Permitted Suspension Period" means up to two such suspension periods, each of which suspension period shall not either (i) be for more than fifteen (15) business days or (ii) begin less than ten (10) business days after the last day of the preceding suspension (whether or not such last day was during or after a Permitted Suspension Period); provided further that the Company shall, if lawful to do so, provide the Investor with at least two (2) business days' notice of the existence (but not the substance of) a Potential Material Event; (i) Use its reasonable efforts to secure and maintain the designation and listing of all the Registrable Securities covered by the Registration Statement on the Principal Trading Market within the meaning of Rule 11Aa2-1 of the SEC under the Exchange Act and the quotation of the Registrable Securities on the Principal Trading Market. (j) Provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the initial Effective Date. (k) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts as the case may be, as the Investors may reasonably request, and, within five (5) business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an appropriate instruction and opinion of such counsel, which shall include, without limitation, directions to the transfer agent to issue certificates of Registrable Securities(including certificates for Registrable Securities to be issued after the Effective Date and replacement certificates for Registrable Securities previously issued) without legends or other restrictions; and (l) Take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of the Registrable Securities pursuant to the Registration Statement. (m) Comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall cover said 12-month period, or end shorter periods as is consistent with the requirements of Rule 158. 6 4. Obligations of the Investors. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement; and (b) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), above, such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. Expenses of Registration. All reasonable expenses (other than underwriting discounts and commissions of the Investor) incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printers and accounting fees, the fees and disbursements of counsel for the Company shall be borne by the Company. 6. Indemnification. In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Investor who holds such Registrable Securities, the directors, if any, of such Investor, the officers, if any, of such Investor, each person, if any, who controls any Investor within the meaning of the Securities Act or the Exchange Act (each, an "Indemnified Person" or "Indemnified Party"), against any losses, claims, damages, liabilities or expenses (joint or several) incurred (collectively, "Claims") to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to clause (b) of this Section 6, the Company shall reimburse the Investors, promptly as such expenses are incurred and are due and 7 payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a) shall not (I) apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, after such prospectus was made available by the Company pursuant to Section 3(c) hereof; (II) be available to the extent such Claim is based on a failure of the Investor to deliver or cause to be delivered the prospectus made available by the Company or the amendment or supplement thereto made available by the Company; (III) be available to the extent such Claim is based on the delivery of a prospectus by the Investor after receiving notice from the Company under Section 3(f), (g) or (h) hereof (other than a notice regarding the effectiveness of the Registration Statement or any amendment or supplement thereto), or (IV) apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. Each Investor will indemnify the Company and its officers, directors and agents (each, an "Indemnified Person" or "Indemnified Party") against any claims arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company, by or on behalf of such Investor, expressly for use in connection with the preparation of the Registration Statement or the amendment or supplement thereto, subject to such limitations and conditions as are applicable to the indemnification provided by the Company to this Section 6. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. (b) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be. In case any such action is brought against any Indemnified Person or Indemnified Party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such Indemnified Person or Indemnified Party of its election so to assume the defense thereof, the indemnifying party will not be liable to such Indemnified Person or Indemnified Party under this Section 6 for any legal or other reasonable out-of-pocket expenses subsequently incurred by such Indemnified Person or Indemnified Party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The Indemnified Person or Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and reasonable out-of-pocket expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the Indemnified Person or Indemnified Party provided such counsel is of the opinion that all defenses available to the Indemnified Party can be maintained without prejudicing the rights of the indemnifying party. The failure to deliver written notice to the indemnifying party within a 8 reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. Contribution. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (b) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation; and (c) except where the seller has committed fraud (other than a fraud by reason of the information included or omitted from the Registration Statement as to which the Company has not given notice as contemplated under Section 3 hereof) or intentional misconduct, contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. Reports under Securities Act and Exchange Act. With a view to making available to Investor the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit Investor to sell securities of the Company to the public without Registration ("Rule 144"), the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to Investor so long as Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit Investor to sell such securities pursuant to Rule 144 without Registration. (d) The Company will, at the request of any Holder of Registrable Securities, upon receipt from such Holder of a certificate certifying (i) that such Holder has held such Registrable Securities for a period of not less than one (1) year, (ii) that such Holder has not been an affiliate (as defined in Rule 144) of the company for more than the ninety (90) preceding days, and (iii) as to such other matters as may be appropriate in accordance with such Rule, remove from the stock certificate representing such Registrable Securities that portion of any restrictive legend which relates to the registration provisions of the Securities Act, provided, however, that, at the Company's cost and expense, counsel to Investor may provide such instructions and opinion to the transfer agent regarding the removal of the restrictive legend. 9. Assignment of the Registration Rights. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the 9 Investors to any transferee of the Registrable Securities only if the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee and (b) the securities with respect to which such registration rights are being transferred or assigned. 10. Amendment of Registration Rights. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a fifty (50%) percent interest of the Shares as of such date. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. Miscellaneous. (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Notices required or permitted to be given hereunder shall be given in the manner contemplated by the Purchase Agreement, (i) if to the Company or to the Investor, to their respective address contemplated by the Purchase Agreement, and (ii) if to any other Investor, at such address as such Investor shall have provided in writing to the Company, or at such other address as each such party furnishes by notice given in accordance with this Section 11(b). (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) This Agreement shall be deemed to be a contract made under the laws of the State of Delaware for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California, Santa Clara County in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (e) The Company, the Investor and VFIN hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with this Agreement or any of the other Transaction Agreements. (f) If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (g) subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. 10 (h) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (i) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (j) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (k) The Company acknowledges that any failure by the Company to perform its obligations under Section 3(a) hereof, or any delay in such performance could result in loss to the Investors, and the Company agrees that, in addition to any other liability the Company may have by reason of such failure or delay, the Company shall be liable for all direct damages caused by any such failure or delay, unless the same is the result of force majeure. Neither party shall be liable for consequential damages. (l) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 11 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. COMPANY: FOCUS ENHANCEMENTS, INC. By: /s/ Michael D'Addio ------------------------------------------------- Name: Michael D'Addio Title: President and Chief Executive Officer FOLKINBURG INVESTMENTS LIMITED By: /s/ David Sims ------------------------------------------------- Name: David Sims Title: Director STONE STREET LIMITED PARTNERSHIP By: /s/ Elizabeth Leonard ------------------------------------------------- Name: Elizabeth Leonard Title: Director PAPELL HOLDINGS LIMITED By: /s/ C.B. Williams ------------------------------------------------- Name: International First Secretarial Group Ltd. Title: Secretary VFINANCE INVESTMENTS, INC. By: /s/ Richard Rosenblum ------------------------------------------------- Name: Richard Rosenblum Title: BOAT BASIN INVESTMENTS LLC By: /s/ Abi Beck ------------------------------------------------- Name: Abi Beck Title: Manager 12 EX-23.1 9 p14863_ex23-1.txt CONSENT OF WOLF & COMPANY P.C. Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of FOCUS Enhancements, Inc. on Form SB-2, of our report dated April 27, 2001 appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus Wolf & Company, P.C. /s/ Wolf & Company, P.C. Boston, Massachusetts January 22, 2002 EX-23.2 10 p14863_ex23-2.txt CONSENT OF PRICEWATERHOUSECOOPERS, LLP Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form SB-2 of our report dated January 28, 2000, except for the Note 14, as to which the date is January 30, 2001 relating to the financial statements of Videonics Inc., which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ Pricewaterhouse Coopers LLP San Jose, California January 18, 2002 EX-23.3 11 p14863_ex23-3.txt CONSENT OF DELOITTE & TOUCHE, LLP Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Pre-effective Amendment No. 3 to Registration Statement No. 333-55178 of Focus Enhancements, Inc. of our report dated October 5, 2001 (relating to the financial statements of Videonics, Inc. as of December 31, 2000 and for the year then ended) appearing in the Prospectus, which is a part of such Registration Statement and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP San Jose, California January 18, 2002 -----END PRIVACY-ENHANCED MESSAGE-----