EXHIBIT 10.1

 

FOCUS ENHANCEMENTS, INC.
2004 STOCK INCENTIVE PLAN

 

1.     Purpose.  This Stock Incentive Plan, to be known as the 2004 Stock
Incentive Plan (hereinafter, this “Plan”), is intended to promote the interests
of Focus Enhancements, Inc. (hereinafter, the “Company”) by providing an
inducement to obtain and retain the services of qualified persons to serve as
employees of the Company or members of its Board of Directors (the “Board”).

 

2.     Available Shares.  The total number of shares of Common Stock, par value
$0.01 per share, of the Company (the “Common Stock”) for which options or
restricted stock may be granted under this Plan shall not exceed 2,452,000
shares, subject to adjustment in accordance with paragraph 2 of this Plan. 
Shares subject to this Plan are authorized but unissued shares or shares that
were once issued and subsequently reacquired by the Company.  If any options or
restricted stock granted under this Plan are surrendered or forfeited before
exercise or lapse without exercise, in whole or in part, the shares reserved
therefore shall continue to be available under this Plan.

 

In the event of any change in the outstanding shares of Common Stock or other
securities then subject to the Plan by reason of any stock split, reverse stock
split, stock dividend, recapitalization, merger, consolidation, combination or
exchange of shares or other similar corporate change, or if the outstanding
securities of the class then subject to the Plan are exchanged for or converted
into cash, property or a different kind of security, or if cash, property or
securities are distributed in respect of such outstanding securities (other than
a regular cash dividend), then, unless the terms of such transaction shall
provide otherwise, such equitable adjustments shall be made in the Plan and the
awards thereunder (including, without limitation, appropriate and proportionate
adjustments in (i) the number and type of shares or other securities that may be
acquired pursuant to awards theretofore granted under the Plan; (ii) the maximum
number and type of shares or other securities that may be issued pursuant to
awards thereafter granted under the Plan; (iii) the number of shares of
restricted stock that are outstanding; and (iv) the maximum number of shares or
other securities with respect to which awards may thereafter be granted to any
Participant in any Plan Year) as the Committee determines are necessary or
appropriate, including, if necessary, any adjustment in the maximum number of
shares of Common Stock available for distribution under the Plan as set forth in
this Section 3. Such adjustments shall be conclusive and binding for all
purposes of the Plan.

 

3.     Administration.  This Plan shall be administered by the by the
Compensation Committee, which consists of two or more members of the Board, each
of whom shall be both a “Non-Employee Director,” as that term is defined in
Rule 16b-3(b)(3)(i) of the Exchange Act, and an “outside director” within the
meaning of Section 162(m) of the Code. The Committee shall, subject to the
provisions of the Plan, have the power to construe this Plan, to determine all
questions hereunder, and to adopt and amend such rules and regulations for the
administration of this Plan as it may deem desirable.  No member of the Board or
the Committee shall be liable for any action or determination made in good faith
with respect to this Plan or any option granted under it.

 

1

--------------------------------------------------------------------------------

 

4.     Grant of Options or Restricted Shares / Eligibility.  Subject to the
availability of shares under this Plan, the Committee may make grants of options
and/or restricted shares to employees of the Company and/or members of the Board
under this Plan from time to time in accordance with the terms of the Plan.

 

5.     Shareholder Approval.  Anything in this Plan to the contrary
notwithstanding, the effectiveness of this Plan and of the grant of all options
or restricted stock hereunder is in all respect subject to this Plan and options
or restricted stock granted under it shall be of no force and effect unless and
until the approval of this Plan by the vote of the holders of a majority of the
Company’s shares of Common Stock present in person or by proxy and entitled to
vote at a meeting of shareholders at which this Plan is presented for approval.

 

6.     Options.  (a)  Option Price.  The purchase price of the stock covered by
an option granted pursuant to this Plan shall be 100% of the fair market value
of such shares on the day the option is granted.  The option price will be
subject to adjustment in accordance with the provisions of paragraph 2 of this
Plan.  For purposes of establishing the exercise price and for all other
valuation purposes under the Plan, the fair market value of a share of common
stock on any relevant date will be the lower of (1) the last sale price of our
common stock on such relevant date, or (2) the opening sale price on the date
fair market value is determined, where the opening sale price is represented by
the closing sale price on the trading day immediately prior, in the case where
the stock is traded on the NASDAQ Capital Market or NASDAQ National Market. 
Alternatively, fair market value shall be determined by the average between the
highest and lowest sales price quoted (on that date) by an established quotation
service for over-the-counter securities, if the common stock is not reported on
the NASDAQ Capital Market or NASDAQ National Market List.  However, if the
Common Stock is not publicly traded at the time an option is granted under the
Plan, “fair market value” shall be deemed to be the fair value of the Common
Stock as determined by the Committee after taking into consideration all factors
which it deems appropriate, including, without limitation, recent sale and offer
prices of the Common Stock in private transactions negotiated at arm’s length.

 

(b)           Period of Option.  Unless sooner terminated in accordance with the
provisions of paragraph 6(e) of this Plan, an option granted hereunder shall
expire on the date that is ten (10) years after the date of grant of the option.

 

(c)           Vesting of Options and Non-Transferability of Options.  Options
granted under this Plan shall not be exercisable until they become vested. 
Options granted under this Plan shall vest in the optionee and thus become
exercisable in accordance with the vesting schedule as determined by the
Committee from time to time in a option grant letter, or upon the occurrence of
a specified event or performance criteria (including certain performance
criteria similar to that set forth in paragraph 7(b)(4)), provided, however, the
optionee has continuously served as a member of the Board, as an employee of the
Company, or in another advisory role to the Company.

 

The number of shares as to which options may be exercised shall be cumulative,
so that once the option shall become exercisable as to any shares it shall
continue to be exercisable as to

 

2

--------------------------------------------------------------------------------

 

said shares, until expiration or termination of the option as provided in this
Plan; provided however, any option granted under this Plan shall in no event be
exercised unless and until this Plan has been approved by the Company’s
stockholders, but upon such approval the vesting shall become effective as of
the date of the grant.

 

(d)           Non-transferability.  Any option granted pursuant to this Plan
shall not be assignable or transferable other than by will or the laws of
descent and distribution or pursuant to a domestic relations order and shall be
exercisable during the optionee’s lifetime only by him or her.

 

(e)           Termination of Option Rights.

 

(1)   Except as otherwise specified in the agreement relating to an option, in
the event an optionee ceases to be an employee of Company or a member of the
Board, as the case may be, for any reason other than death or permanent
disability, any then unexercised portion of options granted to such optionee
shall, to the extent not then vested, immediately terminate and become void;
except as set forth in paragraphs 6(b) and 6(c), any portion of an option which
is then vested but has not been exercised at the time the optionee so ceases to
be a member of the Board or an employee may be exercised, to the extent it is
then vested by the optionee within ninety days after such event.

 

(2)   Notwithstanding the foregoing, in the event any optionee who is a member
of the Board of Directors  (i) ceases to be a member of the Board of Directors
at the request of the Company, (ii) is removed without cause, or (iii) otherwise
does not stand for nomination or re-election as a director of the Company at the
request of the Company, then any portion of any Option granted to such optionee
may be exercised, to the extent it is then vested by the optionee within one
year after such event.

 

(3)   Notwithstanding anything to the contrary herein, in no event shall any
option be exercised if the optionee is dismissed from employment or removed from
the Board of Directors for any one of the following reasons:  (i) disloyalty,
gross negligence, dishonesty or breach of fiduciary duty to the Company; or (ii)
the commission of an act of embezzlement, fraud or deliberate disregard of the
rules or polices of the Company which results in loss, damage or injury to the
Company, whether directly or indirectly; or (iii) the unauthorized disclosure of
any trade secret or confidential information of the Company; or (iv) the
commission of an act which constitutes unfair competition with the Company or
which induces any customer of the Company to break a contract with the Company;
or (v) the conduct of any activity on behalf of any organization or entity which
is a competitor of the Company (unless such conduct is approved by a majority of
the members of the Board of Directors).

 

(4)   In the event that an optionee ceases to be an employee of the Company or a
member of the Board, as the case may be, by reason of his or her death or
permanent disability, any option granted to such optionee shall be immediately

 

3

--------------------------------------------------------------------------------

 

and automatically accelerated and become fully vested and all unexercised
options shall be exercisable by the optionee (or by the optionee’s personal
representative, heir or legatee, in the event of death) for a period of one year
thereafter.

 

(f)            Exercise of Option.  Subject to the terms and conditions of this
Plan and the option agreements, an option granted hereunder shall, to the extent
then exercisable, be exercisable in whole or in part by giving written notice to
the Secretary of the Company by mail or in person addressed to FOCUS
Enhancements, Inc., 1370 Dell Avenue, Campbell, California 95008, at its
principal executive offices, or other such address as optionee may be informed
from time to time, stating the number of shares with respect to which the option
is being exercised, accompanied by payment in full for such shares.  Payment may
be (a) in United States dollars in cash or by check, (b) in whole or in part in
shares of the Common Stock of the Company already owned by the person or persons
exercising the option or shares subject to the option being exercised (subject
to such restrictions and guidelines as the Board may adopt from time to time),
valued at fair market value determine in accordance with the provisions of
paragraph 6 or (c) consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
to the broker or selling agent to pay that amount to the Company, which sale
shall be at the participant’s direction at the time of exercise. 
Notwithstanding the foregoing, the Committee shall have the authority, in their
absolute discretion to settle options that are exercised by way of the “cashless
exercise” method described in (c) of this paragraph 6 through an issuance of the
“net shares,” where the term “net shares” is the number of shares that is
equivalent in value to the fair market value of the underlying stock on the
exercise date, as determined in accordance with the provisions of this paragraph
6, less the exercise price.  The Company’s transfer agent shall, on behalf of
the Company, prepare a certificate or certificates representing such shares
acquired pursuant to exercise of the option, shall register the optionee as the
owner of such shares on the books of the Company and shall cause the fully
executed certificate(s) representing such shares to be delivered to the optionee
as soon as practicable after payment of the option price in full.  The holder of
an option shall not have any rights of a stockholder with respect to the shares
covered by the option, except to the extent that one or more certificates for
such shares shall be delivered to him or her upon the due exercise of the
option.

 

7.     Restricted Stock.  Restricted stock awards under the Plan shall consist
of grants of shares of Common Stock of the Company subject to the terms and
conditions hereinafter provided.

 

(a)   Grant of Awards.  The Committee shall (i) select the officers and key
employees to whom restricted stock may from time to time be granted,
(ii) determine the number of shares to be covered by each award granted,
(iii) determine the issue price; (iv) determine the terms and conditions (not
inconsistent with the Plan) of any award granted hereunder, and (v) prescribe
the form of the agreement, legend or other instrument necessary or advisable in
the administration of awards under the Plan.  Restricted stock may be granted to
Board members in lieu of Board fees.

 

(b)   Terms and Conditions of Awards.  Any restricted stock award granted under
the Plan shall be evidenced by a Restricted Stock Agreement executed by the
Company and the

 

4

--------------------------------------------------------------------------------

 

recipient, in such form as the Committee shall approve, which agreement shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions not inconsistent with the Plan as the Committee shall
prescribe:

 

(1)   Number of Shares Subject to an Award:  The Restricted Stock Agreement
shall specify the number of shares of Common Stock subject to the Award.

 

(2)   Restriction Period:  The period of restriction applicable to each Award
shall be established by the Committee but may not be less than one year, unless
the Committee determines otherwise.  The Restriction Period applicable to each
Award shall commence on the Award Date.

 

(3)   Consideration:  With respect to employees of the Company, each recipient,
as consideration for the grant of an award, shall remain in the continuous
employ of the Company for at least one year from the date of the granting of
such award, or as otherwise determined by the Committee, and any shares covered
by such an award shall lapse if the recipient does not remain in the continuous
employ of the Company for at least one year from the date of the granting of the
award, except as otherwise determined by the Committee.

 

(4)   Restriction Criteria:  The Committee shall establish the criteria upon
which the Restriction Period shall be based.  Restrictions shall be based upon
either or both of (i) the continued employment of the recipient or (ii) the
attainment by the Company of one or more of the following measures of operating
performance:

 

a.  Earnings

d.  Financial return ratios

 

 

b.  Revenue

e.  Total Shareholder Return

 

 

c.  Operating or net cash flows

f.  Market share

 

The Committee shall establish the specific targets for the selected criteria
and, in its judgment, can select additional measures of performance.  These
targets may be set at a specific level or may be expressed as relative to the
comparable measure at comparison companies or a defined index.  These targets
may be based upon the total Company, one or more business units of the Company
or a defined business unit that the executive has responsibility for or
influence over.  In cases where objective performance criteria are established,
the Committee shall determine the extent to which the criteria have been
achieved and the corresponding level to which restrictions will be removed from
the Award or the extent to which a participant’s right to receive an Award
should be lapsed in cases where the performance criteria have not been met and
shall certify these determinations in writing.  The Committee may provide for
the determination of the attainment of such restrictions in installments where
deemed appropriate.

 

(c)   Terms and Conditions of Restrictions and Forfeitures.  The shares of
Common Stock awarded pursuant to the Plan shall be subject to the following
restrictions and conditions:

 

5

--------------------------------------------------------------------------------

 

(1)   During the Restriction Period, the participant will not be permitted to
sell, transfer, pledge or assign restricted stock awarded under this Plan.

 

(2)   Except as provided in Section 7(c)(1), or as the Committee may otherwise
determine, the participant shall have all of the rights of a stockholder of the
Company, including the right to vote the shares and receive dividends and other
distributions provided that distributions in the form of stock shall be subject
to the same restrictions as the underlying restricted stock.

 

(3)   In the event of a participant’s retirement, death or disability prior to
the end of the Restriction Period for a participant who has satisfied the one
year employment requirement of Section 7(b)(3) with respect to an award prior to
retirement, death or disability, or as otherwise determined by the Committee,
the participant, or the participant’s estate, shall be entitled to receive that
proportion (to the nearest whole share) of the number of shares subject to the
Award granted as the number of months of the Restriction Period which have
elapsed since the Award date to the date at which the participant’s retirement,
death or disability occurs, bears to the total number of months in the
Restriction Period.  The participant’s right to receive any remaining shares
shall be canceled and forfeited and the shares will be deemed to be reacquired
by the Company.

 

(4)   In the event of a participant’s retirement, death, disability or in cases
of special circumstances as determined by the Committee, the Committee may, in
its sole discretion when it finds that such an action would be in the best
interests of the Company, accelerate or waive in whole or in part any or all
remaining time based restrictions with respect to all or part of such
participant’s restricted stock.

 

(5)   Upon termination of employment for any reason during the Restriction
Period, subject to the provisions of paragraph 7(c)(3) above or in the event
that the participant fails promptly to pay or make satisfactory arrangements as
to the withholding taxes as provided in the following paragraph, all shares
still subject to restriction shall be forfeited by the participant and will be
deemed to be reacquired by the Company.

 

(6)   A participant may, at any time prior to the expiration of the Restriction
Period, waive all rights to receive all or some of the shares of a restricted
stock Award by delivering to the Company a written notice of such waiver.

 

(7)   Notwithstanding the other provisions of this Section 7, the Committee may
adopt rules that would permit a gift by a participant of restricted shares to
members of the participant’s immediate family (spouse, parents, children,
stepchildren, grandchildren or legal dependants) or to a trust whose beneficiary
or beneficiaries shall be either such a person or persons or the participant.

 

(8)   Any attempt to dispose of restricted stock in a manner contrary to the
restrictions shall be ineffective.

 

6

--------------------------------------------------------------------------------

 

8.     Acceleration Upon Change in Control.  The Committee may, in its
discretion, provide that unvested awards will accelerate upon the occurrence of
a Change in Control.  The terms of such acceleration shall be specifically set
out in an agreement upon the grant of an award or pursuant to an employment,
severance or similar agreement.

 

“Change in Control” shall mean any of the following occurrences:

 

(a) any “person,” as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company or any trustee or other fiduciary holding
securities under an employee benefit plan of the Company), is or becomes the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company’s then outstanding securities;

 

(b) during any period of two consecutive years, individuals who at the beginning
of such period constitute the Board of Directors, and any new director (other
than a director designated by a person who has entered into an agreement with
the Company to effect a transaction described in clause (a), (c) or (d) of this
definition) whose election by the Board of Directors or nomination for election
by the Company’s shareholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a majority
thereof;

 

(c) the shareholders of the Company approve a merger or consolidation of the
Company with any other entity, other than (i) a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no “person” (as hereinabove defined)
acquires more than 50% of the combined voting power of the Company’s then
outstanding securities; or

 

(d) the shareholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company’s assets.

 

9.     Legend on Certificates.  The certificates representing restricted shares
or shares issued pursuant to the exercise of an option granted hereunder shall
carry such appropriate legend, and such written instructions shall be given to
the Company’s transfer agent, as may be deemed necessary or advisable by counsel
to the Company in order to comply with the requirements of the Securities Act of
1933 or any state securities laws.

 

10.   Representations of Optionee.  If requested by the Company, the optionee
shall deliver to the Company written representations and warranties upon
exercise of the option that are necessary to show compliance with Federal and
state securities laws, including representations and warranties to the effect
that a purchase of shares under the option is made for investment and not with a
view to their distribution (as that term is used in the Securities Act of 1933).

 

7

--------------------------------------------------------------------------------

 

11.   Agreement.  Each option or restricted stock award granted under the
provisions of this Plan shall be evidenced by an agreement, which agreement
shall be duly executed and delivered on behalf of the Company and by the grantee
to whom such award is granted.  The agreement shall contain such terms,
provisions and conditions not inconsistent with this Plan as may be determined
by the committee and the officer executing it.

 

12.   Termination and Amendment of Plan.  Awards may no longer be granted under
this Plan after May 27, 2014, and this Plan shall terminate when all options
granted or to be granted hereunder are no longer outstanding.  The Board may at
any time terminate this Plan or make such modification or amendment thereof as
it deems advisable; provided, however, that if stockholder approval of the Plan
is required by law, the Board may not, without approval by the affirmative vote
of the holders of a majority of the shares of Common Stock present in person or
by proxy and voting on such matter at a meeting, (a) increase the maximum number
of shares for which awards may be granted under this Plan (except by adjustment
pursuant to Section 8), (b) materially modify the requirements as to eligibility
to participate in this Plan, (c) materially increase benefits accruing to option
holders under this Plan or (d) amend this Plan in any manner which would cause
Rule 16b-3 under the Securities Exchange Act (or any successor or amended
provision thereof) to become inapplicable to this Plan Termination or any
modification or amendment of this Plan shall not, without consent of a
participant, affect his or her rights under an option previously granted to him
or her.

 

13.   Reorganization or Liquidation of the Company.  In the event of (a) the
complete liquidation of the Company, (b) a merger, reorganization, or
consolidation of the Company with any other corporation (other than a Subsidiary
of the Company) in which the Company is not the surviving corporation, or (c)
the sale of all or substantially all of the Company’s assets, any unvested
restricted stock and unexercised options then outstanding shall be deemed
canceled as of the effective date of such event unless the surviving corporation
in any such merger, reorganization or consolidation or the acquiring corporation
in any such sale elects to assume the unvested restricted stock and unexercised
options under the Plan or to issue substitute unvested restricted stock and
options in place thereof.  Notwithstanding anything in this Plan or any option
agreement to the contrary, the Company shall not be deemed to have been
liquidated by reason of the merger or consolidation of the Company with or into
a Subsidiary of the Company in a transaction in which the Company is not the
surviving corporation.  The Company shall give each optionee at least thirty
(30) days prior written notice of the anticipated effective date of any such
liquidation, merger, reorganization, consolidation or sale.  Notwithstanding
anything in this Plan or in any Stock Option Agreement to the contrary, (i) all
Option exercises effected during the 30-day period prior to the effective date
of any such merger, reorganization , consolidation or sale, shall be deemed to
be effective immediately prior to the closing of such liquidation, merger,
reorganization, consolidation or sale and (ii), if the Company abandons or
otherwise fails to close any such liquidation, merger, reorganization,
consolidation or sale, then (a) all exercises during the foregoing 30-day period
shall cease to be effective ab initio and (b) the outstanding options shall be
exercisable as otherwise determined under the applicable option agreement and
without consideration of this paragraph 13 or the corresponding provisions of
any option agreement.

 

14.   Withholding of Income Taxes.  The Company shall make appropriate
provisions for the payment of any Federal, state or local taxes or any other
charges that may be required by law to be withheld by reason of a grant or the
issuance of shares of Common Stock pursuant to the

 

8

--------------------------------------------------------------------------------

 

Plan.    At the election of the optionee or restricted stockholder, the
withholding obligation may be satisfied: (a) through payment in United States
dollars in cash or check, (b) through the optionee’s or restricted stockholder’s
surrender of shares of Common Stock that the optionee or restricted stockholder
had owned for more than six (6) months prior to the date of such transfer, (c)
by authorizing a Company-approved third party to sell the shares (or a
sufficient portion of the shares) acquired upon exercise of the option and remit
to the Company a sufficient portion of the sale proceeds to pay any tax
withholding resulting from such exercise, and (d) through the Company’s
retention of shares of Common Stock which would otherwise be issued as a result
of the exercise of the option or the award of the restricted stock. 
Notwithstanding the foregoing, in the case where optionee elects tax withholding
alternative (c), the Committee shall have the authority, in their absolute
discretion to satisfy the employer tax withholding holding through the Company’s
retention of shares of Common Stock which would otherwise be issued as a result
of the exercise of the option.

 

15.   Compliance with Regulations.  It is the Company’s intent that the Plan
comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934
(or any successor or amended provision thereof) and any applicable Securities
and Exchange Commission interpretations thereof.  If any provision of this Plan
is deemed not to be in compliance with Rule 16b-3, the provision shall be null
and void.

 

16.   Governing Law.  The validity and construction of this Plan and the
instruments evidencing options shall be governed by the laws of the State of
Delaware, without giving effect to the principles of conflicts of law thereof.

 

 

Approved by Board of Directors of the Company, as amended: September 28, 2005.

 

9

--------------------------------------------------------------------------------