Exhibit 4.1


 


FOCUS ENHANCEMENTS, INC. 


 


SENIOR SECURED CONVERTIBLE NOTES DUE JANUARY 1,
2011


 


THIS NOTE AND
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE
SECURITIES LAWS.  THIS NOTE AND SUCH
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THIS NOTE AND
SUCH SHARES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF
SUCH ACT.


 


1.                                       INTEREST


 


Focus
Enhancements, Inc., a Delaware corporation (the “Company”, which term
shall include any successor corporation under the Purchase Agreement
hereinafter referred to), promises to pay interest on the principal amount of
this Note at the rate of ten percent (10%) per annum.  The Company shall pay interest semiannually
on June 30 and December 30 of each year, commencing on June 30,
2006.  Interest on the Notes shall accrue
from the most recent date to which interest has been paid or, if no interest
has been paid, from the Purchase Agreement Closing Date; provided, however,
that if there is not an existing default in the payment of interest and if this
Note is authenticated between a record date referred to on the face hereof and
the next succeeding interest payment date, interest shall accrue from such
interest payment date.  Interest will be
computed on the basis of a 365-day year and 30-day months.


 


2.                                       METHOD
OF PAYMENT


 


The Company
shall pay interest on this Note (except defaulted interest) to the person who
is the Holder of this Note at the close of business on the related interest
payment date.  The Holder must surrender
this Note to the Company to collect payment of principal.  The Company will pay principal and interest
in money of the United States that at the time of payment is legal tender for
payment of public and private debts.  If
there is no pending Event of Default under the Loan Documents as of the
interest payment date for which interest will be paid the Company may, however,
pay interest due on June 30, 2006, December 30, 2006 and June 30,
2007 by issuing a new Note in the principal amount of the interest due, and in
all other respects having terms identical to this Note.  The Company will pay principal due upon
surrender of Notes by check sent to the Holder’s address on the books and
records of the Company, or, if the Holder has provided wire transfer
instructions to the Company at least five Business Days prior to the payment
date, in immediately available funds by wire transfer.


 


3.                                       PURCHASE
AGREEMENT


 


This Note is
one of a duly authorized issue of Notes of the Company designated as its Senior
Secured Convertible Notes Due January 1, 2011 (the “Notes”) issued under
the Purchase Agreement.  The terms of
this Note include those stated in the Purchase Agreement.  The Notes


 


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are secured obligations of the Company and are convertible upon the
conditions stated in the Purchase Agreement and the Note.


 


4.                                       SECURITY
INTEREST; ADDITIONAL SECURED CREDITORS


 


This Note is
secured by all of the assets of the Company in accordance with the terms and
subject to the conditions of the Security Agreement dated as of the Purchase
Agreement Closing Date among the Company, Purchasers’ Agent, and the
Purchasers.  In case of an Event of
Default, the Purchasers shall have the rights set forth in the Security
Agreement; provided that such rights shall be subject to the senior or
contemporaneous rights of the Bank and Berg as set forth in the Amended
Intercreditor Agreement and the New Intercreditor Agreement both dated as of
the Purchase Agreement Closing Date.


 


6.                                       DEFAULT


 


In the case an
Event of Default shall occur, the aggregate unpaid principal balance plus
accrued and unpaid interest on this Note shall become or may be declared to be
due and payable in the manner and with the effect provided in the Loan
Documents.


 


7.                                       OPTIONAL
REDEMPTION


 


This Note is
subject to redemption, at the option of the Company, in whole or in part, at
any time upon at least 30 days’ notice at a Redemption Price in cash equal to
102% of the principal amount of the Note to be redeemed together with accrued
and unpaid interest, if any, on the principal amount of the Note redeemed to
the date of redemption.  Accrued interest
also shall be paid in cash at the Redemption Date, except as provided otherwise
under Paragraph 2 of this Note and the Purchase Agreement.  No sinking fund is provided for the Notes.


 


8.                                       NOTICE
OF REDEMPTION


 


Notice of
redemption as stated in Paragraph 7 will be delivered at least 30 days before
the Redemption Date to the Holder of this Note at the Holder’s address on the
books and records of the Company.  Notes
in denominations larger than $100,000 may be redeemed in part, but only in
whole multiples of $100,000.  On and
after the Redemption Date interest shall cease to accrue on Notes or portions
of them called for redemption.


 


9.                                       REPURCHASE
OF NOTES AT OPTION OF HOLDER UPON A FUNDAMENTAL CHANGE


 


A.                                   Subject
to the terms and conditions of the Purchase Agreement, if a Fundamental Change
(other than the Semiconductor Business Spin-off) occurs at any time prior to
the Final Maturity Date, the Holder will, upon receipt of the notice of the
occurrence of a Fundamental Change, have the right to require the Company to
repurchase any or all of such Holder’s Notes for cash in an amount equal to
101% of the principal amount of the Notes to be repurchased plus accrued and unpaid
interest, if any, to (but not including) the Fundamental Change Repurchase
Date, unless such Fundamental Change Repurchase Date falls after an interest
payment record date and on or prior to the corresponding interest payment date,
in which case the Fundamental


 


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Change Repurchase Price will include the full amount of accrued and
unpaid interest payable on such interest payment date to the Holder of record
at the close of business on the corresponding interest payment record
date.  Subject to Section 3.1 of the
Purchase Agreement, on or before the 15th Business Day after the
effective date of a Fundamental Change, the Company will provide to the Holder
and Purchasers’ Agent a notice of the occurrence of the Fundamental Change and
of the resulting repurchase right.  To
exercise the repurchase right, the Holder must deliver a Repurchase Exercise
Notice duly completed to the Company as described in the Purchase Agreement.


 


B.                                     Holder
has the right to withdraw any Fundamental Change repurchase notice, in whole or
in part, by delivering to the Company a written notice of withdrawal in
accordance with the provisions of the Purchase Agreement.


 


C.                                     All
interest shall cease to accrue on this Note (or portions thereof) immediately
after such Fundamental Change Repurchase Date, and the Holder shall have no
other rights as such other than the right to receive the Fundamental Change
Repurchase Price upon surrender of the Note.


 


10.                                 CONVERSION
UPON SEMICONDUCTOR BUSINESS SPIN-OFF


 


Upon the
occurrence of the Semiconductor Business Spin-off, this Note may be converted
at the Holder’s sole option into the senior class of voting equity interests of
the entity or entities to which the Semiconductor Business is transferred (referred
to as “Newco”) representing a maximum (excluding Notes issued in lieu of
interest payments as provided in Paragraph 2) of 25% of the total voting power
and value of Newco at a conversion rate equal to 1% of Newco voting equity
interests for $400,000 of Note principal (.0025% per $1,000 of principal);
provided that such conversion will not be effected for any Holder unless
Holders of at least $1,000,000 of Note principal exercise the conversion
right.  Subject to Section 3.2 of
the Purchase Agreement, to convert this Note pursuant to this Section 10
the Holder must deliver a Spin-off Conversion Notice and the conversion shall
be effective upon the Original Issuance Date of the equity interests of Newco
into which the Notes are convertible. 
The Holder has the right to withdraw any notice of conversion pursuant
to this Paragraph 10, in whole or in part, by delivering to the Company a
written notice of withdrawal in accordance with the Purchase Agreement.


 


11.                                 OPTIONAL
CONVERSION


 


A.                                   The
Holder, at the Holder’s sole option, may convert the principal amount of this
Note (or any portion thereof equal to $100,000 or any integral multiple of
$100,000 in excess thereof) into Shares, and/or such other consideration as
provided in Section 8.1 of the Purchase Agreement, at any time prior to
the close of business on the last Business Day prior to the Final Maturity
Date, together with all accrued and unpaid interest on the Note through the
Business Day immediately preceding the Conversion Date, at the Applicable Conversion
Rate (which is the Initial Conversion Rate as adjusted from time to time in
accordance with the Purchase Agreement) in effect on the Conversion Date; provided,
however, that, if such Note is called for redemption or submitted or
presented for purchase pursuant to Section 2.9 or Section 3.1 of the


 


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Purchase Agreement, such conversion right shall terminate at the close
of business on the Business Day immediately preceding the Redemption Date or
Fundamental Change Repurchase Date, as the case may be, for such Note or such
earlier date as the Holder presents such Note for redemption or for purchase
(unless the Company shall default in making the redemption payment or
Fundamental Change Conversion Equity Price payment when due, as the case may
be, in which case the conversion right shall terminate at the close of business
on the date such default is cured and such Note is redeemed or purchased, as
the case may be).  The Initial Conversion
Rate is one Share per $1.00 principal amount of Note, or 1.00, and is subject
to adjustment as provided in the Purchase Agreement.  Upon surrender of this Note for conversion,
the Company will issue, or will cause its transfer agent to issue, the Shares
to the Holder within three Business Days following the Conversion Date.  No fractional Shares will be issued upon
conversion; in lieu thereof, an amount will be paid in cash based upon the
Closing Sale Price of the Common Stock on the Trading Day immediately prior to
the Conversion Date.


 


B.                                     To
convert this Note under Paragraph 10 or 11A, the Holder must (a) complete
and manually sign the conversion notice set forth below and deliver such notice
to the Company, (b) surrender the Note to the Company, (c) furnish
appropriate endorsements and transfer documents if required by the Transfer
Agent or the Company, and (d) pay any transfer or similar tax, if
required.


 


C.                                     If
Holder has delivered a Fundamental Change Repurchase Right Notice exercising
the option of the Holder to require the Company to purchase this Note, then
this Note may be converted pursuant to Paragraph 11A only if the Fundamental
Change Repurchase Right Notice is withdrawn in accordance with the terms of the
Purchase Agreement.  The Holder may not
elect to convert this Note under Paragraph 11A if the Holder has delivered to
the Company a notice of conversion pursuant to Paragraph 10 and has not
properly withdrawn such notice in accordance with the Purchase Agreement.


 


12.                                 DENOMINATIONS,
TRANSFER, EXCHANGE


 


The Notes are
issued without coupons, in denominations of $100,000 and integral multiples of
$100,000 and are recorded in the name of the Holder on the books and records of
the Company.  The Holder may register the
transfer of or exchange of this Note in accordance with the Purchase
Agreement.  The Company may require the
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes or other governmental charges that may be imposed
in relation thereto by law or permitted by the Purchase Agreement.


 


13.                                 PERSONS
DEEMED OWNERS


 


The Holder of
this Note may be treated as the owner of it for all purposes.


 


14.                                 AMENDMENT,
SUPPLEMENT AND WAIVER


 


Subject to
certain exceptions, the Purchase Agreement or the Notes may be amended or
supplemented with the consent of the Holders of at least a Majority-in-Interest
of the Notes, and an existing default or Event of Default and its consequence
or compliance with any provision of


 


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the Purchase Agreement or the Notes may be waived in a particular
instance with the consent of the Holders of a Majority-in-Interest of the
Notes.  Without the consent of or notice
to any Holder, the Company and the Purchasers’ Agent may amend or supplement
the Purchase Agreement or the Notes to, among other things, cure any ambiguity,
defect or inconsistency or make any other change that does not adversely affect
the rights of any Holder.


 


15.                                 SUCCESSOR
ENTITY


 


When a
successor corporation assumes all the obligations of its predecessor under the
Notes and the Purchase Agreement in accordance with the terms and conditions of
the Purchase Agreement, the predecessor corporation (except in certain
circumstances specified in the Purchase Agreement) shall be released from those
obligations.


 


16.                                 NO
RECOURSE AGAINST OTHERS


 


No past,
present or future director, officer, employee, incorporator or stockholder of
the Company, as such, shall have any liability for any obligations of the
Company under the Notes, the Purchase Agreement or for any claim based on, in
respect of, or by reason of, such obligations or their creation.  The Holder of this Note by accepting this
Note waives and releases all such liability. 
The waiver and release are part of the consideration for the issuance of
this Note.


 


17.                                 ABBREVIATIONS
AND DEFINITIONS


 


Customary
abbreviations may be used in the name of the Holder or an assignee, such as:
TEN COM (= tenants in common), TEN ENT (= tenants
by the entireties), JT TEN (= joint tenants with right of survivorship and not
as tenants in common), CUST (= Custodian) and UGMA (= Uniform Gifts to Minors
Act).


 


All terms used
in this Note but not specifically defined herein are defined in the Purchase
Agreement and are used herein as so defined.


 


18.                                 PURCHASE
AGREEMENT TO CONTROL; GOVERNING LAW


 


In the case of
any conflict between the provisions of this Note and the Purchase Agreement,
the provisions of the Purchase Agreement shall control.


 


THIS NOTE
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAW OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS
OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION
WOULD BE REQUIRED THEREBY.


 


The Company
will furnish to any Holder, upon written request and without charge, a copy of
the Purchase Agreement.  Requests may be
made to: Focus Enhancements, Inc., 1370 Dell Avenue, Campbell, CA  95008.


 


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Executed by
the undersigned duly authorized officer of the Company at the Company’s
principal office in Campbell, California on January 24, 2006.


 


	
   

  	
  FOCUS ENHANCEMENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Brett Moyer

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
  President & CEO

  	
   

  



 


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ASSIGNMENT FORM


 


To assign this
Note, fill in the form below:


 


I or we assign
and transfer this Note to:


 


	
  (Insert assignee’s social security or tax
  I.D. number)

  
	
   

  
	
   

  
	
  (Print or type assignee’s name, address and
  zip code)

  
	
   

  
	
  and
  irrevocably appoint

  
	
   

  
	
  agent to
  transfer this Note on the books of the Company. The agent may substitute
  another to act for him or her.

  



 


	
  Date:

  	
   

  	
  Your
  Signature:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Sign
  exactly as your name appears on the

  other side of this Note)

  



 






* Signature
guaranteed by:


 


	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  



 


*                 Signature(s) must
be guaranteed by a qualified guarantor institution with membership in an
approved signature guarantee program pursuant to Rule 17Ad-15 under the
Securities Exchange Act of 1934.


 


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CONVERSION NOTICE


 


To convert this
Note into Common Stock of the Company, check the box: o


 


To convert
only part of this Note into Common Stock of the Company, state the principal


 


amount to be converted (must be $100,000 or a integral multiple of
$100,000): $             ,
and check the box: o


 


To convert
this Note into equity interests of Newco as described in the Spin-off Notice,
if applicable, check the box: o


 


If you want
the stock certificate made out in another person’s name, fill in the form below:


 


	
  (Insert assignee’s social security or tax
  I.D. number)

  
	
   

  
	
   

  
	
  (Print or type assignee’s name, address and
  zip code)

  



 


	
  Date:

  	
   

  	
  Your
  Signature:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Sign
  exactly as your name appears on the

  other side of this Note)

  



 






* Signature
guaranteed by:


 


	
  By:

  	
   

  	
   

  	
   

  



 


*                 Signature(s) must
be guaranteed by a qualified guarantor institution with membership in an
approved signature guarantee program pursuant to Rule 17Ad-15 under the
Securities Exchange Act of 1934.


 


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REPURCHASE EXERCISE NOTICE

UPON A FUNDAMENTAL CHANGE


 


To:                              Focus
Enhancements, Inc.


 


The
undersigned registered owner of this Note hereby irrevocably acknowledges
receipt of a notice from Focus Enhancements, Inc. (the “Company”) as to
the occurrence of a Fundamental Change with respect to the Company and requests
and instructs the Company to redeem the entire principal amount of this Note,
or the portion thereof (which is $100,000 or an integral multiple thereof)
below designated, in accordance with the terms of the Purchase Agreement referred
to in this Note at the Fundamental Change Repurchase Price, together with
accrued interest to, but excluding, the Repurchase Date, to the registered
Holder hereof.


 


	
  Dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature(s)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature(s)
  must be guaranteed by a qualified guarantor institution with membership in an
  approved signature guarantee program pursuant to Rule 17Ad-15 under the
  Securities Exchange Act of 1934.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature
  Guaranty

  
	
   

  	
   

  	
   

  
	
  Principal
  amount to be redeemed

  	
   

  	
   

  
	
  (in an
  integral multiple of $100,000, if less than all):

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
						



 


 


NOTICE: The
signature to the foregoing Election must correspond to the name as written upon
the face of the Note in every particular, without alteration or any change
whatsoever.


 


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