U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 33-85664
FIBERSTARS, INC.
(Exact name of small business issuer as specified in its charter)
California 94-3021850
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2883 Bayview Drive, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 490-0719
Securities registered under Section 12(b) of the Exchange Act:
Title of Name of each exchange on
Each Class which registered
Common Stock Nasdaq National Market
Securities registered under section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ ]
Net sales of the registrant for the fiscal year ended December 31, 1998
were $22,682,000.
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $10,298,464 as of March 19, 1999 based upon the
last trading price of the Common Stock of registrant on the Nasdaq National
Market as of that date. This calculation does not reflect a determination that
any person is an affiliate of the registrant for any other purpose.
As of March 19, 1999, there were 3,982,601 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-KSB incorporates information by
reference from registrant's definitive Proxy Statement to be used in connection
with its 1999 Annual Meeting of Shareholders.
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PART I
This 10-KSB contains forward-looking statements. Such statements generally
concern future operating results, capital expenditures, product development and
enhancements, liquidity and strategy. Specific forward-looking statements in
this report include, without limitation, our remarks concerning the evolution of
the fiber optic lighting market, the future size of the fiber optic lighting
market, our expectations concerning the future performance of our recently
completed acquisitions, our expectations regarding future performance of certain
lamp components of our products that have recently experienced problems, the
rate of adoption of fiber optic lighting in Europe and in the United States,
trends in the price and performance of fiber optic lighting products, the future
performance of our lighting products, our relationship with ADLT and future
technologies expected to result from our relationship with ADLT. We may not
update these forward looking statements, and the occurrence of the events
predicted in these statements is subject to a number of risks and uncertainties,
including those discussed in this report. These risks and uncertainties could
cause our actual results to differ materially from the results predicted in our
forward looking statements. You are encouraged to consider all the information
in this report, and in our Annual Report, along with our other periodic reports
on file with the SEC, prior to investing in our stock.
Item 1. Description of Business
Overview
Fiberstars, Inc. ("Fiberstars" or the "Company"), which was incorporated in
California in 1985, develops and markets fiber optic lighting systems, which are
used in a variety of commercial and residential applications. The Company
pioneered the use of fiber optic technology in lighting. By continuing to
improve the price and performance of its products and by expanding its marketing
efforts, Fiberstars has become the world's leading supplier in this emerging
market.
The Company's products often have advantages over conventional lighting in
areas of efficiency, safety, maintenance and beauty, and thus can be used in
place of conventional lighting in a number of applications. By delivering
special lighting effects which conventional lighting cannot match, fiber optic
lighting systems are especially attractive for a wide range of decorative
applications, such as the lighting of swimming pools and spas, signage, "neon"
decoration, landscaping, and other segments within the commercial and
residential markets.
The Company designs, develops and manufactures its fiber optic lighting
systems and distributes its products worldwide, primarily through independent
sales representatives, distributors and swimming pool builders.
Products
Fiberstars' lighting systems combine three types of products -
illuminators, fiber tubing, and fixtures - in configurations which meet the
needs of specific market segments. The electrically powered illuminators
generate and focus light to enter into the ends of optical fiber. Fiber tubing
products connect to the illuminators and are designed to emit light either at
the end of the tube as a spot source of light, or along the length of the tube,
similar in effect to neon lighting. The systems can also include fixtures and
other accessories designed for specific applications.
Illuminators
The Company manufactures a number of different illuminators for use in
different applications. Most commercial illuminators utilize metal halide high
intensity discharge (H.I.D.) lamps to provide long life and maximum brightness.
Some include patented reflectors which have been designed by Fiberstars to
enhance performance. The Company's lower cost illuminators use quartz halogen
lamps, some of which are custom products manufactured to Fiberstars'
specifications. Illuminator advances in 1998 include the Model 601 which
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was released from engineering for shipment in 1999. It provides up to 33% more
light output than our previous high-end illuminator while costing about 50% less
to build.
Fiberstars also introduced a new pool lighting product line in the November
1998 National Spa and Pool Institute trade show. The new line, System 6000,
offers superior lamp life and other characteristics vs. the Company's previous
line.
Fiber Tubing
Fiber tubing products are manufactured in various lengths and diameters to
meet the requirements of each particular market and application. Fiberstars'
patented BritePak(R) products can maintain reasonably consistent brightness for
side-lit fiber runs up to 100 feet in length. For end-lit applications, several
spotlights are typically connected to a single illuminator and are placed
withinfifty feet from the illuminator.
New fiber products in 1998 include BritePak(R) III Ultra Pure cabled side
light product providing 20% more brightness.
Fixtures and Accessories
Certain fixtures and accessories have been designed by Fiberstars for the
Company's product lines. Other fixtures are supplied by third parties. The
Company's Commercial Lighting Division produces a broad assortment of ceiling
and landscape fixtures from among which lighting designers may choose. The
Company's new patent-pending lightbar, LinearEssence(TM), began shipping toward
the end of 1998. It is targeted at the display case and under cabinet lighting
markets which are new for Fiberstars.
Other Products
In 1997, Fiberstars' Pool and Spa Group introduced Fiberstars Catalyst(TM),
a safe chemical product designed to reduce the usage of chlorine in residential
swimming pools. In 1998, Marketing responsibility for this product was
transferred to a consultant, Barry Nelson, of Water Quality Management, a pool
water systems company.
Applications and End-Users
The Company's fiber optic lighting products are specified by architects,
professional lighting designers, swimming pool builders or end-users.
The Company's products have been installed for commercial lighting
applications in fast food restaurants such as Burger King and McDonald's; retail
stores such as Albertson's, Giant Food and Toys R Us; hotels such as the MGM
Grand and the Stratosphere Tower in Las Vegas; and entertainment facilities such
as theme parks operated by the Walt Disney Company and Universal Studios.
Fiberstars commercial lighting systems also have been used in a number of
specialty applications, including theatrical productions, bridges, theater
aisles and ceilings, the Monterey Bay Aquarium, Marathon Coach, HBO Studios, AMC
theaters, Chevron and New York Life.
The Company's primary products for pool and spa lighting are designed to
provide underwater lighting for newly constructed pools. In addition, Fiberstars
markets pool products for spa lighting, pool perimeter lighting, patios, decks
and landscape lighting. The Company's underwater lighting systems are installed
in pools and spas built by major national pool builders and builder groups, as
well as numerous regional and local pool builders throughout the United States
and Canada.
A series of residential landscape lighting products is being tested in
limited retail distribution. This product was not a material portion of the
Company's business in 1998 and is not expected to be material in 1999.
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Sales, Marketing and Distribution
Commercial Lighting Products
In the commercial lighting market, the Company's marketing efforts are
directed at creating specifications for Fiberstars' systems in plans developed
by architects, professional lighting designers and building owners. The Company
reaches these professionals through approximately 60 independent lighting
representative organizations throughout the United States, approximately 20 of
which account for a substantial majority of the Company's commercial lighting
product sales. The independent lighting representatives assist in the
specification process, directing orders to electrical equipment distributors,
who in turn typically purchase products from Fiberstars. Domestic distributors
of commercial lighting products typically do not engage in marketing efforts or
stock any inventory of the Company's products. The Company's arrangements with
its independent representatives do not prohibit the handling of conventional
lighting products, including products that may be competitive with those of the
Company, although such representatives typically do not handle competing fiber
optic lighting products. Sonic, the Company's largest commercial lighting
customer, accounted for 13% of the Company's net sales in 1998.
In November 1998, the Company acquired the net assets of Crescent Lighting
Ltd., in the United Kingdom and Lichberatung Mann in Germany. Together, these
two companies oversee the sales operations in Europe which include
sub-distributors and sales representatives.
Outside of Europe, Fiberstars' commercial lighting products are sold
internationally by approximately 17 distributors that sell into more than 34
countries, including Mitsubishi in Japan; and Fiberstars Australasia Pty Ltd., a
46.5%-owned joint venture that sells products in Australia, New Zealand,
Indonesia, Malaysia and Fiji. These distributors are primarily responsible for
any marketing activities in their territories.
In August 1998, the Company acquired the net assets of FibreOptics
International Inc., a Seattle company, which is now the Company's sales and
marketing arm for themed entertainment and signs.
Swimming Pool and Spa Products
The Company's underwater lighting products are sold primarily for
installation in new swimming pools and spas. Accordingly, the marketing for the
Company's swimming pool and spa products depends substantially on swimming pool
builders to recommend the Company's products to their customers and to adapt
their swimming pool designs to include Fiberstars lighting systems. The Company
utilizes regional sales representative organizations that specialize in swimming
pool products sold to pool builders and pool product distributors. Each
representative organization typically has the exclusive right to sell the
Company's products within its territory, receiving commissions on sales in its
territory. Regional and national distributors in the swimming pool market stock
the Company's products to fill orders received from swimming pool builders, and
some of these distributors engage in limited marketing activities for the
Company's products.
The Company enters into incentive arrangements to encourage pool builders
to purchase the Company's products. The Company also has entered into agreements
with certain large national pool builders, under which the builders purchase
Fiberstars systems directly from the Company and offer the Company's products
with their swimming pools. The Company provides pool builders and independent
sales representatives with marketing tools, including promotional videos,
showroom displays and demonstration systems. The Company also uses trade
advertising and direct mail in addition to an ongoing program of sales
presentations to pool builders and distributors.
South Central Pools (SCP), the largest Pool distributor in the U.S. and the
Company's largest pool customer, accounted for 10% of the Company's net sales in
1998 and 13% in 1997. The Company expects to maintain its business relationship
with SCP; however, a cessation or substantial decrease in the volume of
purchases by this customer could reduce availability of the Company's products
to end users and could in turn have a material adverse effect on the Company's
net sales and results of operations.
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The majority of sales of the Company's swimming pool lighting systems to
date have been made in the United States and Canada. The Company entered into a
distribution agreement in Europe in 1998 with Astral, a European pool equipment
company. Sales to Astral were not material in 1998.
Backlog
The Company normally ships product within a few days after receipt of an
order and generally does not have a significant backlog of orders. The Company's
backlog at year's end was $952,000 vs. an average of $535,000 per month in 1998,
the Company does not consider backlog to be an indicator of future performance.
Competition
The Company's products compete with a wide variety of lighting products,
including conventional electric lighting in various forms and decorative neon
lighting. The Company has also experienced increasing competition from other
companies offering products containing fiber optic technology. Principal
competitive factors include price, performance (including brightness,
reliability and other factors), aesthetic appeal (including color and color
variation), market presence, installation and maintenance requirements, power
consumption.
The Company believes its products compete favorably against conventional
lighting in such areas as aesthetic appeal, ease of installation and maintenance
and power consumption. The unique characteristics of fiber optic lighting (such
as no heat or electricity at the light, ability to change colors, and remote
lamp replacement) enable the products to be used in some situations where
conventional lighting is not practical. However, the initial purchase price of
the Company's products is typically higher than conventional lighting, and the
Company's products tend to be less bright than conventional alternatives. In the
case of Neon lighting, certain popular neon colors, such as bright red, cannot
be achieved as effectively with the Company's products.
Fiberstars is engaged in ongoing efforts to develop and improve its
products, adapt its products for new applications and design and engineer new
products. The Company expects that its ability to compete effectively with
conventional lighting technologies, other fiber optic lighting products, and new
lighting technologies that may be introduced will depend substantially upon
achieving greater brightness and reducing the cost of the Company's systems. In
1998, the Company redesigned several illuminators and fiber products to improve
performance such as the above mentioned 601 illuminator and the line of Lifetime
Illuminators(TM). In addition to continuing work with a number of outside lamp,
power supply and optic companies, the Company has been working on advanced
product development with Advanced Lighting Technologies, Inc. (ADLT), the world
leader in metal halide lamp technology.
Providers of conventional lighting systems include large lamp manufacturers
and lighting fixture companies, which have substantially greater resources than
the Company. These conventional lighting companies may introduce new and
improved products, which may reduce or eliminate some of the competitive
advantages of the Company's products. In commercial lighting, the Company also
competes primarily with local and regional neon lighting manufacturers and
craftspeople who in many cases are better established in their local markets
than the Company.
Direct competition from other fiber optic lighting products has continued
to increase. Competitive products are offered in the pool market by ESSEF
Company's American Products Division and Hayward Pool Products, two major
manufacturers of pool equipment and supplies. In commercial lighting, fiber
optic lighting products are offered by an increasing number of smaller
companies, some of which compete aggressively on price. These competing products
include a new line of light boxes recently introduced by a small U.S.
manufacturer at very aggressive pricing. Certain of these competitors offer
products with performance characteristics comparable to those of the Company's
products. The Company is aware that several larger companies in the conventional
lighting industry are developing fiber optic lighting systems that may compete
in the near future with the Company's products. In Europe, both Philips and
Schott, a glass fiber company, offer fiber optic lighting systems. Schott has
recently formed an entity to enter the U.S. market. In Europe, Philips
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markets Fiberstars' BritePak(R) fiber tubing on an OEM basis, along with
Philips' own illuminators and other products. Many companies compete with the
Company in Asia, including Mitsubishi, Bridgestone and Toray. 3M recently
entered the market in Japan. Mitsubishi sells Fiberstars BritePak fiber tubing
in Japan, and licenses certain illuminator technology from Fiberstars for
manufacture and sale in Japan. In the U.S., Rohm & Haas and Advanced Lighting
Technologies have a joint venture, Unison, for the sale of fiber optic products.
The Company cannot predict the impact of competition on its business.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, which would adversely affect the Company's operating
results. There can be no assurance that the Company will be able to continue to
compete successfully against current and future competitors. However, the
Company also believes that increased competition may be accompanied by an
increase in the rate of market expansion, and that the Company is well
positioned to participate in any such expansion.
Assembly, Testing and Quality Assurance
The Company's illuminator manufacturing consists primarily of final
assembly, testing and quality control. The Company uses independent contractors
to manufacture some components and subassemblies, and has worked with a number
of its vendors to design custom components to meet Fiberstars' specific needs.
Inventories of domestically produced component parts are managed on a
just-in-time basis when practicable. The Company's quality assurance program
provides for testing of all sub-assemblies at key stages in the assembly process
as well as testing of finished products.
Mitsubishi is the sole supplier of the Company's fiber, under a supply
agreement lasting until March 2001. The Company expects to maintain this
relationship with Mitsubishi; Mitsubishi owns approximately 3.2% of the Company
and distributes Fiberstars' products in Japan. The Company also relies on sole
source suppliers for certain lamps, reflectors, remote control devices and power
supplies. Although the Company cannot predict the effect that the loss of one or
more of such suppliers would have on the Company, such loss could result in
delays in the shipment of products and additional expenses associated with
redesigning products, and could have a material adverse effect on the Company's
operating results.
Research and Product Development
The Company believes that growth in fiber optic lighting will be driven by
improvements in technology to provide increased brightness at lower costs, and
the Company is committing much of its R&D resources to those challenges. In
1998, the Company redesigned its high-end commercial illuminator, improving
brightness by 33%. In the fall of 1998, the Company increased BritePak fiber
tubing brightness by approximately 20%. Pool illuminator lamp life was increased
from a few hundred hours to 6,000 hours by moving to HID technology. Despite its
ongoing development efforts, there can be no assurance that the Company will be
able to achieve future improvements in brightness and cost or that competitors
will not develop lighting technologies that are brighter, less expensive or
otherwise superior to those of the Company.
At the end of 1998, the Company entered into a letter of intent with
Unison, the lighting joint venture between ADLT and Rohm & Haas, which calls for
the development of a low cost illuminator for Fiberstars. ADLT acquired about
18% of the Company's common stock in a private transaction during 1997 and in
the first quarter of 1998 increased that position to approximately 29%.
Additional purchases of the Company's common stock by ADLT require approval of
Fiberstars' Board of Directors. Fiberstars and ADLT plan to work together to
design next generation systems. The Company's goal is to improve the
price/performance of fiber optic lighting systems to compete more directly with
conventional lighting across a much broader spectrum of the general lighting
market.
The Company augments its internal research and development efforts by
involving certain of its component suppliers, independent consultants and other
third parties in the process of seeking improvements in the company's products
and technology. The Company depends substantially on these parties to undertake
research and development efforts necessary to achieve improvements that would
not otherwise be possible given
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the multiple and diverse technologies that must be integrated in the Company's
products and the Company's limited engineering, personnel and financial
resources. These third parties have no material contractual commitments to
participate in these efforts, and there can be no assurance that they will
continue to do so.
Intellectual Property
The Company believes that the success of its business depends primarily on
its technical innovations, marketing abilities and responsiveness to customer
requirements, rather than on patents, trade secrets, trademarks, copyrights and
other intellectual property rights. Nevertheless, the Company has a policy of
seeking to protect its intellectual property through patents, license
agreements, trademark registrations, confidential disclosure agreements and
trade secrets. There can be no assurance, however, that the Company's issued
patents are valid or that any patents applied for will be issued. There can be
no assurance that the Company's competitors or customers will not copy aspects
of the Company's fiber optic lighting systems or obtain information that the
Company regards as proprietary. There also can be no assurance that others will
not independently develop products similar to those sold by the Company. The
laws of some foreign countries in which the Company sells or may sell its
products do not protect the Company's proprietary rights in its products to the
same extent as do the laws of the United States.
The Company is aware that a large number of patents and pending patent
applications exist in the field of fiber optic technology. The Company also
believes that certain of its competitors hold and have applied for patents
related to fiber optic lighting. Although to date the Company has not been
involved in litigation challenging its intellectual property rights, there can
be no assurance that third parties will not assert claims that the Company's
products infringe patents or other intellectual property rights or that, in case
of a dispute, licenses to such technology will be available, if at all, on
reasonable terms. In the event of litigation to determine the validity of any
third-party claims, such litigation, whether or not determined in favor of the
Company, could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel from productive
tasks. Also in the event of an adverse ruling in such litigation, the Company
might be required to expend significant resources to develop non-infringing
technology or to obtain licenses to the infringing technology, which licenses
may not be available on acceptable terms. In the event of a successful claim
against the Company and the Company's failure to develop or license a substitute
technology, the Company's operating results could be adversely affected.
Fiberstars has licensed the rights to manufacture certain of its
illuminators to Mitsubishi for sale in Japan.
Employees
As of December 31, 1998, Fiberstars employed 106 people full time, of whom
28 were involved in sales, marketing and customer service, 12 in research and
product development, 48 in assembly and quality assurance, and 18 in finance and
administration. From time to time the Company also employs part time personnel
in various capacities, primarily assembly and clerical support. The Company has
never had a work stoppage, no employees are subject to any collective bargaining
agreement, and the Company considers its employee relations to be good.
The Company's future success will depend to a large extent on the continued
contributions of certain employees, many of whom would be difficult to replace.
The future success of the Company also will depend on its ability to attract and
retain qualified technical, sales, marketing and management personnel, for whom
competition is intense. The loss of or failure to attract and retain any such
persons could delay product development cycles, disrupt the Company's operations
or otherwise have a material adverse effect on the Company's business.
Item 2. Description of Property
The Company's principal executive offices and manufacturing and assembly
facilities are located in a 31,500 square foot facility in Fremont, California,
under a lease agreement expiring in 1999. The Company
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leases a 9,500 square foot facility in Fremont, California, which it devotes to
fiber processing, under a lease agreement which expires in 1999. The Company
also subleases an approximately 5,200 square foot facility in Fremont,
California under a sublease agreement that expires in 1999. In December 1998,
the Company entered into a new seven year lease for a 60,000 square foot
facility in Fremont, California. It plans to consolidate its Fremont operations
in this new facility during third quarter 1999.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock MarketSM under the symbol "FBST". The following table sets forth
the high and low sale prices for the Company's Common Stock, as reported on the
Nasdaq National Market for the periods indicated. These reported prices reflect
interdealer prices without adjustments for retail markups, markdowns or
commissions.
High Low
---- ---
First quarter 1997 5 1/8 4 1/4
Second quarter 1997 5 1/4 3 3/4
Third quarter 1997 6 9/16 4 7/8
Fourth quarter 1997 8 1/2 4 7/8
First quarter 1998 6 9/16 5
Second quarter 1998 6 3/16 4 1/4
Third quarter 1998 5 1/8 3 15/16
Fourth quarter 1998 4 1/2 3 3/8
There were approximately 225 holders of record of the Company's Common
Stock as of March 19, 1998, and the Company estimates that at that date there
were approximately 800 additional beneficial owners.
The Company has not declared or paid any cash dividends and does not
anticipate paying cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 6. Management's Discussion and Analysis of Results
of Operations and Financial Condition
General
In August 1998, the Company purchased the net assets of Fiber Optics
International, Inc. (FOI, a Seattle company, for $865,000 consisting of $315,000
in cash and 122,350 in shares of Fiberstars common stock. In November 1998, the
Company acquired the net assets of Crescent Lighting Ltd. (Crescent) and
Lichberatung Mann (LBM), fiber optic lighting manufacturers and distributors in
Europe. Fiberstars paid $2,875,000 in cash and 282,386 in shares of Fiberstars
common stock, or an aggregate of $4,013,000. In December 1998 the Company sold
the manufacturing and distribution rights of its phototherapy fiber optic
products to Respironics, Inc. for a net gain of $801,000.
Results of Operations
NET SALES
Net sales increased 27% to $22,682,000 in 1998. The increase was primarily a
result of growth in the commercial lighting products. Pools lighting sales also
grew for the year, after starting the year with a decrease due to adverse
weather conditions and product problems with a new line. The acquisitions
contributed to revenue growth in the 4th quarter.
Net sales in 1997 increased to $17,871,000, up 15% from 1996 sales of
$15,576,000. The 1997 increase was due to growth in the commercial and pool
fiber optic lighting markets.
International sales accounted for approximately 17% of net sales in 1998 as
compared to 17% in 1997 and 15% in 1996.
GROSS PROFIT
Gross profit increased to $8,546,000 in 1998, a 9% increase. The gross profit
margin was 38% in 1998, a decline from the 44% gross margin achieved in 1997.
The decrease in gross margin was primarily a result of higher cost of sales for
some of the Company's pools products early in the year along with an increase in
warranty costs associated with a lamp component. The Company has gained
assurances from its lamp supplier that the lamp component involved in the
warranty claims has been fixed and as a result expects gross margins to show
some improvement in 1999.
The Company's gross margin percentage achieved in 1997 was 44% as compared to
42% achieved in 1996. The increase in 1997 was primarily due to lower fiber
processing costs in connection with the Company's fiber processing facility, as
well as higher than average margins from the Fiberstars Catalyst(TM) pool
sanitation product line, which began shipping in 1997.
OPERATING EXPENSES
Research and development expenses were $1,283,000 in 1998, a 10% increase over
1997. The increase is largely due to additional personnel and product
development expenses associated with releasing new products in 1998 and
preparing products to be released in 1999. Sales and marketing expenses were
$5,381,000 in 1998 as compared to $4,393,000 in 1997, an increase of 22%. A
portion of the increase was due to $333,400 in additional expenses from the
acquired companies in 1998 for which there were no expenses in 1997. The balance
of the increase is a result of additional personnel and marketing costs
associated with supporting existing products as well as introduction costs for
new products released during the year. General and administrative costs were
$1,675,000 in 1998, an increase of 18% over 1997 costs. This increase was
largely a result of writing down the value of $200,000 in assets which were
deemed to have no future value, along with goodwill amortization from
acquisitions of $63,000 which was part of general and administrative expense in
1998. Total operating expenses were 37% of sales in 1998 as compared to 39% in
1997 and 38% in 1996.
Research and development expenses increased by 21% to $1,165,000 in 1997. The
increases consisted primarily of increased personnel and project expenses
associated with increased product development activity. Selling and marketing
expenses increased by 18% to $4,393,000 in 1997. Increases occurred in the pool
division and included increases in advertising, sales literature and personnel
related expenses. General and administrative expenses increased by 13% to
$1,419,000 in 1997, primarily due to increases in personnel expenses,
professional fees and other expenses, consistent with growth in the business
during the year. Total operating expenses increased by $1,033,000 to $6,977,000
in 1997, an increase of 17%. As a percentage of sales, total operating expenses
increased to 39% in 1997 from 38% in 1996, as operating expenses increased more
rapidly than sales.
OTHER INCOME AND EXPENSES
Other income and expense includes interest income and expense, income (loss)
from the Company's joint venture as recognized under the equity method, and
income from divestitures. Net interest income was $223,000 in 1998 compared to
$246,000 in 1997. The decrease was due primarily to a use of cash in the 4th
quarter to acquire two companies, along with a general decrease in interest
rates in 1998. The loss from the Company's joint venture was $22,000 in 1998
versus a loss of $12,000 in 1997. This larger loss is mainly due to adverse
exchange rate affects on business in Australia. As highlighted above, the
divestiture income was a result of the Company selling its rights to the
phototherapy fiber optic product to Respironics, Inc.
Net interest income in 1997 was $246,000 or the same as that achieved in 1996.
The Company's investment in joint venture activities yielded a loss of $12,000
in 1997 compared to a profit of $8,000 in 1996.
INCOME TAXES
The income tax rate in 1998 was 37% compared to 40% in 1997 and 40% in 1996. The
lower rate was due to the recognition of certain tax benefits accumulated over
prior years. There is no assurance that the income tax rate in future periods
will be maintained at the level experienced in 1998.
NET INCOME
As a result of the increase in sales in 1998, partially offset by lower gross
margin and higher expenses, and aided by the one time net gain, net income for
the year was $762,000 or 18% above net income achieved in 1997. The Company
recorded net income of $644,000 in 1997, a gain of 26% over net income of
$511,000 achieved in 1996.
Liquidity and Capital Resources
For the year ended December 31, 1998, cash and cash equivalents when combined
with short-term investments were $1,290,000 as compared to $5,120,000 for the
year ended December 31, 1997. Cash in the amount of $3,232,000 was used in the
year to acquire three companies. Additional cash was utilized by operations in
the 4th quarter to fund additions to accounts receivable for purchases of "early
buy" products by customers in the pools market. Cash may decline further during
the 1st quarter of 1999, but then increase in the 2nd quarter as the early buy
season comes to an end.
In June 1998, the Company renewed its $1 million unsecured line of credit for
working capital purposes and its $500,000 term loan commitment to finance
equipment purchases. Both lines expire on June 28, 1998. As of December 31, 1998
the Company had no borrowings outstanding against either of these lines of
credit
The Company also had a total borrowing of $527,700 against a credit facility
held by its German subsidiary. This borrowing is largely held in order to
finance the building of new offices owned by the Company in Basching, Germany.
The Company believes that existing cash balances, together with the Company's
bank lines of credit and funds that may be generated from operations, will be
sufficient to finance the Company's currently anticipated working capital
requirements and capital expenditure requirements for at least the next twelve
months.
Subsequent event
In March, 1999 the company increased its unsecured line of credit for working
capital to $2 million.
Other Factors
This Annual Report contains forward-looking statements. Such statements
generally concern future operating results, capital expenditures, product
development and enhancements, liquidity and strategy. Specific forward-looking
statements in this report include, without limitation, our remarks concerning
the evolution of the fiber optic lighting market, the future size of the fiber
optic lighting market, our expectations concerning the fixture performance of
our recently completed acquisitions, our expectations regarding future
performance of certain lamp components of our products that have recently
experienced problems, the rate of adoption of fiber optic lighting in Europe and
in the United States, trends in the price and performance of fiber optic
lighting products, the future performance of our lighting products, our
relationship with ADLT and future technologies expected to result from our
relationship with ADLT. We may not update these forward looking statements, and
the occurrence of the events predicted in these statements is subject to a
number of risks and uncertainties, including those discussed in this report.
These risks and uncertainties could cause our actual results to differ
materially from the results predicted in our forward looking statements. You are
encouraged to consider all the information in this report, and in our Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission ("SEC"),
along with our other periodic reports on file with the SEC, prior to investing
in our stock.
Basiness Risks and Uncertainties
Our quarterly operating results can vary significantly depending upon a
number of factors. It is difficult to predict the lighting market's acceptance
of our products on a quarterly basis, and the level and timing of orders
received can fluctuate substantially. Our sales volumes also fluctuate.
Historically we have shipped a substantial portion of our quarterly sales in the
last month of each of the second and fourth quarters of the year. Significant
portions of our expenses are relatively fixed in advance based upon our
forecasts of future sales. If sales fail below our expectations in any given
quarter, we will not be able to make any significant adjustment in our operating
expenses and our operating results will be adversely affected, In addition, our
product development and marketing expenditures may vary significantly from
quarter to quarter and are made well in advance of potential resulting revenue.
Sales of our pool and spa lighting products, which currently are
available only with newly constructed pools and spas, depend substantially upon
the level of new construction. Sales of commercial lighting products also depend
significantly upon the level of new building construction. Construction levels
are affected by housing market trends, interest rates, and the weather. Because
of the seasonality of construction, our sales of swimming pool and commercial
lighting products, and thus our overall revenues and income, have tended to be
significantly lower in the first quarter of each year. Various economic and
other trends may alter these seasonal trends from year to year, and we cannot
predict the extent to which these seasonal trends will continue. We believe our
business has been favorably impacted by recent strength in the overall U.S.
economy. If the U.S. economy softens, our operating results will probably
suffer.
In the fourth quarter of 1998, we introduced two major new products. Our
Pool & Spa product called the Fiberstars Lifetime Illuminator(TM) is expected to
outperform similar types of illuminators in the marketplace. The Model 601
illuminator for the Commercial Lighting market will replace and is expected to
outperform and be less costly than our current brightest illuminator Model 501.
We could have difficulties manufacturing these new products as a result of our
inexperience with them. Also, it is difficult to predict whether the market will
accept either of these new products. If either of these new products fails to
meet expectations, our operating results will be adversely affected.
Competition is increasing in a number of our markets. A number of
companies offer directly competitive products, including fiber optic lighting
products for downlighting, display case and water lighting, and neon and other
lighted signs. Our competitors include some very large and well established
companies such as [Philips, Schott, 3M, Bridgestone, Mitsubishi, Osram/Siemens
and Robin & Haas/Advanced Lighting Technologies]. All of these companies have
substantially greater financial, technical and marketing resources than we do.
We anticipate that any future growth in fiber optic lighting will be accompanied
by continuing increases in competition, which could accelerate growth in the
market for fiber optic lighting, but which could also adversely affect our
operating results to the extent we do not compete effectively.
We were awarded our ninth patent in the fourth quarter of 1998. However,
we believe the success of our business depends primarily on our continued
technical innovation, marketing abilities and responsiveness to customer
requirements, rather than on patents, trade secrets, trademarks, copyrights and
other intellectual property rights. Nevertheless, we have a policy of seeking to
protect our intellectual property through, among other things, the prosecution
of patents with respect to certain of our technologies. There are many issued
patents and pending patent applications in the field of fiber optic technology,
and certain of our competitors hold and have applied for patents related to
fiber optic lighting. Although to date we have not been involved in litigation
challenging our intellectual property rights or asserting intellectual property
rights of others, we have in the past received communications from third parties
asserting rights in our patents or that our technology infringes intellectual
property rights held by such third parties. Based on information currently
available to use we do not believe that any such claims involving our technology
or patents are meritorious. However, we may be required to engage in litigation
to protect our patent rights or to defend against the claims of others. In the
event of litigation to determine the validity of any third party claims or
claims by us against such third party, such litigation, whether or not
determined in our favor, could result in significant expense.
Our business is subject to additional risks that could materially and
adversely affect our future business, including:
o manufacturing risks, including the risks of shortages in materials or
components necessary to our manufacturing and assembly operations, and
the risks of increases in the prices of raw materials and components;
o sales and distribution risks, such as risks of changes in product mix
or distribution channels that result in lower margins;
o risks of the loss of a significant distributor or sales representative;
o risks of the loss of a significant customer or swimming pool builder;
o risks of the effects of volume discounts that we grant from time to
time to our larger customers, including reduced profit margins;
o risks of product returns and exchanges; in this regard, as noted above,
we have increased our warranty reserve in the fourth quarter of 1998 in
response to evidence of defective lamps in certain of our products. We
cannot assure you we will not experience similar component problems in
the future that could also require increased warranty reserves and
manufacturing costs.
o risks associated with product development and introduction problems,
such as increased research, development and marketing expenses
associated with new product introductions; and
o risks associated with delays in the introduction of new products and
technologies, including lost sales and loss of market share.
Year 2000 Compliance
Many currently installed computer systems and software products are not capable
of distinguishing 20th century dates from 21st century dates. As a result, in
less than two years, computers systems and/or software used by many companies in
a very wide variety of applications will experience operating difficulties
unless they are modified or upgraded to adequately process information
involving, related to or dependent upon the century change. Significant
uncertainty exists in the software and information services industries
concerning the scope and magnitude of problems associated with the century
change. In light of the potentially broad effects of the year 2000 on a wide
range of business systems, the Company's products and services may be affected.
The Company utilizes and is dependent upon data processing computer hardware and
software to conduct its business, and in 1998 completed an upgrade of hardware
and software at an approximate cost of $30,000. The Company has completed its
assessment of its own computer systems and based upon this assessment, the
Company believes its computer systems are "Year 2000 compliant;" that is,
capable of adequately distinguishing 21st century dates from 20th century dates.
However, there can be no assurance that the Company has timely identified or
will timely identify and remediate all significant Year 2000 problems in its
own computer systems, that remedial efforts subsequently made will not involve
significant time and expense, or that such problems will not have a material
adverse effect on the Company's business, operating results and financial
condition. If unforeseen internal disruptions occur, the Company believes that
its existing disaster recovery program, which includes the manual processing of
certain key transactions, would significantly mitigate the impact.
The Company has made only limited efforts to determine the extent of and
minimize the risk that the computer systems of the Company's suppliers or
customers are not Year 2000 compliant, or will not become compliant on a timely
basis. The Company expects that the process of making inquiries with these
customers and suppliers will be ongoing through the end of 1999. If Year 2000
problems prevent any of the Company's suppliers from timely delivery of products
or services required by the Company, the Company's operating results could be
materially adversely affected. However, the Company currently estimates that its
costs to address Year 2000 issues relating to its suppliers will not be
material, and that these costs will be funded from its operating cash flows. The
Company has identified and will continue to identify alternative suppliers in
the event its preferred suppliers become incapable of timely delivering products
or services required by the Company. The Company's suppliers are generally
locally or regionally based, which tends to lessen the Company's exposure from
the lack of readiness of any single supplier.
The Company may also face delays in receipt of payments from customers with
unresolved Year 2000 problems, and such delays could materially adversely affect
the Company's operating results. To the extent any such delays are significant
or protracted, the Company's quarterly results would be adversely affected. The
Company intends to continually reassess this risk as it receives communications
about the status of its customers with regard to Year 2000 issues, and if
necessary, adjust its account sales and policies accordingly.
Year 2000 costs relating to the Company's own computer systems including
consulting fees and costs to remediate or replace hardware and software as well
as non-incremental costs resulting from redeployment of internal resources are
estimated to be immaterial. The Company is not able to accurately estimate
potential costs associated with the Year 2000 issues of its customers and
suppliers, and is in the process of verifying that these companies will be year
2000 compliant by the end of 1999. There can be no assurance that the estimated
costs for remediating the Company's own systems as well as estimated costs
associated with the potential non-compliance of its customers and suppliers are
correct, and actual results could differ materially from these estimates.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer costs, and similar
uncertainties.
Item 7. Financial Statements
The financial statements and related notes thereto required by this item
are listed and set forth in a separate section of this report following the
index to exhibits.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
9
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
The information required by this Item regarding directors and nominees is
incorporated herein by reference to the information in the Company's definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders to be held on June
24, 1998 (the "Proxy Statement") under the caption "PROPOSAL NO. 1: ELECTION OF
DIRECTORS."
The executive officers of the Company who are not directors, and their ages
as of December 31, 1998, are as follows:
Name Age Position
---- --- --------
George K. Awai 43 Vice President, Research and Development
Barry R. Greenwald 52 Senior Vice President and General
Manager, Pool Division
J. Arthur Hatley 49 Vice President and General Manager,
Commercial Lighting
J. Steven Keplinger 39 Senior Vice President, Operations
and Retail
Fredrick N. Martin 55 Chief Operating Officer
Robert A. Connors 50 Vice President, Finance, Chief Financial
Officer
- - ----------
Mr. Awai joined the Company in October 1986 as Vice President, Engineering.
Prior to joining the Company, Mr. Awai served as Senior Fiber Optics Engineering
Supervisor at Advanced Cardiovascular Systems, Inc., a subsidiary of Eli Lilly
engaged in research and development of medical devices, from August 1985 to
October 1986. From December 1983 to August 1985, Mr. Awai served as Quality
Assurance Optics Manager at Kaptron, Inc., a fiber optics manufacturing company.
Mr. Awai served as Senior Optical Engineering Technician at Siemens
Optoelectronics from August 1982 to December 1983, as Fiber Optics Laboratory
Supervisor at Cooper Medical Devices, Inc. from May 1981 to July 1982, and as
Senior Fiber Optics Technician at Olympus Corporation from September 1979 to May
1981.
Mr. Greenwald joined the Company in October 1989 as General Manager, Pool
Division. He became Vice President in September 1993 and Senior Vice President
in February 1997. Prior to joining the Company, Mr. Greenwald served as National
Sales Manager at Aquamatic, a swimming pool accessory company, from August 1987
to October 1989. From May 1982 to August 1987, Mr. Greenwald served as National
Sales Manager at Jandy Inc., a swimming pool equipment company.
Mr. Hatley joined the Company in July 1995 as National Sales Manager,
Commercial Lighting Division. He was promoted to General Manager in January 1996
and was named Vice President in December 1996. Prior to joining the Company, Mr.
Hatley served in progressive sales management capacities for Reggiani and Capri
Lighting companies. Mr. Hatley was previously a commercial lighting agency
principal and also served at Graybar Electric, a national lighting and
electrical products distributor.
Mr. Keplinger joined the Company in August 1988 as Manager of Operations.
He became Vice President in 1991 and Senior Vice President in February 1997.
From June 1986 to August 1988, Mr. Keplinger was a sales representative at
Leemah Electronics, an electronics manufacturing company. From February 1983
10
<PAGE>
to June 1986, Mr. Keplinger was a sales manager with California Magnetics Corp,
a custom transformer manufacturing company. Mr. Keplinger is also a director of
Fiberstars Australasia Pty. Ltd.
Mr. Martin joined the Company in March 1997 as Senior Vice President
responsible for Engineering, R&D and Commercial Lighting sales and marketing and
was promoted to Chief Operating Officer in 1998. From May 1994 to February 1997,
Mr. Martin was general partner in a retail business. From 1989 to 1993, Mr.
Martin was President and Chief Executive Officer of Progress Lighting. Prior to
that, he served as Executive Vice President of sales & marketing for USI
Lighting, a large lighting fixture and controls company, and as President of
Prescolite, a lighting fixture company.
Mr. Connors joined the Company in July 1998 as Vice President, Finance,
Chief Financial Officer. From 1984 to 1998, Mr. Connors held a variety of
positions for Micro Focus Group Plc, a software company, including Chief
Financial Officer and Chief Operating Officer. Prior to that, he held senior
finance positions with Eagle Computer and W. R. Grace.
Item 10. Executive Compensation
The information regarding executive compensation required by Item 10 is
incorporated herein by reference to the information in the Proxy Statement under
the caption "Executive Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information regarding security ownership of certain beneficial owners
and management required by Item 11 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Security Ownership of
Principal Shareholders and Management."
Item 12. Certain Relationships and Related Transactions
The information regarding certain relationships and related transactions
required by Item 12 is incorporated herein by reference to the information in
the Proxy Statement under the caption "Certain Transactions."
Item 13. Exhibits and Reports on Form 8-K
(a) Reference is made to the Index to Exhibits that begins on page 12 of
this report.
(b) Form 8-K filed on December 4, 1998, is included as Exhibit 10.27 and
is included in the Index to Exhibits that begins on page 12 of this
report.
11
<PAGE>
INDEX TO EXHIBITS
(Item 13(a))
Exhibit
Number Document
- - ------ --------
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.3 in the Registrant's
Registration Statement on Form SB-2 (Commission File No. 33-79116-LA)
which became effective on August 17, 1994).
3.2 Bylaws of Registrant, including all amendments (incorporated by
reference to Exhibit 3.2 in the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1994).
3.3 Amendment to Bylaws of Registrant, dated as of December 1, 1995
(incorporated by reference to Exhibit 3.3 in the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1995).
10.0 Form of warrant issued to the Underwriters in the Company's initial
public offering (incorporated by reference to Exhibit 1.1 in the
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-79116-LA) which became effective on August 17, 1994)
10.1+ Form of Indemnification Agreement for directors and officers of the
Registrant (incorporated by reference to Exhibit 10.1 in the
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-79116-LA) which became effective on August 17, 1994).
10.2+ 1988 Stock Option Plan, as amended, and forms of stock option agreement
(incorporated by reference to Exhibit 10.2 in the Registrant's
Registration Statement on Form SB-2 (Commission File No. 33-79116-LA)
which became effective on August 17, 1994).
10.3+ 1994 Stock Option Plan, as amended, and forms of stock option agreement
(incorporated by reference to Exhibit 10.3 in the Registrant's
Registration Statement on Form SB-2 (Commission File No. 33-79116-LA)
which became effective on August 17, 1994).
10.4+ 1994 Employee Stock Purchase Plan and form of subscription agreement
(incorporated by reference to Exhibit 10.4 in the Registrant's
Registration Statement on Form SB-2 (Commission File No. 33-79116-LA)
which became effective on August 17, 1994).
10.5+ 1994 Directors' Stock Option Plan and form of stock option agreement
(incorporated by reference to Exhibit 10.5 in the Registrant's
Registration Statement on Form SB-2 (Commission File No. 33-79116-LA)
which became effective on August 17, 1994).
10.6 Registration Rights Agreement dated as of June 27, 1990, between the
Registrant and certain holders of the Registrant's capital stock, as
amended by Amendment No. 1 dated as of February 6, 1991 and Amendment
No. 2 dated as of April 30, 1994 (incorporated by reference to Exhibit
10.10 in the Registrant's Registration Statement on Form SB-2
(Commission File No. 33-79116-LA) which became effective on August 17,
1994).
10.7 Amendment No. 3 to Registration Rights Agreement to include Warrant
shares as Registerable Securities (incorporated by reference to Exhibit
1.2 in the Registrant's Registration Statement on Form SB-2 (Commission
File No. 33-79116-LA) which became effective on August 17, 1994).
10.8+ Stock Purchase Agreement and related Promissory Note between David N.
Ruckert and the Registrant dated as of December 9, 1987, as amended
(incorporated by reference to Exhibit 10.14 in the Registrant's
Registration Statement on Form SB-2 (Commission File No. 33-79116-LA)
which became effective on August 17, 1994).
12
<PAGE>
10.9+ Common Stock Purchase Warrant dated as of June 27, 1988 issued by the
Registrant to Philip Wolfson (incorporated by reference to Exhibit 10.15
in the Registrant's Registration Statement on Form SB-2 (Commission File
No. 33-79116-LA) which became effective on August 17, 1994).
10.10 Lease Agreement dated December 20, 1993 between the Registrant and
Bayside Spinnaker Partners IV (incorporated by reference to Exhibit
10.19 in the Registrant's Registration Statement on Form SB-2
(Commission File No. 33-79116-LA) which became effective on August 17,
1994).
10.11 Form of Agreement between the Registrant and independent sales
representatives (incorporated by reference to Exhibit 10.20 in the
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-79116-LA) which became effective on August 17, 1994).
10.12+ Consulting Agreement dated August 25, 1994 between the Registrant and
Philip Wolfson, M.D. (incorporated by reference to Exhibit 10.17 in the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1994).
10.13* Distribution Agreement dated March 21, 1995 between the Registrant and
Mitsubishi International Corporation (incorporated by reference to
Exhibit 10.18 in the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1994).
10.14* Three (3) Year Supply Agreement dated March 21, 1995 between the
Registrant and Mitsubishi International Corporation (incorporated by
reference to Exhibit 10.19 in the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1994).
10.15 Stock Purchase Agreement dated March 21, 1995 among the Registrant,
Mitsubishi International Corporation and Mitsubishi Corporation
(incorporated by reference to Exhibit 10.20 in the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1994).
10.16+ Consulting Agreement dated as of December 14, 1995, between Registrant
and Michael D. Ernst (incorporated by reference to Exhibit 10.21 in the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995).
10.17 Distribution Agreement dated as of February 21, 1996, between the
Registrant and Fiberoptic Medical Products, Inc. (incorporated by
reference to Exhibit 10.24 in the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.21 Amendment to 1994 Stock Option Plan, effective as of December 6, 1996
(incorporated by reference to Exhibit 10.21 in the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1996).
10.22 Promissory Note dated as of October 7, 1996, issued in favor of the
Registrant by Steve Keplinger (incorporated by reference to Exhibit
10.22 in the Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1996).
10.23 Promissory Note dated as of March 25, 1997, issued in favor of the
Registrant by Barry Greenwald (incorporated by reference to Exhibit
10.23 in the Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1996).
10.24* Amended and Restated Three (3) Year Supply Agreement dated March 31,
1998 between the Registrant and Mitsubishi International Corporation
(incorporated by reference in the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1997).
13
<PAGE>
10.25 Rental Agreement dated February 1, 1998 between the Registrant and
Signature Floors.
10.26 Promissory Note dated as of March 15, 1998, issued in favor of the
Registrant by Barry Greenwald
10.27 Consulting Agreement dated November 1, 1997 between the Registrant and
Barry A. Nelson.
10.29 Loan Agreement dated June 28, 1998, between the Registrant and Wells
Fargo Bank.
10.30 Term Commitment Note of the Registrant dated as of June 28, 1998, to
Wells Fargo Bank.
10.31 Revolving Line of Credit Note of the Registrant dated as of June 28,
1998, to Wells Fargo Bank
10.32 Asset Purchase Agreement by and among FibreOptics International, Inc., a
Washington corporation, and the Registrant dated August 31, 1998.
10.33 Sale and Purchase Agreement dated as of November 19, 1998, by and among
Fiberstars, Inc., Hillgate (4) Limited, Crescent Lighting Limited,
Michael Beverly Morrison and Corinne Bertrand.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule
* Confidential treatment requested.
+ Management Compensatory Plan or Arrangement
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereto duly authorized, on the 31st day of March, 1999.
FIBERSTARS, INC.
By: /s/ DAVID N. RUCKERT
---------------------------------
David N. Ruckert
Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this Report has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ DAVID N. RUCKERT Chief Executive Officer and March 31, 1999
- - ---------------------------- Director (Principal
David N. Ruckert Executive Officer)
/s/ ROBERT A. CONNORS Chief Financial Officer March 31, 1999
- - ---------------------------- (Principal Accounting Officer)
Robert A. Connors
/s/ JOHN B. STUPPIN Director March 31, 1999
- - ----------------------------
John B. Stuppin
/s/ THEODORE L. ELIOT, JR Director March 31, 1999
- - ----------------------------
Theodore L. Eliot, Jr.
/s/ MICHAEL FEUER, PH.D. Director March 31, 1999
- - ----------------------------
Michael Feuer, Ph.D.
/s/ B.J. GARET Director March 31, 1999
- - ----------------------------
B.J. Garet
/s/ WAYNE R. HELLMAN Director March 31, 1999
- - ----------------------------
Wayne R. Hellman
/s/ PHILIP WOLFSON Director March 31, 1999
- - ----------------------------
Philip Wolfson
15
<PAGE>
FIBERSTARS, INC.
CONSOLIDATED BALANCE SHEETS, December 31, 1998 and 1997
(amounts in thousands except share and per share amounts)
ASSETS 1998 1997
-------- --------
Current assets:
Cash and cash equivalents $ 1,290 $ 523
Short-term investments 4,597
Accounts receivable, net of allowances for
doubtful accounts of $370 in 1998 and $293 in 1997 5,210 2,525
Notes and other receivables 771 161
Inventories 4,179 3,068
Prepaids and other current assets 369 373
Deferred income taxes 507 677
-------- --------
Total current assets 12,326 11,924
Fixed assets, net 1,522 1,003
Investment in joint venture 18 40
Goodwill 4,403
Other assets 566 103
Deferred income taxes 89 54
-------- --------
Total assets $ 18,924 $ 13,124
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 2,598 $ 1,068
Accrued liabilities 2,198 1,318
Current portion of long-term debt 107 13
-------- --------
Total current liabilities 4903 2,399
Long-term debt, less current portion 667 17
-------- --------
Total liabilities 5,570 2,416
-------- --------
Commitments and contingencies (Note 9)
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.0001 per share:
Authorized:2,000,000 shares in 1998 and 1997
Issued and outstanding :no shares in 1998 and 1997
Common stock, par value $0.0001 per share:
Authorized:30,000,000 shares in 1998 and 1997
Issued and outstanding: 3,952,601 shares in
1998 and 3,509,474 shares in 1997 -- --
Additional paid-in capital 13,930 12,035
Notes receivable from shareholders (86) (75)
Accumulated deficit (490) (1,252)
-------- --------
Total shareholders' equity 13,354 10,708
-------- --------
Total liabilities and shareholders' equity $ 18,924 $ 13,124
======== ========
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
FIBERSTARS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
(amounts in thousands except share and per share amounts)
1998 1997 1996
------- ------- -------
Net sales $22,682 $17,871 $15,576
Cost of sales 14,136 10,047 9,032
------- ------- -------
Gross profit 8,546 7,824 6,544
------- ------- -------
Operating expenses:
Research and development 1,283 1,165 962
Sales and marketing 5,381 4,393 3,728
General and administrative 1,675 1,419 1,254
------- ------- -------
Total operating expenses 8,339 6,977 5,944
------- ------- -------
Income from operations 207 847 600
Other income (expense):
Equity in joint ventures' income (loss) (22) (12) 8
Divestiture 801
Interest and other income 224 248 252
Interest expense (1) (2) (6)
------- ------- -------
Income before provision for income taxes 1,209 1,081 854
Provision for income taxes (447) (437) (343)
------- ------- -------
Net income $ 762 $ 644 $ 511
======= ======= =======
Net income per share - basic $ 0.21 $ 0.19 $ 0.15
======= ======= =======
Shares used in per share calculation - basic 3,623 3,446 3,398
======= ======= =======
Net income per share - diluted $ 0.21 $ 0.18 $ 0.14
======= ======= =======
Shares used in per share calculation - diluted 3,695 3,597 3,539
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
FIBERSTARS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Notes
Common Stock Additional Receivable
----------------- Paid-In from Accumulated
Shares Amount Capital Shareholders Deficit Total
------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 3,381 $ -- $ 11,848 $(75) $(2,407) $ 9,366
Exercise of common stock options 7 9 9
Issuance of common stock under employee
stock purchase plan 9 32 32
Issuance of common stock pursuant to
exercise of warrants 16 14 14
Net Income 511 511
----- ------ -------- ---- ------- -------
Balances, December 31, 1996 3,413 -- 11,903 (75) (1,896) 9,932
Exercise of common stock options 88 97 97
Issuance of common stock under employee
stock purchase plan 9 35 35
Net income 644 644
----- ------ -------- ---- ------- -------
Balances, December 31, 1997 3,510 -- 12,035 (75) (1,252) 10,708
Exercise of common stock options 46 164 164
Issuance of common stock under employee
stock purchase plan 10 35 35
Issuance of common stock pursuant to
exercise of warrants 12 11 (11) 0
Issuance of common stock for acquisitions 405 1,685 1,685
Net income 762 762
----- ------ -------- ---- ------- -------
Balances, December 31, 1998 3,983 $ -- $ 13,930 $(86) $ (490) $13,354
===== ====== ======== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FIBERSTARS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
------- ------- -------
Cash flows from operating activities:
Net income $ 762 $ 644 $ 511
------- ------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 647 453 322
Provision for doubtful accounts receivable 77 76 56
Deferred income taxes 135 407 343
Equity in joint venture 22 12 (8)
Changes in assets and liabilities:
Accounts receivable, trade (1,072) 2 (63)
Inventories (275) (900) (264)
Prepaids and other current assets 36 (192) (5)
Other assets (463) 19 (53)
Accounts payable 240 101 (131)
Accrued liabilities 671 196 145
------- ------- -------
Total adjustments 18 174 342
------- ------- -------
Net cash provided by operating activities 780 818 853
------- ------- -------
Cash flows from investing activities:
Sale of short-term investments 4,597
Purchase of short-term investments (1,282) (869)
Acquisition of business, net of cash acquired (3,232)
Loans made under notes receivable (610) (30) (161)
Acquisition of fixed assets (479) (624) (400)
Sale of investment in joint venture 298
------- ------- -------
Net cash provided by (used in)
investing activities 276 (1,936) (1,132)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuances of common stock 199 132 55
Repayment of long-term debt (488) (11) (12)
------- ------- -------
Net cash provided by (used in) financing
activities (289) 121 43
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 767 (997) (236)
Cash and cash equivalents, beginning of year 523 1,520 1,756
------- ------- -------
Cash and cash equivalents, end of year $ 1,290 $ 523 $ 1,520
======= ======= =======
Supplemental Information:
Interest paid $ 1 $ 2 $ 6
Income taxes paid $ 66 $ 24 $ 38
The Company purchased certain businesses during 1998. In conjunction with the
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 7,649
Cash paid for capital stock (3,232)
Capital stock issued (1,685)
-------
Liabilities assumed $ 2,732
-------
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations:
Fiberstars, Inc. (the Company) develops and assembles lighting products
using fiber optic technology for commercial lighting and swimming pool and
spa lighting applications. The Company markets its products for worldwide
distribution primarily through independent sales representatives,
distributors and swimming pool builders.
2. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of Fiberstars,
Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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 reported period. Actual results could differ from those
estimates.
Cash Equivalents:
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.
Short-Term Investments:
Short-term investments consist of debt securities with remaining maturity
of more than three months when purchased. The Company has determined that
all of its debt securities should be classified as available-for-sale. The
difference between the cost basis and the market value of the Company's
investments was not material at December 31, 1998 and 1997. The Company's
investments at December 31, 1998 and 1997 primarily consist of corporate
notes with maturities of one year or less. Short-term investments are held
by one investment bank as of December 31, 1998.
Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
F-5
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, continued:
Investments in Joint Ventures:
The Company records its investments in joint ventures under the equity
method of accounting.
Fair Value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and other accrued liabilities approximate
fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the
carrying value of long-term debt obligations also approximates fair
value.
Revenue Recognition:
The Company recognizes sales upon shipment.
Depreciation and Amortization:
Fixed assets are stated at cost and depreciated by the straight-line
method over the estimated useful lives of the related assets (two to five
years). Leasehold improvements are amortized on a straight-line basis
over their estimated useful lives or the lease term, whichever is less.
Certain Risks and Concentrations:
The Company invests its excess cash in deposits and high-grade short-term
securities with two major banks.
The Company sells its products primarily to commercial lighting
distributors and residential pool distributors and pool installation
contractors in North America, Europe and the Far East. The Company
performs ongoing credit evaluations of its customers and generally does
not require collateral. Although the Company maintains allowances for
potential credit losses that it believes to be adequate, a payment
default on a significant sale could materially and adversely affect its
operating results and financial condition. At December 31, 1998, one
customer accounted for 22% of accounts receivable and at December 31,
1997, one customer accounted for more than 17% accounts receivable.
One customer accounted for 13%, 13% and 10% of net sales in 1998, 1997
and 1996, respectively.
F-6
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, continued:
The Company currently buys all of its fiber, the main component of its
products, from one supplier. Although there is a limited number of fiber
suppliers, management believes that other suppliers could provide fiber
on comparable terms. A change in suppliers, however, could cause delays
in manufacturing and a possible loss of sales which would adversely
affect operating results.
Research and Development:
Research and development costs are charged to operations as incurred.
Income Taxes:
The Company accounts for income taxes using the liability method under
which deferred tax assets or liabilities are calculated at the balance
sheet date using current tax laws and rates in effect.
Earnings Per Share:
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128")
effective December 31, 1997. SFAS 128 requires the presentation of basic
and diluted earnings per share (EPS). Basic EPS is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed giving
effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of
incremental shares upon exercise of stock options. All prior period
earnings per share amounts have been restated to comply with SFAS 128.
F-7
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, continued:
Earnings Per Share, continued:
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts):
Year Ended December 31,
----------------------------
1998 1997 1996
------ ------ ------
Numerator - Basic and Diluted EPS
Net income $ 762 $ 644 $ 511
Denominator - Basic EPS
Weighted average shares outstanding 3,623 3,446 3,398
------ ------ ------
Basic earnings per share $ 0.21 $ 0.19 $ 0.15
====== ====== ======
Denominator - Diluted EPS
Denominator - Basic EPS 3,623 3,446 3,398
Effect of dilutive securities:
Stock options and warrants 72 151 141
------ ------ ------
3,695 3,597 3,539
------ ------ ------
Diluted earnings per share $ 0.21 $ 0.18 $ 0.14
====== ====== ======
Options and warrants to purchase 584,626 shares, 371,705 shares and
421,095 shares of common stock were outstanding at December 31, 1998,
1997 and 1996, respectively, but were not included in the calculations of
diluted EPS because their exercise prices were greater than the average
fair market price of the common shares.
Recent Pronouncements:
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." This
standard requires companies to capitalize qualifying software costs which
are incurred during the application development stage and amortize them
over the software's estimated useful life. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The Company is currently
evaluating the impact of SOP 98-1 on its financial statements and related
disclosures.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs
of Start-Up Activities." This standard requires companies to expense the
costs of start-up activities and organization
F-8
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, continued:
Recent Pronouncements, continued:
costs as incurred. In general, SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. The Company believes the adoption of
SOP 98-5 will not have a material impact on its results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 establishes new standards of accounting and
reporting for derivative instruments and hedging activities. SFAS 133
requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging
relationship that exists. SFAS 133 will be effective for fiscal years
beginning after June 15, 1999. The Company does not currently hold
derivative instruments or engage in hedging activities.
In the first quarter of 1998, the Company adopted statement of financial
accounting standards No. 130, ("SFAS 130"), "Reporting Comprehensive
Income", which specifies the computation, presentation and disclosure
requirements for comprehensive income. There was no impact on the
Company's financial position, results of operation or cash flows as a
result of adoption, and comprehensive and net income are the same.
In 1998, the Company adopted statement of financial accounting standards
No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires publicly held companies to report
financial and other information about key revenue-producing segments of
the entity for which such information is available and utilized by the
Chief Operations decision maker. SFAS 131 also requires revenue
geographic information and revenue with significant customers to be
disclosed. The Company operates in one segment and will not be reporting
product segment information but will report geographic and significant
customer revenue.
3. Inventories (in thousands):
December 31,
--------------------
1998 1997
------ ------
Raw materials $2,780 $2,020
Finished goods 1,399 1,048
------ ------
$4,179 $3,068
====== ======
F-9
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Fixed Assets (in thousands):
December 31,
------------------
1998 1997
------- -------
Equipment $ 2,823 $ 2,197
Furniture and fixtures 250 127
Computer software 452 242
Leasehold improvements 541 101
------- -------
4,066 2,667
Less accumulated depreciation and amortization (2,544) (1,664)
------- -------
$ 1,522 $ 1,003
======= =======
5. Acquisitions:
In August 1998, the Company completed the acquisition of the net assets
of Fibre Optics International, Inc. (FOI) for $865,000 consisting of
$315,000 in cash and 122,350 shares of Fiberstars stock. FOI is a
manufacturer and marketer of fiber optic-lighted signs, based in Seattle,
Washington.
In November 1998, the Company acquired the net assets of Lichberatung
Mann (LBM), fiber optic lighting manufacturers and distributor
headquartered near Munich, Germany. Also in November 1998, the Company
purchased the net assets of Crescent Lighting, Ltd. (Crescent), which is
a fiber optic lighting manufacturer and distributor based in Newbury,
England. The consideration given for both the European acquisitions was
$2,875,000 in cash and 282,386 shares of Fiberstars stock, or an
aggregate of $4,013,000.
All three acquisitions were accounted for as purchases. Accordingly, the
purchase price was allocated to the net assets acquired based on their
estimated fair market values. In connection with the acquisitions, the
Company recorded goodwill of $4,466,000 which is being amortized on a
straight line basis over ten years.
The following table presents the unaudited pro forma results assuming the
Company had acquired FOI, LBM and Crescent at the beginning of fiscal
years 1997 and 1998, respectively. Net income and diluted earnings per
share amounts have been adjusted to include goodwill amortization of
$447,000 for the twelve months ended December 31, 1997 and 1998. This
information may not necessarily be indicative of the future combined
results of the Company.
Year Ended December 31,
-----------------------
1998 1997
------- -------
Revenues $28,240 $24,184
Net income 414 702
Diluted earnings per share $ 0.10 $ 0.18
Basic earnings per share $ 0.10 $ 0.18
F-10
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Joint Venture:
Fiberoptic Medical Products, Inc.
In February 1996, the Company entered into an agreement to sell its
equity in Fiberoptic Medical Products, Inc. (FMP) for the net book value
of approximately $300,000.
Fiberstars Australasia Pty. Ltd:
The Company participates in a joint venture with Fiberstars Australasia
Pty. Ltd., to market lighting products using fiberoptic technology in
Australia and New Zealand. The Company maintains a 46.5% interest in
Fiberstars Australasia.
The Company recorded sales to Fiberstars Australasia totaling $137,000,
$259,000 and $234,000, for the years ended December 31, 1998, 1997 and
1996, respectively. Accounts receivable from Fiberstars Australasia Pty.
Ltd. as of December 31, 1998 and 1997 were $130,887 and $67,752,
respectively.
The following represents condensed financial information (unaudited) of
Fiberstars Australasia as of December 31, 1998 and 1997 and for the years
then ended, and combined information of FMP and Fiberstars Australasia
for the year ended December 31, 1996 (in thousands):
December 31,
------------------
1998 1997
---- ----
Current assets $ 193 $ 208
Property and other assets 64 37
----- -----
$ 257 $ 245
===== =====
Current liabilities $ 227 $ 172
Issued capital 108 108
Accumulated deficit (78) (35)
----- -----
$ 257 $ 245
===== =====
December 31,
----------------------------
1998 1997 1996
---- ---- ----
Revenue $ 569 $ 589 $566
Expenses 620 626 545
----- ----- ----
Net income (loss) $ (51) $ (37) $ 21
===== ===== ====
F-11
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Accrued Liabilities (in thousands):
December 31,
-----------------
1998 1996
---- ----
Sales commissions and incentives $1,003 $ 735
Accrued warranty expense 325 218
Accrued legal and accounting fees 372 99
Other 498 266
------ ------
$2,198 $1,318
====== ======
8. Lines of Credit:
On June 28, 1998, the Company entered into the following borrowing
arrangements with its bank:
a) A $1,000,000 revolving line of credit expiring June 28, 1998,
bearing interest at prime plus 0.125% (8.625% at December 31,
1997). Borrowings under this line are uncollateralized, and the
Company must maintain zero balance for at least 30 consecutive
days during each fiscal year.
b) A $500,000 term loan commitment to finance equipment purchases,
expiring June 28, 1999. Borrowings bear interest at prime plus
0.50% (9% at December 31, 1998). Under this note, the Company may
finance up to 80% of the cost of the new equipment and 75% of the
cost of used equipment. The note is collateralized by a security
interest in all equipment financed with the proceeds. Interest
only is payable monthly until June 28, 1999, after which the
principal plus interest is repayable in 36 monthly installments.
There were no amounts outstanding at December 31, 1998. The
Company is required to maintain certain financial ratios on a
quarterly basis, including specified levels of working capital and
tangible net worth.
c) A (pound) 250,000 bank overdraft agreement with Lloyds Bank Plc
which is reviewed again in November 1999. There were no borrowings
against this facility at December 31, 1999.
d) A DM 1,150,000 bank borrowing facility in Germany with Sparkasse
Newmarket Bank. There was DM 886,497 in borrowings against this
facility as of December 31, 1998. DM 450,000 of this facility
terminates in 2003 and DM 700,000 terminates in 2008.
9. Commitments and Contingencies:
The Company occupies manufacturing and office facilities under operating
leases expiring in 1999 under which it is responsible for related
maintenance, taxes and insurance. Minimum lease commitments under the
leases are as follows (in thousands):
F-12
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Minimum lease commitments
-------------------------
1999 $ 581
2000 701
------
Total minimum lease payments $1,282
------
Rent expense approximated $388,000, $322,000 and $318,000, for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims
which are pending or known to be threatened, will not have a material
adverse effect on the Company's financial position or results of
operations.
10. Shareholders' Equity:
Common Stock:
The notes receivable from shareholders for common stock bear interest at
a rate of 9% and are payable ten years from the date of issuance.
Under the terms of certain agreements with the Company, the holders of
approximately 1,489,000 shares of common stock have certain demand and
piggyback registration rights. All registration expenses generally would
be borne by the Company.
Warrants:
The Company has issued warrants to purchase shares of its common stock to
certain directors and consultants of the Company. These warrants, which
were granted at the fair market value of the common stock at the date of
grant as determined by the Board of Directors, expire on varying dates
through 1999.
In connection with its public offering in August 1994, the Company issued
to the underwriters, RvR Securities Corp. and Van Kasper & Company,
warrants (the Underwriters' warrants) to purchase up to 100,000 shares of
the Company's common stock at an exercise price equal to 120% of the
initial offering price of $4.50 per share. The Underwriters' warrants are
exercisable for a period of five years from the date of the public
offering expiring on August 18, 1999.
F-13
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant activity comprised:
Warrants Outstanding
-------------------------------
Exercise
Shares Price Amount
------ ----- ------
(in thousands)
Balances, December 31, 1995 12,6666 $0.90-$5.40 $ 564
Warrants exercised (15,625) $0.90 (14)
------- -----
Balances, December 31, 1996 and 1997 111,041 $0.90-$5.40 $ 550
Warrants exercised/cancelled (11,041) $0.90 (10)
------- -----
Balances, December 31, 1998 100,000 $5.40 $ 540
======= =====
At December 31, 1998, 100,000 outstanding warrants were exercisable. The
Company has reserved 100,000 shares of common stock for issuance upon
exercise of the common stock warrants.
1988 Stock Option Plan:
Upon adoption of the 1994 Stock Option Plan (see below), the Company's
Board of Directors determined to make no further grants under the 1988
Stock Option Plan (the 1988 Plan). Upon cancellation or expiration of any
options granted under the 1988 Plan, the related reserved shares of
common stock will become available instead for options granted under the
1994 Stock Option Plan.
1994 Stock Option Plan:
At December 31, 1998, an aggregate of 1,350,000 shares of the Company's
common stock are reserved for issuance under the 1994 Stock Option Plan
to employees, officers, directors and consultants at prices not lower
than the fair market value of the common stock of the Company on the date
of grant. Options granted may be either incentive stock options or
nonstatutory stock options. The plan administrator (the Board of
Directors or a committee of the Board) determines the terms of options
granted under the plan including the number of shares subject to the
option, exercise price, term and exercisability.
1994 Directors' Stock Option Plan:
At December 31, 1998, a total of 200,000 shares of common stock has been
reserved for issuance under the 1994 Directors' Stock Option Plan. The
plan provides for the granting of nonstatutory stock options to
nonemployee directors of the Company.
F-14
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Shareholders' Equity, continued:
Activity Under the Stock Option Plans:
Option activity under all plans comprised:
Options Outstanding
------------------------------
Weighted
Options Average
Available Exercise
for Number Price
Grant of Shares Per Share Amount
----- --------- --------- ------
(in thousands)
Balances, December 31, 1995 200,842 544,203 $3.83 $2,137
Additional shares reserved 500,000
Granted (299,050) 299,050 $4.99 1,455
Canceled 49,892 (49,892) $5.15 (216)
Exercised (7,188) $1.04 (9)
-------- --------- ------
Balances, December 31, 1996 451,684 786,173 $4.10 3,367
Granted (355,600) 355,600 $4.93 1,866
Canceled 22,724 (22,724) $4.83 (114)
Exercised (87,791) $0.99 (97)
-------- --------- ------
Balances, December 31, 1997 118,808 1,031,258 5,022
Additional shares reserved 550,000
Granted (282,500) 282,500 $4.49 1,088
Canceled 18,284 (18,284) $4.74 (90)
Exercised (45,790) $3.54 (164)
-------- --------- ------
Balances, December 31, 1998 404,592 1,249,684 $5,856
======== ========= ======
At December 31, 1998, 1997 and 1996, options to purchase 623,169, 436,497
and 372,818 shares of common stock, respectively were exercisable at
weighted average fair values of $4.78, $4.44 and $3.46, respectively.
F-15
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Shareholders' Equity, continued:
Activity Under the Stock Option Plans:
<TABLE>
<CAPTION>
OPTIONS OPTIONS CURRENTLY
OUTSTANDING EXERCISABLE
------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Average
Exercise of Shares Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ----------- -------- ----------- --------
(in thousands) (in years) (in thousands)
<S> <C> <C> <C> <C> <C>
$0.90-$0.90 67 3.3 $0.90 67 $0.90
$3.60-$4.63 377 5.3 $4.99 108 $4.43
$4.75-$4.75 262 3.0 $4.75 111 $4.75
$5.13-$5.88 484 3.1 $5.49 277 $5.51
$6.25-$6.50 60 2.1 $6.49 60 $6.46
</TABLE>
1994 Employee Stock Purchase Plan:
At December 31, 1998, a total of 50,000 shares of common stock has been
reserved for issuance under the 1994 Employee Stock Purchase Plan. The
plan permits eligible employees to purchase common stock through payroll
deductions at a price equal to the lower of 85% of the fair market value
of the Company's common stock at the beginning or ending of the offering
period. Employees may end their participation at any time during the
offering period, and participation ends automatically on termination of
employment with the Company. At December 31, 1998, 39,382 shares had been
issued under this plan.
Stock-Based Compensation:
The Company has adopted the disclosure only provision of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." The Company, however, continues to apply APB
25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for options granted under the Stock Option Plans
nor for shares issued under the Employee Stock Purchase Plan. Had
compensation cost for these plans been determined based on the fair value
of the options at the grant date for awards in 1998, 1997 and 1996
consistent with the provisions of SFAS 123, the Company's net income and
net income per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share amounts):
F-16
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Shareholders' Equity, continued:
December 31,
-------------------------
1998 1997 1996
---- ---- ----
Net income - as reported $ 762 $ 644 $ 511
===== ===== =====
Net income - pro forma $ 538 $ 480 $ 422
===== ===== =====
Basic earnings per share - as reported $0.21 $0.19 $0.15
===== ===== =====
Basic earnings per share - pro forma $0.15 $0.14 $0.12
===== ===== =====
Diluted earnings per share - as reported $0.21 $0.18 $0.14
===== ===== =====
Diluted earnings per share - pro forma $0.15 $0.13 $0.12
===== ===== =====
As the provisions of SFAS 123 are only applied to stock options granted
after January 1, 1995 in the above pro forma amounts, the impact of the
pro forma stock compensation cost will likely continue to increase, as
the vesting period for the Company's options and the period over which
compensation is charged to expense is generally four years.
The fair value of each option grant is estimated on the date of grant
using a type of Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Fair value of options issued $1.72 $2.38 $1.39
Exercise price $3.80 $5.20 $4.80
Expected life of option 3.88 years 3.91 years 3.89 years
Risk-free interest rate 4.82% 6.00% 6.11%
Expected volatility 50% 50% 23%
11. Income Taxes
The components of the provision for income taxes are as follows (in
thousands):
Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
Current:
Federal $(265) $ (20) $ (23)
State (47) (10) (1)
----- ----- -----
(312) (30) (24)
----- ----- -----
Deferred:
Federal (115) (386) (303)
State (20) (21) (16)
----- ----- -----
(135) (407) (319)
----- ----- -----
Provision for income taxes $(447) $(437) $(343)
===== ===== =====
F-17
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes, continued:
The principal items accounting for the difference between income taxes
computed at the United States statutory rate and the provision for income
taxes reflected in the statements of operations are as follows:
Years Ended December 31,
-------------------------
1998 1997 1996
---- ---- ----
United States statutory rate (34.0)% (34.0)% (34.0)%
State taxes (net of federal tax benefit) (5.5) (3.9) (5.5)
Other (2.5) (2.5) (0.6)
----- ----- -----
(37.0)% (40.4)% (40.1)%
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset are as follows (in thousands):
Years Ended December 31,
------------------------
1998 1997
---- ----
Allowance for doubtful accounts $ 126 $ 117
Accrued expenses and other reserves 606 352
Depreciation and amortization 60 (31)
General business credits 215
Net operating loss carryforwards 95
Installment sales (213)
Other 17 (17)
----- -----
Total deferred tax asset $ 596 $ 731
===== =====
The deferred tax is not reduced by a valuation allowance as management
believes it will fully realize the benefit from its deferred tax assets.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
F-18
<PAGE>
FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Segments and Geographic Sales:
The Company has adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information",
effective for fiscal years beginning after December 31, 1997. SFAS 131
supersedes Statement of Financial Accounting Standards No. 14 ("SFAS
14"), "Financial Reporting for Segments of a Business Enterprise". SFAS
131 changes current practice under SFAS 14 by establishing a new
framework on which to base segment reporting and also requires interim
reporting of segment information.
The Company operates in a single industry segment that manufactures,
markets and sells fiber optic lighting products. The Company markets its
products for worldwide distribution primarily through independent sales
representatives, distributors and swimming pool builders in North
America, Europe and the Far East.
A summary of geographic sales is as follows (in thousands):
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
U.S. Domestic $18,912 $14,736 $13,294
European subsidiaries 768 0 0
Export 3002 3,135 2,282
------- ------- -------
$22,682 $17,871 $15,576
======= ======= =======
13. Employee Retirement Plan:
The Company maintains a 401(k) profit sharing plan for its employees who
meet certain qualifications. The Plan allows eligible employees to defer
up to 15% of their earnings, not to exceed the statutory amount per year
on a pretax basis through contributions to the Plan. The Plan provides
for employer contributions at the discretion of the Board of Directors;
however, no such contributions were made in 1998, 1997 and 1996.
14. Related Party Transactions:
During 1998 and 1997, the Company advanced a total of $30,000 in each
year to certain officers by way of promissory notes. The notes are
collateralized by certain issued or potentially issuable shares of the
Company's common stock. The notes bear interest at rates ranging from 6%
to 8% per annum and are repayable at various dates through April, 1999.
At December 31, 1998 and 1997, $196,000 and $161,000 were outstanding and
included with notes receivable.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Fiberstars, Inc.
Fremont, California
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Fiberstars,
Inc. and its subsidiaries (the Company) at December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
San Jose, California
February 4, 1999
F-20
================================================================================
ASSET PURCHASE AGREEMENT
by and among
FIBRE OPTICS INTERNATIONAL, INC.,
(a Washington corporation)
DOUGLAS S. CARVER,
DAVE M. CARVER
and
FIBERSTARS, INC.
(a California corporation)
Dated as of August 31, 1998
================================================================================
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I PURCHASE AND SALE OF ASSETS...................................................................1
1.1 Purchase and Sale of Acquired Assets..........................................................1
1.2 No Buyer Assumption of Liabilities............................................................2
1.3 Purchase Price for Acquired Assets............................................................2
1.4 Closing.......................................................................................2
1.5 Purchase Price Allocation.....................................................................3
1.6 Sales Tax.....................................................................................3
ARTICLE II CERTAIN REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS.............................4
2.1 Organization, Standing and Power..............................................................4
2.2 Authority.....................................................................................4
2.3 Subsidiaries..................................................................................5
2.4 Valid Ownership Effective Transfer of Necessary Rights........................................5
2.5 Financial Statements..........................................................................5
2.6 Absence of Certain Changes or Events..........................................................5
2.7 Absence of Liabilities........................................................................6
2.8 Litigation....................................................................................6
2.9 Restrictions on Business Activities...........................................................6
2.10 Real Property.................................................................................6
2.11 Inventory.....................................................................................7
2.12 Capital Equipment and Hard Assets.............................................................7
2.13 Proprietary Rights............................................................................7
2.14 Taxes.........................................................................................8
2.15 Employee Matters..............................................................................8
2.16 Compliance With Laws..........................................................................8
2.17 Environmental Matters.........................................................................9
2.18 Brokers' and Finders' Fees....................................................................9
2.19 Contracts.....................................................................................9
2.20 Insurance....................................................................................10
2.21 Customers....................................................................................10
2.22 Investment in Buyer Shares...................................................................11
2.23 Representations Complete.....................................................................11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER......................................................12
3.1 Organization, Standing and Power.............................................................12
3.2 Authority....................................................................................12
3.3 Validity of Buyer Shares.....................................................................12
3.4 Litigation...................................................................................12
3.5 Compliance With Laws.........................................................................12
3.6 Public Information...........................................................................13
3.7 Brokers' or Finders' Fees....................................................................13
3.8 Representations Complete.....................................................................13
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE IV COVENANTS OF THE PARTIES.....................................................................14
4.1 Representations and Warranties...............................................................14
4.2 Access to Documents..........................................................................14
4.3 Transition Services Performed by Dave M. Carver..............................................14
4.4 Covenant Not to Compete......................................................................14
4.5 No Publicity; Confidentiality................................................................15
4.6 Employee Matters.............................................................................15
4.7 Trademark Renewal............................................................................15
4.8 Piggyback Registration.......................................................................15
4.9 Post-Closing Buyer Covenants.................................................................16
4.10 Reasonable Best Efforts; Further Assurances..................................................16
ARTICLE V ESCROW; INDEMNIFICATION......................................................................16
5.1 Escrow Fund..................................................................................16
5.2 Indemnification..............................................................................16
5.3 Indemnification Procedure....................................................................17
ARTICLE VI CONDITIONS TO CLOSING........................................................................17
6.1 Buyer's Conditions to Closing................................................................17
6.2 Seller's Conditions to Closing...............................................................19
ARTICLE VII GENERAL PROVISIONS...........................................................................20
7.1 Survival at Closing..........................................................................20
7.2 Specific Performance.........................................................................20
7.3 Notices......................................................................................20
7.4 Interpretation...............................................................................21
7.5 Counterparts.................................................................................22
7.6 Entire Agreement; Nonassignability; Parties in Interest......................................22
7.7 Severability.................................................................................22
7.8 Remedies Cumulative..........................................................................22
7.9 Governing Law................................................................................22
7.10 Rules of Construction........................................................................22
7.11 Amendments and Waivers.......................................................................23
7.12 Expenses.....................................................................................23
</TABLE>
-ii-
<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of August 31, 1998, by and among Fibre Optics International, Inc., a
Washington corporation ("Seller"), Douglas S. Carver and Dave M. Carver
(collectively, the "Shareholders"), and Fiberstars, Inc., a California
corporation ("Buyer") (the Seller, Shareholders and Buyer collectively referred
to as the "Parties").
RECITALS
A. Seller has been engaged in the build-to-order manufacturing, sale
and shipping of fiberoptics, lighting and signage business (the "Seller's
Business").
B. Seller wishes to sell to Buyer and Buyer wishes to purchase from
Seller, on the terms and for the consideration provided below, all the assets
relating to the Seller's Business as provided in this Agreement pursuant to the
closing of the transactions contemplated by this Agreement (the "Closing") on
the Closing Date (as defined in Section 1.4) (such transactions contemplated by
this Agreement being referred to as the "Acquisition").
C. The Shareholders and Boards of Directors of Seller and Buyer believe
it is in the best interests of their respective companies and the shareholders
of their respective companies that Seller sell to Buyer for the consideration
set forth below all the Acquired Assets (as defined hereafter) and, in
furtherance thereof, have approved same.
D. Seller and Buyer desire to make certain representations, warranties
and other agreements in connection with the Acquisition.
E. The Shareholders, as inducement for the Buyer to enter into this
Agreement with Seller, desire to make certain representations, warranties and
other agreements in connection with the Acquisition.
NOW, THEREFORE, in consideration of the covenants and representations
set forth herein, and for other good and valuable consideration, the Seller,
Shareholders and Buyer, intending to be legally bound, agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 Purchase and Sale of Acquired Assets. Subject to the terms and
conditions contained in this Agreement, Seller agrees to sell, assign, transfer
and deliver to Buyer, and Buyer agrees to purchase and accept from Seller, all
of Seller's right, title and interest in or to the Acquired Assets as set forth
on Schedule 1.1 attached hereto (together, the "Acquired Assets"), free and
clear of all liens, security interests, pledges, charges, claims, options,
rights, defects in title, restrictions or encumbrances of any kind or character
whatsoever ("Encumbrances", each
1
<PAGE>
an "Encumbrance" ) on the Closing Date; other than those permitted Encumbrances
set forth on Section 2.4 of the Seller Disclosure Schedule (as defined
hereafter).
1.2 No Buyer Assumption of Liabilities. Buyer shall not assume any
liabilities or obligations of any nature (matured or unmatured, fixed or
contingent) of Seller pursuant to this Agreement or the transactions
contemplated hereby other than (i) current liabilities accumulated in the normal
course of business which are itemized on the most recent balance sheet provided
in the Most Recent Balance Sheet (as defined in Section 2.5) to the Buyer as
part of Schedule 2.5 to this Agreement or (ii) future obligations under assumed
contracts expressly assumed by the Buyer as set forth on Schedule 1.2 (the
"Assumed Contracts") attached hereto, except payables to any shareholders, if
applicable.
1.3 Purchase Price for Acquired Assets. The Buyer agrees to pay Eight
Hundred Sixty Five Thousand U.S. Dollars ($865,000) (the "Purchase Price"), to
the Seller, at the Closing on the terms and subject to the conditions set forth
in this Agreement, by delivery of:
(i) a cash payment by wire transfer of immediately
available funds to such account as is specified by Seller, in the amount equal
to Three Hundred Fifteen Thousand and 05/100 U.S. Dollars ($315,000.05);
(ii) 103,108 shares of common stock of Buyer (the
"Shares") issued in the name of Fibre Optics International, Inc. and valued in
the aggregate amount of Four Hundred Sixty-Three Thousand Five Hundred One and
39/100 U.S. Dollars ($463,501.39) based upon the average of the closing price
per share on the ten (10) trading days immediately preceding the Closing (such
price being $4.4953 per share, the "Closing Price");
(iii) a deposit into escrow of 19,242 shares of
common stock of Buyer issued in the name of Fibre Optics International, Inc. and
valued in the aggregate amount of Eighty-Six Thousand Four Hundred Ninety-Eight
and 56/100 U.S. Dollars ($86,498.56) based upon the Closing Price (the "Escrow
Shares") in accordance with Section 5.1 below (all Escrow Shares and Shares
collectively the "Buyer Shares").
1.4 Closing.
(a) Closing. The Closing shall be held at the offices of Gray
Cary Ware & Freidenrich LLP, at 100 Congress Avenue, Suite 1440, Austin, Texas
78701 or at such time and place as may be mutually agreed upon by the Parties to
this Agreement, at 10:00 a.m. on August 31, 1998 (the "Closing Date").
2
<PAGE>
(b) Delivery At Closing. At the Closing:
(i) Seller shall deliver to Buyer an Assignment and
Bill of Sale in the form attached hereto as Exhibit A duly transferring the
Acquired Assets to Buyer (the "Bill of Sale").
(ii) Buyer shall deliver to Seller the Purchase Price
as set forth in Section 1.3 above.
(iii) Seller and Buyer shall deliver or cause to be
delivered to one another such other certificates, instruments and documents
necessary or appropriate to evidence the due execution, delivery and performance
of this Agreement as set forth in Sections 6.1(f) and 6.2(e) below.
(iv) Seller shall deliver all books and records of
Seller regarding the Acquired Assets, including, without limitation, such
operating manuals and records necessary for Buyer to own and operate the
Acquired Assets in the ordinary course in Seller's possession or control.
(v) Seller, through its officers, agents and
employees, will put Buyer into full possession and enjoyment of all tangible
Acquired Assets, terms FOB Seller, unless Buyer otherwise specifies in writing
that title and risk of loss pass outside of California.
(c) Taking of Necessary Action; Further Action. If, at any
time after the Closing Date, any further action is necessary or desirable to
carry out the purposes of this Agreement and to vest Buyer with full right,
title and possession to all Acquired Assets, the officers and directors of
Seller are fully authorized in the name of Seller or otherwise to take, and will
take all such lawful and necessary and/or desirable action (including without
limitation obtaining any required consents or approvals).
1.5 Purchase Price Allocation. The Seller and Buyer agree to allocate
the Purchase Price (and all other capitalizable costs) among the Acquired Assets
for all purposes (including financial accounting and tax purposes) in accordance
with the allocation schedule attached hereto as Exhibit B.
1.6 Sales Tax. The Seller agrees that it promptly shall pay all sales
or similar taxes required to be paid by reason of the sale by the Seller to the
Buyer of the Acquired Assets pursuant to this Agreement, based upon the
allocation provided for in Exhibit B.
3
<PAGE>
ARTICLE II
CERTAIN REPRESENTATIONS AND WARRANTIES
OF SELLER AND SHAREHOLDERS
In this Agreement, any reference to any event, change, condition or
effect being "material" with respect to any entity or group of entities means
any material event, change, condition or effect related to the condition
(financial or otherwise), properties, assets (including intangible assets),
liabilities, business, operations or results of operations of such entity or
group of entities. In this Agreement, any reference to a "Material Adverse
Effect" or "Material Adverse Change" with respect to any entity or group of
entities means any event, change or effect that is materially adverse to the
condition (financial or otherwise), properties, assets, liabilities, business,
operations, results of operations or prospects of such entity and its
subsidiaries, taken as a whole.
In this Agreement, any reference to a party's "knowledge" means such
party's actual knowledge. Except as set forth on Schedule 2 (the "Seller
Disclosure Schedule," whereby the exceptions will be arranged in sections
corresponding to the numbered representations and warranties set forth in this
Article II), the Seller and the Shareholders, hereby each jointly and severally
represent and warrant to Buyer the following as of the Closing Date:
2.1 Organization, Standing and Power. Seller is a corporation duly
organized and validly existing under the laws of the State of Washington. Seller
has the corporate power to own its properties and to carry on its business as
now being conducted and is duly qualified to do business in each jurisdiction in
which the failure to be so qualified would have a Material Adverse Effect on
such entity or the Acquired Assets. Seller has delivered a true and correct copy
of its Articles of Incorporation and Bylaws or other charter documents, as
applicable, each as amended to date, to Buyer. Seller is not in violation of any
of the provisions of its Articles of Incorporation or Bylaws or equivalent
organizational documents.
2.2 Authority. Seller has all requisite corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Seller. This Agreement has been duly executed
and delivered by Seller and constitutes the valid and binding obligations of
Seller enforceable against Seller in accordance with its terms. The execution
and delivery of this Agreement by Seller do not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any benefit under (i) any provision of the
organizational documents of Seller, or (ii) any material mortgage, indenture,
lease, contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Seller or any of their respective properties or assets. No
consent, approval, order or authorization of, or registration or declaration
with, any court, administrative agency or commission or other governmental
authority or instrumentality ("Governmental
4
<PAGE>
Entity") is required by or with respect to Seller in connection with the
execution and delivery of this Agreement or the consummation of the Acquisition
except for such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable securities laws.
2.3 Subsidiaries. Seller does not directly or indirectly own any equity
or similar interest or any interest convertible or exchangeable or exercisable
for, any equity or similar interest in, any corporation, partnership, joint
venture or other business association or entity.
2.4 Valid Ownership Effective Transfer of Necessary Rights.
(a) Ownership. Seller owns and has good and marketable title
to all of the Acquired Assets free and clear of all Encumbrances, and has the
rights to sell, assign, transfer, and deliver the Acquired Assets.
(b) Effective Transfer of Necessary Rights. Upon the Closing,
by means of this Agreement, together with the documents, instruments and
agreements contemplated hereby, Seller will transfer good and marketable title
to all Acquired Assets (including the Intellectual Property, as defined
hereafter) to Buyer, free and clear of all Encumbrances. The Acquired Assets
transferred to Buyer pursuant to this Agreement, and the documents, instruments
and agreements contemplated hereby will include all necessary assets and
intellectual property rights related to the Seller's Business, free and clear of
all Encumbrances.
2.5 Financial Statements. Seller has delivered to Buyer the following
financial statements for the Seller (collectively the "Financial Statements")
which are attached hereto as Schedule 2.5:
(a) unaudited consolidated balance sheets and statements of
income as of and for the fiscal years ended June 30, 1996, June 30, 1997 and
June 30, 1998 (the "Most Recent Fiscal Year End"); and
(b) unaudited consolidated balance sheet for the purpose of a
Closing balance sheet dated as of August 31, 1998 (the "Most Recent Balance
Sheet").
2.6 Absence of Certain Changes or Events. Since the Most Recent Fiscal
Year End, Seller has conducted the Seller's Business in the ordinary and usual
course and, without limiting the generality of the foregoing, has not:
(i) suffered any Material Adverse Change;
(ii) sold, leased, transferred or assigned any of its
assets, tangible or intangible, other than for a fair consideration in the
ordinary course of business;
(iii) suffered any damage, destruction or loss,
whether or not covered by insurance, in an amount exceeding Five Thousand U.S.
Dollars ($5,000);
5
<PAGE>
(iv) granted or agreed to make any increase in
compensation payable to Seller's employees other than those occurring in the
ordinary course of business consistent with Seller's past practices with respect
to the Seller's Business;
(v) permitted or allowed the Acquired Assets to be
subjected to any Encumbrance of any kind;
(vi) made any capital investment in, any loan to, or
any acquisition of the securities or assets of any individual, partnership,
corporation, association, trust, joint venture, unincorporated organization, or
Governmental Entity in an amount exceeding Five Thousand U.S. Dollars ($5,000);
(vii) issued any note, bond or other debt security or
created incurred, assumed, or guaranteed any indebtedness for borrowed money or
capitalized lease obligation either involving more than Five Thousand U.S.
Dollars ($5,000) in the aggregate;
(viii) made any changes in the accounting method or
practices it follows, whether for general financial, or tax purposes, or any
change in depreciation or amortization policy or rates adopted therein;
(ix) made any cash withdrawals or disbursements from
the Seller's accounts outside of its ordinary course of business; or
(x) agreed to take any action described in this
Section 2.6 outside of its ordinary course of business or which would constitute
a breach of any of the representations contained in this Agreement.
2.7 Absence of Liabilities. Seller has no obligations or liabilities of
any nature (matured or unmatured, fixed or contingent) other than as disclosed
on the Most Recent Balance Sheet or as Assumed Contracts, and Buyer shall not
assume any liabilities or obligations of Seller as a result of its purchase of
the Acquired Assets.
2.8 Litigation. There is no private or governmental action, proceeding,
claim, arbitration or investigation pending before any agency, court or
tribunal, foreign or domestic, or, to the knowledge of Seller, threatened
against Seller (with respect to the Seller's Business), or that could prevent,
enjoin, or materially alter or delay any of the transactions contemplated by
this Agreement.
2.9 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon Seller which has or could
reasonably be expected to have the effect of prohibiting or impairing Buyer's
future operation of the Seller's Business.
2.10 Real Property. Schedule 1.1 contains descriptions of all real
property owned by Seller or used or held for use in connection with the Seller's
Business and leases or licenses or other rights to possession of any real
property so used or held (collectively the "Real Property"). Seller has
delivered to Buyer correct and complete copies of any leases or subleases
related to
6
<PAGE>
such Real Property. With respect to the Real Property, Seller has good and
marketable title to their interest in such Real Property, free and clear of all
Encumbrances, except for liens to be released prior to or at Closing, if
applicable, or those Encumbrances of record that are usual or customary. With
respect to each lease (i) the leases are in full force and effect, and are
valid, binding and enforceable in accordance with their respective terms, (ii)
all accrued and currently payable rents and other payments required by such
leases have been paid, (iii) Seller is not in default in any respect under any
such leases and no notice of default or termination has been given or received,
and (iv) Seller has not violated any term or condition under any such lease. No
third-party consent or approval is required for the assignment of any such lease
to Buyer, or for the consummation of the transactions contemplated herein. To
the extent that any third-party consent or approval is required, such consent or
approval shall be provided by Seller to Buyer prior to the Closing Date. Seller
shall obtain appropriate estoppel letters with respect to any other persons or
entities with an interest in the Leased Property, in a form reasonably
satisfactory to Buyer.
2.11 Inventory. The inventory included in the Acquired Assets
(including raw materials, work in progress and finished goods) is as set forth
on Schedule 1.1 and constitutes substantially all of the inventory relating to
the Seller's Business. Such inventory is identified as to those items which are
consistent with the current version of the Seller's Business product(s) and
those items which are either inconsistent with such current version or otherwise
obsolete or damaged. Seller has also identified on Schedule 1.1 all inventory
that is on loan or consignment to customers, sales offices or design centers of
the Seller's Business and the location of such inventory.
2.12 Capital Equipment and Hard Assets. All tangible assets listed on
Schedule 1.1 are in substantially good condition and repair and are adequate for
the uses to which they are being put or would be put in the ordinary course of
business consistent with industry standards.
2.13 Proprietary Rights.
(a) Seller neither owns nor is licensed under any patents or
patent applications. Seller owns all rights, titles and interest in and to or
has obtained licenses, whenever necessary and appropriate, to use all
technology, software, software tools, know-how, processes, trade secrets, trade
names, copyrights and other proprietary rights included in the Acquired Assets.
Schedule 2.13 contains an accurate and complete description of (i) all
trademarks and tradenames in or related to the Acquired Assets, and a list of
all licenses and other agreements relating thereto, and (ii) a list of all
licenses and other know-how, or processes that Seller is licensed or otherwise
authorized by such third parties to use, market, distribute or incorporate into
the Acquired Assets (such software, technology, know-how and processes are
collectively referred to as the "Third Party Technology"). No claims have been
asserted against Seller (and Seller is not aware of any claims which are likely
to be asserted against it or which have been asserted against others) by any
person challenging or questioning the validity or effectiveness of any license
or agreement relating thereto. To the best knowledge of Seller, none of the
Acquired Assets nor the use of any trademarks, tradenames, copyrights, software,
technology, know-how or processes contained in the Acquired Assets infringes on
the rights of,
7
<PAGE>
constitutes misappropriation of, or in any way involves unfair competition with
respect to, any proprietary information or intangible property right of any
third person or entity, including without limitation any patent, trade secret,
copyright, trademark or tradename.
(b) Except as set forth in Schedule 2.13, Seller has not
granted any third party any right to manufacture, reproduce, distribute, market
or exploit any of the Acquired Assets or any adaptations, translations, or
derivative works based on the Acquired Assets or any portion thereof.
(c) All designs, drawings, specifications, source code, object
code, documentation, flow charts and diagrams incorporating, embodying or
reflecting any of the Acquired Assets at any stage of their development were
written, developed and created solely and exclusively by employees of Seller
without the assistance of any third party or entity or were created by third
parties who assigned ownership of their rights to Seller in valid and
enforceable consultant confidentiality and invention assignment agreements.
Seller has kept secret and has not disclosed the source code for the software
included within the Acquired Assets to any person or entity other than certain
employees of Seller who are subject to the terms of a binding confidentiality
agreement with respect thereto. Seller has taken all appropriate measures to
protect the confidential and proprietary nature of such software.
2.14 Taxes. Seller has timely filed within the time period for filing
or any extension granted with respect thereto all federal, state, local and
other returns and reports relating to any and all taxes or any other
governmental charges, obligations or fees for taxes and any related interest or
penalties ("Tax" or "Taxes") required to be filed by it with respect to the
Seller's Business and the Acquired Assets and such returns and reports are true
and correct. The Company has withheld and paid all Taxes required to be withheld
and paid, with respect to (i) such returns and reports, (ii) all employees,
independent contractor, shareholder, or other third party related to the
Seller's Business, and (iii) all sales, use and similar Taxes. No income, sales,
use or similar Tax return or report of the Company has been examined or audited
by the Internal Revenue Service or any state taxing authority. There are no
pending or, to the best of the Company's knowledge, threatened audits,
examinations, assessments, asserted deficiencies or claims for additional Taxes.
2.15 Employee Matters. Seller has no employee or consultant benefit
plans or agreements, and to the extent it has had any of the foregoing in the
past, Seller has no liabilities or obligations relating in any way whatsoever to
the same.
2.16 Compliance With Laws. Seller has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
federal, state, local or foreign statute, law or regulation (including, without
limitation, laws and regulations relating to labor matters) with respect to the
conduct of its business, or the ownership or operation of its business, except
for such violations or failures to comply as could not, individually or in the
aggregate, be reasonably expected to have a Material Adverse Effect on Seller.
Seller has obtained each federal, state, county, local or foreign governmental
consent, license, permit, grant, or other authorization of a Governmental Entity
(i) pursuant to which Seller currently operates or holds
8
<PAGE>
any interest in any of its properties or (ii) that is required for the operation
of Seller's business or the holding of any such interest (collectively referred
to as "Seller Authorizations"), and all of such Seller Authorizations are in
full force and effect, except where the failure to obtain or have any such
Seller Authorizations could not reasonably be expected to have a Material
Adverse Effect on Seller or the Acquired Assets.
2.17 Environmental Matters.
(a) To the best of Shareholders' knowledge, Seller has
complied in all material respects with all federal, state and local
environmental laws, rules and regulations as in effect on the date hereof
applicable to the Seller's Business and its operations. To the best of Seller's
and Shareholders' knowledge, no hazardous or toxic waste, substance, material or
pollutant (as those or similar terms are defined under the Comprehensive
Environmental Response, Compensation and Liability act of 1980, as amended, 42
U.S.C. ss.ss.9601 et seq., Toxic Substances Control Act, 15 U.S.C. ss.ss.2601 et
seq., or any other applicable federal, state and local environmental law,
statute, ordinance, order, judgment, rule or regulation relating to the
environment or the protection of human health ("Environmental Laws")), have been
released, emitted or discharged or are currently located in, on, under, or about
the real property on which the Acquired Assets are situated or contained in the
tangible personal property included in the Acquired Assets. To the best of
Shareholders' knowledge, the Acquired Assets and Seller's use thereof are not in
violation of any Environmental Laws or any occupational, safety and health or
other applicable law now in effect. Seller shall be, as of the Closing Date and
thereafter, solely responsible for all environmental liabilities, of whatever
kind and nature, arising out of or attributable to the operation or ownership of
the Acquired Assets prior to the Closing Date.
(b) No Notice of Lack of Compliance with Environmental Laws.
Neither Seller nor the Shareholders have been notified by any governmental
authority of any violation by Seller or the Shareholders of any Environmental
Laws.
2.18 Brokers' and Finders' Fees. Seller has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
2.19 Contracts.
(a) Schedule 2.19 lists all contracts (collectively the
"Contracts", each a "Contract" ) currently in force with any third party,
including but not limited to, (i) agreements, contracts or commitments that call
for fixed and/or contingent payments or expenditures by or to the Seller of more
than Five Thousand Dollars ($5,000); or (ii) agreements, contracts or
commitments with officers, employees, agents, consultants, advisors, salesmen,
sales representatives, distributors or dealers that are not cancelable by it on
notice of not longer than thirty (30) days and without liability, penalty or
premium; or (iii) agreement to loan or advance any sums to any person, any line
of credit, standby financing, revolving credit or other similar financing
arrangement of any sort.
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(b) Seller is not restricted by agreement from carrying on its
business anywhere in the world.
(c) Except as set forth on Schedule 2.19, Seller is not under
any liability or obligation, and no such outstanding claim has been made, with
respect to the return of inventory or merchandise in the possession of
wholesalers, distributors, retailers, or other customers, except such
liabilities, obligations and claims as, in the aggregate, do not exceed Five
Thousand Dollars ($5,000).
(d) Seller has not guaranteed any obligations of other persons
or made any agreements to acquire or guarantee any obligations of other persons.
(e) All material contracts, agreements and instruments to
which Seller is a party are valid, binding, in full force and effect, and
enforceable by Seller in accordance with their respective terms. No such
material contract, agreement or instrument contains any material liquidated
damages, penalty or similar provision. To the best of Seller's knowledge, no
party to any such material contract, agreement or instrument intends to cancel,
withdraw, modify or amend such contract, agreement or arrangement. No Contract
requires any third party's consent, approval or waivers in connection with the
execution and delivery of this Agreement or the consummation of the Acquisition.
To the extent that any third-party consent or approval is required, such consent
or approval shall be provided by Seller to Buyer prior to the Closing Date.
(f) Seller is not in default under or in breach or violation
of, nor, to Seller's knowledge, is there any valid basis for any claim of
default by Seller under, or breach or violation by Seller of, any contract,
commitment or restriction to which Seller is a party or to which it or any of
its properties is bound, where such defaults, breaches, or violations would, in
the aggregate, have a Material Adverse Effect on the operations, assets,
financial condition or prospects of Seller. To the best of Seller's knowledge,
no other party is in default under or in breach or violation of, nor is there
any valid basis for any claim of default by any other party under or any breach
or violation by any other party of, any material contract, commitment, or
restriction to which Seller is bound or by which any of its properties is bound,
where such defaults, breaches, or violations would, in the aggregate, have a
Material Adverse Effect on the operations, assets, financial condition or
prospects of Seller.
2.20 Insurance. Seller maintains insurance policies providing general
coverage for full replacement value against risks commonly insured against. All
of such policies are in full force and effect and Seller is not in breach or
default of any provision thereof and no event has occurred which, with notice or
the lapse of time, would constitute such a breach or default, or permit
termination, modification or acceleration, under such policies. Seller has not
received notice from any issuer of any such policies of its intention to cancel,
terminate or refuse to renew any policy issued by it.
2.21 Customers . Seller has provided Buyer with a list of substantially
all customers of the Seller's Business for the last three (3) years, together
with a schedule of such customers' orders and specifying which orders (whether
for revenue or not) have not yet been filled, and of
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those orders which have been filled, those as to which revenue has been
recognized, the amount (if any) of cash collected and the amount of revenue
deferred. Additionally, Seller has provided Buyer, for each listed customer
order, a brief description of the status of that installation and any further
commitments, contingencies, milestones or customer expectations with regard to
that order.
2.22 Investment in Buyer Shares.
(a) Seller (i) understands that the Buyer Shares have not been
and will not be, registered under the Securities Act of 1933, as amended (the
"Securities Act"), or under any state securities laws, and are being acquired in
reliance upon federal and state exemptions from registration requirements
thereof, (ii) is acquiring the Buyer Shares solely for its own account for
investment purposes, and not with a view to the distribution thereof, (iii) is a
sophisticated investor with knowledge and experience in business and financial
matters as to be capable of evaluating the merits and risks of an investment in
Buyer, (iv) acknowledges that it has received all information it desires
concerning Buyer, its common stock and any other matter it deems relevant or
material to evaluating the merits and risks inherent in holding the Buyer
Shares, (v) is able to bear the economic risk of investment and lack of
liquidity inherent in holding the Buyer Shares.
(b) Seller understands that the Buyer Shares may not be sold,
transferred or otherwise disposed of without registration under the Securities
Act or reliance upon an exemption therefrom, and that in the absence of an
effective registration statement covering the Securities or an available
exemption from registration under the Securities Act, the Buyer Shares must be
held until a transfer or disposition of the Buyer Shares is otherwise permitted
pursuant to the Securities Act or applicable state securities laws. To the
extent applicable, each certificate or other document evidencing any of the
Buyer Shares shall be endorsed with the following restrictive legend:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED
ABSENT AN EFFECTIVE REGISTRATION THEREOF, OR EXEMPTION
THEREUNDER, UNDER SUCH ACT OR COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT."
2.23 Representations Complete. None of the representations or
warranties made by Seller herein or in any Schedule hereto, or certificate
furnished by Seller pursuant to this Agreement, when all such documents are read
together in their entirety, contains any untrue statement of a material fact, or
omits any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
3.1 Organization, Standing and Power. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Buyer has the corporate power to own its properties and to carry on
its business as now being conducted and as proposed to be conducted and is duly
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified and in good standing would have a Material
Adverse Effect on Buyer. Buyer is not in violation of any of the provisions of
its Articles of Incorporation or Bylaws or equivalent organizational documents.
3.2 Authority. Buyer has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Buyer. This Agreement has been duly executed and
delivered by Buyer and constitutes the valid and binding obligation of Buyer
enforceable against Buyer in accordance with its terms. The execution and
delivery of this Agreement by Buyer does not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any benefit under (i) any provision of the Articles of
Incorporation or Bylaws of Buyer or any of its subsidiaries, as amended, or (ii)
any material mortgages indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Buyer or any of its
respective properties or assets. No consent, approval, order or authorization
of, or registration or declaration with, any Governmental Entity is required by
or with respect to Buyer in connection with the execution and delivery of this
Agreement or the consummation of the Acquisition except for such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws.
3.3 Validity of Buyer Shares. The Buyer Shares, when issued and
delivered to Seller in accordance with this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable.
3.4 Litigation. There is no private or governmental action, proceeding,
claim, arbitration or investigation pending before any agency, court or
tribunal, foreign or domestic, or, to the knowledge of Buyer, threatened against
Buyer, or that could prevent, enjoin, or materially alter or delay any of the
transactions contemplated by this Agreement.
3.5 Compliance With Laws. Buyer has complied with, is not in violation
of, and has not received any notices of violation with respect to, any federal,
state, local or foreign statute, law or regulation (including, without
limitation, laws and regulations relating to labor matters) with respect to the
conduct of its business, or the ownership or operation of its business, except
for such violations or failures to comply as could not, individually or in the
aggregate, be
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reasonably expected to have a Material Adverse Effect on Buyer. Buyer has
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which Buyer currently operates or holds any interest in any of its
properties or (ii) that is required for the operation of Seller's business or
the holding of any such interest, and all of such authorizations are in full
force and effect, except where the failure to obtain or have any such
authorizations could not reasonably be expected to have a Material Adverse
Effect on Buyer.
3.6 Public Information.
(a) The Buyer shall make and keep public information
available, as those terms are understood and defined in Rule 144 under the
Securities Act, at all times from and after 90 days following the effective date
of the first registration of the Company under the Securities Act of an offering
of its securities to the general public.
(b) The Buyer shall file with the Securities Exchange
Commission (the "Commission") in a timely manner all reports and other documents
the Commission may prescribe under Section 13(a) or 15(d) of the Exchange Act at
any time after the Buyer has become subject to such reporting requirements of
the Exchange Act.
(c) The Buyer shall furnish to a holder and/or a prospective
purchaser of such Shares or Escrow Shares (a "Holder"), forthwith upon request
(i) a written statement by the Buyer as to its compliance with the reporting
requirements of Rule 144 under the Securities Act (at any time from and after 90
days following the effective date of the first registration statement of the
Company for an offering of its securities to the general public) and of the
reporting requirements of the Exchange Act (at any time after it has become
subject to such reporting requirements), (ii) a copy of the most recent annual
or quarterly report of the Company, (iii) any other reports and documents
necessary to satisfy the information-furnishing condition to offers and sales
under Rule 144A under the Securities Act, and (iv) such other reports and
documents as a Holder of any Shares or Escrow Shares reasonably requests to
avail itself of any rule or regulation of the Commission allowing such Holder to
sell any such securities without registration.
3.7 Brokers' or Finders' Fees. Buyer is not a party to, or in any way
obligated under, and has no knowledge of, any contract or outstanding claim for
the payment of any broker's or finder's fee in connection with the origin,
negotiation, execution or performance of this Agreement, the nonpayment of which
could result in the placement of a lien or other encumbrance on the Acquired
Assets, or a claim against Buyer or its affiliates.
3.8 Representations Complete. None of the representations or warranties
made by Buyer herein or in any Schedule hereto, or certificate furnished by
Buyer pursuant to this Agreement, when all such documents are read together in
their entirety, contains any untrue statement of a material fact, or omits any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
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ARTICLE IV
COVENANTS OF THE PARTIES
4.1 Representations and Warranties. On or after the Closing, Buyer,
Seller or each of the Shareholders shall give detailed written notice to the
other parties promptly upon learning of any fact which would render untrue any
of the Party's representations or warranties contained in this Agreement or the
information contained in any Schedule to this Agreement.
4.2 Access to Documents. If, after the Closing Date, (i) in order to
properly prepare its tax returns or other documents or reports required to be
filed with governmental authorities or its financial statements; (ii) in
connection with any threatened or pending litigation or claim which involves or
may involve Buyer; or (iii) for any other reasonable purpose, it is necessary
that Buyer be furnished with additional information or documents relating to the
Acquired Assets and such information or documents are in the possession of
Seller or Shareholders, and can reasonably be furnished to Buyer, Seller or
Shareholders shall, upon written request therefor, promptly furnish such
information or documents to Buyer. Buyer shall reimburse the Seller or
Shareholders providing such information or documents for the cost of copying or
shipping any requested documents.
4.3 Transition Services Performed by Dave M. Carver. The Buyer hereby
agrees to pay Dave M. Carver an hourly rate of $50 per hour for work performed
by Dave M. Carver on behalf of the Seller which is (i) reasonable and
appropriate for the transition and continuation of the Seller's Business and
(ii) authorized by the Chief Financial Officer of the Buyer or such officer that
Buyer may designate from time to time prior to the work being performed. Dave M.
Carver shall be responsible for providing a good-faith report of such work
performed and hours worked to such officer of the Buyer.
4.4 Covenant Not to Compete. As of the Closing Date, Dave M. Carver, by
executing this Agreement, hereby agrees to enter into a five (5) year
non-compete agreement covering the geographic territory in which the Seller
currently does business, which agreement shall preclude solicitation or hiring
of former employees of Seller hired by Buyer without Buyer's prior written
consent, and further agrees that for a period of five (5) years from the
Effective Date he will not, directly or indirectly, individually or as an owner,
partner, shareholder, joint venturer, employee, consultant, principal, agent,
trustee or licensor, or in any other similar capacity whatsoever of or for any
person, firm, partnership, company or corporation (other than Buyer), (a) own,
manage, consult with, operate, sell, control or participate in the ownership,
management, operation, sales or control of (i) any business that competes with
the business of Buyer (whether through stand-alone products or broader products
that include equivalent functionality), and/or (ii) any business engaged in the
design, research, development, marketing, sales, manufacturing or licensing of
products that are substantially similar to or competitive with any products of
Buyer (whether through stand-alone products or broader products that include
equivalent functionality); (b) accept to provide consulting services on behalf
of a customer of Buyer with the intent or purpose of depriving Buyer of business
performed by Buyer by transferring such work to a department, division or
affiliate of the customer or to a third party; or (c) request or advise any of
the
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customers, suppliers or other business contacts of Buyer to withdraw, curtail,
cancel or not increase their business with Buyer.
4.5 No Publicity; Confidentiality. Without the consent of the other
party, which consent may be granted by David Ruckert on behalf of Buyer, and
Doug Carver on behalf of Seller, none of the Parties shall reveal the existence
of or contents of this Agreement or make any internal or public announcements
except to their respective professional advisors or as otherwise required by
applicable law. The Parties acknowledge and agree that all confidential material
or information delivered as part of any due diligence performed by the Parties
shall be kept completely confidential by the Parties and the Parties' respective
agents, representatives, or employees to any third party in any manner
whatsoever, in whole or in part, without the prior written consent of the other
party or by order of a court of competent jurisdiction. Each of the Parties
agree to undertake reasonable precautions to safeguard and protect the
confidentiality of all such confidential information, to accept responsibility
for any breach of this Agreement by itself, or representatives or members of its
organization, and at its sole expense to take all reasonable measures (including
but not limited to court proceedings) to restrain its representatives or members
of its organization from prohibited or unauthorized disclosure or uses of
confidential information.
4.6 Employee Matters. At the Closing Date, Buyer agrees to enter into
an employment agreement with Doug Carver in substantially the form attached
hereto as Exhibit C (the "Employment Agreement").
4.7 Trademark Renewal. Within 30 days of the Closing Date, the Seller
on behalf of the Seller or Buyer (as mutually determined by the Parties) shall
have filed or shall have cause to be filed an application for registration for
the trademark as originally issued under Registration Number 1536793 for the
design mark "Fibre Optics International, Inc." with the United States Patent and
Trademark Office (the "Trademark Renewal"); provided that all reasonable costs
(including attorney's fees) associated to such Trademark Renewal shall be borne
by the Seller and the Shareholders.
4.8 Piggyback Registration.
(a) Notice of Registration. If, at any time after the one-year
anniversary and before the two-year anniversary of the Closing Date, Buyer shall
determine to register any of its equity securities, either for its own account
or for the account of a security holder or holders, other than a registration
relating solely to employee benefit plans or a registration relating solely to a
Rule 145 transaction, Buyer will:
(i) promptly give written notice to Seller or the
Shareholders, if applicable, for so long as it continues to hold the
registration rights contained herein (each for the purposes of this Section 4.7,
a "Holder"), and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Buyer
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Shares specified in a written request or requests, made within thirty (30) days
after receipt of such written notice from Buyer, by any Holder.
(b) Right to Terminate Registration. The registration rights
granted under this Section 4.7 are solely piggyback in nature, and the Buyer
shall have the right to terminate or withdraw any registration initiated by it
under this Section 4.7 prior to the effectiveness of such registration, whether
or not any Holder has elected to include securities in such registration.
4.9 Post-Closing Buyer Covenants. In accordance with Buyer's Stock
Option Plan, a copy of which has been provided to Seller, and Buyer's policy for
granting options, Buyer hereby agrees to (i) grant an option to purchase 7,500
shares of common stock of the Buyer to Steve Fancher and (ii) grant options to
Douglas S. Carver under the Employment Agreement at the next meeting of the
Board Compensation Committee of the Buyer to be held as soon as reasonably
practicable after the Closing Date.
4.10 Reasonable Best Efforts; Further Assurances. Each of the Parties
to this Agreement shall use its or their reasonable best efforts to effectuate
the transactions contemplated hereby and to fulfill and cause to be fulfilled
the conditions to closing under this Agreement. Each party hereto, at the
reasonable request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
ARTICLE V
ESCROW; INDEMNIFICATION
5.1 Escrow Fund. As soon as practicable after the Closing, the Escrow
Shares shall be deposited in an escrow with the Bank of San Francisco (or other
institution selected by Buyer with the reasonable consent of Seller) as escrow
agent (the "Escrow Agent"), such deposit to constitute the "Escrow Fund" and to
be governed by the terms set forth herein and in the escrow agreement attached
hereto as Exhibit D (the "Escrow Agreement"). The Escrow Fund shall be available
to compensate Buyer pursuant to the indemnification obligations of Seller set
forth in this Agreement, with respect to Damages (as defined below) arising by
reason of Seller's failures under Section 5.2 hereafter. The Escrow Fund shall
act as partial security for Seller's indemnification obligations set forth in
this Agreement, but shall not serve as Buyer's exclusive remedy with respect
thereto. The Escrow Fund shall be released upon the later of (i) February 28,
1999 and (ii) completion of delivery of all Acquired Assets by Seller to Buyer
(the "Escrow Period"), as provided in and subject to the terms of the Escrow
Agreement.
5.2 Indemnification.
(a) Indemnification by Seller and Shareholders. Subject to the
limitations set forth in this Article V, Seller and Shareholders, jointly and
severally, will defend, indemnify, and
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hold harmless Buyer and its respective officers, directors, agents and
employees, and each person, if any, who controls or may control Buyer within the
meaning of the Securities Act (individually, an "Indemnified Person" and
collectively, "Indemnified Persons"), and shall reimburse Indemnified Persons,
for, from and against any and all losses (which shall include any diminution in
value), costs, damages, liabilities and expenses arising from claims, demands,
actions and causes of action, including, without limitation, reasonable legal
fees, (collectively, "Damages") arising out of (i) any misrepresentation or
breach of or default in connection with any of the representations, warranties,
covenants and agreements given or made by Seller or Shareholders in this
Agreement, or any exhibit or other schedule to this Agreement, or (ii)
transactions, events, acts or omissions of or by Seller or Shareholders relating
to the Seller's Business on or before the Closing.
(b) Indemnification by Buyer. Subject to the limitations set
forth in this Article V, Buyer shall defend, indemnify and hold harmless Seller
and the Shareholders, and shall reimburse Seller and the Shareholders, for, from
and against all Damages arising out of any misrepresentation or breach of or
default in connection with any of the representations, warranties, covenants or
agreements given or made by Buyer in this Agreement or any exhibit or other
schedule to this Agreement.
(c) Limitations. In no event shall the liability under
Sections 5.2(a) or (b) exceed the amount of the Purchase Price (such that the
Buyer Shares shall remain valued at the Closing Price); provided, however, to
the extent Buyer Shares are valued less than the Closing Price at the time in
which indemnification is sought, Buyer's remedy as to the amount of the Purchase
Price shall be limited to that amount which takes into account such value of the
Buyer Shares.
(d) Threshold. Buyer will not be entitled to make a claim
against Seller or the Shareholders under Section 5.2(a) and the Seller or
Shareholders will not be entitled to make a claim against the Buyer under
Section 5.2(b) unless and until the aggregate amount of indemnifiable losses
incurred exceeds Ten Thousand U.S. Dollars ($10,000). At such time, such
aggregate threshold amount shall be fully and completely subject to all prior
claims and, for purposes of Buyer's claims, payable from the Escrow Fund subject
to the terms and conditions of the Escrow Agreement.
(e) Indemnification Procedure Proceeding Against the Escrow
Fund. All claims for indemnification asserted against the Escrow Fund shall be
asserted and resolved as set forth in the Escrow Agreement.
ARTICLE VI
CONDITIONS TO CLOSING
6.1 Buyer's Conditions to Closing. The obligations of Buyer hereunder
are subject to fulfillment or satisfaction, on and as of the Closing, of each
the following conditions (any one or more of which may be waived by the Buyer):
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(a) Representations and Warranties. Each of the
representations and warranties Seller and Shareholders have set forth in Article
II above shall be true and correct in all material respects at and as of the
Closing Date.
(b) Performance. All of the terms, covenants and conditions of
this Agreement to be complied with and performed by the Seller and Shareholders
at or prior to the Closing shall have been duly complied with and performed in
all material respects.
(c) No Injunction. There shall be no effective injunction,
writ, preliminary restraining order or any order of any nature issued by a court
of competent jurisdiction restraining or prohibiting the consummation of the
transactions contemplated hereby.
(d) No Proceeding or Litigation. There shall not be
threatened, instituted or pending any suit, action, investigation, inquiry or
other proceeding against any party hereto by or before any governmental entity
requesting or looking toward an order, judgment or decree that (i) restrains or
prohibits the consummation of the transactions contemplated hereby, or (ii)
would have a material adverse effect on Buyer's ability to exercise control over
or manage the Acquired Assets or the Seller's Business after the Closing.
(e) Consents. All material written consents, approvals,
assignments, waivers or authorizations, including Seller Authorizations and
other consents scheduled hereto, that are required to be obtained as a result of
the transactions contemplated by this Agreement or for the continuation in full
force and effect of any of the Contracts shall have been obtained.
(f) Delivery of Deliverables. Seller and Shareholders shall
deliver or cause to be delivered each of the following deliverables, duly
executed and/or reasonably satisfactory in form and substance to Buyer, to Buyer
at the Closing:
(i) the Acquired Assets by making the Acquired Assets
available to Buyer;
(ii) a certificate signed by the President of the
Seller to the effect that each of the conditions specified above in Section
6.1(a)-(d) is satisfied in all material respects;
(iii) all required third party and Governmental
Entity consents in accordance with Section 6.1(e);
(iv) the executed opinion of Bulivant Houser Bailey,
P.C., as Seller's Counsel, dated as of the Closing Date and substantially in the
form attached as Exhibit E hereto;
(v) executed copies of the Bill of Sale, the
Employment Agreement, a Certification of Non Foreign Status completed by the
Seller, and the Escrow Agreement;
(vi) a certificate, signed by the Secretary of
Seller, certifying as to the truth and accuracy of and attaching copies of all
board of directors resolutions adopted in connection with the Acquisition; and
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(vii) completed Schedules to this Agreement, as
applicable to the Seller and/or Shareholders.
(g) Other Matters. All actions required to be taken by Sellers
and Shareholders in connection with consummation of the transactions
contemplated hereby and all certificates, instruments, and other documents
required to effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to Buyers.
6.2 Seller's Conditions to Closing. The obligations of Seller hereunder
are subject to fulfillment or satisfaction, on and as of the Closing, of each of
the following conditions (any one or more of which may be waived by Seller, but
only in a writing signed by Seller):
(a) Representations and Warranties. Each of the
representations and warranties Buyer has set forth in Article III above shall be
true and correct in all material respects at and as of the Closing Date.
(b) Performance. All of the terms, covenants and conditions of
this Agreement to be complied with and performed by the Buyer at or prior to the
Closing shall have been duly complied with and performed in all material
respects.
(c) No Injunction. There shall be no effective injunction,
writ, preliminary restraining order or any order of any nature issued by a court
of competent jurisdiction restraining or prohibiting the consummation of the
transactions contemplated hereby.
(d) No Proceeding or Litigation. There shall not be
threatened, instituted or pending any suit, action, investigation, inquiry or
other proceeding against any party hereto by or before any governmental entity
requesting or looking toward an order, judgment or decree that restrains or
prohibits the consummation of the transactions contemplated hereby.
(e) Delivery of Deliverables. Buyer shall deliver each of the
following Deliverables, duly executed and/or reasonably satisfactory in form and
substance to Buyer, to Buyer at the Closing:
(i) the Purchase Price in the form and manner
required under Section 1.3 above;
(ii) the executed opinion of Gray Cary Ware &
Freidenrich LLP, counsel to Buyer, in substantially the form attached hereto as
Exhibit F;
(iii) executed copies of the Escrow Agreement, the
Employment Agreement, and the resale certificate, in substantially the form
attached hereto as Exhibit G (the "Resale Certificate");
(iv) a certificate signed by an authorized officer of
the Buyer to the effect that each of the conditions specified above in Section
6.2(a)-(b) is satisfied in all material respects;
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(v) a certificate, signed by the Secretary of Buyer,
certifying as to the truth and accuracy of and attaching copies of all board of
directors resolutions adopted in connection with the Acquisition; and
(vi) completed Schedules to this Agreement, as
applicable to the Buyer.
(f) Other Matters. All actions required to be taken by Buyer
in connection with consummation of the transactions contemplated hereby and all
certificates, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form and
substance to Seller.
ARTICLE VII
GENERAL PROVISIONS
7.1 Survival at Closing. The representations, warranties and agreements
set forth in this Agreement shall survive the Closing, except the
representations, warranties and/or agreements set forth in Article II, Article
III and Article IV shall survive until the latest of (i) the second anniversary
of the Closing; (ii) with respect to Section 2.13 (Taxes) the expiration of all
applicable statutes of limitations; and (iii) final resolution of any pending
claim under Article VI (but only as to such pending claim or claims).
7.2 Specific Performance. The Parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
Moreover, each party's obligation under this Agreement is unique. If any party
should default in its obligations under this Agreement, the Parties each
acknowledge that it would be extremely impracticable to measure the resulting
damages. It is accordingly agreed that the Parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the U.S. or any
state having jurisdiction, this being in addition to any other remedy to which
they are entitled in law or in equity.
7.3 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the Parties
at the following address (or at such other address for a party as shall be
specified by like notice):
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(a) if to Seller or any of the Shareholders to:
Fibre Optics International, Inc.
309 S. Cloverdale Street
Bldg. D-2
Seattle, Washington 98108
Attention: Douglas S. Carver, President
Facsimile No.: (206) 762-3503
Telephone No.: (206) 762-2922
with a copy to:
Bulivant Houser Bailey, P.C.
1601 Fifth Avenue, Suite 2400
Seattle, Washington 98101-1618
Attention: Douglas A. Luetjen, Esq.
Facsimile No.: (206) 386-5130
Telephone No.: (206) 292-8930
(b) if to Buyer, to:
Fiberstars, Inc.
2883 Bayview Drive
Fremont, California 94538
Attention: David N. Ruckert, Chief Executive
Officer
Facsimile No.: (510) 490-0947
Telephone No.: (510) 490-0719
with a copy to:
Gray Cary Ware & Freidenrich
100 Congress Avenue, Suite 1440
Austin, Texas 78701
Attention: Paul E. Hurdlow, Esq.
Facsimile No.: (512) 457-7070
Telephone No.: (512) 457-7020
7.4 Interpretation. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning, or interpretation of this Agreement.
21
<PAGE>
7.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the Parties and delivered to the other Parties, it being understood that all
Parties need not sign the same counterpart.
7.6 Entire Agreement; Nonassignability; Parties in Interest. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits and the
Schedules, (a) constitute the entire agreement among the Parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the Parties with respect to the subject matter
hereof, (b) are not intended to confer upon any other person any, rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise except as otherwise specifically provided.
7.7 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the Parties hereto. The Parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
7.8 Remedies Cumulative. Except as otherwise provided herein, any and
all remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby, or by law or equity
upon such party, and the exercise by a party of any one remedy will not preclude
the exercise of any other remedy.
7.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
conflicts of law. Each of the Parties hereto irrevocably consents to the
exclusive jurisdiction of any court located within the State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
7.10 Rules of Construction. The Parties agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
22
<PAGE>
7.11 Amendments and Waivers. No amendment of any provisions of this
Agreement shall be valid unless it is in writing and signed by Buyer and Seller.
No waiver by Buyer or Seller of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any such prior or subsequent occurrence.
7.12 Expenses. Whether or not the Acquisition is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, the fees and expenses of its
advisers, accountants and legal counsel) shall be paid by the party incurring
such expense.
(The remainder of this page is intentionally left blank.)
23
<PAGE>
IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized,
all as of the date first written above.
FIBRE OPTICS INTERNATIONAL, INC.,
a Washington corporation
By: /s/ DOUGLAS S. CARVER
---------------------------------------------
Douglas S. Carver
President
FIBERSTARS, INC.,
a California corporation
By: /s/ DAVID N. RUCKERT
---------------------------------------------
David N. Ruckert
Chief Executive Officer
SHAREHOLDERS:
---------------------------------------------
/s/ DOUGLAS S. CARVER
DOUGLAS S. CARVER
---------------------------------------------
/s/ DAVE M. CARVER
DAVE M. CARVER
[SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Fiberstars, Inc. on Form S-8 (File No. 33-85664) of our reports dated February
4, 1999, on our audits of the consolidated financial statements and financial
statement schedules of Fiberstars, Inc. as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, which report
is included in this Annual Report on Form 10-KSB.
PricewaterhouseCoopers, LLP
San Jose, California
February 4, 1999
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<FISCAL-YEAR-END> DEC-31-1998
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