January 14, 2000
Dear Shareholder:
I cordially invite you to attend a special meeting (the "Special Meeting")
of the shareholders of Fiberstars, Inc. ("Fiberstars") to be held at Fiberstars'
corporate offices, 44259 Nobel Drive, Fremont, California, 94538, on Friday,
January 28, 2000, at 2:00 p.m., local time. At the Special Meeting, you will be
asked to vote on a proposal to approve the issuance of up to an aggregate amount
of 1,000,000 shares of common stock, par value $0.0001 per share, of Fiberstars
(the "Fiberstars Common Stock") upon exercise or exchange of certain warrants
granted pursuant to the Asset Purchase Agreement, dated on or about January 14,
2000 (the "Purchase Agreement"), among Fiberstars and Unison Fiber Optic
Lighting Systems, LLC ("Unison"), a Delaware limited liability company and
wholly-owned subsidiary of Advanced Lighting Technologies, Inc., a significant
shareholder of Fiberstars.
Under the Purchase Agreement, Fiberstars will acquire certain assets and
assume certain liabilities of Unison (the "Acquisition"), for consideration
consisting of four warrants to purchase up to an aggregate of 1,000,000 shares
of Fiberstars Common Stock at an exercise price of $0.01 per share. The warrants
are exercisable only upon the occurrence of certain events related to
significant increases in the trading price of Fiberstars Common Stock and sales
of solid core fiber based upon the technology acquired in the Acquisition.
Unison may elect at any time while a warrant remains outstanding to cancel such
warrant in exchange for Fiberstars issuing to Unison a fixed number of shares of
Fiberstars Common Stock.
The closing of the Acquisition is subject to certain conditions, including
approval by Fiberstars' shareholders of the issuance of shares of Fiberstars
Common Stock as described above (the "Share Issuances"). I urge you to read
carefully the detailed information that follows this letter regarding the
Purchase Agreement.
Fiberstars' Board of Directors (the "Fiberstars Board"), excluding
directors employed by ADLT (such disinterested directors to be referred to
herein as the "Disinterested Board"), have carefully reviewed and considered the
terms of the Purchase Agreement and have determined that the Purchase Agreement
and the transactions contemplated thereby, including the Acquisition and the
Share Issuances (collectively, the "Transactions"), are in the best interests of
Fiberstars and its shareholders. Accordingly, the Disinterested Board has
unanimously approved the Transactions and recommends that you vote in favor of
the Share Issuances at the Special Meeting.
Your participation in the Special Meeting, in person or by proxy, is
especially important, because the item to be voted on is very important to
Fiberstars. Whether or not you plan to attend the Special Meeting in person, on
behalf of Fiberstars and your fellow shareholders, I urge you to complete, date,
sign and promptly return the enclosed proxy card in the enclosed prepaid
envelope to ensure that your shares will be represented at the Special Meeting.
On behalf of the Fiberstars Board, I thank you for your support and urge
you to vote FOR approval of the Share Issuances.
Very truly yours,
/s/ David N. Ruckert
-------------------------------
David N. Ruckert
Chief Executive Officer
<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. __)
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2)
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
FIBERSTARS, INC.
----------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
----------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS ....................................... 3
WHO CAN HELP ANSWER YOUR QUESTIONS ................................................. 3
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS ......................... 3
SUMMARY ............................................................................ 4
SPECIAL FACTORS TO CONSIDER WHEN DECIDING HOW TO VOTE .............................. 6
Dilution to Existing Shareholders; Impact on Market Value of Fiberstars Common Stock 6
Consequences if Share Issuances are not Approved ................................... 6
THE SPECIAL MEETING ................................................................ 6
Date, Time and Place; Purpose ...................................................... 6
Record Date ........................................................................ 6
Solicitation of Proxies ............................................................ 6
Required Vote; Quorum .............................................................. 6
THE TRANSACTIONS ................................................................... 7
Background of the Transactions ..................................................... 7
Recommendation of the Disinterested Board; Fiberstars' Reasons for the Transactions 8
Unison's Reasons for the Transactions .............................................. 9
Accounting Treatment ............................................................... 10
Tax Treatment ...................................................................... 10
No Appraisal or Preemptive Rights .................................................. 10
MATERIAL PROVISIONS OF THE PURCHASE AGREEMENT ...................................... 11
Explanatory Description ............................................................ 11
Representations and Warranties ..................................................... 11
Covenants .......................................................................... 12
Conditions ......................................................................... 12
Termination ........................................................................ 12
MATERIAL CONTRACTS RELATED TO THE TRANSACTIONS ..................................... 12
Development Agreement .............................................................. 12
Cross-Licensing Agreement .......................................................... 13
Mutual Supply Agreement ............................................................ 13
FINANCIAL AND OTHER INFORMATION OF UNISON .......................................... 14
Description of Business ............................................................ 14
Description of Property ............................................................ 14
Financial Statements ............................................................... 14
Managements Discussion and Analysis or Plan of Operation ........................... 14
FINANCIAL AND OTHER INFORMATION OF FIBERSTARS ...................................... 16
UNAUDITED SELECTED PRO FORMA FINANCIAL DATA ........................................ 16
INFORMATION ABOUT THE COMPANIES .................................................... 23
Fiberstars ......................................................................... 23
<PAGE>
Unison ............................................................................. 23
MARKET PRICES OF FIBERSTARS COMMON STOCK AND DIVIDEND DATA ......................... 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF FIBERSTARS .......................................................... 24
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON ............................ 25
FUTURE SHAREHOLDER PROPOSALS ....................................................... 25
WHERE YOU CAN FIND MORE INFORMATION ................................................ 25
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE .................................. 26
ACCOUNTANTS ........................................................................ 26
OTHER MATTERS ...................................................................... 26
APPENDIX A--Asset Purchase Agreement, dated on or about January 14, 2000.
APPENDIX B--Unison Fiber Optic Lighting Systems, LLC Consolidated Financial Statements
for the year ended June 30, 1999 and the six months ended June 30, 1998.
APPENDIX C--Fiberstars, Inc. 10-KSB for the period ending December 31, 1998.
APPENDIX D--Fiberstars, Inc.10-QSB for the period ending September 30, 1999.
APPENDIX E--Proxy
</TABLE>
<PAGE>
FIBERSTARS, INC.
44259 Nobel Drive
Fremont, California 94538
Notice of Special Meeting of Shareholders
To be held January 28, 2000
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "Special
Meeting") of Fiberstars, Inc., a California corporation ("Fiberstars"), will be
held at 44259 Nobel Drive, Fremont, California, 94538, on Friday, January 28,
2000, at 2:00 p.m., local time, or at any adjournment or postponement thereof,
for the following purposes:
(1) To consider and vote on a proposal to approve the issuance of up to an
aggregate of 1,000,000 shares of Fiberstars common stock (the "Share
Issuances") upon the exercise or exchange of certain warrants (the
"Warrants") granted pursuant to an Asset Purchase Agreement (the
"Purchase Agreement"), dated on or about January 14, 2000, among
Fiberstars, and Unison Fiber Optic Lighting Systems, LLC ("Unison") a
Delaware limited liability company and wholly-owned subsidiary of
Advanced Lighting Technologies, Inc., a significant shareholder of
Fiberstars, under which Fiberstars will acquire certain assets and
assume certain liabilities of Unison (the "Acquisition") for
consideration consisting of the Warrants.
(2) To act on any other matters as may arise relating to the conduct of the
Special Meeting and any adjournment or postponement thereof.
THE DISINTERESTED BOARD OF FIBERSTARS HAS UNANIMOUSLY APPROVED THE
PROPOSAL DESCRIBED ABOVE AND RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL AT THE
SPECIAL MEETING.
Shareholders of record at the close of business on November 29, 1999 are
entitled to receive notice of and to vote at the Special Meeting or any
adjournment or postponement thereof. A complete list of shareholders entitled to
vote will be available for inspection at the Special Meeting and for a period of
ten days prior to the Special Meeting at Fiberstars' corporate offices at 44259
Nobel Drive, Fremont, California 94538, during ordinary business hours.
The accompanying Proxy Statement describes the Purchase Agreement and the
proposed Acquisition and Share Issuances. To ensure that your vote will be
counted, please complete, date and sign the enclosed proxy card and return it
promptly in the enclosed postage-paid envelope, whether or not you plan to
attend the Special Meeting. You may revoke your proxy in the manner described in
the accompanying Proxy Statement at any time before the vote at the Special
Meeting. Executed proxies with no instructions indicated thereon will be voted
"FOR" approval of the Share Issuances.
Fremont, California
January 14, 2000
FOR THE BOARD OF DIRECTORS
/s/ DAVID N. RUCKERT
-------------------------------------
DAVID N. RUCKERT
Chief Executive Officer
Your vote is important. To vote your shares, please mark, date, sign and return
the enclosed proxy card as soon as possible in the enclosed postage-prepaid
envelope, whether or not you plan to attend the Special Meeting. If you attend
the meeting, you may choose to vote in person even if you have previously sent
in your proxy card.
<PAGE>
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
FIBERSTARS, INC.
44259 Nobel Drive
Fremont, California 94538
INFORMATION CONCERNING SOLICITATION AND VOTING OF PROXIES
This Proxy Statement is being furnished to holders of common stock, par
value $0.0001 per share (the "Fiberstars Common Stock"), of Fiberstars, Inc., a
California corporation ("Fiberstars"), in connection with the solicitation of
proxies by and on behalf of Fiberstars' Board of Directors (the "Fiberstars
Board") for use at a special meeting of shareholders to be held at Fiberstars'
corporate offices, 44259 Nobel Drive, Fremont, California, 94538, on Friday,
January 28, 2000, at 2:00 p.m., local time, and at any adjournment or
postponement thereof (the "Special Meeting"). This Proxy Statement and the
accompanying Notice and Proxy Card are first being mailed to holders of
Fiberstars Common Stock entitled to notice of, and to vote at, the Special
Meeting on or about January 14, 2000.
At the Special Meeting, holders of Fiberstars Common Stock will be asked to
consider and vote on a proposal to approve the issuance of up to an aggregate
amount of 1,000,000 shares of Fiberstars Common Stock (the "Share Issuances")
upon the exercise or exchange of certain warrants granted pursuant to the Asset
Purchase Agreement, dated on or about January 14, 2000 (the "Purchase
Agreement"), among Fiberstars and Unison Fiber Optic Lighting Systems, LLC
("Unison"), a Delaware limited liability company and wholly owned subsidiary of
Advanced Lighting Technologies, Inc. ("ADLT"), a significant shareholder of
Fiberstars. A copy of the Purchase Agreement is attached to this Proxy Statement
as Appendix A.
Pursuant to the Purchase Agreement, on January 28, 2000 (the "Closing
Date") Fiberstars will acquire certain assets (the "Assets") of Unison related
to the fiber optic lighting portion of Unison's business (the "Business") and
will assume certain liabilities of Unison that arise after the Closing Date with
respect to the Business. The acquisition of the Assets and assumption of
liabilities shall be referred to as the "Acquisition". In exchange for the
Assets, Unison will receive consideration consisting of four warrants (the
"Warrants", and each a "Warrant") to purchase up to an aggregate of 1,000,000
shares of Fiberstars Common Stock at an exercise price of $0.01 per share. Each
Warrant when exercisable will allow Unison to purchase up to 250,000 shares of
Fiberstars Common Stock. No warrant is exercisable, generally, until Fiberstars
has recorded sales, in accordance with generally accepted accounting principles
("GAAP"), to third party customers, of at least 1,000 CPC units (i.e., a
lamp/optics combination using a "compound parabolic collector", or "CPC", in a
fiber optic illuminator). Additionally, each Warrant contains individual
exercise conditions based upon significant increases in the trading price of
Fiberstars' Common Stock and certain additional sales requirements as follows:
Warrant No. 1 is exercisable only when the average closing price of Fiberstars
Common Stock over any thirty (30) calendar day period (the "Average Price") is
equal to six dollars ($6.00) and Fiberstars has Sales (defined as a sale by
Fiberstars to a third party customer, in accordance with GAAP) of at least 1,000
ft. of Solid Core Fiber Cable (defined as extruded solid core "Optiflex" fiber
cable, advanced "Cast Fiber", advanced "Cable-Lite", or similar successor solid
core fiber cable products); Warrant No. 2 is exercisable only when the Average
Price equals eight dollars ($8.00) and Fiberstars has Sales of 10,000 ft. of
Solid Core Fiber Cable; Warrant No. 3 is exercisable only when the Average Price
equals ten dollars ($10.00) and Fiberstars has Sales of 50,000 ft. of Solid Core
Fiber Cable; and Warrant No. 4 is exercisable only when the Average Price equals
twelve dollars ($12.00) and Fiberstars has Sales of 100,000 ft. of Solid Core
Fiber Cable. In the event of a merger, consolidation or similar event involving
Fiberstars, the Warrants become immediately exercisable.
Unison may elect at any time while a Warrant remains outstanding, even if
the Warrant is not yet exercisable, to cancel a particular Warrant in exchange
for Fiberstars issuing to Unison a fixed number of shares of Fiberstars Common
Stock. Warrant No. 1 may be cancelled and exchanged for 151,250 shares of
Fiberstars Common Stock, Warrant No. 2 may be cancelled and exchanged for
119,375
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shares of Fiberstars Common Stock, Warrant No. 3 may be cancelled and exchanged
for 95,625 shares of Fiberstars Common Stock and Warrant No. 4 may be cancelled
and exchanged for 78,750 shares of Fiberstars Common Stock.
The closing of the transactions (the "Closing") is subject to certain
conditions, including approval by Fiberstars' shareholders of the Share
Issuances. Under the rules of the National Association of Securities Dealers
("NASD") governing corporations with securities listed on the Nasdaq National
Market, shareholder approval by a majority of the total votes cast in person or
by proxy at the Special Meeting is required prior to the issuance of the
Fiberstars Common Stock pursuant to the Warrants because: (i) ADLT has a 26%
interest in Fiberstars as well as a 100% interest in Unison and the issuance of
Fiberstars Common Stock upon exercise of the Warrants could result in an
increase in the number of outstanding shares of Fiberstars Common Stock of more
than 5%; (ii) the Fiberstars Common Stock issued upon exercise of the Warrants
could have upon issuance voting power equal to or in excess of 20% of the voting
power outstanding before such issuance; and (iii) the issuance of Fiberstars
Common Stock upon exercise of the Warrants will be at a price less than the
market value of the stock and could equal 20% or more of the Fiberstars Common
Stock outstanding before the issuance (the "NASD Vote Requirement").
Based on their evaluation of the Purchase Agreement and the transactions
contemplated thereby, including the Acquisition and the Share Issuances
(collectively, the "Transactions"), the Fiberstars Board, excluding directors
employed by ADLT (such disinterested directors to be referred to herein as the
"Disinterested Board"), has unanimously approved the Transactions and recommends
that you vote FOR approval of the Share Issuances at the Special Meeting.
THE TRANSACTIONS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION ("SEC") NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS
OR MERITS OF THE TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The date of this Proxy Statement is January 14, 2000.
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
Q1: WHAT SHOULD I DO NOW?
A1: You should vote your shares by completing, signing and dating your proxy
card and mailing it to us in the enclosed return envelope. You may also
vote by attending the Special Meeting and voting in person.
Q2: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A2: You may change your vote by:
--sending a written notice to the Secretary of Fiberstars prior to the
Special Meeting;
--signing another proxy card and returning it by mail prior to the Special
Meeting; or
--attending the Special Meeting and voting in person.
Q3: WHEN DO YOU EXPECT THE TRANSACTIONS TO BE COMPLETED?
A3: We are working to complete the Transactions as soon as possible. We hope to
complete the Transactions, excluding the Share Issuances, on the day of the
Special Meeting or the first business day immediately following the Special
Meeting. The Share Issuances will only occur upon the exercise or exchange
of the Warrants by Unison.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have additional questions about the transactions you should contact:
FIBERSTARS, INC.
44259 Nobel Drive
Fremont, California 94538
Attn: Robert A. Connors
If you would like additional copies of this Proxy Statement, or if you have
questions with respect to voting your shares, you should contact:
Chase Mellon Consulting Services
450 West 33rd Street--14th Floor
New York, NY 10001
Attn: Peter Tomaszewski
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements, including,
without limitation, statements concerning possible or assumed future results of
operations of Fiberstars set forth under "The Transactions--Background of the
Transactions," "--Recommendation of the Board of Directors; Fiberstars' Reasons
for the Transactions" and "--Unison's Reasons for the Transactions";
"Description of the Companies--Fiberstars" and "--Unison"; and "Management's
Discussion and Analysis or Plan of Operation of Fiberstars" and "Management's
Discussion and Analysis or Plan of Operation of Unison", and including those
statements preceded by, followed by or that include the words "intends,"
"believes," "expects," "anticipates" or similar expressions. These statements
constitute forward-looking statements for purposes of the safe harbor contained
in the Private Securities Litigation Reform Act of 1995. We have based these
forward-looking statements on our current expectations and projections about
future events. 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 herein. 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 proxy statement and in other documents we
file from time to time with the SEC.
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SUMMARY
This summary highlights selected information from this Proxy Statement and
may not contain all of the information that is important to you. To understand
the Transactions fully and for a more complete description of the legal terms of
the Transactions, you should read carefully this entire document. See
"CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS." Unless otherwise
indicated, all dollar amounts herein are in U.S. dollars.
The Companies
Fiberstars, Inc.
44259 Nobel Drive
Fremont, California 94538
(510) 490-0719
Fiberstars develops and markets fiber optic lighting systems, which are
used in a variety of commercial and residential applications and is the world' s
leading supplier in this emerging market. Fiberstar's products 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. Fiberstars designs, develops and manufactures its fiber optic
lighting systems and distributes its products worldwide, primarily through
independent sales representatives, distributors and swimming pool builders. See
"Information about the Companies--Fiberstars."
Unison Fiber Optic Lighting Systems, LLC
32000 Aurora Road
Solon, Ohio 44139
(440) 519-1033
Unison is a designer, manufacturer and marketer of fiber optic lighting
systems and system components, operating primarily in the United States. Unison
is a Delaware limited liability company formed in January 1998 as a joint
venture of Rohm and Haas Company and ADLT. On or about January 14, 2000, Unison
became a wholly-owned subsidiary of ADLT. See "Information about the
Companies--Unison Fiber Optic Lighting Systems."
The Special Meeting
Date, Time and Place; Purpose
A Special Meeting of Fiberstars' shareholders will be held at Fiberstars'
corporate offices, 44259 Nobel Drive, Fremont, California, 94538, on Friday,
January 28, 2000, at 2:00 p.m., local time. At the Special Meeting, Fiberstars
shareholders will be asked to consider and vote upon a proposal to approve the
Share Issuances and to transact such other matters as may arise relating to the
conduct of the Special Meeting. See "The Special Meeting--Date, Time and Place;
Purpose."
Record Date
The close of business on November 29, 1999 is the record date for the
Special Meeting (the "Record Date"). Only Fiberstars shareholders of record on
the Record Date are entitled to receive notice of and to vote at the Special
Meeting. See "The Special Meeting--Record Date."
Required Vote; Quorum
Approval by a majority of the total votes cast in person or by proxy at the
Special Meeting is required to satisfy the NASD Vote Requirement. Each share of
Fiberstars Common Stock outstanding on the Record Date is entitled to one vote.
There are no other voting securities of Fiberstars outstanding. A majority of
the shares of Fiberstars Common Stock which are issued and outstanding and
entitled to vote, present in person or represented by proxy at the Special
Meeting, shall constitute a quorum. See "The Special Meeting--Required Vote;
Quorum."
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The Transactions
On or about January 14, 2000, Fiberstars and Unison entered into the
Purchase Agreement. Under the Purchase Agreement, on the Closing Date Fiberstars
will acquire the Assets of Unison necessary to the Business and will assume
certain of the liabilities of Unison with respect to the Business that arise
after the Closing Date. In exchange for the Assets, Unison will receive
consideration consisting of the Warrants. Each Warrant when exercisable will
allow Unison to purchase up to 250,000 shares of Fiberstars Common Stock. No
Warrant is exercisable until Fiberstars has achieved a general sales
requirement. Additionally, each Warrant contains individual exercise conditions
based upon significant increases in the trading price of Fiberstars' Common
Stock and certain additional sales requirements. In the event of a merger,
consolidation or similar event involving Fiberstars, the Warrants become
immediately exercisable. See "Material Provisions of the Purchase
Agreement--Explanatory Description."
Unison may elect at any time while a Warrant remains outstanding, even if
the Warrant is not yet exercisable, to cancel a particular Warrant in exchange
for Fiberstars issuing to Unison a fixed number of shares of Fiberstars Common
Stock. See "Material Provisions of the Purchase Agreement--Explanatory
Description."
Shareholder Approval Requirements
The Closing is subject to certain conditions, including approval by
Fiberstars shareholders of the Share Issuances. Under the rules of the NASD
which govern corporations with securities listed on the Nasdaq National Market,
approval is required by a majority of the total votes cast in person or by proxy
at the Special Meeting of the issuance of Fiberstars Common Stock pursuant to
the Warrants prior to their issuance. "The Special Meeting--Required Vote;
Quorum."
Background of the Transactions; Reasons for the Transactions
For a description of the events leading up to the execution of the
Purchase Agreement and the factors considered by the Fiberstars Board in
evaluating and approving the Transactions, see "The Transactions--Background of
the Transactions" and "--Recommendation of the Board of Directors; Fiberstars'
Reasons for the Transactions."
Recommendation of the Disinterested Board
The Disinterested Board has determined that the Transactions are in the
best interests of Fiberstars and its shareholders. Accordingly, the
Disinterested Board has approved the Transactions and recommends that the
Fiberstars shareholders vote FOR approval of the Share Issuances. See "The
Transactions--Recommendation of the Board of Directors; Fiberstars' Reasons for
the Transactions."
Tax Treatment
For U.S. federal income tax purposes, no income, gain or loss will be
recognized by Fiberstars or the Fiberstars shareholders as a result of the
Transactions. See "The Transactions--Tax Treatment."
Accounting Treatment
The Transactions will be accounted for by Fiberstars under the "purchase"
method of accounting in accordance with GAAP. See "The Transactions--Accounting
Treatment."
No Appraisal or Preemptive Rights
Holders of Fiberstars Common Stock are not entitled under California law to
seek appraisal of their shares in connection with the Transactions. In addition,
holders of Fiberstars Common Stock are not entitled to preemptive rights with
respect to the Share Issuances.
5
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SPECIAL FACTORS TO CONSIDER WHEN DECIDING HOW TO VOTE
Dilution to Existing Shareholders; Impact on Market Value of Fiberstars Common
Stock
The issuance of the new shares of Fiberstars Common Stock to Unison upon
exercise of the Warrants granted pursuant to the Purchase Agreement will cause
dilution of the voting power of current Fiberstars shareholders. In addition,
the issuance of such shares of Fiberstars Common Stock to Unison could cause a
decline in the market value of the Fiberstars Common Stock because of the
increased concentration of ownership. Specifically, it is possible Fiberstars
may not be as attractive an acquisition target to a potential buyer other than
ADLT as a result of the increased direct and indirect ownership of ADLT
following the Acquisition.
Consequences if Share Issuances are not Approved
Satisfaction of the NASD Vote Requirement is a condition precedent to the
consummation of the Transactions. If this requirement is not satisfied, then
Fiberstars has no obligation to complete the transactions contemplated by the
Purchase Agreement.
Risk regarding Intellectual Property of Unison
A third-party's European patent may affect one of the patents Fiberstars
will aquire from Unison in the Acquisition. If the European patent is found to
be enforced and prior art, Fiberstars could be unable to sell some of Unison's
fiber optic cable products in Europe without a license to the technology
encompassed by the European patent. Additionally, Unison licenses technology
from a competitor of Fiberstars. Under the terms of the license, Unison may be
unable to transfer the license to Fiberstars. In that event, one of Unison's
fiber optic cable products may have to be redesigned by Fiberstars before it can
be sold commercially.
THE SPECIAL MEETING
Date, Time and Place; Purpose
A Special Meeting of Fiberstars shareholders will be held at 2:00 p.m.,
local time, on January 28, 2000, 44259 Nobel Drive, Fremont, California, 94538.
At the Special Meeting, Fiberstars' shareholders of record will be asked to
consider and vote upon a proposal to approve the Share Issuances and to transact
such other matters as may arise relating to the conduct of the Special Meeting
and any postponement or adjournment thereof.
Record Date
The close of business on November 29, 1999 has been fixed as the Record
Date for the determination of Fiberstars shareholders entitled to notice of, and
to vote at, the Special Meeting. Only Fiberstars shareholders of record at the
close of business on the Record Date are entitled to receive notice of and to
vote at the Special Meeting. As of the Record Date, there were 3,987,286 shares
of Fiberstars Common Stock outstanding. As of the Record Date, ADLT and the
directors and executive officers of Fiberstars and their affiliates owned
approximately 26.0% and 43.0%, respectively, of the outstanding shares of
Fiberstars Common Stock.
Solicitation of Proxies
Fiberstars will bear the cost of the Special Meeting and soliciting proxies
therefor. Chase Mellon Consulting Services will assist in the solicitation of
proxies by Fiberstars for a base fee of $5,500 plus reasonable out-of-pocket
expenses. Additionally, officers and other Fiberstars employees may solicit
proxies by telephone, telegram, telefax, other electronic means or in person.
Such officers and employees will not receive any fees for such solicitation.
Required Vote; Quorum
Approval by a majority of the total votes cast in person or by proxy at the
Special Meeting is required to satisfy the NASD Vote Requirement. Each share of
Fiberstars Common Stock outstanding on the Record Date is entitled to one vote.
There are no other voting securities of Fiberstars outstanding. A majority of
the shares of Fiberstars Common Stock which are issued and outstanding and
entitled to vote, present, in person or represented by proxy, at the Special
Meeting will constitute a quorum. For purposes of the quorum and the discussion
below regarding the vote necessary to take shareholder action, shareholders of
record who are present at the meeting in person or by proxy and who abstain,
including brokers holding customers' shares of record who cause abstentions to
be recorded at the meeting, are considered shareholders who are present and
entitled to vote and they count toward the quorum.
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Brokers holding shares of record for customers generally are not entitled
to vote on certain matters unless they receive voting instructions from their
customers. As used herein, "uninstructed shares" means shares held by a broker
who has not received instructions from its customers on such matters and the
broker has so notified Fiberstars on a proxy form in accordance with industry
practice or has otherwise advised Fiberstars that it lacks voting authority. As
used herein, "broker non-votes" means the votes that could have been cast on the
matter in question by brokers with respect to uninstructed shares if the brokers
had received their customers' instructions. To be adopted, the Share Issuances
must receive the affirmative vote of the majority of the votes cast at the
Special Meeting. Uninstructed shares are not entitled to vote on this matter,
and therefore broker non-votes do not affect the outcome. Abstentions have the
effect of negative votes.
THE DISINTERESTED BOARD RECOMMENDS THAT FIBERSTARS SHAREHOLDERS VOTE FOR
APPROVAL OF THE SHARE ISSUANCES.
THE TRANSACTIONS
Background of the Transactions
Fiberstars' strategy to capitalize upon the growth potential in the fiber
optic lighting market calls for development of fiber optic products which are
comparable to certain types of electric lights in performance and price.
Beginning in 1996, the management of Fiberstars ("Management") and the
Fiberstars Board began discussing the desirability of a strategic relationship
with a lamp and power supply company to help Fiberstars achieve this goal.
From time to time throughout fiscal 1996, Management had discussions with
various lamp and power supply companies. The most promising discussions were
with ADLT, which has a number of divisions which manufacture many of the
components of a fiber optic system, including metal halide lamps, power
supplies, fixtures and optical coatings. During these meetings ADLT informed
Management that part of ADLT's strategic plan was to participate in the growth
of the fiber optic lighting market, and, to that end, ADLT determined that it
was in its best interest to purchase an equity position in Fiberstars.
On July 30, 1997, ADLT purchased all the shares of Fiberstars Common Stock
held by Belfield Services, Inc., a venture capital firm ("Belfield"), which
amounted to a 19% equity interest in Fiberstars. At that time, the Fiberstars
Board requested that ADLT sign a standstill agreement, which provided among
other things that ADLT could not hold more than 30% of the Fiberstars Common
Stock outstanding without the consent of the Fiberstars Board. In September of
1997, Wayne Hellman, Chairman and CEO of ADLT, joined the Fiberstars Board.
In February of 1998, ADLT purchased all of the shares of Fiberstars Common
Stock held by a second venture capital firm affiliated with Belfield bringing
ADLT's equity position in Fiberstars to 29%. At present, ADLT's equity position
in Fiberstars is 26% and it has two representatives on the nine member
Fiberstars Board, Mr. Hellman and Alan Ruud, President and COO of ADLT. (Mr.
Ruud joined the Fiberstars Board in July of 1999).
In furtherance of ADLT's strategic plan to penetrate the fiber optic
lighting market, ADLT initiated discussions with Management during the first
quarter of 1998 regarding the acquisition of Fiberstars by Unison, at the time a
joint venture of ADLT and Rohm and Haas, Inc. ("RH"). These discussions did not
materialize into a definitive agreement between the parties; however, the
interest in a strategic combination remained and the parties continued
discussions from time to time throughout 1998.
In December 1998, Fiberstars entered into a letter of intent with Unison to
develop a new lighting system for the Fiberstars swimming pool market which was
lower in cost and higher in light output than Fiberstars current systems.
Pursuant to this relationship, Unison disclosed to Fiberstars in mid-1999 its
work on compound parabolic collectors ("CPCs"), which marry optics to the core
of a
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metal halide lamp to deliver higher output into fiber at a lower cost.
Management recognized that this technology had application in Fiberstars'
commercial downlight market as well as in the swimming pool sector. Management
informed the Fiberstars Board of Unison's technology and at this time the
Fiberstars Board formed a committee (the "Committee"), consisting of Fiberstars'
Chairman John B. Stuppin, Fiberstars' CEO David N. Ruckert and Fiberstars Board
members B.J. Garet and Jon Merriman, to review and negotiate a possible
strategic combination of Unison by Fiberstars. In the third quarter of 1999, the
Committee instructed Management to begin discussions with Unison regarding the
acquisition of Unison by Fiberstars. The Committee also authorized Management to
commence a due diligence review of Unison to evaluate the merits of acquiring
Unison. To assist in its due diligence and evaluation of Unison, Fiberstars
engaged Gray Cary Ware & Freidenrich LLP to act as its legal advisor and
PricewaterhouseCoopers to perform certain due diligence with respect to Unison's
financial and accounting information.
On July 23, 1999, Management made a presentation to the Fiberstars Board
regarding the acquisition of the assets of Unison. Messrs. Hellman and Ruud
excused themselves from the meeting prior to the presentation because of their
relationship with ADLT. The presentation outlined a proposed transaction whereby
Fiberstars would agree to buy selected assets of Unison, including technology
(owned and licensed) and specified purchasing rights to ADLT and Rohm & Haas
products. Management indicated that the proposed transaction to combine the
leading market position of Fiberstars with the technology and low cost supply
agreements of Unison would help Fiberstars achieve its strategic goal of
providing a fiber optic lighting system with the light output and low cost
pricing of certain electric downlights.
Negotiations continued after the July 23, 1999 Fiberstars Board meeting.
Management informed the Committee that in conjunction with the purchase of
assets Fiberstars would be asked to hire 15 key Unison employees. Furthermore,
Unison would agree to provide Fiberstars with a $2 million development agreement
for completing development work on the CPC technology as well as certain fiber
development projects.
On October 5, 1999, Fiberstars Board held a meeting to review the terms and
conditions of Fiberstars' acquisition of Unison. Messrs. Hellman and Ruud
excused themselves from the meeting prior to the presentation because of their
relationship with ADLT. Fiberstars' legal advisor reviewed the terms and
conditions of the proposed transaction set forth in a letter of intent to be
delivered to Unison and the legal duties and responsibilities of the
Disinterested Board in connection with the proposed transaction. Management
presented an analysis of the financial terms of the proposed transaction,
including the financial data and analyses used in evaluating the proposed
transaction. Following substantial discussion, the Disinterested Board
unanimously determined that the Acquisition and the related Share Issuances were
in the best interests of Fiberstars and its shareholders. The Disinterested
Board approved these matters, subject to negotiation of the final terms of the
Purchase Agreement and authorized its officers to take other steps necessary to
effect the Transactions.
On October 14, 1999, Fiberstars and Unison signed a letter of intent which
outlined the terms and conditions of the Acquisition. Additionally in October
1999, ADLT disclosed that it was in negotiations to purchase all of RH's
membership interest in Unison. In connection with these events, Management and
ADLT began discussions to modify the standstill agreement between Fiberstars and
ADLT to incorporate the terms of the Acquisition providing a ceiling of 40% of
Fiberstars Common Stock.
Between October 14, 1999 and January 14, 2000, Fiberstars and Unison
representatives negotiated the final terms of the Purchase Agreement. On or
about January 14, 2000, the parties reached agreement on the final terms of the
Purchase Agreement and executed the Purchase Agreement. On or about January 14,
2000, ADLT purchased all of RH's membership interest in Unison and Unison became
a wholly owned subsidiary of ADLT.
Recommendation of the Disinterested Board; Fiberstars Reasons for the
Transactions
THE DISINTERESTED BOARD BELIEVES THAT THE TRANSACTIONS ARE IN THE BEST
INTERESTS OF FIBERSTARS AND ITS SHAREHOLDERS. THE DISINTERESTED
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BOARD UNANIMOUSLY APPROVED THE TRANSACTIONS, INCLUDING THE AUTHORIZATION OF THE
SHARE ISSUANCES AND UNANIMOUSLY RECOMMENDS TO ITS SHAREHOLDERS THAT THEY VOTE
FOR THE AUTHORIZATION OF THE SHARE ISSUANCES.
In reaching its decision to approve and recommend the authorization of the
Share Issuances, the Disinterested Board considered a number of factors,
including those described below:
1. The key fiber optic lighting technologies and other assets
to be acquired for lamp and fiber development and production including:
(i) 8 patents; (ii) 4 pending patent applications and numerous
in-process patent applications (including the rights to the Optiflex
fiber and manufacturing processes developed by RH and the patent
application for CPC and other optical technologies developed by Unison
and/or ADLT); (iii) trademarks; and (iv) intellectual capital from key
employees who will be joining Fiberstars.
2. Fiberstars believes the Unison operations acquired by
Fiberstars will be fully funded in the first year through: (i) the
development agreement which provides $2,000,000 of funding for lamp and
fiber development over a 15 month period; (ii) sales from existing
Unison products; and (iii) cost savings achieved through supply
agreements in place with ADLT.
3. The access to favorable purchase and license terms for key
fiber optic lighting components from the ADLT group of companies,
including a supply agreement which provides Fiberstars with
inter-company pricing on any ADLT/RH products or materials purchased
and a cross-licensing agreement which provides Fiberstars with
exclusive rights to ADLT technologies for fiber optic lighting markets.
4. The strengthening of the Company's management team in
technology and marketing, including the addition of John Davenport,
former General Manager of General Electric Lighting, Jeff McDonald,
formerly in sales at General Electric Lighting, and Roger Buelow, an
experienced lamp designer also formerly of General Electric Lighting.
5. The acquisition of $600,000 in tangible assets needed for
continuing research and development work on lamps and fiber as well as
favorable terms on acquiring fiber production equipment from RH once
the Optiflex fiber product is ready for production.
6. The potential for development of lower cost fiber optic
lighting products which will better compete with traditional lighting
sources.
7. The terms and conditions of the Asset Purchase Agreement.
The Disinterested Board also considered certain countervailing factors in
its deliberations concerning the Transactions, including:
1. The dilutive effects of the issuance of shares upon the
exercise of the warrants.
2. The problems and costs associated with the integration of
the acquired operations and people.
3. The risks of product development, including costs
associated with delays and the risk that Fiberstars may not be able to
develop technology enabling Fiberstars' products to effectively compete
with electric lighting systems.
4. The risk that Fiberstars will be unable to sell some of
Unison's fiber optic cable products in Europe without a third-party
license if a particular European patent held by such third-party is
found to be enforced and prior art encompassing such products.
5. The risk that Fiberstars may have to redesign one of
Unison's fiber optic cable products if Unison is unable to transfer a
license to certain technology by a competitor of Fiberstars.
6. The effects of the increased concentration of ADLT
ownership of Fiberstars Common Stock.
In the view of the Disinterested Board, these considerations were not
sufficient, individually or in the aggregate, to outweigh the advantages of the
Transactions.
Unison's Reasons for the Transactions
Unison believes that the sale of certain assets and fiber optic technology
to Fiberstars is the best way to commercialize Unison's technology. The
technology and asset transfer, together with the signing of a technology
development agreement, may enable Fiberstars to introduce improved fiber optic
products in the future. These
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improvements may provide future value to Unison and its members through royalty
payments received, if any, pursuant to the development agreement and through the
Warrants to purchase Fiberstars Common Stock.
Accounting Treatment
The Transactions will be accounted for by Fiberstars under the "purchase"
method of accounting in accordance with U.S. generally accepted accounting
principles, and all of the assets acquired and specific liabilities assumed by
Fiberstars pursuant to the Purchase Agreement will be recorded in Fiberstars'
consolidated financial statements at their estimated relative fair value on the
closing date of the acquisition to reflect the aggregate consideration paid by
Fiberstars in connection with the Transactions.
Tax Treatment
For U.S. federal income tax purposes, no income, gain or loss will be
recognized by Fiberstars or the Fiberstars shareholders as a result of the
Transactions.
No Appraisal or Preemptive Rights
Holders of Fiberstars Common Stock are not entitled under California law to
seek appraisal of their shares in connection with the Transactions. In addition,
holders of Fiberstars Common Stock are not entitled to preemptive rights with
respect to the Share Issuances.
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MATERIAL PROVISIONS OF THE PURCHASE AGREEMENT
The description of the Purchase Agreement set forth below is qualified by
reference to the complete text of the Purchase Agreement, a copy of which is
attached as Appendix A to this Proxy Statement and incorporated herein by
reference.
Explanatory Description
Under the Purchase Agreement, on January 28, 2000 (the "Closing Date")
Fiberstars will acquire certain assets (the "Assets") of Unison which are
necessary and material to the Fiber Optic Lighting portion of Unison's business
(the "Business"). In addition, Fiberstars will assume certain liabilities (the
"Liabilities") of Unison. The Liabilities assumed shall only be those which
arise after the Closing Date under certain identified contracts relating to the
Business. Fiberstars will not assume any liabilities which are not expressly
assumed pursuant to the Purchase Agreement.
In exchange for the Assets, Unison will receive consideration consisting of
four warrants (the "Warrants" and each a "Warrant") to purchase up to an
aggregate of 1,000,000 shares of Fiberstars Common Stock at an exercise price of
$0.01 per share. Each warrant when exercisable will allow Unison to purchase up
to 250,000 shares of Fiberstars Common Stock. No Warrant is exercisable,
generally, until Fiberstars has recorded sales, in accordance with generally
accepted accounting principles ("GAAP"), to third party customers, of at least
1,000 CPC units (i.e., a lamp/optics combination using a "compound parabolic
collector", or "CPC", in a fiber optic illuminator). Additionally, each Warrant
contains individual exercise conditions based upon the performance of the price
of Fiberstars' common stock and certain additional sales requirements as
follows: Warrant No. 1 is exercisable only when the average closing price of
Fiberstars' common stock over any thirty (30) calendar day period (the "Average
Price") is equal to six dollars ($6.00) and Fiberstars' has Sales (defined as a
sale by Buyer to a third party customer, in accordance with GAAP) of at least
1,000 ft. of Solid Core Fiber Cable (defined as extruded solid core "Optiflex"
fiber cable, advanced Cast Fiber, advanced Cable-Lite, or similar successor
solid core fiber cable products); Warrant No. 2 is exercisable only when the
Average Price equals eight dollars ($8.00) and Fiberstars has Sales of 10,000
ft. of Solid Core Fiber Cable; Warrant No. 3 is exercisable only when the
Average Price equals ten dollars ($10.00) and Fiberstars has sales of 50,000 ft.
of Solid Core Fiber Cable; and Warrant No. 4 is exercisable only when the
Average Price equals twelve dollars ($12.00) and Fiberstars has Sales of 100,000
ft. of Solid Core Fiber Cable.
Unison may elect at any time while a Warrant remains outstanding, even if
the Warrant is not yet exercisable, to cancel a particular numbered Warrant in
exchange for Fiberstars issuing to Unison a fixed number of shares of Fiberstars
Common Stock. Warrant No. 1 may be cancelled and exchanged for 151,250 shares of
Fiberstars Common Stock, Warrant No. 2 may be cancelled and exchanged for
119,375 shares of Fiberstars Common Stock, Warrant No. 3 may be cancelled and
exchanged for 95,625 shares of Fiberstars Common Stock and Warrant No. 4 may be
cancelled and exchanged for 78,750 shares of Fiberstars Common Stock.
Additionally, each Warrant is immediatlely exercisable upon a "Change of
Control" of Fiberstars. A Change of Control is defined as (i) the acquisition by
any person, excluding ADLT, of more than 50% of the combined voting power of
Fiberstars' then outstanding voting securities, (ii) the approval by the
Shareholders of Fiberstars of a merger or consolidation of Fiberstars other than
a merger or consolidation which would result in the voting securities
outstanding immediately prior thereto continuing to represent more than 50% of
the combined voting power of the voting securities of the surviving entity or
(iii) the approval by the shareholders of Fiberstars of a plan of complete
liquidation of Fiberstars or an agreement for the sale or disposition of all or
substantially all of Fiberstars' assets.
Representations and Warranties
The Purchase Agreement includes representations and warranties by Unison as
to: (a) organization and qualification, (b) authorization, (c)
non-contravention, (d) government approvals, (e) financial statements, (f)
absence of changes, (g) title to properties; absence of liens and encumbrances,
(h) purchased intellectual property, (i) contracts and other data, (j)
performance, (k) consents, (l) litigation, (m) compliance with laws, (n) assets,
(o) taxes, (p) condition of properties, (q) absence of undisclosed liabilities,
(r) compliance with environmental requirements, (s) employees, (t) business
relations, and (u) full disclosure. The representations and warranties of Unison
will survive for a period of two years commencing on the Closing Date.
The Purchase Agreement includes representations and warranties of
Fiberstars as to: (a) organization and qualification, (b) authorization, (c)
non-contravention, (d) government approvals, (e) litigation, and (f) brokers.
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Covenants
The Purchase Agreement contains covenants of Unison as to (a) conduct of
business, (b) access to information, (c) non-assignable licenses, leases and
contracts, (d) non-competition, (e) non-solicitation, (f) exclusivity, (g)
injunctive relief, and (h) the Optiflex Manufacturing Line.
The Purchase Agreement contains covenants of both Unison and Fiberstars as
to confidentiality, and consents and authorizations.
Conditions
The obligations of Fiberstars under the Purchase Agreement are subject to
the satisfaction in all material respects or waiver by Fiberstars of the
following conditions: (a) each of the representations and warranties of Unison
in the Purchase Agreement, disclosure schedule or in any closing certificate
shall be true and correct at and as of the Closing Date, (b) Unison shall have
complied with all covenants, (c) Fiberstars shall have received certified or
other copies of all documents relating to Unison incident to the Transactions,
(d) no legal action or proceeding shall have been instituted after January 14,
2000 regarding the transactions contemplated by the Purchase Agreement which
would prevent the consummation of the Transactions or have a material adverse
effect on the Business, (e) Unison shall have obtained all required consents
with regard to the assignment of contracts, (f) Unison shall have executed and
delivered to Fiberstars a bill of sale, (g) Unison shall have delivered the
assets to Fiberstars, (h) Unison shall have executed and delivered the ancillary
agreements to Fiberstars, (i) Unison shall have delivered to Fiberstars a
certificate signed by its President certifying to fulfillment of the conditions
described above, (j) Fiberstars shall have received a legal opinion from counsel
to Unison, (k) Fiberstars shall have satisfactorily completed its due diligence
review of Unison, (l) Fiberstars' shareholders shall have approved the Share
Issuances, and (m) certain prior agreements between Fiberstars and Unison shall
have terminated upon Closing.
The obligations of Unison under the Purchase Agreement are subject to the
satisfaction in all material respects or waiver by Unison of the following
conditions: (a) each of the representations and warranties of Fiberstars in the
Purchase Agreement or any closing certificate shall be true and correct in all
material respects on and as of the Closing Date, (b) Fiberstars shall have
complied with all covenants, (c) Unison shall have received certified or other
copies of all documents relating to Fiberstars incident to the Transactions, (d)
no legal action or proceeding shall have been instituted after January 14, 2000
regarding the transactions contemplated by the Purchase Agreement which would
prevent the consummation of the Transactions or have a material adverse effect
on the Business, (e) Fiberstars shall have executed and delivered the assumption
agreement to Unison, (f) Fiberstars shall have executed and delivered the
ancillary agreements to Unison, (g) Unison shall have received a legal opinion
from counsel to Fiberstars, (h) certain prior agreements between Fiberstars and
Unison shall have terminated upon Closing.
Termination
The Purchase Agreement may be terminated, and the Acquisition abandoned, at
any time prior to the closing of the Transactions by : (a) the mutual written
consent of Fiberstars and Unison; (b) Fiberstars, if the Closing does not occur
by March 1, 2000; or (c) by either Fiberstars or Unison if there is an order or
decree preventing to a material degree the consummation of the transactions
contemplated by the Purchase Agreement. If the Purchase Agreement is terminated,
it will become void and no liability shall survive on the part of any party,
except that: (a) no party shall be relieved of any liability resulting from a
breach of the confidentiality provisions of the Purchase Agreement; and (b) each
party will bear its respective expenses, costs and fees in connection with the
transactions contemplated by the Purchase Agreement.
Material Contracts Related to the Transaction
Development Agreement
In connection with the transactions contemplated by the Purchase Agreement,
Fiberstars will enter into a development agreement with Unison to develop
certain lamp and fiber technologies. In exchange for this development work,
Unison will pay
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Fiberstars $2,000,000 over a 15 month period in scheduled quarterly payments as
follows: (i) $500,000 on January 1, 2000, (ii) $500,000 on April 1, 2000, (iii)
$500,000 July 1, 2000, (iv) $250,000 October 1, 2000, and (v) $250,000 January
1, 2001.
This funding is to be used for development work on the following projects:
(i) an improved, more flexible Advanced CableLite fiber, (ii) an Optiflex fiber
suitable in life and light-acceptance capability for the commercial lighting
and/or the residential pool market, (iii) pool and spa market dual CPC
technology, (iv) accent downlight using dual CPC technology, and (v) single CPC
technology for pool and spa and commercial lighting applications.
Pursuant to the agreement, Fiberstars will agree to maintain certain
staffing levels on the projects and to work toward achieving certain development
milestones. Additionally, Fiberstars will agree to pay royalties of 3% for five
years, 2% in the sixth and seventh years and 1% for the eighth, ninth and tenth
years on net sales of Advanced CableLite fiber, Optiflex fiber and illuminators
using the CPC technology. Fiberstars will retain exclusive rights on all
technology for fiber optic lighting applications. After the ten year royalty
period, Fiberstars assumes exclusive royalty-free rights to the fiber optic
lighting applications of this technology.
Cross License Agreement
In connection with the transactions contemplated by the Purchase Agreement,
ADLT, Unison and Fiberstars will enter into a Cross-Licensing Agreement. Under
the agreement, ADLT and Unison agree to grant to Fiberstars, and Fiberstars
agrees to grant to ADLT and Unison, a world-wide, royalty-free, non-exclusive
license to new products developed by the parties. The license granted to
Fiberstars is limited to the fiberoptic field of use while the ADLT license
excludes the fiberoptic field of use and may only be sub-licensed to affiliates
of the respective parties. Each license is limited in scope utility and/or
design patent applications and/or patents owned or controlled by the respective
party. The agreement is for a term of ten years, which term shall automatically
renew for a period of ten years unless proper notice given or earlier terminated
by the parties.
Mutual Supply Agreement
In connection with the transactions contemplated by the Purchase Agreement,
ADLT, including certain subsidiaries of ADLT, and Fiberstars will enter into a
Mutual Supply Agreement. Under the agreement, each of ADLT and Fiberstars will
agree to manufacture and sell products to the other party at specified prices.
Manufacture of the products will be pursuant to specifications provided by each
party and products will be supplied pursuant to purchase orders submitted by the
respective parties in accordance with the agreement. The agreement is for a term
of five years, which term may be renewed by either party with proper notice
given for an additional five year period if the parties agree upon prices.
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FINANCIAL AND OTHER INFORMATION OF UNISON
Description of Business
Unison is a designer, manufacturer and marketer of fiber optic lighting
systems and system components, operating primarily in the United States. Unison
maintains its headquarters in Solon, OH and conducts extensive research and
development programs in Solon and Bristol, PA. Its Cable-Lite division in
Dallas, TX manufactures fiber optic illuminators and cable. Unison markets and
sells its fiber optic systems and system components primarily in the United
States to customers and representatives. Unison's sales and customer service
personnel provide complete ordering and pricing information, in addition to
technical service, to customers.
In June 1999, Unison streamlined its operations and significantly reduced
its workforce. As part of this restructuring, Unison consolidated its production
facilities, implemented an aggressive sales program and intensified its current
product development and technology programs.
Descripion of Property
Unison performs research and development activities at facilities in Solon,
OH and in Bristol, PA. Each of these facilities is leased by Unison.
Additionally, Unison leases a facility in Dallas, TX from which Unison
manufactures products.
Financial Statements
Financial statements for Unison are attached hereto as Appendix B.
Management's Discussion and Analysis or Plan of Operation
The following is Unison management's discussion and analysis of the
financial condition and results of operations of Unison for the six months ended
June 30, 1998 and the twelve months ended June 30, 1999. This discussion and
analysis should be read in conjunction with, and is qualified in its entirety
by, the audited financial statements for the periods ended June 30, 1998 and
June 30, 1999 attached hereto as Appendix B. Management's discussion and
analysis provides information concerning Unison's business environment,
consolidated results of operations and liquidity and capital resources. In
addition to historical information, management's discussion and analysis
includes certain forward-looking statements regarding events and financial
trends that may affect Unison's future operating results and financial position.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. Such statements are subject
to risks and uncertainties that could cause Unison's actual results and
financial position to differ materially.
12 Months Ended 6 Months Ended
Income Statement Data June 30, 1999 June 30, 1998
- --------------------- ----------- -----------
Net sales .................................. $ 864,833 $ 211,521
Cost of sales .............................. 2,016,647 370,224
Gross loss ................................ (1,151,814) (158,703)
Selling and administrative expense ......... 3,492,464 1,501,196
Research and development expense ........... 3,231,826 2,394,485
Restructuring expense ...................... 300,647 --
Loss from operations ...................... (8,176,751) (4,054,384)
Other income
Interest income ........................... 458,972 353,200
Other ..................................... 9,470 --
Net loss ............................... $(7,708,309) $(3,701,184)
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Twelve Months Ended June 30, 1999 Compared To Six Months Ended June 30, 1998
(On an Annualized Basis)
Net sales for the year ended June 30, 1999 were $864,833, more than double
the net sales of the previous six months (on an annualized basis). The increased
sales came from Unison' s Cablelite division and the retail display market. Cost
of sales of $2,016,647 for the 12 months ended June 30, 1999 increased
significantly from the previous six months due primarily to the Bristol, PA
fiber plant moving from pilot operation into production.
Selling and administrative expense of $3,492,464 increased 16% from the
previous six months (on an annualized basis) due primarily to increased
personnel and promotional costs. Research and development expense of $3,231,826
decreased 33% from the previous six months (on an annualized basis) due to a
reduction in certain start-up costs (such as prototype design, tooling and
consulting) in the 1999 period and the transfer of the Bristol, PA fiber plant
into production
Unison earns interest on its short-term investments and on notes receivable
from its members. Interest income declined from the 6 months ended June 30, 1998
to the 12 months ended June 30, 1999 as Unison's cash balances and notes
receivable decreased.
Unison's net loss of $7,708,309 increased 4% from the previous 6 months (on
an annualized basis). Unison is a limited liability company and therefore had no
income tax liability for the periods shown.
Restructuring
In June 1999, Unison provided $300,647 for certain restructuring costs,
primarily employee severance and outplacement costs. This restructuring
streamlined Unison's operations, significantly reduced its workforce and
significantly reduced its spending and projected losses in the future.
Liquidity And Capital Resources
Unison's working capital was $ (3,571,478) at June 30, 1999, as compared to
$755,699 at June 30, 1998. The decrease in working capital was due to Unison's
net loss for the year ended June 30, 1999, partially offset by payment of a
member's note receivable during 1999.
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FINANCIAL AND OTHER INFORMATION OF FIBERSTARS
The financial and other information regarding Fiberstars is incorporated
herein by reference to the information in the Annual Report on Form 10-KSB for
the year ending December 31, 1998 and in the Quarterly Report on Form 10-QSB for
the period ending September 30, 1999 attached hereto as Appendix C and Appendix
D, respectively, including the information required by Items 201, market for
common equity and related shareholder matters, 303, management's discussion and
analysis or plan of operation and 304, changes in disagreements with accountants
on accounting and financial disclosure of Regulation S-B, as well as the
financial information required by Part I of Form 10-QSB.
UNAUDITED SELECTED PRO FORMA FINANCIAL DATA
The accompanying unaudited pro forma combined condensed balance sheet combines
the historical financial statements of Fiberstars, Inc. (the Company) and the
balance sheet of Unison as if the acquisition had occurred on or before
September 30, 1999.
The accompanying unaudited pro forma combined condensed statement of operations
for the year ended December 31, 1998 includes the historical consolidated
statement of operations of the Company for the year ended December 31, 1998 and
the historical statement of operations of Unison for the nine months ended
September 30, 1999 as if the acquisition had occurred on January 1, 1998.
The accompanying unaudited pro forma combined consolidated statement of
operations for the nine months ended September 30, 1999 includes the historical
statement of operations of the Company and of Unison for the nine months ended
September 30, 1999 as if the acquisition had occurred on January 1, 1998.
The unaudited pro forma combined condensed statements of operations give effect
to the acquisition using the purchase method of accounting, and are based upon
allocation of the purchase price and include the adjustments described in the
notes attached thereto.
The unaudited pro forma combined condensed financial statements do not purport
to represent what the Company's results of operations would have been had the
acquisition occurred on the date indicated or for any future period or date. The
pro forma adjustments give effect to available information and assumptions that
the Company believes are reasonable. The unaudited pro forma combined condensed
financial statements should be read in conjunction with the Company's historical
financial statements and the financial statements of Unison and the notes
thereto included or incorporated elsewhere herein.
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<TABLE>
FIBERSTARS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
FOR SEPTEMBER 30, 1999
(amounts in thousands)
(unaudited)
<CAPTION>
Pro Forma Pro Forma
Fiberstars Unison(B1) Adjustments(B2) Combined
---------- ---------- --------------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................. $ 3,096 $ 128 $ (128) $ 3,096
Accounts receivable trade, net ........................ 5,046 169 (169) 5,046
Notes and other accounts receivable ................... 201 3,000 (3,000) 201
Inventories ........................................... 4,017 1,463 (1,463) 4,017
Prepaid expenses and other assets ..................... 458 32 (32) 458
Deferred income taxes ................................. 163 -- -- 163
-------- -------- -------- --------
Total current assets ................................ 12,981 1,792 (1,792) 12,981
Fixed assets, net ..................................... 2,175 2,986 (2,386)(B3) 2,775
Goodwill, net ......................................... 3,983 1,003 (1,003) 3,983
Acquired Technology ................................... -- -- 2,000 (B4) 2,000
Investment in joint ventures .......................... 2 -- -- 2
Other assets .......................................... 173 54 (54) 173
Deferred income taxes ................................. 89 -- -- 89
-------- -------- -------- --------
Total assets ........................................ $ 19,403 $ 5,835 $ (3,235) $ 22,003
======== ======== ======== ========
LIABILITIES
Current liabilities
Accounts payable ...................................... $ 2,352 $ 5,979 (5,979) $ 2,352
Accrued expenses ...................................... 2,084 83 (83) 2,084
Current portion of long-term debt ..................... 8 -- -- 8
-------- -------- -------- --------
Total current liabilities ........................... 4,444 6,062 (6,062) 4,444
Long-term debt, less current portion ................... 708 -- -- 708
-------- -------- -------- --------
Total liabilities ................................... 5,152 6,062 (6,062) 5,152
-------- -------- -------- --------
SHAREHOLDERS' EQUITY
Common stock ........................................... -- -- -- --
Additional paid-in capital ............................. 13,946 14,970 (14,970) 13,946
Issuance of warrants ................................... -- -- 2,600 (B5) 2,600
Notes receivable from shareholder ...................... (75) -- -- (75)
Note receivable, member ................................ -- (3,000) 3,000 --
Cumulative translation adjustments ..................... (46) -- -- (46)
Accumulated deficit .................................... 426 (12,197) 12,197 426
-------- -------- -------- --------
Total shareholders' equity .......................... 14,251 (227) 2,827 16,851
-------- -------- -------- --------
Total liabilities and shareholders'
equity ........................................... $ 19,403 $ 5,835 $ (3,235) $ 22,003
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
17
<PAGE>
Note A--Acquisition:
On December 3, 1999, Fiberstars, inc. (the Company) entered into a Letter of
Intent to acquire the net assets of Unison Fiber Optic Lighting Systems, LLC
(Unison) for an aggregate of $2,600,000 in the form of four warrants to purchase
up to an aggregate of 1,000,000 shares of the Company's common stock. Unison is
a manufacturer and distributor of fiber optic lighting systems worldwide.
Note B--Pro Forma Adjustments:
(1) Unison Fiber Optic Lighting Systems, LLC on or about
January 14, 2000 became a wholly owned subsidiary of Advanced Lighting
Technologies, Inc. of Solon, Ohio. Prior to that date it was a joint
venture partnership between Advanced Lighting Technologies, Inc. and
Rohm and Haas Company. The balance sheet for Unison as of September 30,
1999 represents all of the assets, liabilities and equity holdings of
the joint venture.
(2) Fiberstars will be assuming only a portion of the balance
sheet of the joint venture in the form of selected fixed assets, as
well as technology which had no balance sheet value on the books of
Unison. The remainder of the assets not acquired substantially consist
of manufactory equipment which Fiberstars otherwise has an option to
acquire for $1,000,000. Those assets are presently not being used by
Unison. These assets are described in notes 3 and 4 below. All other
balance sheet items have been eliminated as part of the pro forma
adjustments.
(3) $600,000 of fixed assets are not eliminated. These fixed
assets represent the book value of office equipment, R&D research
equipment and solid core fiber production equipment to be utilized by
former Unison employees who will be employed by Fiberstars.
(4) Represents the allocated value of certain technology for
lamp and solid core fiber production.
(5) Represents the value of four warrants to purchase up to an
aggregate of 1,000,000 shares of the Company's Common Stock used to
acquire the assets described in (3) and (4). The value of the warrants
was determined by reference to an appropriate options pricing model.
18
<PAGE>
<TABLE>
FIBERSTARS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999
(amounts in thousands except per share amounts)
(unaudited)
<CAPTION>
Pro Forma Pro Forma
Fiberstars Unison (1) Adjustments (2) Combined
---------- ---------- --------------- --------
<S> <C> <C> <C> <C>
Net sales ............................................... $ 24,083 $ 787 $ -- $ 24,870
Cost of Sales ........................................... 13,969 1,218 -- 15,354
-------- -------- -------- --------
Gross profit ............................................ 10,114 (431) -- 9,683
Operating expenses ...................................... 8,672 4,738 150(3) 13,560
-------- -------- -------- --------
1,442 (5,169) (150) (3,877)
Interest income/(expense) ............................... (15) 166 -- 151
Other income/(expense) .................................. 13 (2) -- 11
-------- -------- -------- --------
Income before income taxes .............................. 1,440 (5,005) (150) (3,715)
Provision for income taxes .............................. (524) 1,752 54(4) 1,282
-------- -------- -------- --------
Net income/(loss) ....................................... $ 916 $ (3,253) $ (96) $ (2,433)
======== ======== ======== ========
Net income/(loss) per share--basic ...................... $ 0.23 -- -- $ (0.61)
======== ======== ======== ========
Shares used in per share calculation--
basic .................................................. 3,984 -- -- 3,984
-------- -------- -------- --------
Net income/(loss) per share--diluted .................... $ 0.23 -- -- $ (0.61)
-------- -------- -------- --------
Shares used in per share
calculation--diluted ................................... 4,064 -- -- 3,984
-------- -------- -------- --------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
19
<PAGE>
FIBERSTARS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999
(1) Unison Fiber Optic Lighting Systems, LLC on or about January 14, 2000 became
a wholly owned subsidiary of Advanced Lighting Technologies, Inc. of Solon,
Ohio. Prior to that date it was a joint venture partnership between Advanced
Lighting Technologies, Inc. and Rohm and Haas Company. The statement of
operations for Unison as of September 30, 1999 represents the profit and
loss accounts of a start-up venture. During the three month period prior to
September 30, 1999, the scale of the operation had been cut back
considerably from a high of 52 employees to 25 full time employees. As a
result, these pro-forma results will not be representative of the combined
results after the acquisition.
(2) Pro forma adjustments are additional adjusting entries required to represent
the combination as though it had been in effect for the entire period
reported. Of the $2 million allocated to acquired technology, approximately
$1 million will be allocated to in-process research and development which
will be charged to the Company's results of operations in the first
published results subsequent to the transaction.
(3) Represents the amortization of the acquired technology and depreciation of
fixed assets purchased from Unison exclusive of consideration for the
approximately $1 million for in-process research and development (See note
2). The period of amortization is 8 years.
(4) Represents tax adjustment to reflect 36% overall income tax rate applicable
to pro forma results.
<TABLE>
(5) Unison results for the quarter ending September 30, 1999 included expenses
from personnel and operations which were largely reduced or discontinued by
Unison prior to the Acquisition. The results for this quarter without these
personnel and operations may be shown as follows:
<CAPTION>
Pro-forma Quarter
Unison Costs of personnel ending Sept. 30, 1999
Quarter ending and operations without costs
Sept. 30, 1999 not continued not continued
-------------- ------------- -------------
<S> <C> <C> <C>
Sales .......................... 313 313
COS ............................ 355 141 214
--- --- ---
Gross Profit ................... -42 -141 99
Expenses ....................... 810 380 430
Operating income ............... -852 -521 -331
=== === ===
</TABLE>
20
<PAGE>
<TABLE>
FIBERSTARS, INC.
PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
Pro Forma Pro Forma
Fiberstars Unison(1) Adjustments(2) Combined
---------- --------- -------------- --------
<S> <C> <C> <C> <C>
Net sales ....................................... $ 22,682 $ 603 $ -- $ 23,285
Cost of Sales ................................... 14,136 2,781 -- 16,917
-------- -------- -------- --------
Gross profit .................................... 8,546 (2,178) -- 6,368
Operating expenses .............................. 8,339 5,691 200(3) 14,230
-------- -------- -------- --------
Operating income ................................ 207 (7,869) (200) (7,862)
Interest income/(expense) ....................... 223 646 -- 869
Other income/(expense) .......................... 779 11 -- 790
-------- -------- -------- --------
Income before income taxes ...................... 1,209 (7,212) (200) (6,203)
Provision for income taxes ...................... (447) 2,524 72 2,149
-------- -------- -------- --------
Net income/(loss) ............................... $ 762 $ (4,688) $ (128) $ (4,054)
-------- -------- -------- --------
Net income/(loss) per share--basic .............. $ 0.21 -- -- $ (1.12)
-------- -------- -------- --------
Shares used in per share calculation--
basic .......................................... 3,623 -- -- 3,623
-------- -------- -------- --------
Net income/(loss) per share--diluted ............ $ 0.21 -- -- $ (1.12)
-------- -------- -------- --------
Shares used in per share
calculation--diluted ........................... 3,695 -- -- 3,623
-------- -------- -------- --------
</TABLE>
21
<PAGE>
FIBERSTARS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(1) Unison Fiber Optic Lighting Systems, LLC on or about January 14, 2000 became
a wholly owned subsidiary of Advanced Lighting Technologies, Inc. of Solon,
Ohio. Prior to that date it was a joint venture partnership between Advanced
Lighting Technologies, Inc. and Rohm and Haas Company. The statement of
operations for Unison as of September 30, 1999 represents the profit and
loss accounts of a start-up venture. During the three month period prior to
September 30, 1999, the scale of the operation had been cut back
considerably from a high of 52 employees to 25 full time employees. As a
result, these pro-forma results will be representative of the combined
results as of the combination.
(2) Pro forma adjustments are additional adjusting entries required to represent
the combination as though it had been in effect for the entire period
reported. Of the $2 million allocated to acquired technology, approximately
$1 million will be allocated to in-process research and development which
will be charged to the Company's results of operations in the first
published results subsequent to the transaction.
(3) Represents the amortization of the acquired technology and depreciation of
fixed assets purchased from Unison exclusive of consideration for the
approximately $1 million for in-process research and development (See note
2). The period of amortization is 8 years.
(4) Represents tax adjustment to reflect 36% overall income tax rate applicable
to pro forma results.
22
<PAGE>
INFORMATION ABOUT THE COMPANIES
Fiberstars
Fiberstars 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. Fiberstars 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.
Fiberstars' products 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.
Fiberstars designs, develops and manufactures its fiber optic lighting
systems and distributes its products worldwide, primarily through independent
sales representatives, distributors and swimming pool builders.
Unison
Unison is a Delaware limited liability company formed as a joint venture of
RH and ADLT. As of January 2000 Unison became a wholly owned subsidiary of ADLT.
Unison is a designer, manufacturer and marketer of fiber optic lighting systems
and system components, operating primarily in the United States. Unison
maintains its headquarters in Solon, Ohio and conducts extensive research and
development programs in Solon and Bristol, PA. Its Cable-Lite division in
Dallas, TX manufactures fiber optic illuminators and cable. Unison markets and
sells its fiber optic systems and system components primarily in the United
States to customers and representatives. Unison's sales and customer service
personnel provide complete ordering and pricing information, in addition to
technical service, to customers.
MARKET PRICES OF FIBERSTARS COMMON STOCK AND DIVIDEND DATA
As of the close of business on January 14, 2000, there were approximately
200 shareholders of record for Fiberstars Common Stock. Fiberstars believes that
the actual number of holders of Fiberstars Common Stock exceeds 1300. Fiberstars
has not declared or paid any cash dividends on shares of its equity securities,
including Fiberstars Common Stock, since its incorporation in 1985. Fiberstars
currently intends to retain earnings to support its growth strategy and does not
anticipate paying dividends in the foreseeable future. Fiberstars Common Stock
is traded on the Nasdaq National Market under the symbol "FBST". Fiberstars
Common Stock commenced trading on August 18, 1994. On October 15, 1999, the last
full day of trading before the announcement of the Acquisition, the high sales
price of Fiberstars Common Stock was $3.875 per share and the low sales price of
Fiberstars Common Stock was $3.875 as reported on the Nasdaq National Market.
You should obtain more recent stock price quotes from other sources of financial
information.
23
<PAGE>
SECURITY OWNERSHIP OF BENEFICIAL OWNERS
AND MANAGEMENT OF FIBERSTARS
<TABLE>
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of September 30, 1999 as
to (i) each person known by the Company to own beneficially more than five
percent of the outstanding shares of Common Stock, (ii) each director of the
Company or director nominee who beneficially owns shares, (iii) the Company's
Chief Executive Officer and the five highest paid executive officers of the
Company whose total annual salary and bonus exceeded $100,000 during the year
ended December 31, 1998, and (iv) all executive officers and directors of the
Company as a group. Unless otherwise specified, the address for each officer and
director is 44259 Nobel Drive, Fremont, California 94538.
<CAPTION>
Shares Beneficially Owned
-------------------------
Percent
Name and Address (1) Number of Total
- --------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Advanced Lighting Technologies, Inc.(2)
Wayne Hellman
Alan Ruud
3200 Aurora Rd.
Solon, OH 44139 ............................................... 1,039,677 26.0
David N. Ruckert(3) ............................................ 271,573 6.6
Philip Wolfson(4) .............................................. 154,008 3.8
Michael Feuer(5) ............................................... 113,067 2.8
John B. Stuppin(6) ............................................. 100,832 2.5
Barry R. Greenwald(7) .......................................... 79,211 2.0
J. Steven Keplinger(8) ......................................... 70,746 1.8
Theodore L. Eliot, Jr.(9) ...................................... 37,666 *
B. J. Garet(10) ................................................ 26,666 *
Frederick Martin(11) ........................................... 34,771 *
J. Arthur Hatley(12) ........................................... 16,477 *
All officers and directors as a group (14 persons)(13) ......... 1,944,694 43.0
<FN>
- ------------
* Less than one percent.
1) To Fiberstars' knowledge, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes to this table.
2) Includes 1,023,011 shares held by Advanced Lighting Technologies, Inc., of
which Mr. Hellman is Chairman and CEO and Mr. Ruud is President and COO and
as to which each of Mr. Hellman and Mr. Ruud disclaim beneficial ownership.
Also includes 16,666 shares subject to outstanding stock options held by Mr.
Hellman that are exercisable on or before September 30, 1999.
3) Includes 137,500 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
4) Includes 49,166 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
5) Includes 40,468 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
6) Includes 39,166 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
24
<PAGE>
7) Includes 75,330 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
8) Includes 66,331 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
9) Includes 1,000 owned by the Eliot Trust, of which Mr. Eliot is a
beneficiary. Also, includes 36,666 shares subject to outstanding stock
options exercisable on or before September 30, 1999.
10) Includes 26,666 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
11) Includes 32,500 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
12) Includes 16,250 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
13) Includes 571,709 shares subject to outstanding stock options exercisable on
or before September 30, 1999.
</FN>
</TABLE>
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Two directors, Mr. Wayne Hellman and Mr. Alan Ruud, of the nine member
Fiberstars Board are designees of ADLT. Mr Hellman is Chairman and CEO of ADLT
and Mr. Ruud is its President and COO.
Upon the closing of the Transactions, ADLT will beneficially own an
aggregate of 1,039,677 shares of Fiberstars Common Stock. In addition, Unison,
which prior to the Closing Date will become a wholly owned subsidiary of ADLT,
will own warrants to purchase up to an additional 1,000,000 shares of Fiberstars
Common Stock.
Mr. Hellman and Mr. Ruud disclaim beneficial ownership as to the shares of
Fiberstars Common Stock beneficially owned by ADLT and Unison.
FUTURE SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-4(c)(1) of the Exchange Act, the Company's proxy for
the 2000 Annual Meeting of Shareholders may confer discretionary authority to
vote on any proposal submitted by a shareholder if written notice of such
proposal is not received by the Company at its offices at 44259 Nobel Drive,
Fremont, CA 94538, on or before February 15, 2000, or, if the 2000 Annual
Meeting of Shareholders is held more than 30 days before or after May 12, 2000,
within a reasonable time before the mailing of the Company's proxy materials for
the 2000 Annual Meeting of Shareholders.
Proposals of shareholders of the Company that are intended to be presented
by such shareholders at the Company's 2000 Annual Meeting of Shareholders must
be received by the Company no later than December 2, 1999 to be considered for
inclusion in the proxy statement and form of proxy relating to such meeting.
WHERE YOU CAN FIND MORE INFORMATION
Fiberstars files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that Fiberstars files with the SEC at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. These SEC filings are also available to the public from
commercial document retrieval services and at the Internet web site maintained
by the SEC at "http://www.sec.gov."
Unison has supplied all information contained in this Proxy Statement
relating to Unison. Except as otherwise indicated, all other information
contained in this Proxy Statement has been supplied or prepared by Fiberstars.
You should rely only on the information contained in this Proxy Statement.
25
<PAGE>
We have not authorized anyone to provide you with information that is different
from what is contained in this Proxy Statement. This Proxy Statement is dated
January 14, 2000. You should not assume that the information contained in this
Proxy Statement is accurate as of any date other than that date. Neither the
mailing of this Proxy Statement to shareholders nor the authorization of the
issuance of Fiberstars Common Stock pursuant to the Purchase Agreement creates
any implication to the contrary.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, each of which was previously filed by Fiberstars
(Commission File No. 000-24230) with the SEC pursuant to Section 13 of the
Exchange Act, are incorporated herein by reference:
(1) Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 and amendments thereto filed April 2, 1999, April 28,
1999 and May 28, 1999;
(2) Quarterly Report on Form 10-QSB for the fiscal quarter
ended September 30, 1999.;
(3) Quarterly Report on Form 10-QSB for the fiscal quarter
ended June 30, 1999; and
(4) Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 1999.
Fiberstars will provide without charge to each person to whom a Proxy
Statement is delivered upon written or oral request to such person, within one
business day of receipt of such request, a copy of any documents incorporated
herein by reference (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference into the documents that this Proxy
Statement incorporates). Requests for such copies should be directed to
Fiberstars' Secretary, Fiberstars, Inc., 44259 Nobel Drive, Fremont, California
94538.
ACCOUNTANTS
One or more representatives of PricewaterhouseCoopers LLP, the principal
accountants of Fiberstars for the current year and for the most recently
completed fiscal year, (i) will attend the Special Meeting; (ii) will have the
opportunity to make a statement if they desire to do so; and (iii) will be
available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors knows of no other matters to be submitted to the
Special Meeting. If any other matters properly come before the Special Meeting,
then the persons named in the enclosed form of proxy will vote the shares they
represent in such manner as the Board may recommend.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ DAVID N. RUCKERT
------------------------------------------
DAVID N. RUCKERT
President, Chief Executive Officer, Chief
Operating Officer and Director
Dated: January 14, 2000
26
<PAGE>
APPENDIX A
================================================================================
ASSET PURCHASE AGREEMENT
Among
FIBERSTARS, INC.
AND
UNISON FIBER OPTIC LIGHTING SYSTEMS, LLC
Dated as of December ___, 1999
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I TRANSFER OF ASSETS, PURCHASE PRICE, CLOSING, ETC.......................................................1
SECTION 1.01 Transfer of Assets.........................................................................1
SECTION 1.02 Instruments of Conveyance and Transfer.....................................................3
SECTION 1.03 Nonassignable Contracts....................................................................3
SECTION 1.04 Purchase Price.............................................................................3
SECTION 1.05 Closing....................................................................................5
SECTION 1.06 Payments to Seller on the Closing Date.....................................................5
SECTION 1.07 Assumption of Liabilities..................................................................5
SECTION 1.08 Non-Assumption of Certain Liabilities......................................................5
ARTICLE II REPRESENTATIONS AND WARRANTIES........................................................................6
SECTION 2.01 Representations and Warranties of Seller...................................................6
SECTION 2.02 Representations and Warranties by Buyer...................................................11
ARTICLE III ADDITIONAL COVENANTS AND AGREEMENTS.................................................................13
SECTION 3.01 Conduct of Business.......................................................................13
SECTION 3.02 Access to Information by Buyer............................................................13
SECTION 3.03 Confidentiality...........................................................................13
SECTION 3.04 Consents and Authorizations...............................................................14
SECTION 3.05 Non-Assignable Licenses, Leases and Contracts.............................................14
SECTION 3.06 Non-Competition...........................................................................14
SECTION 3.07 Non-Solicitation..........................................................................14
SECTION 3.08 Exclusivity...............................................................................15
SECTION 3.09 Injunctive Relief.........................................................................15
SECTION 3.10 Optiflex Manufacturing Line...............................................................15
ARTICLE IV CONDITIONS PRECEDENT.................................................................................16
SECTION 4.01 Conditions Precedent to the Obligations of Buyer..........................................16
SECTION 4.02 Conditions Precedent to the Obligations of Seller.........................................17
ARTICLE V SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION...........................................................18
SECTION 5.01 Survival..................................................................................18
SECTION 5.02 Indemnity.................................................................................18
SECTION 5.03 Third Party Claims........................................................................19
SECTION 5.04 Limitation on Indemnities.................................................................20
ARTICLE VI FURTHER ASSURANCES....................................................................................20
SECTION 6.01 Further Assurances........................................................................20
SECTION 6.02 Books and Records.........................................................................20
SECTION 6.03 Cooperation on Taxes......................................................................21
ARTICLE VII MISCELLANEOUS........................................................................................21
SECTION 7.01 Termination...............................................................................21
SECTION 7.02 Effect of Termination.....................................................................21
SECTION 7.03 Expenses, etc.............................................................................21
SECTION 7.04 Execution in Counterparts.................................................................22
SECTION 7.05 Notices...................................................................................22
SECTION 7.06 Waivers...................................................................................22
SECTION 7.07 Amendments, Supplements, etc..............................................................22
SECTION 7.08 Entire Agreement..........................................................................23
SECTION 7.09 Applicable Law............................................................................23
SECTION 7.10 Binding Effect, Benefits..................................................................23
SECTION 7.11 Assignability.............................................................................23
SECTION 7.12 Public Announcements......................................................................23
SECTION 7.13 Invalid Provisions........................................................................23
SECTION 7.14 Commercially Reasonable...................................................................24
</TABLE>
i
INDEX TO EXHIBITS
Exhibit Description
------- -----------
A List of Assets
A-1 Purchased Intellectual Property
B Bill of Sale and Assignment Agreement
C Warrants
D Assumption Agreement
E Ancillary Agreements, consisting of:
E-1 Development Agreement
E-2 Supply Agreement
E-3 Cross-License Agreement
E-4 Parent Agreement
ii
<PAGE>
INDEX OF DEFINITIONS
ADLT...................................................................Recital C
Adverse Effect...................................................ss. 2.01(f)(xi)
Affiliate...............................................................ss. 3.06
Ancillary Agreements......................................ss. 4.01(h), Exhibit E
Assets...............................................................ss. 1.01(a)
Business...............................................................Recital B
Buyer...............................................................Introduction
Closing.................................................................ss. 1.05
Closing Date............................................................ss. 1.05
CPC..................................................................ss. 1.04(a)
Disclosure Schedule.....................................................ss. 2.01
Employment Agreement......................................ss. 4.01(i), Exhibit F
Encumbrances.........................................................ss. 2.01(g)
Environmental Permits...........................................ss. 2.01(r)(iii)
Fiber Optic Lighting Applications.......................................ss. 3.06
Financial Statements.................................................ss. 2.01(e)
GAAP.................................................................ss. 1.04(a)
Hazardous Material................................................ss. 2.01(r)(i)
Hazardous Materials Activities...................................ss. 2.01(r)(ii)
Material Adverse Effect.................................................ss. 2.01
Permitted Exceptions.............................................ss. 2.01(f)(xi)
Purchase Price..........................................................ss. 1.04
Purchased Intellectual Property.....................ss. 1.01(a)(ii), Exhibit A-1
Seller..............................................................Introduction
Solid Core Fiber Cable...............................................ss. 1.04(a)
Warrants.....................................................ss. 1.04, Exhibit C
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT dated as of December __, 1999, is between
FIBERSTARS, INC. ("Buyer"), and UNISON FIBER OPTIC LIGHTING SYSTEMS, LLC
("Seller").
RECITALS
A. Seller is engaged in the business of developing manufacturing,
marketing and selling lighting products and components, including fiber optic
lighting; and
B. Buyer desires to purchase and acquire from Seller, and Seller
desires to sell, assign and transfer to Buyer, certain assets and properties
held in connection with, necessary for, or material to the Seller's fiber optic
lighting portion of its business (the "Business"); and Buyer has agreed to
assume certain liabilities of Seller, all for the Purchase Price (as defined in
Section 1.04 below) and on the terms and subject to the conditions of this
Agreement.
C. A member of Seller is Venture Lighting International, Inc.
("Venture"); and Venture is a wholly owned subsidiary of Advanced Lighting
Technologies, Inc. ("ADLT").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties agree as follows:
ARTICLE I
TRANSFER OF ASSETS, PURCHASE PRICE, CLOSING, ETC.
SECTION 1.01 Transfer of Assets.
(a) The assets, properties and business of Seller to be sold,
conveyed, transferred and delivered by Seller to Buyer pursuant to this Section
1.01(a) are referred to in this Agreement as the "Assets". On the terms and
subject to the conditions hereinafter set forth, on the Closing Date (as
hereinafter defined), Seller will sell, convey, transfer and deliver to Buyer,
and Buyer will purchase from Seller, for the purchase price provided in Section
1.04 hereof, all the following assets and properties of Seller as the same shall
exist on the Closing Date, except those assets excluded pursuant to paragraph
(b) below:
(i) all tangible property (real, personal or mixed),
computer systems, work in process, supplies, leaseholds, leasehold improvements,
tools, fixtures, machinery and equipment of Seller existing on the Closing Date
and either (x) attributable to the Business or (y) otherwise set forth in the
List of Assets attached hereto as Exhibit A hereto, including, without
limitation, equipment for research and developing work and pilot manufacturing
for Optiflex fiber processing and manufacturing equipment for Advance CableLite
fiber and certain research and development equipment;
<PAGE>
(ii) all of the intellectual property rights owned by Seller
or licensed to Seller and used in connection with the Business or the Assets,
including, without limitation, all of Seller's (a) rights in any trademarks,
service marks, trade names, corporate names, copyrights, patents, patent
applications, design rights, inventions and trade secrets; and (b) computer
software programs and systems, know-how, formulae and designs, and documentation
relating to the foregoing (the "Purchased Intellectual Property"). The Purchased
Intellectual Property is further described on Exhibit A-1.
(iii) all drawings, blueprints, specifications, designs and
data relating to the Business, including, without limitation, specific
development plans with milestone dates acceptable to Buyer for ADLT to develop
in cooperation with the Buyer (a) dual CPC lamp/optics technology and (b) single
CPC lamp/optics technology;
(iv) all catalogues, brochures, sales literature,
advertising, promotional material and other selling material relating to the
Business;
(v) all books and records and all files, documents, papers,
agreements, books of account and other records pertaining to the Assets or to
the Business which are located at the offices or used in connection with the
Assets or the Business, subject to Seller obtaining any necessary consents with
respect to personal information concerning its employees;
(vi) any other assets or rights of every kind and nature,
real or personal, tangible or intangible, which are owned or used by Seller or
useful in connection with the Business.
Without limiting the generality of the foregoing, the Assets shall,
except as set forth in paragraph (b) below, include all assets set
forth in a detailed list to be prepared from the accounting records of
Seller and furnished by Seller to Buyer at or prior to the Closing
Date, and all such assets as may have been acquired by Seller and
reasonably necessary to, or for use primarily in connection with, the
Business since the date of such list and which would be included on a
list prepared in like manner from such accounting records as of the
Closing Date, except any such assets which may have been disposed of
since said date in the ordinary course of business and consistent with
past practice.
(b) Anything herein contained to the contrary notwithstanding,
the following assets and properties of Seller are specifically excluded from the
Assets and shall be retained by Seller:
(i) all cash on hand, including bank accounts and temporary
cash investments (except for petty cash funds maintained at offices of the
Business), accounts receivable, notes receivable, inventories, prepayments, and
deferred items of the Business, outstanding on the Closing Date;
(ii) claims for refunds of Taxes (as hereinafter defined)
and other governmental charges for periods ending on or prior to the Closing
Date;
(iii) claims or rights against third parties relating to
liabilities or obligations which are not assumed by Buyer hereunder;
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<PAGE>
(iv) rights under insurance policies, including rights to
any cancellation value on the Closing Date; and
(v) the manufacturing line equipment located at Bristol,
Pennsylvania; and
(vi) patents and other intellectual property rights which
are only licensed to Buyer, as distinguished from being assigned to Buyer, as
further described on Exhibit A-1 attached hereto.
SECTION 1.02 Instruments of Conveyance and Transfer. Subject to Section
1.03 below, on the Closing Date Seller shall execute and deliver to Buyer (i) a
bill of sale in the form included in the Bill of Sale and Assignment Agreement
annexed hereto as Exhibit B, transferring to Buyer the properties and assets to
be acquired by Buyer under the terms of this Agreement, (ii) assignments of all
patents, patent applications and computer software and of all contracts,
licenses, leases and similar agreements to be assigned to Buyer pursuant to this
Agreement, and (iii) such other bills of sale, instruments of assignment and
other appropriate documents as may be reasonably requested by Buyer, as the case
may be, in order to carry out the intentions and purposes of this Agreement. To
the extent that any property or asset which is to be assigned and conveyed to
Buyer requires a prior consent from a third party, and such consent has not been
obtained by the time of the Closing Date, then Seller hereby grants to Buyer the
exclusive license right to use said property or asset, on a royalty-free basis,
until such required consent is obtained. Seller agrees to pursue diligent
efforts to obtain such consent as soon as feasible and to assign and convey to
Buyer said property or asset as soon as the consent is so obtained.
SECTION 1.03 Nonassignable Contracts. Nothing in this Agreement shall
be construed as an attempt or agreement to assign (i) any contract which is
nonassignable without the consent of the other party or parties thereto unless
such consent shall have been given or (ii) any contract or claim as to which all
the remedies for the enforcement thereof enjoyed by Seller would not pass to
Buyer as an incident of the assignments provided for by this Agreement. In
order, however, that the full value of every contract and claim of the character
described in clauses (i) and (ii) above and all claims and demands on such
contracts may be realized, Seller will use its commercially reasonable efforts
to obtain approval to assignment, and failing that, Seller will by itself or by
its agents, at the request and under the direction of Buyer, as the case may be,
in the name of Seller or otherwise as Buyer, as the case may be, shall specify
and as shall be permitted by law, take all such action and do or cause to be
done all such things as shall in the reasonable opinion of Buyer be necessary or
proper (x) in order that the rights and obligations of Seller under such
contracts shall be preserved (provided Buyer assumes all such obligations) and
(y) for, and to facilitate, the collection of the moneys due and payable, and to
become due and payable, to Seller in and under every such contract and claim and
in respect of every such claim and demand, and Seller shall hold the same for
the benefit of and shall pay the same over promptly to Buyer.
SECTION 1.04 Purchase Price.
(a) The aggregate purchase price for the Assets (the "Purchase
Price") shall be warrants to purchase up to one million (1,000,000) shares of
Buyer's common stock at an
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exercise price of $0.01 per share in the form attached hereto as Exhibit C (the
"Warrants"). There shall be four separate Warrants, each for 250,000 shares.
Each Warrant shall have an expiration date as of the seventh anniversary of the
Closing Date. None of the Warrants shall be exercisable until the Buyer has
recorded sales, in accordance with generally accepted accounting principles
("GAAP"), to third party customers, of at least 1,000 "CPC" units (i.e., a
lamp/optics combination using a "compound parabolic collector" in a fiber optic
illuminator). In addition, the Warrants shall become exercisable only upon the
achievement of certain share prices of Buyer's common stock averaged over a
thirty (30) calendar day period as quoted on the Nasdaq national market (or any
other national public market system on which Buyer's common stock regularly
trades). A Warrant shall become exercisable when the average closing price of
Buyer's common stock over any thirty (30) calendar day period is equal to or
greater than the value set forth below, provided that Buyer also has met the
additional sales requirement set forth below:
<TABLE>
<CAPTION>
Warrant Minimum Average Additional Sales
Number Warrant Share Price Requirement
- ------ ------- ----------- -----------
<S> <C> <C> <C>
1 250,000 shares $6 per share Sales of 1,000 ft of Solid Core Fiber Cable
2 250,000 shares $8 per share Sales of 10,000 ft of Solid Core Fiber Cable
3 250,000 shares $10 per share Sales of 50,000 ft of Solid Core Fiber Cable
4 250,000 shares $12 per share Sales of 100,000 ft of Solid Core Fiber Cable
</TABLE>
As used above, the term "Solid Core Fiber Cable" means extruded solid core
"Optiflex" fiber cable, advanced Cast Fiber, advanced Cable-Lite, or similar
successor solid core fiber cable products developed from the Purchased
Intellectual Property. The above additional sales requirement means a sale by
Buyer to a third party customer, in accordance with GAAP, of Solid Core Fiber
Cable. Buyer shall use its commercially reasonable efforts to develop and sell
Solid Core Fiber Cable and CPC units, as described above.
(b) As an alternative to exercising one or more of the foregoing
Warrants, Seller may elect at any time while a Warrant remains outstanding, even
if the Warrant is not yet exercisable, to cancel a particular numbered Warrant
in exchange for Buyer issuing to Seller a number of shares of Buyer's common
stock, as follows:
--------------------------------------------------------------
Cancelled Shares to
Warrant Number Be Issued
--------------------------------------------------------------
1 151,250
--------------------------------------------------------------
2 119,375
--------------------------------------------------------------
3 95,625
--------------------------------------------------------------
4 78,750
--------------------------------------------------------------
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<PAGE>
Said election shall be by a written notice delivered to Buyer, together with the
Warrant to be cancelled.
(c) All of the share certificates issued pursuant to an exercise
or cancellation of a Warrant shall be endorsed with a customary legend
restricting transfers of shares in accordance with applicable securities laws.
SECTION 1.05 Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Buyer, once
the conditions precedent set forth in Sections 4.01 and 4.02 have been
satisified or waived, targetted to occur on January 28, 2000 at 10 A.M., local
time, or at such other place or at such other date or time as Seller and Buyer
may mutually agree (such date and time of Closing is herein called the "Closing
Date"); it being understood and agreed that for all purposes relating to Taxes
the Closing shall be effective as of the close of business on the Closing Date.
SECTION 1.06 Payments to Seller on the Closing Date. On the Closing
Date, in full consideration for the sale, conveyance, transfer and delivery to
Buyer of the Assets hereinafter, subject to the assumption of liabilities
provided for herein, Buyer shall issue the Warrants to the Seller.
SECTION 1.07 Assumption of Liabilities. On the Closing Date, Buyer
shall execute and deliver to Seller an assumption agreement, in the form of the
Assumption Agreement annexed hereto as Exhibit D, pursuant to which, subject to
Section 1.08 below, Buyer shall assume and agree to pay, perform and discharge
when due those certain liabilities and obligations of Seller with respect to the
Business as identified on Exhibit D.
SECTION 1.08 Non-Assumption of Certain Liabilities. Buyer is not
assuming, and shall not be deemed to have assumed, any liabilities or
obligations of Seller of any kind or nature whatsoever, except as expressly
provided above in Section 1.07 hereof. In no event shall Buyer be deemed to have
assumed or taken subject to any liabilities arising on or prior to the Closing
Date. Anything in Section 1.07 or elsewhere in this Agreement to the contrary
notwithstanding, and without limiting the generality of the foregoing, it is
hereby agreed that Buyer is not assuming any liability and shall have no
obligation for or with respect to any liability or obligation of Seller (i) for
any taxes of Seller, its subsidiaries or affiliates or for which Seller or any
of its subsidiaries or affiliates is or may be liable, without regard to when
such tax is due or payable or (ii) arising out of any action, suit or proceeding
based upon an event occurring or a claim arising (x) on or prior to the Closing
Date or (y) after the Closing Date in the case of claims in respect of services
delivered by Seller on or prior to the Closing Date and attributable to acts
performed or omitted by Seller on or prior to the Closing Date.
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<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.01 Representations and Warranties of Seller. Except as
otherwise set forth in the Disclosure Schedule (the "Disclosure Schedule"),
which has been delivered to Buyer as of the date hereof, Seller represents and
warrants to, and agrees with, Buyer as follows:
(a) Organization and Qualification, etc. Seller is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of Delaware, has power and authority to own all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction as set forth in the Disclosure Schedule where, to the reasonable
belief of Seller, such qualification is appropriate to the Business and the
failure to so qualify would have a Material Adverse Effect (as hereinafter
defined).
"Material Adverse Effect" means any change in, or effect on,
the Business as currently conducted by the Seller that is materially
adverse to the results of operations or financial condition of the
Business, taken as a whole.
(b) Authority Relative to Agreement. Seller has the power and
authority to execute and deliver this Agreement, and to consummate the
transactions contemplated on the part of Seller hereby. No other proceedings on
the part of Seller are necessary to authorize the execution and delivery of this
Agreement by Seller or the consummation by Seller of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Seller and, assuming the due authorization, execution and delivery of this
Agreement by Buyer, is a valid and binding agreement of Seller, enforceable
against Seller in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditor's rights and by
rules of law governing specific performance, injunctive relief or other
equitable remedies.
(c) Non-Contravention. The execution and delivery of this
Agreement by Seller does not and the consummation by Seller of the transactions
contemplated hereby will not (i) violate any provision of the organizational
documents (including the Operating Agreement) of Seller, or (ii) violate, or
result with the giving of notice or the lapse of time or both in a violation of,
any provision of, or result in the acceleration of or entitle any party to
accelerate (whether after the giving of notice or lapse of time or both) any
obligation under, or result in the creation or imposition of any lien, charge,
pledge, security interest or other encumbrance upon any of the property of
Seller pursuant to any provision of, any mortgage, lien, lease, agreement,
license, instrument, law, ordinance, regulation, order, arbitration award,
judgment or decree to which Seller is a party or by which any of its assets is
bound and do not and will not violate or conflict with any other restriction of
any kind or character to which Seller is subject or by which any of its assets
may be bound, and the same does not and will not constitute an event permitting
termination of any mortgage, lien, lease, agreement, license or instrument to
which Seller is a party.
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<PAGE>
(d) Government Approvals. No consent, authorization, order or
approval of, or filing or registration with, any governmental commission, board
or other regulatory body is required for the execution and delivery of this
Agreement and the consummation by the Seller of the transactions contemplated
hereby, except (i) where the failure to obtain such consents, authorizations or
approvals or to make such filings or registrations would not prevent the
consummation of the transactions contemplated hereby and (ii) as may be
necessary as a result of any facts or circumstances relating solely to Buyer, as
the case may be.
(e) Financial Statements. Seller has furnished Buyer its balance
sheet and related statements of income as of and for the period ending September
30, 1999 ("Financial Statements"). All such balance sheets and accounts are in
accordance with the books and records of Seller and fairly and accurately
present in all material respects the financial position and results of
operations of Seller as of the date and for the period indicated, in each case
consistently applied, subject to normal year-end adjustments and the absence of
notes.
(f) Absence of Certain Changes or Events. Since September 30,
1999, with respect to the Business, Seller has not:
(i) incurred any obligation or liability (fixed or
contingent), except normal trade or business obligations incurred in the
ordinary course of business and consistent with past practice;
(ii) discharged or satisfied any lien, security interest or
encumbrance or paid any obligation or liability (fixed or contingent), other
than in the ordinary course of business and consistent with past practice;
(iii) mortgaged, pledged or subjected to any lien, security
interest or other encumbrance any of its assets or properties (other than
Permitted Exceptions (as hereinafter defined));
(iv) transferred, leased or otherwise disposed of any of its
assets or properties or acquired any assets or properties, except in any case in
the ordinary course of business and consistent with past practice;
(v) canceled or compromised any debt or claim, except in the
ordinary course of business and consistent with past practice;
(vi) waived or released, under any contract, rights of
Seller having value to the Business, except in any case in the ordinary course
of business and consistent with past practice;
(vii) transferred or granted any rights under any
concessions, leases, licenses,
agreements, patents, inventions, trademarks, trade names, service marks or
copyrights or with respect to any know-how, except in the ordinary course of
business and consistent with past practice;
(viii) entered into any transaction, contract or commitment,
except those listed, or which pursuant to the terms hereof are not required to
be listed, on the Disclosure
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<PAGE>
Schedule, this Agreement and the transactions contemplated hereby, and those
entered into in the ordinary course of business and consistent with past
practice;
(ix) paid or made provisions for any payment to Seller or
any affiliate of
Seller, except in the ordinary course of business and consistent with past
practice;
(x) suffered any casualty loss or damage (whether or not
such loss or damage shall have been covered by insurance) which affects in any
material respect its ability to conduct its business; or
(xi) suffered any Material Adverse Effect.
"Permitted Exceptions" shall mean (i) mechanic's,
materialman's, warehouseman's and carrier's liens and purchase money
security interests arising in the ordinary course of business; (ii)
liens for taxes and assessments not yet payable; (iii) liens for taxes,
assessments and charges and other claims, the validity of which Seller
is contesting in good faith; and (iv) imperfections of title, liens,
security interests, claims and other charges and encumbrances the
existence of which would not have in the aggregate an Adverse Effect.
"Adverse Effect" means any change in, or effect on, the
Business or its Subsidiaries as currently conducted by Seller that
would result in the incurrence of damages or liabilities of the sum of
$25,000 or more.
(g) Title to Properties; Absence of Liens and Encumbrances, etc.
Seller has good and marketable title to all of the real, tangible personal and
mixed properties and assets owned by it and used in the Business free and clear
of any liens, charges, pledges, security interests or other encumbrances
(collectively, "Encumbrances") (other than Permitted Exceptions), except as
reflected in the Financial Statements. The intangible properties and assets
owned by Seller and used in the Business are free and clear of any Encumbrances
(other than Permitted Exceptions), except as reflected in the Financial
Statements.
(h) Purchased Intellectual Property. The Purchased Intellectual
Property (identified on Exhibit A-1) is owned by Seller free and clear of any
Encumbrances, or Seller has a valid license to use the same, which such licenses
may be freely transferred to Buyer. Except as set forth on Disclosure Schedule,
Seller has not received any notice or claim disputing the right of Seller to own
or use any of the Purchased Intellectual Property or alleging that such use
infringes upon the intellectual property rights of such person. The Purchased
Intellectual Property constitutes all of the proprietary rights necessary and
sufficient for the operation of the Assets and the Business as currently
conducted. The Assets and the operation of the Business are not infringing upon
or otherwise acting adversely to any intellectual property owned by any other
person. Seller is not in default, and to the best of Seller's knowledge no third
party is in default, under any license, sublicense or agreement by which Seller
hold or has given to others the right to use any Purchased Intellectual
Property. No claim has been made challenging the validity of, or any of Seller's
rights under, the Purchased Intellectual Property. Seller has at all times used
legally sufficient and commercially reasonable efforts to protect its trade
secrets and has not disclosed or otherwise dealt with such items in such a
manner as to cause the loss of such
8
<PAGE>
trade secrets by release thereof into the public domain. Seller has at all times
used commercially reasonable efforts to protect the confidentiality of all of
its other confidential and proprietary information and that of third parties
which is subject to confidentiality and non-disclosure obligations which is or
has been in its possession. Each person currently or formerly employed by Seller
(including independent contractors, if any) that has or had access to
confidential information of Seller relating to the Business or the Assets has
executed a confidentiality and non-disclosure agreement in the form previously
provided to Buyer and each current and former employee has executed a
proprietary rights and inventions assignment agreement in the form previously
provided to Buyer. Neither the execution or delivery of such agreements, nor the
carrying on of the Business as employees by such persons, will conflict with or
result in a breach of the terms, conditions or provisions of or constitute a
default under any contract, covenant or instrument under which any of such
persons is obligated.
(i) List of Properties, Contracts and Other Data. Exhibits A and
A-1 attached hereto contain a list describing and setting forth with respect to
the Business as of the date hereof all of the assets, leases, licenses,
intellectual property, permits, contracts, data and other rights used for the
operation of the Business, other than the excluded assets and property described
in Section 1.01(b). Seller has delivered to Buyer true and complete copies of
all documents constituting the items referenced in Exhibits A and A-1.
(j) Performance. Except to the extent described in the Disclosure
Schedule, Seller has performed all of the obligations required to be performed
by it to date and is not in default under any of the agreements, contracts,
instruments or documents listed or described in Exhibits A and A-1, nor, to
Seller's knowledge, is any other party to such agreements, contracts,
instruments or documents in default thereunder.
(k) Consents. Seller has obtained, or prior to the Closing Date
will obtain, all consents and approvals, including approvals of government
agencies, required for the execution and delivery of this Agreement by Seller
and the consummation of the transactions contemplated by this Agreement.
(l) Litigation. There are no actions, suits or proceedings with
respect to the Business pending against Seller at law or in equity, or before or
by any federal, state, municipal, foreign or other governmental department,
commission, board, bureau, agency or instrumentality, nor, to the knowledge of
Seller, are there any such actions, suits or proceedings with respect to the
Business threatened against Seller.
(m) Compliance with Law. Seller is not in default with respect to
any order of any court, governmental authority or arbitration board or tribunal
to which it is a party or, to the knowledge of Seller, to which it is subject
and which applies to the Business and, has not been notified that it is in
violation of any laws, ordinances, governmental rules or regulations to which it
is subject or has failed to obtain any licenses, permits, franchises or other
governmental authorizations necessary to the ownership of the Assets or to the
conduct of the Business.
(n) Assets. The Assets being sold, conveyed, transferred and
delivered or licensed by Seller to Buyer pursuant to this Agreement constitute
all Seller's assets and properties of every kind and description (wherever
located) reasonably necessary to, or used
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<PAGE>
primarily in connection with, the Business including without limitation list of
all customers, suppliers and other business contacts used by Seller in the
Business.
(o) Taxes. Seller has filed all federal, state, local and other
tax returns and reports, if any, required to be filed by it and such returns are
true and correct. Seller has paid all taxes, if any, shown to be due and payable
on said returns and reports and has withheld with respect to employees all
federal and state income taxes, FICA, FUTA and other taxes and charges required
to be withheld. There are no outstanding tax audits or notices of tax audits or
liabilities to pay any additional taxes, and there have been no tax audits for
the last five (5) fiscal years.
(p) Condition of Properties. All of the tangible personal
properties of Seller included in the Assets are in good operating condition and
repair, subject only to ordinary wear and tear which is not such as to render
the properties less than substantially fit for the purposes for which they are
being used. None of said tangible personal properties of Seller are subject to
any deferred maintenance obligations.
(q) Absence of Undisclosed Liabilities. Seller has no liabilities
of any nature, fixed or contingent, which are not reflected in the Financial
Statements other than those liabilities based upon circumstances of which Seller
neither knows nor should reasonably know.
(r) Compliance with Environmental Requirements.
(i) As of the date hereof, to the knowledge of Seller, no
underground storage tanks are present under any property that Seller or any of
its subsidiaries has at any time owned, operated, occupied or leased. As of the
date hereof, no amount of any substance that has been designated by any
governmental entity or by applicable federal, state or local law to be
radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws (a "Hazardous Material"), are present as a
result of the actions of Seller, or, to Seller's knowledge, any actions of any
third party, in, on or under any property, including the land and the
improvements, ground water and surface water, that Seller has at any time owned,
operated, occupied or leased.
(ii) At no time has Seller transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Closing
Date, nor has Seller disposed of, transported, sold, or manufactured any product
containing a Hazardous Material (collectively, "Hazardous Materials Activities")
in violation of any rule, regulation, treaty or statute promulgated by any
governmental entity to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
(iii) Seller currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of its
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<PAGE>
businesses as such activities and businesses (including any Hazardous Materials
Activity) are currently being conducted, the absence of which would be
reasonably likely to result in fines to Seller in excess of Ten Thousand Dollars
($10,000).
(iv) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending or, to the knowledge of Seller,
threatened concerning any Environmental Permit or any Hazardous Materials
Activity of Seller. Seller is not aware of any fact or circumstance which would
be reasonably likely to involve Seller in any environmental litigation or impose
upon Seller any environmental liability which would be reasonably likely to
exceed Ten Thousand Dollars ($10,000).
(s) Employees. Buyer has already employed several of Seller's
former employees. Buyer is not obligated to employ any other existing or former
employees of Seller. Buyer shall not have any responsibility for any obligations
of Seller with respect to any existing or former employees of Seller.
(t) Business Relations. Seller has not received from any customer
or supplier of Seller notice that such customer or supplier intends to change
its business relationship with Seller after consummation of the transactions
contemplated by this Agreement.
(u) Full Disclosure. All documents and papers delivered by or on
behalf of Seller in connection with this Agreement or any of the transactions
contemplated hereby were prepared and delivered by Seller and are complete and
authentic in all respects. Seller has complied with all requests of Buyer and
its representatives for documents, papers and information relating to Seller in
connection with the transactions contemplated hereby, and have not failed to
deliver any document, paper or other information requested by Buyer or its
representatives in connection therewith. No representation or warranty by Seller
contained in this Agreement or any agreement or instrument contemplated hereby,
or in any document, written information, statement, financial statement,
certificate or exhibit prepared or furnished or to be prepared and furnished by
Seller or its representatives to Buyer or its representatives pursuant hereto or
in connection with the transactions contemplated hereby, contains any untrue
statement of a fact or omits to state a fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which it was made, not false or misleading. Notwithstanding
the foregoing, while all projections, provided to Buyer were prepared by the
management of Seller in a good faith effort to describe Seller's proposed
business and products and the markets therefor, and the assumptions applied in
preparing these projections appeared reasonable to management as of the date
thereof, there can be no assurance that the results set forth in such
projections will actually be achieved. To Seller's knowledge, there are no facts
which (individually or in the aggregate) materially and adversely affect the
business, assets, liabilities, financial condition, prospects or operations of
Seller that have not been set forth in the Agreement, the exhibits hereto or in
other documents delivered to Buyer.
(v) Investment Intent. Seller is acquiring the Warrants for
investment for Seller's own account and not with the view to the public resale
or distribution thereof within the meaning of the Securities Act of 1933, as
amended, and the regulations thereunder (the "Securities Act"), and Seller has
no present intention of selling, granting any participation in, or otherwise
distributing the Warrants. No other person has a direct or indirect beneficial
interest, in whole or in part, in the Warrants. Purchaser understands that the
Warrants have not been registered under the Securities Act by reason of a
specific exemption from the registration provisions of the Securities Act, which
exemption depends upon, among other things, the bona fide nature of Seller's
investment intent as expressed herein. As a condition to Seller exercising each
of the Warrants, Seller understands that Seller will need to make the investment
representations as stated in Attachment 2 to the Warrants; and Seller hereby
makes the same representations at this time in connection with Seller's
acquisition of the Warrants. Seller is an accredited investor as defined in Rule
501(a) of Regulation D promulgated under the Securities Act. Seller is
experienced in evaluating and investing in high-risk technology companies such
as Buyer, and by reason of Seller's business and financial experience has the
capacity to protect Seller's own interests in connection with the acquisition of
the Warrants and the underlying shares of Buyer and has the ability to bear the
economic risk of investment. Seller is aware that the Warrants and the
underlying shares of Buyer are highly speculative and that there can be no
assurance as to what return, if any, there may be.
SECTION 2.02 Representations and Warranties by Buyer. Buyer represents
and warrants to, and agrees with, Seller as follows:
(a) Organization and Qualification, etc. Buyer is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California and has
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corporate power and authority to own its properties and assets and to carry on
its business as it is now being conducted.
(b) Authority Relative to Agreement. Buyer has the corporate
power and authority to execute and deliver 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 the buyer's Board of Directors. No other corporate proceedings on
the part of Buyer, are necessary to authorize the execution and delivery of this
Agreement and any ancillary agreements to which it is a party or the
consummation of the transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by Buyer and, assuming the due
authorization, execution and delivery of this Agreement by Seller, is a valid
and binding agreement of Buyer, enforceable against Buyer in accordance with its
terms, except as limited by applicable bankruptcy, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and by rules of law governing specific performance, injunctive
relief or other equitable remedies.
(c) Non-Contravention. The execution and delivery of this
Agreement does not and the consummation of the transactions contemplated hereby
will not (i) violate any provision of the Articles of Incorporation or By-Laws
of Buyer, as the case may be, or (ii) violate, or result with the giving of
notice or the lapse of time or both in a violation of, any provision of, or
result in the acceleration of or entitle any party to accelerate (whether after
the giving of notice or lapse of time or both) any obligation under, or result
in the creation or imposition of any lien, charge, pledge, security interest or
other encumbrance upon any of the property of Buyer pursuant to any provision
of, any mortgage, lien, lease, agreement, license, instrument, law, ordinance,
regulation, order, arbitration award, judgment or decree to which Buyer is a
party or by which any of its assets is bound and do not and will not violate or
conflict with any other restriction of any kind or character to which Buyer is
subject or by which any of its assets may be bound, and the same does not and
will not constitute an event permitting termination of any mortgage, lien,
lease, agreement, license or instrument to which Buyer is a party, except for
any such violation, acceleration, creation, imposition, conflict or termination
which would not prevent the consummation of the transactions contemplated hereby
by Buyer.
(d) Government Approvals. No consent, authorization, order or
approval of, or filing or registration with, any governmental commission, board
or other regulatory body is required for or in connection with the execution and
delivery of this Agreement and the consummation by Buyer of the transactions
contemplated hereby, except (i) where the failure to obtain such consents,
authorizations or approvals or to make such filings or registrations would not
prevent the consummation of the transactions contemplated hereby or thereby and
(ii) as may be necessary as a result of any facts or circumstances relating
solely to Seller.
(e) Litigation. There are no actions, claims, proceedings or
governmental investigations pending against Buyer or any of their assets or
properties at law or in equity, before or by any federal, state, or municipal
court, agency or other governmental entity, or by any other person, which,
individually or in the aggregate, could reasonably be expected (i) to have a
material adverse effect on the financial condition or results of operations of
Buyer or (ii) to prevent the consummation of the transactions contemplated
hereby.
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(f) Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by Buyer directly with
Seller, without the intervention of any person on behalf of Buyer in such manner
as to give rise to any valid claim by any person against Buyer for a finder's
fee, brokerage commission, or similar payment.
ARTICLE III
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 3.01 Conduct of Business. During the period from the date
hereof through and including the Closing Date, except as otherwise contemplated
by this Agreement, Seller shall use its commercially reasonable efforts to
conduct the Business according to its ordinary and usual course of business and
consistent with past practice and use its commercially reasonable efforts,
subject to the foregoing, to preserve substantially intact the business
organization of the Business, keep available the services of its officers and
employees, and maintain its present relationships with licensors, suppliers,
distributors, customers and others having significant business relationships
with it. Representatives of Seller will confer with representatives of Buyer to
keep them informed with respect to the general status of the on-going operations
of the Business.
SECTION 3.02 Access to Information by Buyer. Buyer may prior to the
Closing Date have access to the business and properties of the Business and
information concerning its financial and legal condition as Buyer deem necessary
or advisable in connection with the consummation of the transactions
contemplated hereby, provided that such access shall not interfere with normal
operations of the Business. Seller agrees to permit Buyer and its authorized
representatives, or cause them to be permitted to have, after the date hereof
and until the Closing Date, full access to the premises, books and records of
Seller relating to the Business during normal business hours, and the officers
of Seller will furnish Buyer with such financial and operating data and other
information with respect to the business and properties of the Business as Buyer
shall from time to time reasonably request. No investigation by Buyer heretofore
or hereafter made shall affect the representations and warranties of Seller, and
each such representation and warranty shall survive any such investigation,
provided, however, that in the event that as a result of any such investigation
the senior executive officers of Buyer or such attorneys and accountants as the
senior executive officers of Buyer shall designate to conduct such
investigation, shall receive notice of material facts which, based on
information actually known to them, they shall reasonably determine would be, or
reasonably might be, required to be disclosed in the Disclosure Schedule and are
not so disclosed will use reasonable efforts to inform Seller of such material
facts and no such material facts shall form the basis for indemnification
hereunder, and provided, further, however, that neither Buyer nor any such
officers, attorneys or accountants shall have any obligation to make any inquiry
in respect of the foregoing.
SECTION 3.03 Confidentiality. Each of Buyer, on the one hand, and
Seller, on the other hand, covenants and agrees for itself, its subsidiaries,
its affiliates and its officers and directors that, for a period of three years
following the Closing, it will hold all information concerning the Business and
all information concerning Buyer or Seller, as the case may be,
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received by Buyer or Seller, as the case may be, in connection herewith (other
than any information which (i) becomes generally available to the public, (ii)
was available to Buyer, or Seller, as the case may be, on a non-confidential
basis prior to its disclosure by, Buyer or Seller, or (iii) becomes available to
Buyer or Seller, as the case may be, on a non-confidential basis from a source
other than, Buyer or Seller, that is not prohibited from disclosing such
information to Buyer or Seller, by a contractual, legal or fiduciary obligation)
on a confidential basis, not use itself or voluntarily disclose to others any
such information, promptly return every document furnished by Buyer or Seller in
connection herewith and any copies thereof it may have made and to destroy any
summaries, compilations or similar documents it may have made or derived from
such material, and have its representatives promptly return such documents and
copies and destroy such summaries, compilations or similar documents. Each of
Buyer and Seller further covenants and agrees for itself, its subsidiaries, its
affiliates and its officers and directors that it will keep confidential and not
use trade secrets of the business of Buyer, on the one hand, or Seller, on the
other hand, as the business appears immediately following the Closing Date.
SECTION 3.04 Consents and Authorizations. As soon as practicable, each
of the parties hereto will commence to take all reasonable action to obtain all
authorizations, consents, orders and approvals of all third parties and of all
federal, state and local regulatory bodies and officials which may be or become
necessary for its execution and delivery of, and the performance of its
obligations pursuant to, this Agreement and will cooperate fully with the other
parties in promptly seeking to obtain all such authorizations, consents, orders
and approvals.
SECTION 3.05 Non-Assignable Licenses, Leases and Contracts. Seller
shall use its commercially reasonable efforts to obtain and deliver to Buyer at
or prior to the Closing such consents or waivers as are required in order that
any contract listed on Exhibits A or A-1 or the Disclosure Schedule which would
be breached or violated, or would give any other party the right to cancel the
same, as a result of the occurrence of the Closing hereunder, shall not be so
breached or violated or result in such right of cancellation.
SECTION 3.06 Non-Competition. During the period commencing on the
Closing Date and ending on the tenth anniversary of the Closing Date, Seller
shall not be engaged in any material respect in the business of providing to
third parties any products or services for "Fiber Optic Lighting Applications,"
defined to mean any lighting applications involving remote source lighting and
either (i) fiber optics, or (ii) light pipes, or (ii) other light guides.
Further, Seller shall obtain a similar non-competition covenant signed by ADLT
to bind ADLT and all of its affiliates, in the form of the Parent Agreement
attached hereto as Exhibit E-4. As used in this Section 3.06 and in Section
3.07, the term "affiliate" of ADLT shall mean any business entity in which ADLT,
directly or indirectly, owns or controls at least fifty percent (50%) of the
equity, profit interests or voting power. The foregoing non-competition covenant
shall not apply to any activities of Seller pursuant to any specific agreement
between Buyer and Seller (such as their Supply Agreement or their Development
Agreement).
SECTION 3.07 Non-Solicitation.
(a) During the period commencing on the Closing Date and ending
on the first anniversary of the Closing Date, neither Seller nor any of its
affiliates nor any executive officers thereof will directly or indirectly
actively solicit for employment, or advise or recommend to any
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other person that they employ or solicit for employment, any employee of Buyer;
provided, however, that nothing in this Section 3.07 shall prohibit Seller or
any of its affiliates from employing any person who contacts them on his or her
own initiative or in response to a general solicitation of employees through a
newspaper advertisement or similar means. Further, Seller shall obtain a similar
non-solicitation covenant signed by ADLT to bind ADLT and all of its affiliates,
in the form of the Parent Agreement attached hereto as Exhibit 4.
(b) Each of the Seller and the Shareholders agrees that the
limitations set forth in these Sections 3.06 and 3.07 (including, without
limitation, any time or territorial limitations) are reasonable and properly
required for the adequate protection of the business of Buyer. In the event that
any such territorial or time limitation is deemed to be unreasonable by a court
of competent jurisdiction, Seller agrees to the reduction of the territorial or
time limitation to the area or period which such court shall have deemed
reasonable.
SECTION 3.08 Exclusivity. Until the earlier of the Closing Date or
termination of this Agreement in accordance with its terms, Seller agrees that
it will not (and that it will use its best efforts to assure that its employees,
agents and affiliates do not on its behalf) take any action to solicit,
initiate, seek, encourage or support any inquiry, proposal or offer from,
furnish any information to, or participate in any negotiations with, any
corporation, partnership, person or other entity or group concerning the sale or
acquisition of Seller, its stock (including) by means of a public offering
thereof, but excluding issuance of stock and options to employees in the
ordinary course of business consistent with past practices) or a substantial
part of its assets with any parties other than Buyer, and that any such
discussions presently in progress will be terminated or suspended during that
period. Seller represents and warrants that it has the legal right to terminate
or suspend any such pending negotiations and agrees to indemnify Buyer, its
representatives and agents from and against any claims by any party to such
negotiations based upon or arising out of the discussion or any consummation of
this Agreement.
SECTION 3.09 Injunctive Relief. Seller acknowledges that its expertise
in the Business and the Assets is of a special, unique, unusual, extraordinary
and intellectual character, which gives such expertise a peculiar value, and
that a breach by it of the covenants contained in Section 3 cannot be reasonably
or adequately compensated in damages in an action of law and that such breach
will cause Buyer irreparable injury and damage. Seller further acknowledges that
it possesses unique skills, knowledge and ability and that competition in
violation of this Section 3 would be extremely detrimental to Buyer. By reason
thereof, Seller agrees that Seller shall be entitled, in addition to any other
remedies it may have under this Agreement or otherwise, to temporary,
preliminary and/or permanent injunctive and other equitable relief to prevent or
curtail any breach of this Section 3, without proof of actual damages that have
been or may be caused to Buyer by such breach or threatened breach.
SECTION 3.10 Optiflex Manufacturing Line. Seller hereby grants to Buyer
the option to purchase the Optiflex manufacturing line equipment located in
Bristol, Pennsylvania at a commercially reasonable purchase price, not to exceed
one million dollars ($1,000,000). Said option shall be exercised, if at all, not
later than the earlier to occur of (i) 50 days following Buyer's receipt of a
written notice that the owner of the Bristol facility has required that the
equipment be removed from the Bristol facility, which 50 day notice period shall
not end prior to 12 months after the Closing Date, or (ii) 18 months after the
Closing Date. Any such purchase
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shall be on commercially reasonable terms. Seller hereby agrees to retain and
maintain said equipment in good condition pending any such purchase.
ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.01 Conditions Precedent to the Obligations of Buyer. The
obligations of Buyer under this Agreement are subject to the satisfaction in all
material respects or waiver by Buyer prior to or on the Closing Date of each of
the following conditions:
(a) Accuracy of Representations and Warranties. The
representations and warranties of Seller contained in this Agreement, in the
Disclosure Schedule or in any closing certificate or document delivered to Buyer
pursuant hereto shall be true and correct at and as of the Closing Date as
though made at and as of that time other than such representations and
warranties as are specifically made as of another date.
(b) Compliance with Covenants. Seller shall have performed and
complied with all covenants of this Agreement to be performed or complied with
by it at or prior to the Closing Date.
(c) All Proceedings to be Satisfactory. Buyer shall have received
certified or other copies of all documents relating to Seller incident to the
transactions contemplated hereby as Buyer or its counsel may reasonably request
and such documents shall be reasonably satisfactory in form and substance to
Buyer and its counsel.
(d) Legal Actions or Proceedings. No legal action or proceeding
shall have been instituted after the date hereof against Seller arising by
reason of the acquisition of the Assets pursuant to this Agreement, which is
reasonably likely (i) to restrain, prohibit or invalidate the consummation of
the transactions contemplated by this Agreement or (ii) to have a Material
Adverse Effect.
(e) Assignments of Contracts. Seller shall have obtained all
authorizations, consents, waivers and approvals as may be required in connection
with the assignment of those contracts, agreements, licenses, leases and other
commitments to be assigned to Buyer pursuant to this Agreement.
(f) Bill of Sale. Seller shall have executed and delivered to
Buyer the Bill of Sale and Assignment Agreement in substantially the form of
Exhibit B hereto.
(g) Delivery of Assets. Seller shall have delivered all of the
Assets to Buyer's address set forth in Section 7.05 below.
(h) Ancillary Agreements. Seller shall have executed and
delivered to Buyer the (1) Development Agreement, (2) Supply Agreement, (3)
Cross-Licensing Agreement, and (4) Parent Agreement in substantially the forms
attached hereto as Exhibit E (the "Ancillary Agreements").
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(i) Compliance Certificate. Seller shall deliver to Buyer a
certificate executed by its President in form satisfactory to Buyer and dated as
of the Closing Date, certifying to the fulfillment of the conditions described
in Sections 4.01(a), (b), (c), (d), (e), (f), (g), (h) and (i).
(j) Legal Opinion. Buyer shall have received a legal opinion in
form and substance reasonably satisfactory to Buyer from counsel to Seller dated
as of the Closing Date.
(k) Completion of Due Diligence Investigation. Buyer shall have
completed to its satisfaction its due diligence review of the Business and the
Assets.
(l) Shareholder Approval. The Buyer's shareholders shall have
approved the transactions contemplated by this Agreement.
(m) Prior Agreements.
(i) Upon the Closing, that certain Professional Services
Agreement between Buyer and Seller, dated as of October 1, 1999, shall terminate
automatically, excepting however that those provisions which logically survive
termination shall remain applicable, as appropriate, particularly including
Sections 3 (Rights to Work Product), 4 (Limited Warranty: Limitations of
Liability), 5 (Confidentiality and NonDisclosure), and 8 General.
(ii) Upon the Closing, that certain Agency Agreement between
Buyer and Seller, dated as of November 1, 1999, shall terminate automatically,
excepting however that those provisions which logically survive termination
shall remain applicable, as appropriate, particularly including Sections 2
(Payment to Fiberstars; Review of Records), 6 (Indemnification and Limitation of
Liability), 7 (Limitation of Liability), 8 (Exclusion of Consequential Damages),
and 9 (General).
(iii) Upon the Closing, that certain Distribution Agreement
between Buyer and Seller, dated as of November 1, 1999, shall remain in full
force and effect for the purpose of Buyer continuing to sell the Seller's
remaining inventory of "products" (as defined in said agreement) which are
retained by Seller after the Closing.
SECTION 4.02 Conditions Precedent to the Obligations of Seller. The
obligations of Seller under this Agreement are subject to the satisfaction in
all material respects or waiver by Seller prior to or on the Closing Date of
each of the following conditions:
(a) Accuracy of Representations and Warranties. The
representations and warranties of each of Buyer contained in this Agreement or
in any closing certificate or document delivered to Seller pursuant hereto shall
be true and correct on and as of the Closing Date as though made at and as of
that date other than such representations and warranties as are specifically
made as of another date.
(b) Compliance with Covenants. Buyer shall have performed and
complied with all covenants of this Agreement to be performed or complied with
by, at or prior to the Closing Date.
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(c) All Proceedings to be Satisfactory. Seller shall have
received certified or other copies of all documents relating to Buyer incident
to the transactions contemplated hereby as Seller or its counsel may reasonably
request and such documents shall be reasonably satisfactory in form and
substance to Seller and its counsel.
(d) Legal Actions or Proceedings. No legal action or proceeding
shall have been instituted that is reasonably likely to restrain, prohibit,
violate or otherwise affect the consummation of the transactions contemplated
hereby.
(e) Assumption Agreement. Buyer shall have executed and delivered
to Seller the Assumption Agreement in substantially the form of Exhibit D
hereto.
(f) Ancillary Agreements. Buyer shall have executed and delivered
the Ancillary Agreements to Seller.
(g) Legal Opinion. Seller shall have received a legal opinion in
form and substance reasonably satisfactory to Seller from counsel to Buyer dated
as of the Closing Date.
(h) Prior Agreements. The prior agreements specified in Section
4.01(l) hereof shall terminate as specified in Section 4.01(l) hereof.
ARTICLE V
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
SECTION 5.01 Survival. Subject to the limitations and other provisions
of this Agreement, the representations and warranties of the parties hereto
contained herein shall survive the Closing and shall remain in full force and
effect, regardless of any investigation made by or on behalf of Buyer or Seller
until the second anniversary of the Closing Date.
SECTION 5.02 Indemnity.
(a) Subject to the terms and conditions of this Article V, Seller
hereby agrees to indemnify and hold Buyer harmless from and against all damages
to and liabilities of Buyer resulting from or relating to demands, claims,
actions or causes of action, assessments or other losses, costs and expenses
relating thereto, including reasonable out-of-pocket attorneys' fees and
expenses by reason of or resulting from (i) a breach of any representation or
warranty of Seller contained in or made pursuant to this Agreement , (ii) the
failure of Seller to perform or observe any term, provision or covenant or
agreement to be performed or observed by it pursuant to this Agreement, (iii)
any actions, suits or proceedings (actual or threatened and relating to
activities of Seller on or prior to the Closing Date) listed in the Disclosure
Schedule or any actions, suits or proceedings relating to circumstances arising
prior to or relating to the conduct of the Business on or prior to the Closing
Date or (iv) any liability or obligation of Seller of any kind or nature not
expressly assumed by Buyer pursuant to Section 1.07 hereof.
(b) Subject to the terms and conditions of this Article V, Buyer
hereby agrees to indemnify, defend and hold Seller harmless from and against all
damages to and liabilities of Seller resulting from or relating to demands,
claims, actions or causes of action, assessments or
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other losses, costs and expenses relating thereto, including reasonable
out-of-pocket attorneys' fees and expenses, by reason of or resulting from (i) a
breach of any representation or warranty of Buyer contained in or made pursuant
to this Agreement, (ii) any failure of Buyer to perform or observe any term,
provision, covenant or agreement to be performed or observed by it pursuant to
this Agreement or (iii) the conduct of Business by Buyer subsequent to the
Closing Date.
(c) The parties hereto hereby acknowledge and agree that their
sole and exclusive remedy with respect to any and all claims relating to the
subject matter of this Agreement (other than a claim for fraud or for specific
performance of the terms of this Agreement) shall be pursuant to the
indemnification provisions set forth in this Article V.
(d) Except for actions required to be taken by Buyer pursuant to
this Agreement, Seller shall have no liability under any provision of this
Agreement for any liabilities and damages to the extent that such liabilities
and damages relate to actions taken or not taken by Buyer or their affiliates
after the Closing Date. The parties hereto shall take all reasonable steps to
mitigate all liabilities and damages upon and after becoming aware of any event
which could reasonably be expected to give rise to such liabilities and damages.
In no event shall any party hereto be liable for consequential damages.
SECTION 5.03 Third Party Claims. If any claim, assertion or proceeding
by or in respect of a third party is made against an indemnified party or any
event in respect of a third party occurs, and if the indemnified party intends
to seek indemnity with respect thereto under this Article V or to apply any
damage or liability arising therefrom to the $50,000 amount referred to in
Section 5.04, the indemnified party shall promptly notify the indemnifying party
of such claim in writing. The indemnifying party shall have 30 days after
receipt of such notice to undertake, conduct and control, through counsel of its
own choosing and at its expense, the settlement or defense thereof, and the
indemnified party shall cooperate with it in connection therewith; provided,
that, (a) the indemnifying party shall permit the indemnified party to
participate in such settlement or defense through counsel chosen by the
indemnified party, provided that the fees and expenses of such counsel shall be
borne by the indemnified party, (b) the indemnifying party shall promptly
reimburse the indemnified party for the full amount of any liability resulting
from such claim and all related and reasonable expenses (other than the fees and
expenses of counsel as aforesaid) incurred by the indemnified party within the
limits of this Article V and subject to the $50,000 amount referred to in
Section 5.04, (c) the indemnified party shall not, without the prior written
consent of the indemnifying party, settle or compromise any claim or consent to
the entry of any judgment which does not include as an unconditional term
thereof the giving by the claimant or the plaintiff to the indemnified party a
release from all liability in respect of such claim and (d) nothing herein shall
require any indemnified party to consent to the entry of any order, injunction
or consent decree affecting its ability to conduct its business operations after
the date thereof. So long as the indemnifying party is reasonably contesting any
such claim in good faith (and shall have provided security, if requested, to the
indemnitee in a mutually agreed upon amount), the indemnified party shall not
pay or settle any such claim. Notwithstanding the foregoing, the indemnified
party shall have the right to pay or settle any such claim, provided that in
such event it shall waive any right to indemnity therefor by the indemnifying
party. If the indemnifying party does not notify the indemnified party within 30
days after the receipt of the indemnified party's written notice of a claim of
indemnity
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hereunder that it elects to undertake the defense thereof, the indemnified party
shall have the right to contest, settle or compromise the claim in the exercise
of its reasonable judgment at the expense of the indemnifying party.
SECTION 5.04 Limitation on Indemnities. No claim for indemnification
will be made by Buyer, on the one hand, or by Seller, on the other hand, under
Section 5.02(a)(i) or (b)(i) hereof, respectively, with respect to any
individual item of liability or damage unless and to the extent that the
aggregate of all such claims by Buyer or by Seller, as the case may be, shall be
in excess of $50,000. For avoidance of doubt, said $50,000 amount is a
forgiveness level, and any indemnity claim shall be for only the amounts in
excess of said forgiveness level. Payments by an indemnifying party pursuant to
Section 5.02 shall be limited to the amount of any liability or damage that
remains after deducting therefrom any insurance proceeds and any indemnity,
contribution or other similar payment reasonably recoverable by the indemnified
party from any third party with respect thereto. Notwithstanding anything to the
contrary contained in this Agreement, no claim by any party hereto may be
asserted, nor may any action be commenced against any party hereto, for breach
of any representation, warranty, covenant or agreement unless notice thereof is
received in writing describing in reasonable detail the facts or circumstances
with respect to the subject matter of such claim on or before the date on which
the representation, warranty, covenant or agreement on which such claim or
action is based ceases to survive as set forth in Section 5.01, irrespective of
whether the subject matter of such claim or action shall have occurred before,
on or after such date, except that any claim by Buyer under Section 5.02(a)(iv)
shall survive indefinitely. Any payment made by Seller to Buyer, as the case may
be, under Article V shall constitute a reduction of the Purchase Price for all
purposes, including Federal, state and local tax as well as financial accounting
purposes.
ARTICLE VI
FURTHER ASSURANCES
SECTION 6.01 Further Assurances. At any time and from time to time on
and after the Closing Date (i) at the request of Buyer Seller shall deliver to
Buyer any records, documents and data possessed by Seller and not previously
delivered to Buyer to which Buyer is entitled and execute and deliver or cause
to be executed and delivered all such deeds, assignments, consents, documents
and further instruments of transfer and conveyance, and take or cause to be
taken all such other actions, as Buyer may reasonably deem necessary or
desirable in order to fully and effectively vest in Buyer, or to confirm its
title to and possession of, the Assets or to assist Buyer in exercising rights
with respect thereto which Buyer is entitled to exercise pursuant to the terms
of this Agreement; and (ii) Buyer shall execute and deliver or cause to be
executed and delivered such further instruments and take or cause to be taken
such further actions as Seller may reasonably deem necessary or desirable to
carry out the terms and provisions of this Agreement.
SECTION 6.02 Books and Records. Buyer agrees that it shall preserve and
keep all books and records relating to the Business and the Assets in Buyer's
possession until six months following the expiration of the statute of
limitations (including extensions thereof) applicable to the tax returns filed
by or with respect to the Business for taxable periods ending prior to or on the
Closing Date to which such books or records may be relevant. After such time,
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Seller, upon at least 90 calendar days' prior written notice to Buyer, at its
sole cost and expense, may remove all or any part of such books and records as
Seller may select, and Seller may retain copies thereof. Duly authorized
representatives of Seller shall, upon reasonable notice, have access to such
books and records during normal business hours to examine, inspect and copy such
books and records.
SECTION 6.03 Cooperation on Taxes. Seller and Buyer agree to cooperate
with each other in order to make proper tax filings by executing or causing to
be executed any required documents and by making available to the other, all
books and records relating to the Assets or the Business (including work papers,
records and notes of any kind) at all reasonable times, for the purpose of
allowing the appropriate party to complete any tax return, respond to any
audits, make any determination required under this Agreement (including, but not
limited to, determinations as to which period any asserted tax liability is
attributable), verify any issue and negotiate any settlement with tax authority
or defend or prosecute any tax claim.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by the mutual written consent of Seller and Buyer;
(b) by Buyer, if the Closing shall not have occurred by March 1,
2000;
(c) by either Seller or Buyer if there is an order or decree
restraining, enjoining, prohibiting, invalidating or otherwise preventing to a
material degree the consummation of the transactions contemplated by this
Agreement; or
SECTION 7.02 Effect of Termination. In the event of termination of this
Agreement as provided in Section 7.01, this Agreement shall forthwith become
void and there shall be no liability on the part of any party hereto, except
that Sections 3.03, 7.02, and 7.03 hereof shall survive such termination.
SECTION 7.03 Expenses, etc. Whether or not the transactions
contemplated by this Agreement are consummated, none of the parties hereto shall
have any obligation to pay any of the fees and expenses of the other parties
incident to the negotiation, preparation and execution of this Agreement,
including the fees and expenses of counsel, accountants and other expert. Each
of Seller, on the one hand, and Buyer, on the other hand, will indemnify the
other party, and hold it harmless from and against any claims for finders' fees
or brokerage commissions in relation to or in connection with such transactions
as a result of any agreement or understanding between such indemnifying party
and any third party. Seller shall pay and be responsible for any transfer taxes
arising from the sale of the Assets hereunder and in that connection shall
timely file all required tax returns related thereto and shall indemnify Buyer
with respect thereto, give Buyer a copy of such tax returns together with proof
of payment of the tax.
21
<PAGE>
SECTION 7.04 Execution in Counterparts. For the convenience of the
parties, this Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. Signatures may be transmitted by facsimile.
SECTION 7.05 Notices. All notices which are required or may be given
pursuant to the terms of this Agreement shall be in writing and shall be
sufficient in all respects if given in writing and delivered or mailed by
registered or certified mail postage prepaid, or sent by telecopier, facsimile
transmission (followed by mailing of original notice) or nationally recognized
overnight courier service as follows:
If to Seller, to: Fiberstars, Inc.
44259 Nobel Drive
Fremont, CA 94538
Attn: President
If to Buyer to: Unison Fiber Optic Lighting Systems, LLC
32000 Aurora Road
Solon, Ohio 44139
Attn: President
or such other address or addresses as any party hereto shall have designated by
notice in writing to the other parties hereto. Any notice or other communication
pursuant to this Agreement shall be deemed to have been duly given or made and
to have become effective when delivered in hand to the party to which directed
or if sent by first-class mail postage prepaid or by telecopier, facsimile
transmission or nationally recognized overnight courier service and properly
addressed as set forth above at the earlier of (i) the time when received by the
addressee or (ii) the third business day following the dispatch thereof.
SECTION 7.06 Waivers. Any party hereto (as to itself, but not as to
other parties without their consent) may, by written notice to the other parties
hereto, (a) extend the time for the performance of any of the obligations or
other actions of the other parties under this Agreement; (b) waive any
inaccuracies in the representations or warranties of another party contained in
this Agreement or in any document delivered pursuant to this Agreement; (c)
waive compliance with any of the conditions or covenants of another party
contained in this Agreement; or (d) waive performance of any of the obligations
of another party under this Agreement. Except as otherwise provided in the
preceding sentence hereof, no action taken pursuant to this Agreement, including
without limitation any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any representation, warranty, covenant or agreement contained in this Agreement.
The waiver by any party hereto of a breach of any provision of this Agreement
shall not operate or be construed a waiver of any subsequent breach.
SECTION 7.07 Amendments, Supplements, etc. At any time this Agreement
may be amended or supplemented by such additional agreements, articles or
certificates, as may be determined by the parties hereto to be necessary,
desirable or expedient to further the purposes of
22
<PAGE>
the Agreement, or to clarify the intention of the parties hereto, or to add to
or modify the covenants, terms or conditions hereof or to effect or facilitate
any governmental approval or acceptance of this Agreement or to effect or
facilitate the filing or recording of this Agreement or the consummation of any
of the transactions contemplated hereby. Any such instrument must be in writing
and signed by all parties.
SECTION 7.08 Entire Agreement. This Agreement, its Exhibits and
Schedules, and the documents executed on the Closing Date in connection
herewith, constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral and written, between the parties hereto with respect to the
subject matter hereof. No representation, warranty, promise, inducement or
statement of intention has been made by any party hereto which is not embodied
in this Agreement or such other documents, and no party hereto shall be bound
by, or be liable for, any alleged representation, warranty, promise, inducement
or statement of intention not embodied herein or therein.
SECTION 7.09 Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.10 Binding Effect, Benefits. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
SECTION 7.11 Assignability. Neither this Agreement nor any of the
parties' rights hereunder shall be assignable by any party hereto without the
prior written consent of the other parties hereto, except that Buyer may assign
its rights hereunder to a direct or indirect wholly-owned subsidiary of Buyer,
in which case such assignee shall succeed to all the rights of Buyer hereunder
and shall assume all of Buyer's obligations and liabilities hereunder.
SECTION 7.12 Public Announcements. Buyer and Seller will consult with
each other before issuing any press release or otherwise making any public
statement with respect to the transactions contemplated herein and shall not
issue any such press release or make any such public statement without the
approval of the other, unless counsel has advised such party that such release
or other public statement must be issued immediately and the issuing party has
not been able, despite its good faith efforts, to secure the prior approval of
the other party.
SECTION 7.13 Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future law,
rule or regulation, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision had never comprised a part hereof. The remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of such illegal, invalid or unenforceable provision, there
shall be added automatically as a part of
23
<PAGE>
this Agreement a legal, valid and enforceable provision as similar in terms to
such illegal, invalid or unenforceable provision as may be possible.
SECTION 7.14 Commercially Reasonable. For purposes of this Agreement,
"commercially reasonable" shall mean that a party shall act as a similarly
situated prudent business entity in the same or similar type of business would
act under similar circumstances, but not as though such entity were selling the
Assets.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
FIBERSTARS, INC.
By:
Name: __________________________________
Title: ___________________________________
UNISON FIBER OPTIC LIGHTING SYSTEMS, LLC
By:
Name: ___________________________________
Title: ___________________________________
24
<PAGE>
EXHIBIT A
LIST OF ASSETS
<PAGE>
EXHIBIT A-1
PURCHASED INTELLECTUAL PROPERTY
<PAGE>
EXHIBIT B
BILL OF SALE AND ASSIGNMENT AGREEMENT
<PAGE>
EXHIBIT C
WARRANTS
<PAGE>
EXHIBIT D
ASSUMPTION AGREEMENT
<PAGE>
EXHIBIT E
ANCILLARY AGREEMENTS
<PAGE>
EXHIBIT E-1
DEVELOPMENT AGREEMENT
<PAGE>
EXHIBIT E-2
SUPPLY AGREEMENT
<PAGE>
EXHIBIT E-3
CROSS-LICENSE AGREEMENT
<PAGE>
EXHIBIT E-4
PARENT AGREEMENT
<PAGE>
APPENDIX B
Unison Fiber Optic Lighting Systems, L.L.C.
Consolidated Financial Statements
for the year ended June 30, 1999
and the six months ended June 30, 1998
<PAGE>
Report of Independent Accountants
To the Management of
Unison Fiber Optic Lighting Systems, L.L.C.:
In our opinion, the accompanying balance sheet and the related statements of
operations, members' equity and cash flows, present fairly in all material
respects, the financial position of Unison Fiber Optic Lighting Systems, L.L.C.
(the "Company") at June 30, 1999 and 1998 and the results of its operations and
its cash flows for the year and six month period then ended, 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.
As discussed in Note 10, the Company will become a wholly-owned subsidiary of
Advanced Lighting Technologies, one of the Company members, upon the completion
of the purchase agreement. The accompanying financial statements were prepared
on a going concern basis and no adjustments have been made to reflect any
potential changes that might arise as a result of the aforementioned
transactions.
PricewaterhouseCoopers LLP
Cleveland, Ohio
December 1, 1999
<PAGE>
<TABLE>
Unison Fiber Optic Lighting Systems, L.L.C.
Balance Sheet
June 30, 1999 and 1998
- -------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 823,835 $ 2,889,105
Accounts receivable, trade, less allowance for doubtful
accounts of $60,275 in 1999 and $29,317 in 1998 179,771 59,640
Accounts receivable, member 367,438 255,000
Inventories 1,415,720 685,458
Prepaid expenses 28,661 78,972
----------- -----------
Total current assets 2,815,425 3,968,175
Property, plant and equipment, net 3,060,100 3,403,600
Goodwill, net 1,021,704 983,312
Other assets 50,679 11,603
----------- -----------
Total assets $ 6,947,908 $ 8,366,690
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable, trade $ 597,248 $ 188,283
Accounts payable, members 5,415,060 2,874,221
Accrued liabilities 374,595 149,972
----------- -----------
Total current liabilities 6,386,903 3,212,476
----------- -----------
Commitments and contingencies
Members' capital 3,561,005 11,154,214
Less: Note receivable member 3,000,000 6,000,000
----------- -----------
Total members' capital 561,005 5,154,214
----------- -----------
Total liabilities and members' capital $ 6,947,908 $ 8,366,690
=========== ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
Unison Fiber Optic Lighting Systems, L.L.C.
Statement of Operations
for the year ended June 30, 1999 and for the six months ended June 30, 1998
- --------------------------------------------------------------------------------
1999 1998
Net sales $ 864,833 $ 211,521
Cost of sales 2,016,647 370,224
----------- -----------
Gross loss (1,151,814) (158,703)
Selling and administrative expenses 3,492,464 1,501,196
Research and development 3,231,826 2,394,485
Restructuring expense 300,647 --
----------- -----------
Loss from operations 8,176,751 4,054,384
Other income:
Interest income 458,972 353,200
Other 9,470 --
----------- -----------
Net loss $ 7,708,309 $ 3,701,184
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
Unison Fiber Optic Lighting Systems, L.L.C.
Statement of Members' Equity
for the year ended June 30, 1999 and for the six months ended June 30, 1998
- --------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
<S> <C> <C>
Net loss $(7,708,309) $(3,701,184)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation 643,886 332,813
Amortization 76,708 37,876
Restructuring expenses 300,647 --
Member interest income not received (112,438) (255,000)
Gain on fixed asset disposals (2,690) --
Changes in assets and liabilities:
Accounts receivable (120,131) 88,852
Inventories (730,262) 217,376
Other assets 11,236 (80,825)
Accounts payable 408,965 188,283
Accrued liabilities (25,377) 89,350
----------- -----------
Net cash used in operating activities (7,257,765) (3,082,459)
Cash flows from investing activities:
Purchase of property, plant and equipment (352,919) (479,750)
Proceeds from property, plant and equipment disposals 4,575 --
----------- -----------
Net cash used in investing activities (348,344) (479,750)
Cash flows from financing activities:
Cash contributions from member 3,000,000 4,028,916
Accounts payable, members 2,540,839 2,422,398
----------- -----------
Net cash provided by financing activities 5,540,839 6,451,314
----------- -----------
Net change in cash (2,065,270) 2,889,105
Cash at beginning of period 2,889,105 --
----------- -----------
Cash at end of period $ 823,835 $ 2,889,105
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
Unison Fiber Optic Lighting Systems, L.L.C.
Statement of Members' Equity
for the year ended June 30, 1999 and for the six months ended June 30, 1998
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Total
Members' Members' Members'
Capital Receivable Equity
<S> <C> <C> <C>
Initial capital contributed $ 14,855,398 $ (6,000,000) $ 8,855,398
Net loss (3,701,184) -- (3,701,184)
------------ ------------ ------------
June 30, 1998 11,154,214 (6,000,000) 5,154,214
Member's payment on note receivable -- 3,000,000 3,000,000
Additional capital contributed 115,100 -- 115,100
Net loss (7,708,309) -- (7,708,309)
------------ ------------ ------------
June 30, 1999 $ 3,561,005 $ (3,000,000) $ 561,005
============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
<PAGE>
Unison Fiber Optic Lighting Systems, L.L.C.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization:
Unison Fiber Optic Lighting Systems, L.L.C. (the "Company") is a designer,
manufacturer and marketer of fiber optic lighting systems and systems
components, operating primarily in the United States. The Company was
formed on January 1, 1998 as a joint venture (Limited Liability
Corporation) of Rohm and Haas Company ("Rohm and Haas") and Advanced
Lighting Technologies ("Advanced Lighting") (together the "Member
Companies"). The Member Companies contributed to the joint venture cash,
promissory notes and certain assets in exchange for a 50% membership
interest.
2. Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Advanced Cablelite Corporation after
elimination of all significant inter-company accounts and transactions and
related revenues and expenses.
Accounting Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in certain circumstances that affect amounts reported in the
consolidated financial statements and footnotes. Actual results could
differ from those estimates.
Cash Equivalents
The Company invests only in highly liquid instruments, which it considers
to be cash equivalents.
Concentration of Credit Risk
The Company invests its excess cash primarily in high-quality money market
portfolio and high quality securities. The Company provides credit in the
normal course of business, primarily to customers and distributors in the
fiber optic lighting industry and generally collateral or other security is
not required. The Company conducts ongoing credit evaluations of its
customers and maintains allowances for potential losses which, when
realized, have been within the range of management's expectations.
During 1999, the Company had sales to one customer representing 14% of net
sales. Included in accounts receivable - trade at June 30, 1999 are
balances from three customers representing 15%, 12% and 12%, respectively.
Amounts related to doubtful accounts that were charged to expense for the
year ended June 30, 1999 and for the six months ended June 30, 1998 were
$69,030 and $29,317, respectively.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
6
<PAGE>
Unison Fiber Optic Lighting Systems, L.L.C.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Expenditures for
maintenance and repairs, which extend the useful life, are capitalized.
Depreciation is provided for using the straight-line method over the
following useful lives:
Machinery and equipment 5-7 years
Office and computer equipment 3-5 years
Furniture and fixtures 7 years
Leasehold improvements 2-3 years
Goodwill
Goodwill resulting from Advanced Lighting's acquisition of Advanced
Cablelite Corporation, a contributed asset to the Company (see Note 5), is
being amortized using the straight-line method over 15 years which
represents management's estimate of the customer relationships and industry
expertise acquired. For the year ended June 30, 1999 and the six months
ended June 30, 1998, amortization expense was $76,708 and $37,876,
respectively. Accumulated amortization totaled $114,584 at June 30, 1999
and $37,876 at June 30, 1998. The Company will continually evaluate whether
events and circumstance have occurred that indicate the remaining goodwill
may warrant revision.
Research and Development
Research and development costs, primarily the development of new products
and modifications of existing products, are charged to expense as incurred.
Revenue Recognition
The Company recognizes sales upon shipment.
Recent Pronouncements
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 costs as incurred. In general, SOP
98-5 is effective for 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 Financial Accounting Standards Board ("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 years beginning after June 15, 2000
(as deferred by SFAS 137 in June 1999). The Company does not currently hold
derivative instruments or engage in hedging activities.
6
<PAGE>
Unison Fiber Optic Lighting Systems, L.L.C.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Income Taxes
The Company is organized as a Limited Liability Company and for federal
income tax purposes elected to have the tax effects of profit and loss flow
directly to the Company's members. The Company accrues for and pays local
taxes and certain state taxes.
3. Inventories:
<TABLE>
Inventories consisted of the following:
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $ 748,089 $ 324,295
Work in process 33,275 53,909
Finished goods 634,356 307,254
----------- -----------
Total inventories $ 1,415,720 $ 685,458
=========== ===========
4 Property, Plant and Equipment:
Property, plant and equipment consisted of the following:
1999 1998
Manufacturing machinery and equipment $ 3,124,285 $ 2,961,606
Laboratory equipment 509,414 458,255
Office and computer equipment 246,708 135,597
Furniture and fixtures 73,116 54,618
Leasehold improvements 49,729 126,337
----------- -----------
4,003,252 3,736,413
Less: accumulated depreciation (943,152) (332,813)
----------- -----------
Property, plant and equipment, net $ 3,060,100 $ 3,403,600
=========== ===========
</TABLE>
Depreciation expense was $643,886 for the year ended June 30, 1999 and was
$332,813 for the six months ended June 30, 1998.
8
<PAGE>
Unison Fiber Optic Lighting Systems, L.L.C.
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Members Capital:
The Company was formed on January 1, 1998 as a joint venture of Rohm and
Haas and Advanced Lighting with each Member Company receiving a 50%
membership interest. The following schedule summarizes in aggregate the
contributed assets on January 1, 1998:
Cash $ 4,028,916
Note receivable 6,000,000
Accounts receivable 148,492
Inventory 902,834
Equipment 3,256,661
Goodwill 1,021,188
Other assets 9,751
Liabilities assumed (512,444)
-----------
Total investment 14,855,398
Less: non cash items 10,826,482
Cash investment $ 4,028,916
===========
Included in the above schedule are assets, including goodwill, and
liabilities contributed to the Company from Advanced Lighting's
wholly-owned subsidiary, Advanced Cablelite Corporation. In addition,
during July 1998 an earn-out requirement related to Advanced Cablelite
Corporation resulted in the Company recording an additional $115,100 of
goodwill and investment in the Company.
6. Employee Benefits:
The Company maintains a qualified cash or deferred compensation plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan") that covers
substantially all the employees of the Company. Under the 401(k) Plan, the
Company will make a matching contribution of 50% of the first 6% of an
employees' salary deferral. The Company's contributions totaled $18,897 for
the year ended June 30, 1999 and $4,386 for six months ended June 30, 1998.
7. Restructuring Charges:
In June 1999, the Company provided for certain costs, primarily employee
severance and outplacement costs, in connection with its restructuring
program. This restructuring program streamlined the Company's operations
and significantly reduced its workforce. The Company consolidated its Las
Vegas, Nevada showroom and its Bristol, Pennsylvania production operations
into its Dallas, Texas operations. Restructuring costs totaled $300,647 for
the year ended June 30, 1999.
8
<PAGE>
Unison Fiber Optic Lighting Systems, L.L.C.
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. Related Party Transactions:
The Company leases manufacturing, warehouse, laboratory and office
facilities from its Member Companies. In addition the Member Companies
provide at cost certain services, such as utilities, communication, and
engineering services. The Company also expenses and reimburses salary and
related benefit costs of certain Company employees, who are paid by Rohm
and Haas.
For the year ended June 30, 1999, the Company was charged $3,281,845 and
$166,512 for these facilities and services from Rohm and Haas and Advanced
Lighting, respectively. For the six months ended June 30, 1998 the Company
was charged $1,861,302 from Rohm and Haas and $805,402 from Advanced
Lighting.
The Company owed $4,586,076 to Rohm and Haas and $828,984 to Advanced
Lighting at June 30, 1999 and owed $1,861,302 to Rohm and Haas and
$1,012,919 to Advanced Lighting at June 30, 1998.
The Company has a $3 million promissory note, plus accrued interest of
$367,438, due from Advanced Lighting at June 30, 1999. At June 30, 1998,
the Company had a $3 million promissory note, plus accrued interest of
$127,500, due from Advanced Lighting and a $3 million promissory note, plus
accrued interest of $127,500, due from Rohm and Haas. These notes have been
recorded as a reduction of members' capital on the balance sheet. These
promissory notes were part of the member's contribution to the joint
venture, as described in Note 5. The Advanced Lighting promissory note and
accrued interest at the prime rate (7.75% and 8.5% at June 30, 1999 and
1998, respectively) are due and payable on January 1, 2000.
In addition, the Company had $525,000 and $2,775,000 invested (short-term
cash equivalent) with Rohm and Haas at June 30, 1999 and June 30, 1998,
respectively.
9. Commitments:
The Company leases building and certain equipment under non-cancelable
operating lease agreements. Total rent expense was $436,439 for the year
ended June 30, 1999 and $178,630 for the six months ended June 30, 1998.
Future minimum lease commitments, as of June 30, 1999, are as follows:
2000 $185,200
2001 8,618
2002 2,144
9
<PAGE>
Unison Fiber Optic Lighting Systems, L.L.C.
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. Subsequent Event:
On October 1, 1999, Rohm and Haas and Advanced Lighting signed a letter of
intent, in which Advanced Lighting will purchase Rohm and Haas' membership
interest in the Company. Advanced Lighting and Rohm and Haas expect to sign
the definitive agreement in January 2000.
Concurrent with purchasing Rohm and Haas' interest, Advance Lighting plans
to sell certain Company assets and the fiber optic technology developed by
the Company to Fiberstars, a fiber optic company headquartered in Fremont,
California. In exchange for these assets and technology, Advanced Lighting
will receive four warrants to purchase up to an aggregate of 1,000,000
shares of Fiberstar's Common Stock at an exercise price of $0.01 per
share. Each warrant when exercisable will allow the Company to purchase up
to 250,000 shares of Fiberstars Common Stock. The vesting of these warrants
will be subject to Fiberstars' common shares attaining certain market
prices in the future and to Fiberstars attaining sales levels of certain
products arising from the Company's technology.
Unison may elect at any time while a warrant remains outstanding, even if
the warrant is not yet exercisable, to cancel a particular warrant in
exchange for Fiberstars issuing to Unison a fixed number of shares of
Fiberstars Common Stock. Warrant No. 1 may be cancelled and exchanged for
151,250 shares of Fiberstars Common Stock, Warrant No. 2 may be cancelled
and exchanged for 119,375 shares of Fiberstars Common Stock, Warrant No. 3
may be cancelled and exchanged for 95,625 shares of Fiberstars Common Stock
and Warrant No. 4 may be cancelled and exchanged for 78,750 shares of
Fiberstars Common Stock.
The agreement calls for the Company to provide Fiberstars with $2 million
in research and development funds, to be paid over five quarters, against
milestones for the completion of development work on large core plastic
optical fiber as well as new technology lamp/optics projects. In exchange,
Fiberstars will pay royalties on product sales of these technologies of 3%,
2% and 1% over the next ten years, after which Fiberstars assumes exclusive
royalty-free rights. The Fiberstars letter of intent is subject to normal
closing conditions, including approval by Fiberstars' shareholders, due
diligence efforts and the execution of definitive agreements satisfactory
to the parties.
<PAGE>
APPENDIX C
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
[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.
<PAGE>
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
Lichtberatung 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 effects 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 expired 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 Rohm & 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 one year, 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 May
12, 1999 (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.
10.34 Purchase and Take-over Agreement between Frau Claudia Mann, acting for
LBM Lichtleit-Fasertechnik, Claudia Mann and Fiberstars Deutschland GmbH
and Bernhard Mann.
10.35* Asset Purchase Agreement dated as of December 30, 1998, between
Respironics, Inc. and Fiberstars, Inc.
10.36 Lease Agreement dated November 23, 1998 between Registrant and Catellus
Development Corporation.
10.37 Lease Agreement dated September 15, 1998 between Resistrant and Harsch
Investment Corp.
10.38 Memorandum of Understanding between Registrant and Water Quality
Management, Inc. dated January 22, 1999.
10.39 Promissory Note dated June 19, 1998 between Registrant and Fredrick N.
Martin
10.40 Promissory Note dated March 25, 1999 between Registrant and J. Steven
Keplinger
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
<PAGE>
APPENDIX D
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended September 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from . . . . . . . . . to . . . . . . . . . . .
Commission file number 0-24564
------------------
FIBERSTARS, INC.
(Exact name of registrant as specified in its charter)
------------------
California 94-3021850
- ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
44259 Nobel Drive, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (510) 490-0719
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Number of shares of Common Stock outstanding as of September 30, 1999: 3,987,261
Index to Exhibits is at page 15
Page 1
<PAGE>
<TABLE>
FIBERSTARS, INC.
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements:
a. Consolidated Balance Sheets
September 30, 1999 and December 31, 1998....................................3
b. Consolidated Statements of Operations
Three and nine months ended September 30, 1999 and 1998.....................4
c. Consolidated Statements of Comprehensive Operation
Three and nine months ended September 30, 1999 and 1998.....................5
d. Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998...............................6
e. Notes to Financial Statements.............................................7-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................9-13
Part II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................................14
Signatures......................................................................14
EXHIBITS
Index to Exhibits...............................................................15
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIBERSTARS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
September 30, December 31,
1999 1998
-------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,096 $ 1,290
Accounts receivable trade, net 5,046 5,210
Notes and other accounts receivables 201 771
Inventories, net 4,017 4,179
Prepaids and other current assets 458 369
Deferred income taxes 163 507
-------- --------
Total current assets 12,981 12,326
Fixed assets, net 2,175 1,522
Goodwill, net 3,983 4,403
Investment in joint venture 2 18
Other assets 173 566
Deferred income taxes 89 89
-------- --------
Total assets $ 19,403 $ 18,924
======== ========
LIABILITIES
Current Liabilities:
Accounts payable $ 2,352 $ 2,598
Accrued expenses 2,084 2,198
Current portion of long-term debt 8 107
-------- --------
Total current liabilities 4,444 4,903
Long-term debt, less current portion 708 667
-------- --------
Total liabilities 5,152 5,570
-------- --------
SHAREHOLDERS' EQUITY
Common stock 0 0
Additional paid-in capital 13,946 13,930
Note receivable from shareholder (75) (86)
Cumulative translation adjustments (46) 0
Retained earnings (accumulated deficit) 426 (490)
-------- --------
Total shareholders' equity 14,251 13,354
-------- --------
Total liabilities and shareholders' equity $ 19,403 $ 18,924
======== ========
The accompanying notes are an integral
part of these financial statements
Page 3
<PAGE>
<TABLE>
FIBERSTARS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 8,056 $ 5,477 $ 24,083 $ 16,298
Cost of sales 4,657 3,386 13,969 10,188
-------- -------- -------- --------
Gross profit 3,399 2,091 10,114 6,110
-------- -------- -------- --------
Operating expenses:
Research and development 368 301 1,021 952
Sales and marketing 1,874 1,192 5,833 3,812
General and administrative 666 372 1,818 1,151
-------- -------- -------- --------
Total operating expenses 2,908 1,865 8,672 5,915
-------- -------- -------- --------
Income from operations 491 226 1,442 195
Other income:
Equity in joint venture's loss 0 0 (15) (20)
Interest income, net 8 69 13 177
-------- -------- -------- --------
Income before income taxes 499 295 1,440 352
Provision for income taxes (180) (106) (524) (134)
-------- -------- -------- --------
Net income $ 319 $ 189 $ 916 $ 218
======== ======== ======== ========
Net income per share - basic $ 0.08 $ 0.05 $ 0.23 $ 0.06
======== ======== ======== ========
Shares used in per share calculation - basic 3,987 3,601 3,984 3,557
======== ======== ======== ========
Net income per share - diluted $ 0.08 $ 0.05 $ 0.23 $ 0.06
======== ======== ======== ========
Shares used in per share calculation - diluted 4,112 3,653 4,064 3,643
======== ======== ======== ========
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
Page 4
<PAGE>
<TABLE>
FIBERSTARS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATION
(amounts in thousands except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income $ 319 $ 189 $ 916 $ 218
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 12 0 (46) 0
-------------- ------------- -------------- --------------
Comprehensive income $ 331 $ 189 $ 870 $ 218
============== ============= ============== ==============
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
Page 5
<PAGE>
<TABLE>
FIBERSTARS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 916 $ 218
------- -------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 622 411
Provision for doubtful accounts receivable 56 72
Deferred income taxes 344 134
Equity in joint ventures' loss 15 20
Changes in assets & liabilities:
Accounts receivable 108 (207)
Notes and other receivable (50) 0
Inventories 162 (232)
Prepaid expenses and other current assets (89) (17)
Other assets 393 (100)
Accounts payable (246) (98)
Accrued expenses (113) 522
------- -------
Total adjustments 1,202 505
------- -------
Net cash provided by operating activities 2,118 723
------- -------
Cash flows from investing activities:
Sale of short-term investments 0 517
Repayment of loans made to officers 0 44
Loans made to officers 0 (30)
Acquisition of business, net of cash acquired 0 (260)
Repayment of loans made under notes receivable 620 0
Acquisition of fixed assets (954) (310)
------- -------
Net cash used in investing activities (334) (39)
------- -------
Cash flows from financing activities:
Cash proceeds from sale of common stock 27 182
Repayment of long term debt (57) (13)
------- -------
Net cash provided by (used in) financing activities (30) 169
------- -------
Effect of exchange rate changes on cash 52 0
------- -------
Net increase in cash and cash equivalents 1,806 853
Cash and cash equivalents, beginning of period 1,290 523
------- -------
Cash and cash equivalents, end of period $ 3,096 $ 1,376
======= =======
Non-cash investing activities:
Common stock issued in connection with acquisitions $ 0 $ 550
======= =======
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
Page 6
<PAGE>
1. Summary of Significant Accounting Policies
Interim Financial Statements (unaudited)
Although unaudited, the interim financial statements in this report reflect all
adjustments, consisting of normal recurring accruals, which are, in the opinion
of management, necessary for a fair statement of financial position, results of
operations and cash flows for the interim periods covered and of the financial
condition of the Company at the interim balance sheet dates. The results of
operations for the interim periods presented are not necessarily indicative of
the results expected for the entire year.
The year-end balance sheet information was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto for the year
ended December 31, 1998, contained in the Company's 1998 Annual Report to
Shareholders.
Earnings Per Share
The Company presents its earnings per share (EPS) in accordance with SFAS 128
which requires the presentation of basic and diluted EPS. Basic EPS is computed
by dividing income available to shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed by 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 and warrants.
<TABLE>
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):
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator - Basic and diluted EPS
Net income $ 319 $ 189 $ 916 $ 218
Denominator - Basic EPS
Weighted average shares outstanding 3,987 3,601 3,984 3,557
------ ------ ------ ------
Basic earnings per share $ 0.08 $ 0.05 $ 0.23 $ 0.06
====== ====== ====== ======
Denominator - Diluted EPS
Denominator - Basic EPS 3,987 3,601 3,984 3,557
Effect of dilutive securities:
Stock options 125 52 80 86
------ ------ ------ ------
4,112 3,653 4,064 3,643
------ ------ ------ ------
Diluted earnings per share $ 0.08 $ 0.05 $ 0.23 $ 0.06
====== ====== ====== ======
</TABLE>
Options and warrants to purchase 1,053,802 shares of common stock were
outstanding at September 30, 1999, but were not included in the calculation of
diluted EPS because their inclusion would have been antidilutive. At September
30, 1998, options and warrants to purchase 603,725 were outstanding, but were
not included in the calculation of diluted EPS because their inclusion would
have been antidilutive.
Page 7
<PAGE>
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
September 30, December 31,
1999 1998
------ ------
(unaudited)
Raw materials $2,790 $2,780
Finished Goods 1,227 1,399
------ ------
$4,017 $4,179
====== ======
3. Comprehensive Income
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
This statement requires the disclosure of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is defined as net income plus net sales, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net income. A
separate statement of comprehensive income has been presented with this report.
4. Significant Equity Transactions
There were no significant equity transactions during the quarter.
5. Segments and Geographic Sales
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):
Nine months ended September 30,
-------------------------------
1999 1998
------- -------
(unaudited) (unaudited)
U.S. Domestic $16,817 $14,025
Foreign 7,266 2,273
------- -------
$24,083 $16,298
======= =======
Page 8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion should be read in conjunction with the attached
financial statements and notes thereto.
RESULTS OF OPERATIONS
Net sales increased 47% to $8,056,000 for the quarter ending September 30, 1999
as compared to the net sales for the same period in 1998. The increase was a
result of growth in the commercial lighting and pools product sales. Net sales
from companies acquired in 1998 also contributed to net sales growth in the 3rd
quarter. For the nine months ending September 30, 1999 net sales were
$24,083,000, a 48% increase over the prior year. Net sales year-to-date grew in
both pools and commercial lighting and was augmented by contributions from
companies acquired in 1998.
Gross profit increased to $3,399,000 in the 3rd quarter of 1999, a 63% increase
over the same period in the prior year. The gross profit margin was 42% for the
quarter, an increase from the 38% gross margin achieved in the 3rd quarter of
1998. The increase in gross margin was primarily a result of lower warranty and
freight costs in 1999 versus 1998. Gross profit year-to-date was $10,114,000,
66% above the gross profit for the same period in the prior year. The gross
profit margin year-to-date was 42% compared to 37% in the prior year. The
improvement was a result of lower costs for components along with lower warranty
expenses.
Research and development expenses were $368,000 in the 3rd quarter of 1999, a 6%
decrease over the 3rd quarter of 1998 due to lower travel and project costs.
Research and development expenses were 5% of sales in the 3rd quarter 1999
versus 5% in 1998. Year-to-date, research and development expenses were
$1,021,000 compared to $952,000 in the prior year. As a percentage of net sales,
research and development were 4% year-to-date versus 6% in the prior year
largely as a result of expenses remaining constant while net sales increased.
Sales and marketing expenses were $1,874,000 in the 3rd quarter of 1999 as
compared to $1,192,000 in 1998, an increase of 57%. The increase was primarily
due to $477,000 in additional expenses for the 3rd quarter of 1999 from the
companies acquired in 1998 for which there were no expenses in the 3rd quarter
of 1998. Sales and marketing expenses were 23% of sales in the 3rd quarter of
1999 compared to 22% in 1998. Year-to-date, sales and marketing expenses were
$5,833,000 compared to $3,812,000, a 53% increase. The increase was largely a
result of $1,334,000 in additional expenses from companies acquired in 1998 for
which there were no expenses in the nine months of 1998. Sales and marketing
expenses were 24% of net sales year-to-date in 1999 versus 23% for the same
period in the prior year.
General and administrative costs were $666,000 in the 3rd quarter 1999, an
increase of 79% over 1998 costs. This increase was largely a result of
additional general and administrative costs in the third quarter of 1999 from
companies acquired in 1998 for which there were no expenses in the 3rd quarter
of 1998, as well as moving costs associated with moving the main Fremont office
to a new location. General and administrative costs were 8% of net sales in the
quarter ending September 30, 1999 versus 7% for the same quarter in 1998.
Year-to-date, general and administrative expenses were $1,818,000 in 1999
compared to $1,151,000 for the same period in the prior year. Increases were
largely due to additional costs from companies acquired at the end
Page 9
<PAGE>
of 1998. General and administrative costs were 8% of net sales year-to-date in
1999 versus 7% for the same period in the prior year.
Total operating expenses were 36% of net sales in the 3rd quarter of 1999
compared to 34% for the same period in the prior year. Year-to-date, total
operating expenses were 36% of net sales in 1999, the same as achieved for the
equivalent period in 1998.
Other income and expense includes income from joint ventures and interest income
and expense. Net interest income was $8,000 in the 3rd quarter of 1999 compared
to $69,000 in 1998. The decrease was due primarily to a use of cash in 1998 to
acquire three companies, along with a general decrease in interest rates since
the 3rd quarter of 1998. Year-to-date, the Company incurred losses from its
joint venture with its Australian distributor of $15,000 in 1999 compared to a
loss of $20,000 for the same period in 1998. The Company is working with its
Australian distributor to eliminate these losses in future periods. Net interest
income year-to-date was $13,000 in 1999 versus $177,000 for the same period in
1998, largely as a result of a decrease in the cash position from 1998 to 1999
due to the usage of cash for acquisitions.
The income tax rate in the 3rd quarter 1999 was 36%, the same rate recorded in
1998. The tax rate is lower than historical rates due to the recognition of
certain tax benefits accumulated over prior years. Year-to-date, the income tax
rate was 36%.
As a result of the increase in sales in the 3rd quarter of 1999 over the same
quarter in 1998 and the improvement in gross margin, the Company's net income
increased to $319,000 in the 3rd quarter of 1999 as compared to net income of
$189,000 for the same period in 1998. Year-to-date, net income was $916,000
compared to $218,000 for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
For the period ended September 30, 1999, cash and cash equivalents when combined
with short-term investments were $3,096,000 as compared to $1,290,000 for the
year ended December 31, 1998.
During the first nine months of 1999, net income contributed $916,000 to cash
compared to a $218,000 contribution from net income for the same period in 1998.
After adjusting for depreciation and amortization and deferred income taxes,
along with a small contribution from working capital, there was $2,118,000 in
cash contributed from operating activities in the nine month period as compared
to a total contribution from operating activities of $723,000 for the same
period in 1998. Cash utilized in 1999 to acquire fixed assets was partially
offset by cash received against loans outstanding for a divestiture made in
fiscal 1998, resulting in a net cash used of $334,000 for investing activities.
This compares to a use of $39,000 for investing activities in 1998. A
significant portion of the fixed assets acquired in 1999 were associated with
adding tenant improvements to the new Fremont office building which the company
moved into during the 3rd quarter. There was a net use of $30,000 in cash in
1999 for financing activities, primarily for paying down long term debt of
subsidiaries. This compares to a net provision of cash of $169,000 for the first
nine months of 1998. As a result of the cash provided from operating activities
and investing activities combined with exchange rate effects, there was a net
provision of cash in the first nine months of 1999 of $1,806,000 which resulted
in an ending cash balance of $3,096,000. This compares to a net provision of
$853,000 in cash for the same period in 1998, resulting in an ending cash
balance of $1,376,000 for that period. It is expected that the cash balances
will decrease during the 4th quarter of 1999 as a result of the seasonal
inventory purchases associated with distributor sales in the Pool market.
Page 10
<PAGE>
The Company has a $2.5 million unsecured line of credit for working capital
purposes and a term loan commitment of $500,000 for equipment purchases. These
are renewed on an annual basis, with the most recent renewal in August 1999,
subsequent renewals will also be in August. As of September 30, 1999 the Company
had no borrowings outstanding against either of these lines of credit.
The Company also had a total borrowing of $708,000 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 Berching, 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.
OTHER FACTORS
This Report on Form 10QSB 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, statements regarding
improvements in the Company's cash position. 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
along with our other periodic reports on file with the SEC, prior to investing
in our stock.
BUSINESS 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 fall 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 net sales.
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 and the renovation of
existing buildings. 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
net sales 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
Page 11
<PAGE>
impacted by recent strength in the overall U.S. economy. If the U.S. economy
softens, our operating results will probably suffer.
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 Rohm &
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 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 us 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
Page 12
<PAGE>
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,
within the next year, 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 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. As of this report, the Company has had
responses from a portion of these customers and suppliers. Of those responding,
the majority are compliant, with the rest indicating they will be compliant by
year end 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.
Page 13
<PAGE>
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.
Page 14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits have been filed with this Report:
Exhibit 10.30 - Extension - Term Commitment Note of the
Registrant dated as of August 1, 1999, to
Wells Fargo Bank.
Exhibit 10.31 - Extension - Revolving Line of Credit Note of
the Registrant dated as of August 1, 1999, to
Wells Fargo Bank.
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the
period covered by this report.
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIBERSTARS, INC.
Date: November 15, 1999 By: /s/ Robert A.Connors
-------------------------------
Robert A.Connors
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 15
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<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit Page
Number Number
------ ------
<S> <C> <C>
10.30 Extension - Term Commitment Note of the Registrant dated as of
August 1, 1999, to Wells Fargo Bank. 16
10.31 Extension - Revolving Line of Credit Note of the Registrant dated
as of August 1, 1999, to Wells Fargo Bank. 21
27 Financial Data Schedule
</TABLE>
Page 16
<PAGE>
Appendix E
PROXY FIBERSTARS, INC. PROXY
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints David N. Ruckert, John B. Stuppin and
Robert A. Connors, or any of them, proxy and attorney-in-fact, with full power
to designate a substitute representative, to represent the undersigned and to
vote all of the shares of stock in Fiberstars, Inc., a California corporation
(the "Company"), which the undersigned is entitled to vote at the Special
Meeting of the Shareholders of the Company to be held at Fiberstars' corporate
offices, 44259 Nobel Drive, Fremont, California 94538, Friday, January 28, 2000
at 2:00 P.M. local time, and at any adjournment thereof as hereinafter specified
upon the proposals listed below and as more particularly in the Proxy Statement
of the Company dated January 14, 2000 (the "Proxy Statement"), receipt of which
is hereby acknowledged. This proxy is first being mailed on or about January 14,
2000.
(Continued, and to be signed on the other side)
- --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
<PAGE>
<TABLE>
<S> <C> <C>
[X] Please mark
your votes
as this
FOR AGAINST ABSTAIN
1. Approval of the issuance or exchange of up
to 1,000,000 shares of Company Common [ ] [ ] [ ]
Stock upon exercise or exchange of certain
warrants granted pursuant to an Asset
Purchase Agreement, dated on or around
January 14, 2000, among the Company and
Unison Fiber Optic Lighting Systems, LLC.
2. In their discretion with respect to such
other business as properly may come before
the meeting or any adjustments or
postponements thereof.
I PLAN TO ATTEND THE MEETING
[ ]
The shares represented hereby will be voted as
specified. If no specification is made, such shares
will be voted FOR the above proposal 1.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT
THIS MEETING REGARDLESS OF THE NUMBER OF SHARES YOU
HOLD. PLEASE DATE, SIGN, AND RETURN THE PROXY
PROMPTLY IN THE ENCLOSED, STAMPED ENVELOPE.
(Be sure to date proxy.)
Signature(s) __________________________________________________________________ Dated __________________________________, 2000
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</TABLE>
^ FOLD AND DETACH HERE ^
