-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NLzyDGa/HNCoJhVVjHmTaCjd3TosudR5pFDkcmlHt8zSWPM+ntky/80WRjG0E3q9 VbrX4TfSVTTolB5bU3SapA== 0001023363-97-000009.txt : 19970401 0001023363-97-000009.hdr.sgml : 19970401 ACCESSION NUMBER: 0001023363-97-000009 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIBERSTARS INC /CA/ CENTRAL INDEX KEY: 0000924168 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 943021850 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24230 FILM NUMBER: 97571632 BUSINESS ADDRESS: STREET 1: 2883 BAYVIEW DR CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5104900719 MAIL ADDRESS: STREET 1: 2883 BAYVIEW DR CITY: FREMONT STATE: CA ZIP: 94538 10KSB 1 FOR THE 12 MONTH PERIOD ENDED 12/31/96 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [ ] 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, 1996 were $15,576,000. The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $9,691,000 as of March 26, 1997 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 26, 1997, there were 3,412,721 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 1997 Annual Meeting of Shareholders. 14 PART I Item 1. Description of Business Except for historical information contained herein, the following material includes forward-looking statements that are subject to certain risks and uncertainties. Discussion containing such forward-looking statements will be found in the material set forth under, among other places in this Report, "Description of Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations. By way of example and not limitation, this Report contains forward-looking statements regarding prospective competition and the results thereof upon the Company's business and operating results, the development of existing and future technologies, the prospective impact of consolidation among the Company's customer base, and trends discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding the Company's results of operations. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors discussed in this Report, including without limitation the factors discussed in "Risk Factors." These factors should be considered carefully by those considering transactions in the Company's securities. Overview Fiberstars 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 can not 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 during 1996 included a lower cost version of the largest selling commercial illuminator, with available features which include synchronization of colors among groups of illuminators, and DMX 512 protocol capability that enables computer-control of the units to produce special effects. Fiberstars' FS4 pool illuminator, introduced for the 1996 season, provides light output at least equal to previous models at substantially lower cost. This product led the way to a strong increase in pool lighting sales and was the Company's most successful product in 1996. Late in 1996, the Company introduced a new brighter system for the 1997 season. 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 consistent brightness for side-lit fiber runs up to 120 feet in length. For end-lit applications, several spotlights are typically connected to a single illuminator and are placed no farther than fifty feet from the illuminator. In 1996, the Company introduced BritePak(R) II, a new version of its side-emitting fiber product line, with up to 38% improvement in brightness. The performance improvement in this product line was due in part to the Company's use of new equipment installed at Fiberstars to bring fiber processing in house. Fixtures and Accessories Certain fixtures and accessories have been designed by Fiberstars to feature in the Company's product lines. Other fixtures are supplied by third parties. A new paver fixture, one of the four end-lit fixtures introduced in 1996, received an "Award of Distinction" in the New Product Showcase at Lightfair 1996, the main commercial lighting tradeshow in the United States. 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 Hyatt 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, as well as numerous regional and local pool builders throughout the United States and Canada. 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. Fiberstars' commercial lighting products are sold internationally by approximately 19 distributors that sell into more than 45 countries, including Crescent Lighting in the U.K., which oversees other distributors in Europe; Mitsubishi in Japan; and Fiberstars Australasia Pty Ltd., a 46%-owned joint venture that sells products in Australia, New Zealand and Fiji. These distributors are primarily responsible for any marketing activities in their territories. 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 of 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. In the second half of 1996, the Company's largest customer, BLN (a pool products distributor) was acquired by South Central Pools, another pool distributor and also a Fiberstars customer. Together these customers accounted for 21% of the Company's 1996 net sales. The Company expects its business relationship with South Central to continue satisfactorily; 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. Substantially all sales of the Company's swimming pool lighting systems to date have been made in the United States and Canada. 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 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 and safety. The Company believes its products compete favorably against conventional lighting in such areas as aesthetic appeal, ease of installation and maintenance, power consumption and safety. In addition, 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 dark 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 1995, the Company redesigned several of its illuminators, substantially reducing costs so that in 1996, the installed price of a basic Fiberstars system was reasonably close to that of conventional electric lighting. During 1996, the Company achieved significant brightness improvements in certain illuminators and fiber products. 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 been limited, but is increasing. In the pool market, American Products, the largest producer of electric lights for pools, introduced a fiber optic product line in 1996. In addition, Hayward Pool Products, another sizable manufacturer of pool lights and other equipment, entered into an agreement with a small manufacturer of fiber optic systems to offer those systems to the pool market under the Hayward name. In commercial lighting, fiber optic lighting products are offered by an increasing number of smaller companies, some of which compete aggressively on price. 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 markets Fiberstars' BritePak(R) fiber tubing on an OEM basis, along with Philips' own illuminators and other 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. Prior to 1996, most of the Company's fiber processing activities were performed by subcontractors to Fiberstars' specifications. During 1996 the Company successfully brought these activities in house. Equipment was acquired and installed to encase the fiber bundles in flexible jackets. The patented process used to cable the fiber for side-emitting products is now being performed on equipment designed and built by Fiberstars exclusively for this purpose. These steps have reduced processing costs and improved quality. Mitsubishi is the sole supplier of the Company's fiber, under a supply agreement lasting until March 1998. The Company expects to maintain this relationship with Mitsubishi indefinitely; Mitsubishi owns approximately 3.6% 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 1996, the Company significantly improved the brightness of its primary pool lighting system and of its side-emitting fiber products, and engaged in ongoing activities expected to result in improved performance of the Company's commercial illuminators in 1997 and beyond. 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. 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 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, and to Crescent Lighting in the United Kingdom for sale in the European Economic Community, in exchange for certain royalty payments. Employees At December 31, 1996, Fiberstars employed 47 people full time, of whom 14 were involved in sales, marketing and customer service, 7 in research and product development, 18 in assembly and quality assurance, and 8 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 expiring in 1999, subject to a renewal option for a five-year additional term. The Company also leases a separate 7,800 square foot facility in Fremont, California, devoted to fiber processing. This lease also expires in 1999 and is subject to renewal options for three additional years. Item 3. Legal Proceedings On June 8, 1994, a lawsuit was filed against the Company and others by Steven Lombardo, James Rogers and Landtech Investment Corporation ("Landtech"), who purported to be shareholders or affiliates of shareholders of the Company. The complaint made various allegations in connection with a proposed investment by Landtech in the Company in 1993. On March 24, 1997, the case was dismissed in its entirety, without liability on the part of the Company. 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, 1996. 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 by NASDAQ for the periods indicated. High Low First quarter 1995 6 1/2 5 1/4 Second quarter 1995 6 1/8 4 3/8 Third quarter 1995 6 3 1/4 Fourth quarter 1995 5 1/2 3 5/8 First quarter 1996 4 3/4 3 1/2 Second quarter 1996 6 1/4 4 Third quarter 1996 6 5 Fourth quarter 1996 5 1/2 4 3/8 There were approximately 200 holders of record of the Company's Common Stock as of March 26, 1997, and the Company estimates that at that date there were approximately 800 additional beneficial owners. The Company has not 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 The following discussion should be read in conjunction with the attached financial statements and notes thereto. Results of Operations 1996 Compared with 1995 Net sales increased to $15,576,000 in 1996, up 32% from 1995 sales of $11,798,000. The 1996 increase is primarily attributable to introduction of new, lower cost products, as well as improved conditions in the swimming pool construction market, which resulted in a significant increase in sales of the Company's pool lighting products. Sales of commercial lighting and medical products also increased compared to 1995. International sales accounted for approximately 15% and 18% of net sales in 1996 and 1995, respectively, most of which represented sales of commercial lighting products. The Company's gross margin percentage decreased to 42% in 1996 from 43% in 1995. The decrease was primarily attributable to an increase in fixed overhead in connection with the Company's new fiber processing facility. Research and development expenses increased by 22% to $962,000 in 1996, reflecting the Company's continuing commitment to improving its technology and products. As a percentage of sales, research and development expenses decreased from 6.7% to 6.2%. The Company anticipates that research and development expenses will continue to increase in absolute dollars in future periods, but may fluctuate as a percentage of sales. Selling and marketing expenses increased by 13% to $3,728,000 in 1996. Increases occurred primarily in the pool division and included increases in advertising, sales literature and personnel related expenses. As a percentage of sales, selling and marketing expenses declined to 24% of net sales in 1996 from 28% in 1995. General and administrative expenses decreased by 7% to $1,254,000 in 1996, primarily due to lower legal fees combined with other expense reductions. The Company expects general and administrative expenses to increase moderately in future periods. Total operating expenses increased by $500,000 to $5,944,000 in 1996. As a percentage of sales, total operating expenses decreased from 46% in 1995 to 38% in 1996, as sales increased more rapidly than expenses. Other income and expense includes interest income and expense, plus income from the Company's joint ventures recognized under the equity method. Net interest income improved to $246,000 in 1996 from $181,000 in 1995, primarily due to higher cash balances. Income from joint ventures decreased to $8,000 in 1996, compared to $117,000 in 1995, because the Company sold its equity interest in Fiberoptic Medical Products as of February 21, 1996 (see Note 5 to Financial Statements). The Company does not expect income from its remaining joint venture to have a material impact on the Company's financial results in the near future. The Company recorded net income of $511,000 in 1996, compared to a net loss of $15,000 in 1995. 1995 Compared with 1994 Net sales decreased to $11,798,000 in 1995, down 13% from 1994 sales of $13,562,000. The 1995 decrease was primarily attributable to a weak year in the swimming pool construction market, which resulted in a significant decrease in sales of the Company's pool lighting products. Sales of commercial lighting and medical products increased slightly compared to 1994. International sales accounted for approximately 18% and 16% of net sales in 1995 and 1994, respectively, most of which represented sales of commercial lighting products. The Company's gross margin percentage decreased to 43% in 1995, compared to 44% in 1994. The decrease is primarily attributable to fixed overhead, which remained level with 1994 in absolute dollars, but was a higher percentage of sales due to the decrease in revenue. Research and development expenses increased by 1% to $791,000 in 1995, reflecting the Company's continuing commitment to improving its technology and products. As a percentage of sales, research and development expenses increased from 5.8% to 6.7%. Selling and marketing expenses also increased by 1% to $3,311,000 in 1995, an increase from 24% of sales in 1994 to 28% in 1995. Increases occurred primarily in the Commercial Lighting Division and included increases in advertising, sales literature and personnel related expenses. These increases were partly offset by reduced commissions associated with lower sales levels in the Pool Division. General and administrative expenses totaled $1,342,000 in 1995, an increase of $372,000 from $970,000 in 1994. The increase was primarily attributable to higher operating costs of operating as a public company for the full year 1995, following the Company's IPO in August 1994 - including professional fees, directors and officers insurance, SEC and shareholder reporting, including annual report publication. Litigation expenses related to a shareholder lawsuit against the Company also contributed to the increase. As a percentage of sales, total operating expenses increased from 37% in 1994 to 46% in 1995. This increase results from the increase in absolute dollar expenses (mainly general and administrative), combined with the decrease in sales. Other income and expense includes interest income and expense, plus income from the Company's joint ventures recognized under the equity method. Net interest income was $181,000 in 1995, compared to net interest expense of $12,000 in 1994. This improvement is primarily attributable to higher cash balances after the Company's IPO. Income from joint ventures improved from $55,000 in 1994 to $117,000 in 1995. The Company recorded a net loss of $15,000 in 1995, compared to net income of $2,062,000 in 1994. Net income for 1994 included an income tax benefit of $1,078,000. Seasonality; Risk Factors The Company's quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability. These include factors relating to competition, such as competitive pricing pressure and the potential introduction of new products by competitors; manufacturing factors, including constraints in the Company's manufacturing and assembly operations and shortages or increases in the prices of raw materials and components; sales and distribution factors, such as changes in product mix or distribution channels resulting in lower margins, the loss of a significant distributor or sales representative, the loss of a significant customer or swimming pool builder, the effects of volume discounts that may be granted to larger customers, product returns and exchanges, and seasonality of sales, particularly in sales of the Company's swimming pool and spa lighting products; product development and introduction problems, such as increased research, development and marketing expenses associated with new product introductions, delays in the introduction of new products and technologies and adverse effects on sales of existing products; as well as other factors, including levels of expenses relative to revenue levels, personnel changes, expenses that may be incurred in litigation, generally prevailing economic conditions and fluctuations in foreign currency exchange rates. The Company's annual and quarterly results of operations also have been and will continue to be affected by national economic and other factors, including factors affecting the construction of new swimming pools, such as housing market trends, interest rates and the weather. The Company's quarterly operating results are also substantially affected by the market's acceptance of the Company's products and the level and timing of orders received. Historically the Company has shipped a substantial portion of its quarterly sales in the last month of each of the second and fourth quarters of the year. Significant portions of the Company's expenses are relatively fixed in advance based upon the Company's forecasts of future sales. If sales fall below expectations in any given quarter, the Company's operating results will be adversely affected. In addition, certain product development and marketing expenditures may vary significantly from quarter to quarter and are made well in advance of potential resulting revenue. Sales of the Company's pool and spa lighting products, which currently are available only with newly constructed pools and spas, are highly dependent upon the level of such construction. Sales of commercial lighting products also depend significantly upon the level of new building construction. Because of the seasonality of construction, the Company's sales of swimming pool and commercial lighting products, and thus the Company's 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 the Company cannot predict the extent to which these seasonal trends will continue. The Company anticipates that any future growth in the fiber optic lighting market will be accompanied by increasing competition in a number of its product lines. Such competition could adversely affect the Company's operating results. Liquidity and Capital Resources For the year ended December 31, 1996, cash and cash equivalents decreased by $236,000. Investments in short term marketable securities increased by $869,000. Cash provided by operating activities totaled $853,000, largely resulting from operating income before depreciation, partly offset by an increase in inventories. Investing activities absorbed $1,132,000, including $869,000 to purchase short term securities, $400,000 in acquisition of fixed assets, and loans to officers totaling $161,000, partly offset by proceeds of $298,000 from the sale of the Company's joint venture investment in Fiber Optic Medical Products. In June 1996, the Company renewed its $1 million unsecured line of credit for working capital purposes and its $500,000 term loan commitment to finance equipment purchases. Both lines expire on June 28, 1997. At December 31, 1996, the Company had no borrowings outstanding against either of these lines of credit. 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. 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. 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 1997 Annual Meeting of Shareholders to be held on May 21, 1997 (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, 1996, are as follows: Name Age Position George K. Awai 41 Vice President, Research and Development Barry R. Greenwald 50 Senior Vice President and General Manager, Pool Division J. Arthur Hatley 47 Vice President and General Manager, Commercial Lighting J. Steven Keplinger 37 Senior Vice President, Operations William C. Lapworth 46 Vice President, Finance, Chief Financial Officer and Secretary Fredrick N. Martin 53 Senior Vice President, Engineering, R&D and Commercial Lighting - ------------- 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 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. Lapworth joined the Company in July 1993 as Vice President, Finance and Chief Financial Officer, and became Secretary in February 1994. From November 1987 to November 1992, Mr. Lapworth served as Chief Financial Officer of Standard Engineering Data Company. From 1981 to 1987, he served in various financial management capacities, including Controller and Chief Financial Officer, with Omega Performance Corporation. He previously held financial positions with Progressive Corporation and the Pillsbury Company. Mr. Lapworth earned his C.P.A. certificate at Price Waterhouse and is a graduate of Duke University and Stanford Graduate School of Business. Mr. Martin joined the Company in February 1997 as Senior Vice President responsible for Engineering, R&D and Commercial Lighting sales and marketing. 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. 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 16 of this report. (b) There were no reports on Form 8-K filed by the registrant during the quarter ended December 31, 1996. 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+ 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 Registrable 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). 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). 10.18 Loan Agreement dated as of June 28, 1996, between the Registrant and Wells Fargo Bank. 10.19 Term Commitment Note of the Registrant dated as of June 28, 1996, to Wells Fargo Bank. 10.20 Revolving Line of Credit Note of the Registrant dated as of June 28, 1996, to Wells Fargo Bank. 10.21 Amendment to 1994 Stock Option Plan, effective as of December 6, 1996. 10.22 Promissory Note dated as of October 7, 1996, issued in favor of the Registrant by Steve Keplinger. 10.23 Promissory Note dated as of March 25, 1997, issued in favor of the Registrant by Barry Greenwald. 11.1 Statement Regarding Computation of Net Income (Loss) per Share. 23.1 Consent of Independent Accountants. 27.1 Financial Data Schedule. * Confidential treatment requested + Management Compensatory Plan or Arrangement FIBERSTARS, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES As of December 31, 1996 and 1995 and For the Three Years Ended December 31, 1996 Page Financial Statements: Balance Sheets..................................................... F-1 Statements of Operations........................................... F-2 Statements of Shareholders' Equity................................. F-3 Statements of Cash Flows........................................... F-4 Notes to Financial Statements...................................... F-5 Report of Independent Accountants....................................... F-20 All schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. F-1 FIBERSTARS, INC. BALANCE SHEETS, December 31, 1996 and 1995 (amounts in thousands except share and per share amounts)
ASSETS 1996 1995 -------------- -------------- Current assets: Cash and cash equivalents $ 1,520 $ 1,756 Short-term investments 3,315 2,446 Accounts receivable, net of allowances for doubtful accounts of $236 in 1996 and $209 in 1995 2,621 2,614 Notes receivable from officers 91 Inventories 2,168 1,904 Prepaids and other current assets 181 176 Deferred income taxes 585 668 -------------- -------------- Total current assets 10,481 9,564 Fixed assets, net 832 754 Investment in joint ventures 52 342 Notes receivable from officers, less current portion 70 Other assets 74 21 Deferred income taxes 553 813 -------------- -------------- Total assets $ 12,062 $ 11,494 -------------- -------------- LIABILITIES Current liabilities: Accounts payable $ 967 $ 1,098 Accrued expenses 1,122 977 Current portion of long-term debt 13 13 -------------- -------------- Total current liabilities 2,102 2,088 Long-term debt, less current portion 28 40 -------------- -------------- Total liabilities 2,130 2,128 -------------- -------------- Commitments and contingencies (Note 8). SHAREHOLDERS' EQUITY Preferred stock, par value $0.0001 per share: Authorized: 2,000,000 shares in 1996 and 1995 Issued and outstanding: no shares in 1996 and 1995 Common stock, par value $0.0001 per share: Authorized: 30,000,000 shares in 1996 and 1995 Issued and outstanding: 3,412,680 shares in 1996 and 3,380,615 shares in 1995 - - Additional paid-in capital 11,903 11,848 Note receivable from shareholder (75) (75) Accumulated deficit (1,896) (2,407) -------------- -------------- Total shareholders' equity 9,932 9,366 -------------- -------------- Total liabilities and shareholders' equity $ 12,062 $ 11,494 -------------- --------------
The accompanying notes are an integral part of these financial statements. F-2 FIBERSTARS, INC. STATEMENTS OF OPERATIONS for the years ended December 31, 1996, 1995 and 1994 (amounts in thousands, except per share amounts)
1996 1995 1994 ------------ ------------ ------------ Net sales $ 15,576 $ 11,798 $ 13,562 Cost of sales 9,032 6,678 7,592 ------------ ------------ ------------ Gross profit 6,544 5,120 5,970 ------------ ------------ ------------ Operating expenses: Research and development 962 791 784 Sales and marketing 3,728 3,311 3,275 General and administrative 1,254 1,342 970 ------------ ------------ ------------ Total operating expenses 5,944 5,444 5,029 ------------ ------------ ------------ Income (loss) from operations 600 (324) 941 Other income (expense): Equity in joint ventures' income 8 117 55 Interest and other income 252 191 65 Interest expense (6) (10) (77) ------------ ------------ ------------ Income (loss) before (provision for) benefit from income taxes 854 (26) 984 (Provision for) benefit from income taxes (343) 11 1,078 ------------ ------------ ------------ Net income (loss) $ 511 $ (15) $ 2,062 ------------ ------------ ------------ Net income (loss) per share $0.15 $ (0.00) $0.75 ------------ ------------ ------------ Shares used in per share calculation 3,468 3,344 2,761 ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-3 FIBERSTARS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended December 31, 1996, 1995 and 1994 (in thousands)
Preferred Common Additional Notes Stock Stock Paid-In Receivable from Accumulated Shares Amount Shares Amount Capital Shareholders Deficit Total Balances, January 1, 1994 1,505 $ 7,131 698 $ 174 $ (78) $ (4,454) $ 2,773 Conversion of preferred stock to common stock in connection with initial public offering (1,505) (7,131) 1,513 7,131 -- Conversion of no par value common stock to par value of $0.0001 per share (7,305) $ 7,305 -- Issuance of common stock in connection with initial public offering 1,000 3,670 3,670 Exercise of common stock options 24 22 22 Issuance of common stock under employee stock purchase plan 3 14 14 Net income 2,062 2,062 Balances, December 31, 1994 -- -- 3,238 -- 11,011 (78) (2,392) 8,541 Exercise of common stock options 14 18 18 Issuance of common stock under employee stock purchase plan 9 27 27 Issuance of common stock in private placement 120 792 792 Repayment of notes receivable 3 3 Net loss (15) (15) Balances, December 31, 1995 -- -- 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
The accompanying notes are an integral part of these financial statements. F-4 FIBERSTARS, INC. STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994 ----------- ------------ ------------ Cash flows from operating activities: Net income (loss) $ 511 $ (15) $ 2,062 ----------- ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 322 178 173 Provision for doubtful accounts receivable 56 54 34 Deferred income taxes 343 25 (1,186) Equity in joint venture (8) (117) (55) Changes in assets and liabilities: Accounts receivable (63) 560 (1,176) Inventories (264) (640) (285) Prepaids and other current assets (5) (37) (114) Other assets (53) 16 Accounts payable (131) 309 97 Accrued expenses 145 19 511 ----------- ------------ ------------ Total adjustments 342 351 (1,985) ----------- ------------ ------------ Net cash provided by operating activities 853 336 77 ----------- ------------ ------------ Cash flows from investing activities: Decrease in restricted short-term investments 60 Purchase of short-term investments (869) (2,446) Loans made to officers (161) Acquisition of fixed assets (400) (379) (374) Sale of investment in joint venture 298 ----------- ------------ ------------ Net cash used in investing activities (1,132) (2,825) (314) ----------- ------------ ------------ Cash flows from financing activities: Net proceeds from initial public offering 3,670 Proceeds from issuances of common stock 55 837 36 Proceeds from short-term borrowings 1,350 Repayment of short-term borrowings (1,350) Repayment of long-term debt (12) (84) (68) Repayment of notes receivable for common stock 3 ----------- ------------ ------------ Net cash provided by financing activities 43 756 3,638 ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents (236) (1,733) 3,401 Cash and cash equivalents, beginning of year 1,756 3,489 88 ----------- ------------ ------------ Cash and cash equivalents, end of year $ 1,520 $ 1,756 $ 3,489 ----------- ------------ ------------ Supplemental information: Interest paid $6 $10 $77 Income taxes paid $38 $3
The accompanying notes are an integral part of these financial statements. FIBERSTARS, INC. NOTES TO FINANCIAL STATEMENTS F-5 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: 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, 1996 and 1995. The Company's investments at December 31, 1996 and 1995 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, 1996. Inventories: Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Investments in Joint Ventures: The Company records its investments in joint ventures under the equity method of accounting. FIBERSTARS, INC. NOTES TO FINANCIAL STATEMENTS, Continued 2. Summary of Significant Accounting Policies, continued: 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 residential lighting 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, 1996, one customer accounted for 13% of accounts receivable and at December 31, 1995, no single customer accounted for more than 10% accounts receivable. During 1996, two customers of the Company merged and their combined revenues accounted for 21% of net sales for the year ended December 31, 1996. 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. 2. Summary of Significant Accounting Policies, continued: 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. Stock-Based Compensation: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which is effective for the Company's financial statements for fiscal years beginning after December 15, 1995. SFAS No. 123 allows companies to account for stock-based compensation either under the new provisions of SFAS No. 123 or under the provisions of Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS No. 123 had been adopted. The Company accounts for its stock based compensation in accordance with the provisions of APB No. 25 and presents disclosures required by SFAS No. 123. Net Income (Loss) Per Share: Net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and common stock equivalent shares. Common stock equivalent shares from stock options and warrants are excluded from the computation to the extent that their effect is antidilutive. Dilution from common equivalents has been further limited in 1996 under the modified treasury stock method. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common stock equivalent shares issued at prices below the anticipated public offering price during the 12 months immediately preceding the offering date have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the initial public offering price). 3. Inventories (in thousands): December 31,
---------------------------- 1996 1995 ------------- ------------ Raw materials $ 1,528 $ 1,111 Finished goods 640 793 ------------- ------------ $ 2,168 $ 1,904 ------------- ------------
4. Fixed Assets (in thousands): December 31, --------------------------- 1996 1995 ------------ ------------
Equipment $ 1,757 $ 1,380 Furniture and fixtures 114 112 Computer software 92 85 Leasehold improvements 80 66 ------------ ------------ 2,043 1,643 Less accumulated depreciation and amortization (1,211) (889) ------------ ------------ $ 832 $ 754 ------------ ------------
5. Joint Ventures: 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 $234,000, $130,000 and $95,000, for the years ended December 31, 1996, 1995 and 1994, respectively. Accounts receivable from Fiberstars Australasia Pty. Ltd. as of December 31, 1996 and 1995 were $52,000 and $41,000, respectively. 5. Joint Ventures, continued: The following represents condensed financial information (unaudited) of Fiberstars Australasia as of December 31, 1996 and for the year then ended, and combined information of FMP and Fiberstars Australasia as of December 31, 1995 and for the two years ended December 31, 1995 (in thousands):
December 31, ---------------------------- 1996 1995 ------------- ------------- Current assets $ 204 $ 1,365 Property and other assets 47 77 ------------- ------------- $ 251 $ 1,442 ------------- ------------- Current liabilities $ 129 $ 731 Issued capital 108 558 Retained earnings 14 153 ------------- ------------- $ 251 $ 1,442 ------------- -------------
December 31, ------------------------------------------- 1996 1995 1994 ------------ ------------- -------------
Revenue $ 566 $ 3,909 $ 3,038 Expenses 545 3,654 2,920 ------------ ------------- ------------- Net income $ 21 $ 255 $ 118 ------------ ------------- -------------
6. Accrued Expenses (in thousands): December 31, -------------------------- 1996 1995 ------------- ----------
Sales commissions and incentives $ 656 $ 577 Other 466 400 ------------- ---------- $ 1,122 $ 977 ------------- ----------
7. Lines of Credit: On June 28, 1996, the Company entered into the following borrowing arrangements with its bank: a) A $1,000,000 revolving line of credit expiring June 28, 1997, bearing interest at prime plus 0.25% (9.0% at December 31, 1996). Borrowings under this line are uncollateralized, and the Company must maintain a 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, 1997. Borrowings bear interest at prime plus 0.75% (9.50% at December 31, 1996). Under this note, the Company may finance up to 80% of the cost of 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, 1997, after which the principal plus interest is repayable in 36 monthly installments. There were no amounts outstanding at December 31, 1996. The Company is required to maintain certain financial ratios on a quarterly basis, including specified levels of working capital and tangible net worth. 8. 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): 1997 $ 272 1998 272 1999 68 Rent expense approximated $318,000, $279,000 and $252,000, for the years ended December 31, 1996, 1995 and 1994, 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. 9. Shareholders' Equity: Preferred Stock: At the time of the Company's initial public offering in August 1994, all outstanding shares of preferred stock converted automatically into an aggregate of 1,512,788 shares of common stock. Concurrent with the closing of the initial public offering, the Articles of Incorporation of the Company were amended, deleting all references to series of preferred stock and authorizing undesignated preferred stock consisting of 2,000,000 shares with par value of $0.0001 per share. Common Stock: Concurrent with the closing of the initial public offering, the Articles of Incorporation were amended to authorize an increase in the number of shares of common stock to 30,000,000 with par value of $0.0001 per share. The note receivable from a shareholder for common stock bears interest at a rate of 9% and is 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 1998. 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. 9. Shareholders' Equity, continued: Warrants, continued: Warrant activity comprised: Warrants Outstanding --------------------------------------------- Exercise Shares Price Amount ----------- ------------- ---------------- (in thousands)
Balances, January 1, 1994 26,666 $.90 $ 24 Warrants granted 100,000 $5.40 540 ----------- ---------- Balances, December 31, 1994 and 1995 126,666 $0.90-$5.40 564 Warrants exercised (15,625) $0.90 (14) ----------- ---------- Balances, December 31, 1996 111,041 $0.90-$5.40 $ 550 ----------- ----------
At December 31, 1996, 111,041 outstanding warrants were exercisable. The Company has reserved 111,041 shares of common stock for issuance upon exercise of the common stock warrants. Adoption of SFAS No. 123, "Accounting for Stock-Based Compensation": The Company has Stock Option Plans and an Employee Stock Purchase Plan under which an aggregate of 1,267,579 shares of the Company's common stock have been reserved for future issuance. 9. Shareholders' Equity, continued: Adoption of SFAS No. 123, "Accounting for Stock-Based Compensation", continued: Effective January 1, 1996, the Company elected to adopt the disclosure only provision of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." The Company, however, continues to apply APB Opinion No. 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. Had compensation cost for these plans been determined based on the fair value of the options at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts): 1996 1995 ------------- -------------
Net income (loss) - as reported $ 511 $ (15) ------------- ------------- Net income (loss) - pro forma $ 422 $ (74) ------------- ------------- Net income (loss) per share - as reported $ 0.15 $ (0.00) ------------- ------------- Net income (loss) per share - pro forma $ 0.12 $ (0.02) ------------- -------------
As the provisions of SFAS No. 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 1996 and 1995: 1996 1995 -------------- --------------
Exercise price $4.80 $5.32 Expected life of option 3.89 years 3.86 years Risk-free interest rate 6.11% 6.95% Expected volatility 23% 23%
9. Shareholders' Equity, continued: 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, 1996, an aggregate of 850,000 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, 1996, a total of 150,000 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. 9. 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, January 1, 1994 33,970 208,985 $0.90 $ 187 Additional shares reserved 540,000 Granted (291,069) 291,069 $5.39 1,471 Canceled 72,581 (72,581) $4.82 (350) Exercised (23,957) $0.90 (22) Balances, December 31, 1994 355,482 403,516 $3.19 1,286 Granted (178,200) 178,200 $5.51 963 Canceled 23,560 (23,560) $3.40 (94) Exercised (13,953) $1.32 (18) 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
At December 31, 1996, options to purchase 372,818 shares of common stock were exercisable. The weighted average fair value of options granted in 1996 and 1995 was $1.39 and $1.64, respectively. 9. Shareholders' Equity, continued: Activity Under the Stock Option Plans: OPTIONS OUTSTANDING OPTIONS CURRENTLY 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)
$0.90-$0.90 162 5.6 $0.90 154 $0.90 $3.60-$4.50 89 6.8 $4.29 62 $4.29 $4.75-$4.75 214 4.9 $4.75 $4.75 $5.125-$5.88 271 4.8 $5.51 132 $5.47 $6.50-$6.50 50 2.7 $6.50 25 $6.50
1994 Employee Stock Purchase Plan: At December 31, 1996, 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, 1996, 20,278 shares had been issued under this plan. 10. Income Taxes: The components of the (provision for) benefit from income taxes are as follows (in thousands): Years Ended December 31, ----------------------------------- 1996 1995 1994
Current: Federal $ (23) $ 27 $ (88) State (1) 9 (20) ---------- ---------- ---------- (24) 36 (108) ---------- ---------- ---------- Deferred: Federal (303) (17) State (16) (8) ---------- ---------- ---------- (319) (25) - ---------- ---------- ---------- Reduction in valuation allowance 1,186 ---------- ---------- ---------- (Provision for) benefit from income taxes $ (343) $ 11 $ 1,078 ---------- ---------- ----------
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, ---------------------------------------- 1996 1995 1994 ----------- ----------- ------------ United States statutory rate (34.0) % 34.0% (34.0)% State taxes (net of federal tax benefit) (5.5) 5.5 (5.5) Utilization of net operating loss carryforwards 34.0 Change in valuation allowance 119.9 Other (0.6) 2.8 (4.8) -------- -------- --------- (40.1) % 42.3% 109.6% -------- -------- ---------
10. Income Taxes, continued: 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, ---------------------------- 1996 1995 ------------ ------------- Allowance for doubtful accounts $ 94 $ 84 Accrued expenses and other reserves 336 280 Depreciation and amortization (7) (19) General business credits 100 153 Net operating loss carryforwards 609 1,022 Equity in joint ventures' income (4) (47) Other 10 8 ------------ ------------- Total deferred tax asset $ 1,138 $ 1,481 ------------ -------------
The Company has a federal net operating loss carryforward for tax purposes at December 31, 1996 of approximately $1,877,000. Additionally, at December 31, 1996 the Company had federal research and development credit carryforwards of approximately $100,000. The carryforwards expire from 1997 to 2007. 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. 11. Export Sales: A summary of export sales is as follows (in thousands):
Year Ended December 31, ------------------------------------------------ 1996 1995 1994 -------------- -------------- --------------- U.S. Domestic $ 13,294 $ 9,626 $ 11,450 Export 2,282 2,172 2,112 -------------- -------------- --------------- $ 15,576 $ 11,798 $ 13,562 -------------- -------------- ---------------
12. 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 1996 and 1995. 13. Related Party Transactions: During 1996, the Company advanced a total of $161,000 to two officers by way of promissory notes for the purchase of permanent residences. 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 1999. At December 31, 1996, no amounts had been repaid on these notes. F-20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Fiberstars, Inc. Fremont, California We have audited the accompanying balance sheets of Fiberstars, Inc. as of December 31, 1996 and 1995 and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fiberstars, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California January 31, 1997 EX-10.18 2 WELLS FARGO BANK LOAN AGREEMENT This Loan Agreement (this "Agreement") is entered into by and between FIBERSTARS, INC. ("Borrower") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") and sets forth the terms and conditions which govern all Borrower's commercial credit accommodations from Bank, whether now existing or hereafter granted (each, a "Credit" and collectively, "Credits"), which terms and conditions are in addition to those set forth in any other contract, instrument or document (collectively with this Agreement, the "Loan Documents") required by this Agreement orheretofore or at any time hereafter delivered to Bank in connection with any Credit. 1. REPRESENTATIONS AND WARRANTIES. Borrower makes the following representations and warranties to Bank, which representations and warranties shall be true as of the date hereof and on the date of each extension of credit under each Credit with the same effect as though made on each such date: (a) Legal Status. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of California, and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required or in which the failure to be qualified or licensed could have a material adverse effect on Borrower. (b) Authorization and Validity. Each of the Loan Documents has been duly authorized, and upon its execution and delivery to Bank will constitute a legal, valid and binding obligation of Borrower or the party which executes the same, enforceable in accordance with its respective terms. (c) No Violation. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of law or regulation, or contravene any provision of Borrower's Articles of Incorporation or By-Laws, or result in any breach of or default under any agreement, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. (d) No Litigation. There is no litigation or other action or proceeding pending or threatened against Borrower which could have a material adverse effect on the financial condition or operation of Borrower except as disclosed by Borrower to Bank in writing prior to the date hereof. (e) Financial Statements. The most recent annual financial statement of Borrower, and all interim financial statements delivered to Bank since the date of said annual financial statement, true copies of which have been delivered by Borrower to Bank prior to the date hereof, are complete and correct, present fairly the financial condition of Borrower and disclose all liabilities of Borrower, and have been prepared in accordance with generally accepted accounting principles. Since the dates of such financial statements there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. (f) Tax Returns. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year except as disclosed by Borrower to Bank in writing prior to the date hereof. II. ADDITIONAL TERMS. (a) Conditions Precedent. The obligation of Bank to grant any Credit is subject to the condition that Bank shall have received all contracts, instruments and documents, duly executed where applicable, deemed necessary by Bank to evidence such Credit and all terms and conditions applicable thereto, all of which shall be in form and substance satisfactory to Bank. (b) Application of Payments. Each payment made on each Credit shall be applied first, to any interest then due, second, to any fees and charges then due, and third, to the outstanding principal balance thereof. III. COVENANTS. So long as any Credit remains available or any amounts under any Credit remain outstanding, Borrower shall,unless Bank otherwise consents in writing: (a) Insurance. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public, liability, property damage, flood and workers' compensation, carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. (b) Compliance. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business, including without limitation, the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time, and all state or Federal environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any operations and/or properties of Borrower. (c) Indebtedness. Not create, incur, assume or permit to exist any indebtedness or other liabilities, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, direct or contingent (including any contingent liability under any guaranty of the obligations of any person or entity), except (i) the liabilities of Borrower to Bank, (ii) trade debt incurred by Borrower in the normal course of its business, and (iii) any other liabilities of Borrower existing as of, and disclosed to Bank in writing prior to, the date hereof. (d) Merger; Consolidation; Transfer of Assets. Not merge into or consolidate with any other entity; nor make any substantial change in the nature of Borrower's business as conducted as of the date hereof; nor acquire all or substantially all of the assets of any other person or entity; nor sell lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. (e) Pledge of Assets. Not mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except in favor of Bank and except any of the foregoing existing as of, and disclosed to Bank in writing prior to, the date hereof. (f) Financial Statements. Provide to Bank all of the following, in form and detail satisfactory to Bank, together with such current financial and other information as Bank from time to time may reasonably request: (i) As soon as available, but in no event later than 45 days after and as of the end of each fiscal quarter, a financial statement of Borrower, prepared by Borrower and certified as correct by an officer of Borrower authorized to borrow under the most current Corporate Borrowing Resolution delivered by Borrower to Bank, to include a balance sheet and income statement, together with all supporting schedules and footnotes. (g) Financial Condition. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices, except to the extent modified by the following definitions: (I) Total Liabilities divided by Tangible Net Worth not at any time greater than 0.75 to 1.0, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (ii) Quick Ratio not at any time less than 2.00 to 1.0, with "Quick Ratio" defined as the aggregate of unrestricted cash, unrestricted marketable securities and receivables convertible into cash divided by total current liabilities. (iii) Net income after taxes not less than $1.00 on an annual basis, determined as of each fiscal year end, and pre-tax profit not less than $1.00 on a year-to-date basis, determined as of the end of the second fiscal quarter of each year. (iv) EBITDA Coverage Ratio not less than 1.50 to 1.0 as of each fiscal year end, with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt. IV. DEFAULT; REMEDIES. (a) Events of Default. The occurrence of any of the following shall constitute an "Event of Default" Under this Agreement: (i) The failure to pay any principal, interest, fees or other charges when due under any of the Loan Documents. (ii) Any representation or warranty hereunder or under any other Loan Document shall prove to be incorrect, false or misleading in any material respect when made. (iii) Any violation or breach of any term or condition of this Agreement or any other of the Loan Documents. (iv) Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which Borrower or any guarantor hereunder has incurred debt or any other liability of any kind to any person or entity, including Bank. (v) The filing of a petition by or against Borrower or any guarantor hereunder under any provisions of the Bankruptcy Reform Act, Title 11 of the United States code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of Borrower or any such guarantor; Borrower or any such guarantor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of Borrower or any such guarantor. (vi) Any material adverse change, as determined solely by Bank, in the financial condition of Borrower. (vii) The death or incapacity of any individual guarantor hereunder or the dissolution or liquidation of Borrower or of any guarantor hereunder which is a corporation, partnership or other type of entity. (viii) Any change in ownership during the term hereof of an aggregate of 25% or more of the common stock of Borrower. (b) Remedies. Upon the occurrence of any Event of Default: (i) the entire balance of principal, interest, fees and charges on each Credit shall, at Bank's option, become immediately due and payable in full without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower; (ii) the obligation, if any, of Bank to extend any further credit to Borrower under any Credit shall immediately cease and terminate; and (iii) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any security for any Credit. All rights, powers and remedies of Bank shall be cumulative. V. MISCELLANEOUS (a) No Waiver. No delay, failure or discontinuance of Bank in exercising any right, power or remedy shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under this Agreement, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. (b) Notices. All notices, requests and demands required under this Agreement must be in writing, addressed to the applicable party at its address specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (i) if personally delivered, upon delivery: (ii) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U.S. mail, first class and postage prepaid; and (iii) if sent by telecopy, upon receipt. (c) Costs, Expenses and Attorneys' Fees. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), incurred by Bank in connection with (i) the negotiation and preparation of this Agreement and the other Loan Documents, and Bank's continued administration of each Credit, (ii) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (iii) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to Borrower. (d) Successors; Assignment. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interests or rights hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in; Bank's rights and benefits under each of the Loan Documents. In connection therewith Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any Credit, Borrower or its business, any guarantor of any Credit or the business of any such guarantor, or any collateral for any Credit. (e) Controlling Agreement; Amendment. In the event of any direct conflict between any provision of this Agreement and any provision of any other Loan Document, the terms of this Agreement shall control. This Agreement may amended or modified only in writing signed by Bank and Borrower. (f) No Third Party Beneficiaries. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other Loan Document to which it is not a party. (g) Severability of Provisions. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. (i) Cancellation of Prior Loan Agreements. This Agreement cancels and supersedes all prior loan agreements between Borrower and Bank relating to any Credit. VI. ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law in such arbitrations (A) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (B) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (C) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (1) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (2) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code or Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (9) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control this arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, Borrower and Bank have executed this Agreement as of June 28, 1996. FIBERSTARS, INC. WELLS FARGO BANK NATIONAL ASSOCIATION By: /s/ William C. Lapworth By: /s/ Nuzha Bukhari Title: CFO Title: AVP Address: 2883 BAYVIEW DRIVE Address: 121 Park Center Plaza 3rd Flr FREMONT, CA 94538 San Jose, CA 95115 EX-10.19 3 WELLS FARGO BANK TERM COMMITMENT NOTE $500,000.00 San Jose, California June 28, 1996 FOR VALUE RECEIVED, the undersigned FIBERSTARS, INC. ('Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Santa Clara Valley RCBO, 121 Park Center Plaza, 3rd Flr, San Jose, CA 95115, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $500,000.00, or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. INTEREST/FEES: (a) Interest. The outstanding principal balance of this Note shall bear interest at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) .75000% above the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. (b) Payment of Interest. Interest accrued on this Note shall be payable on the 28th day of each month, commencing July 28,1996. (c) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. (e) Collection of Payments. Borrower authorizes Bank to collect all interest and fees due hereunder by charging Borrower's demand deposit account number 4124-053885 with Bank, or any other demand deposit account maintained by any Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. BORROWING AND REPAYMENT: (a) Use of Proceeds; Limitation on Borrowings. Each advance under this Note shall be available solely to finance Borrower's purchase of new and/or used equipment to be used in Borrower's business. Each advance shall be available to a maximum of 80.0% of the cost or appraised value (as required by Bank) of the new equipment purchased with the proceeds thereof, and 75.0% of the cost or appraised value (as required by Bank) of the used equipment purchased with the proceeds thereof, as evidenced by copies of invoices and/or appraisals acceptable to Bank. (b) Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow and partially or wholly repay its outstanding borrowings, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with, or at any time as a supplement to, this Note; provided however, that amounts repaid may not be reborrowed; and provided further, that the total borrowings under this Note shall not exceed the principal smount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of any principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on June 28, 1997, unless said balance is refinanced by Bank pursuant to the provisions of (d) below. (c) Advances. Advances hereunder, to the total amount of the principal sum available hereunder, may be made by the holder at the oral or written request of (i) DAVID N. RUCKERT or WILLIAM C. LAPWORTH, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. (d) Refinancing. So long as Borrower is in compliance with all terms and conditions contained herein and in any loan agreement or other loan documents in effect between Borrower and Bank on the maturity date set forth above (or on such earlier date as may be requested by Borrower), and Borrower executes a new promissory note and such other documents as Bank shall require, all in form and substance satisfactory to Bank, Bank agrees to refinance the then outstanding principal balance of this Note on the following terms and conditions: (i) The outstanding principal balance of this Note shall be amortized over 3 years and shall be repaid in 36 monthly installments over said term, as set forth in the promissory note executed by Borrower to evidence such refinancing. (ii) The outstanding principal balance so refinanced shall bear interest at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) 0.750% above Bank's Prime Rate in effect from time to time. COLLATERAL: As security for the payment and performance of all obligations of Borrower under this Note, Borrower grants to Bank security interests of first priority (except as agreed otherwise by Bank in writing) in the following property of Borrower, now owned or at any time hereafter acquired: all equipment financed with the proceeds of this note, together with security interests in all other personal property of Borrower now or at any time hereafter pledged to Bank as collateral for any other commercial credit accommodation granted by Bank to Borrower. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing fees and allocated costs of collateral audits. EVENTS OF DEFAULT: Any default in the payment or performance of any obligation under this Note, or any defined event of default under any loan agreement now or at any time hereafter in effect between Borrower and Bank (whether executed prior to, concurrently with or at any time after this Note), shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal, interest, fees and charges outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to any Borrower. (b) Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. FIBERSTARS, INC. By: /s/ William C. Lapworth Title: CFO EX-10.20 4 WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE $1,000,000 San Jose, California June 28, 1996 FOR VALUE RECEIVED, the undersigned FIBERSTARS, INC. (" Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (Bank ) at its office at Santa Clara Valley RCBO, 121 Park Center Plaza 3rd Flr, San Jose, CA 95115, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $1,000,000.00, or so much thereof as may be advanced and be outstanding with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. INTEREST/FEES: (a) Interest. The outstanding principal balance of this Note shall bear interest at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) 0.25% above the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. (b) Payment of Interest. Interest accrued on this Note shall be payable on the 28th day of each month, commencing July 28, 1996. (c) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. (d) Commitment Fee. Prior to the initial extension of credit under this Note, Borrower shall pay to Bank a non-refundable commitment fee of $2,500.00. (e) Collection of Payments. Borrower authorizes Bank to collect all interest and fees due hereunder by charging Borrower's demand deposit account number 4124-053885 with Bank, or any other demand deposit account maintained by any Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SIGHT AND USANCE COMMERCIAL LETTER OF CREDIT SUBFEATURE: (a) Letter of Credit Subfeature. As a subfeature under this Note, Bank agrees from time to time during the term hereof to issue sight commercial and usance commercial letters or credit for the account of Borrower to finance Borrower's inventory purchases (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided however, that the form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion; and provided further, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed $250,000.00. Each Letter of Credit shall be issued for a term not to exceed 180 days, as designated by Borrower; provided however, that no Letter of Credit shall have an expiration date more than 30 days beyond the maturity date of this Note. The undrawn amount of all Letters of Credit shall be reserved under this Note and shall not be available for borrowings hereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit Agreement and related documents, if any, required by Bank in connection with the issuance thereof. Each draft paid by Bank under a Letter of Credit shall be deemed an advance under this Note and shall be repaid by Borrower in accordance with the terms and conditions of this Note; provided however, that if advances hereunder are not available, for any reason, at the time any draft is paid by Bank, then Borrower shall immediately pay to Bank the full amount of such draft, together with interest thereon from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances hereunder. In such event Borrower agrees that Bank, in its sole discretion, may debit any demand deposit account maintained by Borrower with Bank for the amount of any such draft. Notwithstanding the foregoing, usance commercial Letters of Credit shall be issued only to finance Borrower's importation of goods into the United States, and shall contain such provisions and be issued in such manner as to satisfy Bank that any banker's acceptance created by Bank's acceptance or a draft thereunder shall be eligible for discount by a Federal Reserve Bank, will not result in a liability of Bank subjected to reserve requirements under any law, regulation or administrative order, and will not cause Bank to violate any lending limit imposed upon Bank by any law, regulation or administrative order Usance commercial Letters of Credit shall provide for drafts thereunder with terms which do not exceed the lesser of 180 days or such other period of time as may be necessary for the acceptance created thereunder to be eligible for discount and otherwise comply with the terms and conditions of this Note; provided however, that no usance commercial Letter of Credit shall provide for drafts with terms that extend more than 30 days beyond the maturity date of this Note. The amount of each draft accepted by Bank under a usance commercial Letter of Credit shall be paid by Borrower in accordance with the terms and conditions of this Note applicable to Acceptances. (b) Letter of Credit Fees. Borrower shall pay to Bank fees upon the issuance of each Letter of Credit, upon the payment or negotiation by Bank of each draft under any Letter of Credit and upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. CLEAN AND DOCUMENTARY ACCEPTANCE SUBFEATURE: (a) Acceptance Subfeature. As a subfeature under this Note, Bank agrees from time to time during the term hereof to create banker's acceptances (each, an "Acceptance" and collectively, "Acceptances" ) for the account of Borrower (i) by accepting drafts drawn on Bank by Borrower for the purpose of financing Borrower's importation of goods into the United States and (ii) by accepting time drafts presented under usance commercial Letters of Credit issued by Bank for the account of Borrower under this Note; provided however, that the form and substance of each Acceptance shall be subject to approval by Bank, in its sole discretion and provided further, that the aggregate amount of all outstanding Acceptances shall not at any time exceed $250,000.00. Each Acceptance created by Bank's acceptance of a draft drawn on Bank by Borrower shall be in the minimum amount of $5,000.00. Each Acceptance shall be subject to the additional terms and conditions of an Acceptance Agreement in form and substance satisfactory to Bank. Each Acceptance shall be created for a term not to exceed the lesser of 180 days, as designated by Borrower, or such period of time as may be necessary to comply with the terms of the Acceptance Agreement; provided however, that no Acceptance shall mature more than 30 days beyond the maturity date of this Note. The outstanding amount of all Acceptances shall be reserved under this Note and shall not be available for borrowings hereunder. The amount of each Acceptance which matures shall be deemed an advance under this Note and shall be repaid by Borrower in accordance with the terms and conditions of this Note; provided however that if advances hereunder are not available, for any reason, at the time any Acceptance matures, then Borrower shall immediately pay to Bank the full amount of such matured Acceptance, together with interest thereon from the date such Acceptance matures to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances hereunder. In such event Borrower agrees that Bank, in its sole discretion, may debit any demand deposit account rnaintained by Borrower with Bank for the amount of any such Acceptance. All Acceptances created by Bank's acceptance of drafts drawn on Bank by Borrower shall be discounted with Bank. Bank shall not be obligated to discount Acceptances created by Bank's acceptance of time drafts presented under usance commercial Letters of Credit. (b) Acceptance Fees. For each Acceptance created hereunder, Borrower shall pay to Bank on the date such Acceptance is created an acceptance fee determined in accordance with Bank's standard fees and charge then in effect for the creation of Acceptances. BORROWING AND REPAYMENT: (a) Use of Proceeds. Advances under this Note shall be available solely to finance working capital requirements. (b) Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with, or at any time as a supplement to, this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above and provided further, that Borrower shall maintain a zero balance on advances under this Note for a period of at least 30 consecutive days during each fiscal year. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of any principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on June 28, 1997, except with respect to any draft paid by Bank under a commercial Letter of Credit and any Acceptance which matures subsequent to said date, the full amount of which shall be due and payable by Borrower immediately upon payment by Bank or at such maturity as applicable. (c) Advances. Advances hereunder, to the total amount of the principal sum available hereunder, may be made by the holder at the oral or written request of (i) DAVID N. RUCKERT or WILLIAM C. LAPWORTH, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. EVENTS OF DEFAULT: Any default in the payment or performance of any obligation under this Note, or any denied event of default under any loan agreement now or at any time hereafter in effect between Borrower and Bank (whether executed prior to, concurrently with or at any time after this Note), shall constitute an "Event of Default" under this Note. MlSCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal, interest, fees and charges outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to any Borrower. (b) Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. FIBERSTARS, INC. By: /s/ William C. Lapworth Title: CFO EX-10.21 5 AMENDMENT NO. 1 TO 1994 STOCK OPTION PLAN Pursuant to a resolution duly adopted at the meeting of the Board of Directors of Fiberstars, Inc. (the "Company"), Section 3 of the Company's 1994 Stock Option Plan was amended and restated to read in its entirety as follows: 3. Stock Subject to the Plan. Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of shares that may be optioned and sold under the plan is the sum of (i) 850,000 shares of the Common Stock plus (ii) such number of shares as are subject to outstanding and unexercised stock options under the Company's 1988 Stock Option Plan as of the date of adoption of the Plan by the Shareholders, and which options are canceled or otherwise terminated without exercise; provided that the total number of shares available under the Plan shall in no event exceed 1,123,058. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, Shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. IN WITNESS WHEREOF, I have set my hand this 6th day of December, 1996. /s/ William C. Lapworth William Lapworth, Secretary EX-10.22 6 PROMISSORY NOTE $35,188.00 October 7, 1996 FOR VALUE RECEIVED, the undersigned promises to pay to Fiberstars, Inc., a California corporation (the "Company"), the principal sum of thirty-five thousand one hundred eighty-eight dollars ($35,188). Such principal sum shall bear interest from the date hereof at a rate of six percent (6%) per annum on the unpaid balance of this promissory note (the "Note") compounded monthly. Upon demand by the Company, principal and accrued interest shall be paid by the undersigned to the Company. This Note shall be paid in full no later than one year from the date first written above. Each payment shall be credited first to interest then due and the remainder to principal. Principal and interest are payable in lawful money of the United States of America. The undersigned may prepay any amount due hereunder, without premium or penalty. In the event the Company incurs any costs or fees in order to enforce payment of this Note or any portion hereof, the undersigned agrees to pay to the Company, in addition to such amounts as are owed pursuant to this Note, such costs and fees, including, without limitation, a reasonable sum for attorneys' fees. As security for the full and timely payment of this Note, the undersigned pledges and grants to the Company a security interest in certain shares of the Company's stock acquired by the undersigned pursuant to the terms of the Company's 1994 Employee Stock Purchase Plan and the Company's 1988 Stock Option Plan and 1994 Stock Option Plan, as well as shares of the Company's stock which are issuable or potentially issuable to the undersigned pursuant to the 1988 Stock Option Plan and 1994 Stock Option Plan (the "Pledged Stock"). Pledged Stock includes the stock and options listed in Exhibit A. The undersigned shall, upon execution of this Note, deliver all certificates and agreements representing the Pledged Stock to the Company. The Company shall hold the Pledged Stock solely for its benefit for the purpose of perfecting its security interest granted herein. Notwithstanding the foregoing, the undersigned acknowledges that this Note is a full recourse note and that the undersigned is liable for full payment of this Note without regard to the value at any time or from time to time of the Pledged Stock. In the event of any default in the payment of this Note, the Company shall have and may exercise any and all remedies of a secured party under the California Commercial Code, and any other remedies available at law or in equity, with respect to the Pledged Stock. The undersigned (i) acknowledges that state or federal securities laws may restrict the public sale of securities, and may require private sales at prices or on terms less favorable to the seller than public sales and (ii) agrees that where the Company, in its sole discretion, determines that a private sale is appropriate, such sale shall be deemed to have been made in a commercially reasonable manner. In the event the undersigned desires to obtain a release from the Company's security interest in some or all of the Pledged Stock, the undersigned shall pay that portion of the principal balance of this Note equal to the purchase price of the Pledged Stock being released plus accrued interest thereon. The failure of the Company to exercise any of the rights created hereby, or to promptly enforce any of the provisions of this Note, shall not constitute a waiver of the right to exercise such rights or to enforce any such provisions. As used herein, the undersigned includes the successors, assigns and distributees of the undersigned. As used herein, the Company includes the successors, assigns and distributees of the Company, as well as a holder in due course of this Note. This Note is made under and shall be construed in accordance with the laws of the State of California, without regard to the conflict of law provisions thereof. /s/ J. Steven Keplinger J. Steven Keplinger 5759 Caribbean Circle Stockton, CA 95210 Fiberstars, Inc., a California corporation, hereby approves the terms of the above promissory note, effective as of October 7, 1996. Dated: October 7, 1996 FIBERSTARS, INC., a California corporation /s/ William C. Lapworth William C. Lapworth Chief Financial Officer EX-10.23 7 SECURED PROMISSORY NOTE $125,000.00 March 25, 1997 FOR VALUE RECEIVED, the undersigned, Barry Greenwald, ("Maker") promises to pay to Fiberstars, Inc., a California corporation (the "Company"), the principal sum of one hundred twenty-five thousand dollars ($125,000). Such principal sum shall bear interest from the date hereof at a rate of eight percent (8%) per annum on the unpaid balance of this promissory note (the "Note") compounded monthly, except that any amount which becomes past due or remains unpaid after demand shall bear interest at a rate of eighteen percent (18%) per annum, compounded monthly, from the date payment was due. Upon demand by the Company, principal and accrued interest shall be paid by Maker to the Company. This Note shall be paid in full no later than December 31, 1999. Each payment shall be credited first to interest then due and the remainder to principal. Principal and interest are payable in lawful money of the United States of America. Maker may prepay any amount due hereunder, without premium or penalty. Maker acknowledges and understands that the Company will make deductions from Maker's paychecks in order to satisfy Maker's obligations under this Note; and Maker irrevocably authorizes Company to make such deductions. Maker further acknowledges and understands that the Company will accelerate this Note by demand as of the effective date of Maker's termination of employment with Fiberstars (for any reason). In the event of such demand, all sums remaining unpaid under this note shall become immediately due and payable; and Maker irrevocably authorizes the Company to deduct any unpaid sums due under this Note from any unpaid salary, bonuses, commissions, accrued paid-time-off, and any other compensation or other payments due to Maker. Pending any demand or acceleration of this Note by the Company or other arrangement by mutual consent, the Company will deduct payments in the amount of $2,882 (two thousand eight hundred eighty-two dollars) from Maker's paycheck on the fifteenth of each month, from April 15, 1997 through and including December 15, 1999. An additional lump sum payment of thirty thousand dollars, plus interest thereon, is due on or before May 31, 1997. In any period, to the extent that the total of Maker's base salary plus a commission draw approved by Fiberstars plus the monthly repayment amount indicated above is less than Maker's earned compensation, Fiberstars may at its option reduce the repayment amount for that period and modify the oustanding balance of this note accordingly. Any such difference will be made up by increasing the repayment amount in future periods, at Fiberstars' discretion. In the event the Company incurs any costs or fees in order to enforce payment of this Note or any portion hereof, Maker agrees to pay to the Company, in addition to such amounts as are owed pur-suant to this Note, such costs and fees, including, without limitation, a reasonable sum for attorneys' fees. As security for the full and timely payment of this Note, Maker pledges and grants to the Company a security interest in all shares of the Company's stock owned by Maker, acquired pursuant to the terms of the Company's 1994 Employee Stock Purchase Plan and the Company's 1988 Stock Option Plan and 1994 Stock Option Plan, as well as shares of the Company's stock which are issuable or potentially issuable to Maker pursuant to the 1988 Stock Option Plan and 1994 Stock Option Plan (the "Pledged Stock"). Maker shall, upon execution of this Note, deliver all certificates and agreements representing the Pledged Stock to the Company. The Company shall hold the Pledged Stock solely for its benefit for the purpose of perfecting its security interest granted herein. Notwithstanding the foregoing, Maker acknowledges that this Note is a full recourse note and that Maker is liable for full payment of this Note without regard to the value at any time or from time to time of the Pledged Stock. In the event of any default in the payment of this Note, the Company shall have and may exercise any and all remedies of a secured party under the California Commercial Code, and any other remedies available at law or in equity, with respect to the Pledged Stock. Maker (i) acknowledges that state or federal securities laws may restrict the public sale of securities, and may require private sales at prices or on terms less favorable to the seller than public sales and (ii) agrees that where the Company, in its sole discretion, determines that a private sale is appropriate, such sale shall be deemed to have been made in a commercially reasonable manner. Maker hereby waives presentment, demand, protest, notices of protest, dishonor and non-payment of this Note and all notices of every kind. The failure of the Company to exercise any of the rights created hereby, or to promptly enforce any of the provisions of this Note, shall not constitute a waiver of the right to exercise such rights or to enforce any such provisions. Notwithstanding any provision contained herein to the contrary, the benefits of the interest arrangements of this Note shall not be transferable and shall be conditioned on Maker's future performance of substantial services for the Company within the meaning of Section 7872(f)(5) of the Internal Revenue Code of 1986, as amended ("Code"). As used herein, Maker includes the successors, assigns and distributees of Maker. As used herein, the Company includes the successors, assigns and distributees of the Company, as well as a holder in due course of this Note. This Note is made under and shall be construed in accordance with the laws of the State of CaliforniaIn any action brought under or arising out of this Note, Maker hereby consents to the jurisdiction of any competent court within the State of California and consents to the service of process by any means authorized by California law. /s/ Barry R. Greenwald Barry R. Greenwald 410 Castanya Court Danville, California 94526 Fiberstars, Inc., a California corporation, hereby approves the terms of the above promissory note, effective as of March 25, 1997. Dated: March 27, 1997 FIBERSTARS, INC., a California corporation /s/ William C. Lapworth William C. Lapworth Chief Financial Officer EX-11.1 8 FIBERSTARS INC. STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE (amounts in thousands except per share data) Year Ended December 31, 1996 1995 1994 Primary and Fully Diluted: Weighted average common shares outstanding for the period 3,398 3,344 1,591 Weighted average shares from assumed conversion of preferred stock -- -- 973 Common equivalent shares pursuant to Staff Accounting Bulletin No. 83 -- -- 10 Common equivalent shares assuming conversion of dilutive stock options and warrants under the treasury stock method (modified treasury stock method in 1996 70 -- 187 Shares used in computing net income (loss) per share 3,468 3,344 2,761 Net income (loss) $511 ($15) $2,062 Net Income (loss) per share $0.15 ($0.00) $0.75 Calculated in accordance with the guidelines of item 601 of Regulation S-B. All share numbers take account of the Company's 1-for-6 reverse stock split in 1994. Primary and fully diluted calculations are substantially the same. EX-23.1 9 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Fiberstars, Inc. on Form S-8 (File No. 33-85664) of our report dated January 31, 1997, on our audits of the financial statements of Fiberstars, Inc. as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which report is included in this Annual Report on Form 10-KSB. COOPERS & LYBRAND L.L.P. San Jose, California March 31, 1997 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1,520 3,315 2,948 236 2,168 10,481 2,043 1,211 12,062 2,130 0 0 0 9,932 0 12,062 15,576 15,836 9,032 9,032 5,944 0 6 854 343 0 0 0 0 511 0.15 0.15
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