-----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, R/PTnsKRXTy1bSMU+XLQi+IIynaUy6xJ9HMhqVWz5qdnKJCU/+Qrr626ZCZbH24J EvoA1B6hdwPr6b6a6xIH2Q== 0000950005-99-000520.txt : 19990624 0000950005-99-000520.hdr.sgml : 19990624 ACCESSION NUMBER: 0000950005-99-000520 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990528 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/A SEC ACT: SEC FILE NUMBER: 000-24230 FILM NUMBER: 99637764 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/A 1 FORM 10KSB/A U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 33-85664 FIBERSTARS, INC. (Exact name of small business issuer as specified in its charter) California 94-3021850 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2883 Bayview Drive, Fremont, CA 94538 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 490-0719 Securities registered under Section 12(b) of the Exchange Act: Title of Name of each exchange on Each Class which registered Common Stock Nasdaq National Market Securities registered under section 12(g) of the Exchange Act: None Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. [ ] Net sales of the registrant for the fiscal year ended December 31, 1998 were $22,682,000. The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $10,298,464 as of March 19, 1999 based upon the last trading price of the Common Stock of registrant on the Nasdaq National Market as of that date. This calculation does not reflect a determination that any person is an affiliate of the registrant for any other purpose. As of March 19, 1999, there were 3,982,601 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Report on Form 10-KSB incorporates information by reference from registrant's definitive Proxy Statement to be used in connection with its 1999 Annual Meeting of Shareholders. PART I This 10-KSB contains forward-looking statements. Such statements generally concern future operating results, capital expenditures, product development and enhancements, liquidity and strategy. Specific forward-looking statements in this report include, without limitation, our remarks concerning the evolution of the fiber optic lighting market, the future size of the fiber optic lighting market, our expectations concerning the future performance of our recently completed acquisitions, our expectations regarding future performance of certain lamp components of our products that have recently experienced problems, the rate of adoption of fiber optic lighting in Europe and in the United States, trends in the price and performance of fiber optic lighting products, the future performance of our lighting products, our relationship with ADLT and future technologies expected to result from our relationship with ADLT. We may not update these forward looking statements, and the occurrence of the events predicted in these statements is subject to a number of risks and uncertainties, including those discussed in this report. These risks and uncertainties could cause our actual results to differ materially from the results predicted in our forward looking statements. You are encouraged to consider all the information in this report, and in our Annual Report, along with our other periodic reports on file with the SEC, prior to investing in our stock. Item 1. Description of Business Overview Fiberstars, Inc. ("Fiberstars" or the "Company"), which was incorporated in California in 1985, develops and markets fiber optic lighting systems, which are used in a variety of commercial and residential applications. The Company pioneered the use of fiber optic technology in lighting. By continuing to improve the price and performance of its products and by expanding its marketing efforts, Fiberstars has become the world's leading supplier in this emerging market. The Company's products often have advantages over conventional lighting in areas of efficiency, safety, maintenance and beauty, and thus can be used in place of conventional lighting in a number of applications. By delivering special lighting effects which conventional lighting cannot match, fiber optic lighting systems are especially attractive for a wide range of decorative applications, such as the lighting of swimming pools and spas, signage, "neon" decoration, landscaping, and other segments within the commercial and residential markets. The Company designs, develops and manufactures its fiber optic lighting systems and distributes its products worldwide, primarily through independent sales representatives, distributors and swimming pool builders. Products Fiberstars' lighting systems combine three types of products - illuminators, fiber tubing, and fixtures - in configurations which meet the needs of specific market segments. The electrically powered illuminators generate and focus light to enter into the ends of optical fiber. Fiber tubing products connect to the illuminators and are designed to emit light either at the end of the tube as a spot source of light, or along the length of the tube, similar in effect to neon lighting. The systems can also include fixtures and other accessories designed for specific applications. Illuminators The Company manufactures a number of different illuminators for use in different applications. Most commercial illuminators utilize metal halide high intensity discharge (H.I.D.) lamps to provide long life and maximum brightness. Some include patented reflectors which have been designed by Fiberstars to enhance performance. The Company's lower cost illuminators use quartz halogen lamps, some of which are custom products manufactured to Fiberstars' specifications. Illuminator advances in 1998 include the Model 601 which 2 was released from engineering for shipment in 1999. It provides up to 33% more light output than our previous high-end illuminator while costing about 50% less to build. Fiberstars also introduced a new pool lighting product line in the November 1998 National Spa and Pool Institute trade show. The new line, System 6000, offers superior lamp life and other characteristics vs. the Company's previous line. Fiber Tubing Fiber tubing products are manufactured in various lengths and diameters to meet the requirements of each particular market and application. Fiberstars' patented BritePak(R) products can maintain reasonably consistent brightness for side-lit fiber runs up to 100 feet in length. For end-lit applications, several spotlights are typically connected to a single illuminator and are placed withinfifty feet from the illuminator. New fiber products in 1998 include BritePak(R) III Ultra Pure cabled side light product providing 20% more brightness. Fixtures and Accessories Certain fixtures and accessories have been designed by Fiberstars for the Company's product lines. Other fixtures are supplied by third parties. The Company's Commercial Lighting Division produces a broad assortment of ceiling and landscape fixtures from among which lighting designers may choose. The Company's new patent-pending lightbar, LinearEssence(TM), began shipping toward the end of 1998. It is targeted at the display case and under cabinet lighting markets which are new for Fiberstars. Other Products In 1997, Fiberstars' Pool and Spa Group introduced Fiberstars Catalyst(TM), a safe chemical product designed to reduce the usage of chlorine in residential swimming pools. In 1998, Marketing responsibility for this product was transferred to a consultant, Barry Nelson, of Water Quality Management, a pool water systems company. Applications and End-Users The Company's fiber optic lighting products are specified by architects, professional lighting designers, swimming pool builders or end-users. The Company's products have been installed for commercial lighting applications in fast food restaurants such as Burger King and McDonald's; retail stores such as Albertson's, Giant Food and Toys R Us; hotels such as the MGM Grand and the Stratosphere Tower in Las Vegas; and entertainment facilities such as theme parks operated by the Walt Disney Company and Universal Studios. Fiberstars commercial lighting systems also have been used in a number of specialty applications, including theatrical productions, bridges, theater aisles and ceilings, the Monterey Bay Aquarium, Marathon Coach, HBO Studios, AMC theaters, Chevron and New York Life. The Company's primary products for pool and spa lighting are designed to provide underwater lighting for newly constructed pools. In addition, Fiberstars markets pool products for spa lighting, pool perimeter lighting, patios, decks and landscape lighting. The Company's underwater lighting systems are installed in pools and spas built by major national pool builders and builder groups, as well as numerous regional and local pool builders throughout the United States and Canada. A series of residential landscape lighting products is being tested in limited retail distribution. This product was not a material portion of the Company's business in 1998 and is not expected to be material in 1999. 3 Sales, Marketing and Distribution Commercial Lighting Products In the commercial lighting market, the Company's marketing efforts are directed at creating specifications for Fiberstars' systems in plans developed by architects, professional lighting designers and building owners. The Company reaches these professionals through approximately 60 independent lighting representative organizations throughout the United States, approximately 20 of which account for a substantial majority of the Company's commercial lighting product sales. The independent lighting representatives assist in the specification process, directing orders to electrical equipment distributors, who in turn typically purchase products from Fiberstars. Domestic distributors of commercial lighting products typically do not engage in marketing efforts or stock any inventory of the Company's products. The Company's arrangements with its independent representatives do not prohibit the handling of conventional lighting products, including products that may be competitive with those of the Company, although such representatives typically do not handle competing fiber optic lighting products. Sonic, the Company's largest commercial lighting customer, accounted for 13% of the Company's net sales in 1998. In November 1998, the Company acquired the net assets of Crescent Lighting Ltd., in the United Kingdom and Lichberatung Mann in Germany. Together, these two companies oversee the sales operations in Europe which include sub-distributors and sales representatives. Outside of Europe, Fiberstars' commercial lighting products are sold internationally by approximately 17 distributors that sell into more than 34 countries, including Mitsubishi in Japan; and Fiberstars Australasia Pty Ltd., a 46.5%-owned joint venture that sells products in Australia, New Zealand, Indonesia, Malaysia and Fiji. These distributors are primarily responsible for any marketing activities in their territories. In August 1998, the Company acquired the net assets of FibreOptics International Inc., a Seattle company, which is now the Company's sales and marketing arm for themed entertainment and signs. Swimming Pool and Spa Products The Company's underwater lighting products are sold primarily for installation in new swimming pools and spas. Accordingly, the marketing for the Company's swimming pool and spa products depends substantially on swimming pool builders to recommend the Company's products to their customers and to adapt their swimming pool designs to include Fiberstars lighting systems. The Company utilizes regional sales representative organizations that specialize in swimming pool products sold to pool builders and pool product distributors. Each representative organization typically has the exclusive right to sell the Company's products within its territory, receiving commissions on sales in its territory. Regional and national distributors in the swimming pool market stock the Company's products to fill orders received from swimming pool builders, and some of these distributors engage in limited marketing activities for the Company's products. The Company enters into incentive arrangements to encourage pool builders to purchase the Company's products. The Company also has entered into agreements with certain large national pool builders, under which the builders purchase Fiberstars systems directly from the Company and offer the Company's products with their swimming pools. The Company provides pool builders and independent sales representatives with marketing tools, including promotional videos, showroom displays and demonstration systems. The Company also uses trade advertising and direct mail in addition to an ongoing program of sales presentations to pool builders and distributors. South Central Pools (SCP), the largest Pool distributor in the U.S. and the Company's largest pool customer, accounted for 10% of the Company's net sales in 1998 and 13% in 1997. The Company expects to maintain its business relationship with SCP; however, a cessation or substantial decrease in the volume of purchases by this customer could reduce availability of the Company's products to end users and could in turn have a material adverse effect on the Company's net sales and results of operations. 4 The majority of sales of the Company's swimming pool lighting systems to date have been made in the United States and Canada. The Company entered into a distribution agreement in Europe in 1998 with Astral, a European pool equipment company. Sales to Astral were not material in 1998. Backlog The Company normally ships product within a few days after receipt of an order and generally does not have a significant backlog of orders. The Company's backlog at year's end was $952,000 vs. an average of $535,000 per month in 1998, the Company does not consider backlog to be an indicator of future performance. Competition The Company's products compete with a wide variety of lighting products, including conventional electric lighting in various forms and decorative neon lighting. The Company has also experienced increasing competition from other companies offering products containing fiber optic technology. Principal competitive factors include price, performance (including brightness, reliability and other factors), aesthetic appeal (including color and color variation), market presence, installation and maintenance requirements, power consumption. The Company believes its products compete favorably against conventional lighting in such areas as aesthetic appeal, ease of installation and maintenance and power consumption. The unique characteristics of fiber optic lighting (such as no heat or electricity at the light, ability to change colors, and remote lamp replacement) enable the products to be used in some situations where conventional lighting is not practical. However, the initial purchase price of the Company's products is typically higher than conventional lighting, and the Company's products tend to be less bright than conventional alternatives. In the case of Neon lighting, certain popular neon colors, such as bright red, cannot be achieved as effectively with the Company's products. Fiberstars is engaged in ongoing efforts to develop and improve its products, adapt its products for new applications and design and engineer new products. The Company expects that its ability to compete effectively with conventional lighting technologies, other fiber optic lighting products, and new lighting technologies that may be introduced will depend substantially upon achieving greater brightness and reducing the cost of the Company's systems. In 1998, the Company redesigned several illuminators and fiber products to improve performance such as the above mentioned 601 illuminator and the line of Lifetime Illuminators(TM). In addition to continuing work with a number of outside lamp, power supply and optic companies, the Company has been working on advanced product development with Advanced Lighting Technologies, Inc. (ADLT), the world leader in metal halide lamp technology. Providers of conventional lighting systems include large lamp manufacturers and lighting fixture companies, which have substantially greater resources than the Company. These conventional lighting companies may introduce new and improved products, which may reduce or eliminate some of the competitive advantages of the Company's products. In commercial lighting, the Company also competes primarily with local and regional neon lighting manufacturers and craftspeople who in many cases are better established in their local markets than the Company. Direct competition from other fiber optic lighting products has continued to increase. Competitive products are offered in the pool market by ESSEF Company's American Products Division and Hayward Pool Products, two major manufacturers of pool equipment and supplies. In commercial lighting, fiber optic lighting products are offered by an increasing number of smaller companies, some of which compete aggressively on price. These competing products include a new line of light boxes recently introduced by a small U.S. manufacturer at very aggressive pricing. Certain of these competitors offer products with performance characteristics comparable to those of the Company's products. The Company is aware that several larger companies in the conventional lighting industry are developing fiber optic lighting systems that may compete in the near future with the Company's products. In Europe, both Philips and Schott, a glass fiber company, offer fiber optic lighting systems. Schott has recently formed an entity to enter the U.S. market. In Europe, Philips 5 markets Fiberstars' BritePak(R) fiber tubing on an OEM basis, along with Philips' own illuminators and other products. Many companies compete with the Company in Asia, including Mitsubishi, Bridgestone and Toray. 3M recently entered the market in Japan. Mitsubishi sells Fiberstars BritePak fiber tubing in Japan, and licenses certain illuminator technology from Fiberstars for manufacture and sale in Japan. In the U.S., Rohm & Haas and Advanced Lighting Technologies have a joint venture, Unison, for the sale of fiber optic products. The Company cannot predict the impact of competition on its business. Increased competition could result in price reductions, reduced profit margins and loss of market share, which would adversely affect the Company's operating results. There can be no assurance that the Company will be able to continue to compete successfully against current and future competitors. However, the Company also believes that increased competition may be accompanied by an increase in the rate of market expansion, and that the Company is well positioned to participate in any such expansion. Assembly, Testing and Quality Assurance The Company's illuminator manufacturing consists primarily of final assembly, testing and quality control. The Company uses independent contractors to manufacture some components and subassemblies, and has worked with a number of its vendors to design custom components to meet Fiberstars' specific needs. Inventories of domestically produced component parts are managed on a just-in-time basis when practicable. The Company's quality assurance program provides for testing of all sub-assemblies at key stages in the assembly process as well as testing of finished products. Mitsubishi is the sole supplier of the Company's fiber, under a supply agreement lasting until March 2001. The Company expects to maintain this relationship with Mitsubishi; Mitsubishi owns approximately 3.2% of the Company and distributes Fiberstars' products in Japan. The Company also relies on sole source suppliers for certain lamps, reflectors, remote control devices and power supplies. Although the Company cannot predict the effect that the loss of one or more of such suppliers would have on the Company, such loss could result in delays in the shipment of products and additional expenses associated with redesigning products, and could have a material adverse effect on the Company's operating results. Research and Product Development The Company believes that growth in fiber optic lighting will be driven by improvements in technology to provide increased brightness at lower costs, and the Company is committing much of its R&D resources to those challenges. In 1998, the Company redesigned its high-end commercial illuminator, improving brightness by 33%. In the fall of 1998, the Company increased BritePak fiber tubing brightness by approximately 20%. Pool illuminator lamp life was increased from a few hundred hours to 6,000 hours by moving to HID technology. Despite its ongoing development efforts, there can be no assurance that the Company will be able to achieve future improvements in brightness and cost or that competitors will not develop lighting technologies that are brighter, less expensive or otherwise superior to those of the Company. At the end of 1998, the Company entered into a letter of intent with Unison, the lighting joint venture between ADLT and Rohm & Haas, which calls for the development of a low cost illuminator for Fiberstars. ADLT acquired about 18% of the Company's common stock in a private transaction during 1997 and in the first quarter of 1998 increased that position to approximately 29%. Additional purchases of the Company's common stock by ADLT require approval of Fiberstars' Board of Directors. Fiberstars and ADLT plan to work together to design next generation systems. The Company's goal is to improve the price/performance of fiber optic lighting systems to compete more directly with conventional lighting across a much broader spectrum of the general lighting market. The Company augments its internal research and development efforts by involving certain of its component suppliers, independent consultants and other third parties in the process of seeking improvements in the company's products and technology. The Company depends substantially on these parties to undertake research and development efforts necessary to achieve improvements that would not otherwise be possible given 6 the multiple and diverse technologies that must be integrated in the Company's products and the Company's limited engineering, personnel and financial resources. These third parties have no material contractual commitments to participate in these efforts, and there can be no assurance that they will continue to do so. Intellectual Property The Company believes that the success of its business depends primarily on its technical innovations, marketing abilities and responsiveness to customer requirements, rather than on patents, trade secrets, trademarks, copyrights and other intellectual property rights. Nevertheless, the Company has a policy of seeking to protect its intellectual property through patents, license agreements, trademark registrations, confidential disclosure agreements and trade secrets. There can be no assurance, however, that the Company's issued patents are valid or that any patents applied for will be issued. There can be no assurance that the Company's competitors or customers will not copy aspects of the Company's fiber optic lighting systems or obtain information that the Company regards as proprietary. There also can be no assurance that others will not independently develop products similar to those sold by the Company. The laws of some foreign countries in which the Company sells or may sell its products do not protect the Company's proprietary rights in its products to the same extent as do the laws of the United States. The Company is aware that a large number of patents and pending patent applications exist in the field of fiber optic technology. The Company also believes that certain of its competitors hold and have applied for patents related to fiber optic lighting. Although to date the Company has not been involved in litigation challenging its intellectual property rights, there can be no assurance that third parties will not assert claims that the Company's products infringe patents or other intellectual property rights or that, in case of a dispute, licenses to such technology will be available, if at all, on reasonable terms. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. Also in the event of an adverse ruling in such litigation, the Company might be required to expend significant resources to develop non-infringing technology or to obtain licenses to the infringing technology, which licenses may not be available on acceptable terms. In the event of a successful claim against the Company and the Company's failure to develop or license a substitute technology, the Company's operating results could be adversely affected. Fiberstars has licensed the rights to manufacture certain of its illuminators to Mitsubishi for sale in Japan. Employees As of December 31, 1998, Fiberstars employed 106 people full time, of whom 28 were involved in sales, marketing and customer service, 12 in research and product development, 48 in assembly and quality assurance, and 18 in finance and administration. From time to time the Company also employs part time personnel in various capacities, primarily assembly and clerical support. The Company has never had a work stoppage, no employees are subject to any collective bargaining agreement, and the Company considers its employee relations to be good. The Company's future success will depend to a large extent on the continued contributions of certain employees, many of whom would be difficult to replace. The future success of the Company also will depend on its ability to attract and retain qualified technical, sales, marketing and management personnel, for whom competition is intense. The loss of or failure to attract and retain any such persons could delay product development cycles, disrupt the Company's operations or otherwise have a material adverse effect on the Company's business. Item 2. Description of Property The Company's principal executive offices and manufacturing and assembly facilities are located in a 31,500 square foot facility in Fremont, California, under a lease agreement expiring in 1999. The Company 7 leases a 9,500 square foot facility in Fremont, California, which it devotes to fiber processing, under a lease agreement which expires in 1999. The Company also subleases an approximately 5,200 square foot facility in Fremont, California under a sublease agreement that expires in 1999. In December 1998, the Company entered into a new seven year lease for a 60,000 square foot facility in Fremont, California. It plans to consolidate its Fremont operations in this new facility during third quarter 1999. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the quarter ended December 31, 1998. 8 PART II Item 5. Market for Common Equity and Related Stockholder Matters The Company's Common Stock trades on the Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol "FBST". The following table sets forth the high and low sale prices for the Company's Common Stock, as reported on the Nasdaq National Market for the periods indicated. These reported prices reflect interdealer prices without adjustments for retail markups, markdowns or commissions. High Low ---- --- First quarter 1997 5 1/8 4 1/4 Second quarter 1997 5 1/4 3 3/4 Third quarter 1997 6 9/16 4 7/8 Fourth quarter 1997 8 1/2 4 7/8 First quarter 1998 6 9/16 5 Second quarter 1998 6 3/16 4 1/4 Third quarter 1998 5 1/8 3 15/16 Fourth quarter 1998 4 1/2 3 3/8 There were approximately 225 holders of record of the Company's Common Stock as of March 19, 1998, and the Company estimates that at that date there were approximately 800 additional beneficial owners. The Company has not declared or paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 6. Management's Discussion and Analysis of Results of Operations and Financial Condition General In August 1998, the Company purchased the net assets of Fiber Optics International, Inc. (FOI, a Seattle company, for $865,000 consisting of $315,000 in cash and 122,350 in shares of Fiberstars common stock. In November 1998, the Company acquired the net assets of Crescent Lighting Ltd. (Crescent) and Lichtberatung Mann (LBM), fiber optic lighting manufacturers and distributors in Europe. Fiberstars paid $2,875,000 in cash and 282,386 in shares of Fiberstars common stock, or an aggregate of $4,013,000. In December 1998 the Company sold the manufacturing and distribution rights of its phototherapy fiber optic products to Respironics, Inc. for a net gain of $801,000. Results of Operations NET SALES Net sales increased 27% to $22,682,000 in 1998. The increase was primarily a result of growth in the commercial lighting products. Pools lighting sales also grew for the year, after starting the year with a decrease due to adverse weather conditions and product problems with a new line. The acquisitions contributed to revenue growth in the 4th quarter. Net sales in 1997 increased to $17,871,000, up 15% from 1996 sales of $15,576,000. The 1997 increase was due to growth in the commercial and pool fiber optic lighting markets. International sales accounted for approximately 17% of net sales in 1998 as compared to 17% in 1997 and 15% in 1996. GROSS PROFIT Gross profit increased to $8,546,000 in 1998, a 9% increase. The gross profit margin was 38% in 1998, a decline from the 44% gross margin achieved in 1997. The decrease in gross margin was primarily a result of higher cost of sales for some of the Company's pools products early in the year along with an increase in warranty costs associated with a lamp component. The Company has gained assurances from its lamp supplier that the lamp component involved in the warranty claims has been fixed and as a result expects gross margins to show some improvement in 1999. The Company's gross margin percentage achieved in 1997 was 44% as compared to 42% achieved in 1996. The increase in 1997 was primarily due to lower fiber processing costs in connection with the Company's fiber processing facility, as well as higher than average margins from the Fiberstars Catalyst(TM) pool sanitation product line, which began shipping in 1997. OPERATING EXPENSES Research and development expenses were $1,283,000 in 1998, a 10% increase over 1997. The increase is largely due to additional personnel and product development expenses associated with releasing new products in 1998 and preparing products to be released in 1999. Sales and marketing expenses were $5,381,000 in 1998 as compared to $4,393,000 in 1997, an increase of 22%. A portion of the increase was due to $333,400 in additional expenses from the acquired companies in 1998 for which there were no expenses in 1997. The balance of the increase is a result of additional personnel and marketing costs associated with supporting existing products as well as introduction costs for new products released during the year. General and administrative costs were $1,675,000 in 1998, an increase of 18% over 1997 costs. This increase was largely a result of writing down the value of $200,000 in assets which were deemed to have no future value, along with goodwill amortization from acquisitions of $63,000 which was part of general and administrative expense in 1998. Total operating expenses were 37% of sales in 1998 as compared to 39% in 1997 and 38% in 1996. Research and development expenses increased by 21% to $1,165,000 in 1997. The increases consisted primarily of increased personnel and project expenses associated with increased product development activity. Selling and marketing expenses increased by 18% to $4,393,000 in 1997. Increases occurred in the pool division and included increases in advertising, sales literature and personnel related expenses. General and administrative expenses increased by 13% to $1,419,000 in 1997, primarily due to increases in personnel expenses, professional fees and other expenses, consistent with growth in the business during the year. Total operating expenses increased by $1,033,000 to $6,977,000 in 1997, an increase of 17%. As a percentage of sales, total operating expenses increased to 39% in 1997 from 38% in 1996, as operating expenses increased more rapidly than sales. OTHER INCOME AND EXPENSES Other income and expense includes interest income and expense, income (loss) from the Company's joint venture as recognized under the equity method, and income from divestitures. Net interest income was $223,000 in 1998 compared to $246,000 in 1997. The decrease was due primarily to a use of cash in the 4th quarter to acquire two companies, along with a general decrease in interest rates in 1998. The loss from the Company's joint venture was $22,000 in 1998 versus a loss of $12,000 in 1997. This larger loss is mainly due to adverse exchange rate effects on business in Australia. As highlighted above, the divestiture income was a result of the Company selling its rights to the phototherapy fiber optic product to Respironics, Inc. Net interest income in 1997 was $246,000 or the same as that achieved in 1996. The Company's investment in joint venture activities yielded a loss of $12,000 in 1997 compared to a profit of $8,000 in 1996. INCOME TAXES The income tax rate in 1998 was 37% compared to 40% in 1997 and 40% in 1996. The lower rate was due to the recognition of certain tax benefits accumulated over prior years. There is no assurance that the income tax rate in future periods will be maintained at the level experienced in 1998. NET INCOME As a result of the increase in sales in 1998, partially offset by lower gross margin and higher expenses, and aided by the one time net gain, net income for the year was $762,000 or 18% above net income achieved in 1997. The Company recorded net income of $644,000 in 1997, a gain of 26% over net income of $511,000 achieved in 1996. Liquidity and Capital Resources For the year ended December 31, 1998, cash and cash equivalents when combined with short-term investments were $1,290,000 as compared to $5,120,000 for the year ended December 31, 1997. Cash in the amount of $3,232,000 was used in the year to acquire three companies. Additional cash was utilized by operations in the 4th quarter to fund additions to accounts receivable for purchases of "early buy" products by customers in the pools market. Cash may decline further during the 1st quarter of 1999, but then increase in the 2nd quarter as the early buy season comes to an end. In June 1998, the Company renewed its $1 million unsecured line of credit for working capital purposes and its $500,000 term loan commitment to finance equipment purchases. Both lines expired on June 28, 1998. As of December 31, 1998 the Company had no borrowings outstanding against either of these lines of credit The Company also had a total borrowing of $527,700 against a credit facility held by its German subsidiary. This borrowing is largely held in order to finance the building of new offices owned by the Company in Basching, Germany. The Company believes that existing cash balances, together with the Company's bank lines of credit and funds that may be generated from operations, will be sufficient to finance the Company's currently anticipated working capital requirements and capital expenditure requirements for at least the next twelve months. Subsequent event In March, 1999 the company increased its unsecured line of credit for working capital to $2 million. Other Factors This Annual Report contains forward-looking statements. Such statements generally concern future operating results, capital expenditures, product development and enhancements, liquidity and strategy. Specific forward-looking statements in this report include, without limitation, our remarks concerning the evolution of the fiber optic lighting market, the future size of the fiber optic lighting market, our expectations concerning the fixture performance of our recently completed acquisitions, our expectations regarding future performance of certain lamp components of our products that have recently experienced problems, the rate of adoption of fiber optic lighting in Europe and in the United States, trends in the price and performance of fiber optic lighting products, the future performance of our lighting products, our relationship with ADLT and future technologies expected to result from our relationship with ADLT. We may not update these forward looking statements, and the occurrence of the events predicted in these statements is subject to a number of risks and uncertainties, including those discussed in this report. These risks and uncertainties could cause our actual results to differ materially from the results predicted in our forward looking statements. You are encouraged to consider all the information in this report, and in our Annual Report on Form 10-KSB filed with the Securities and Exchange Commission ("SEC"), along with our other periodic reports on file with the SEC, prior to investing in our stock. Basiness Risks and Uncertainties Our quarterly operating results can vary significantly depending upon a number of factors. It is difficult to predict the lighting market's acceptance of our products on a quarterly basis, and the level and timing of orders received can fluctuate substantially. Our sales volumes also fluctuate. Historically we have shipped a substantial portion of our quarterly sales in the last month of each of the second and fourth quarters of the year. Significant portions of our expenses are relatively fixed in advance based upon our forecasts of future sales. If sales fail below our expectations in any given quarter, we will not be able to make any significant adjustment in our operating expenses and our operating results will be adversely affected, In addition, our product development and marketing expenditures may vary significantly from quarter to quarter and are made well in advance of potential resulting revenue. Sales of our pool and spa lighting products, which currently are available only with newly constructed pools and spas, depend substantially upon the level of new construction. Sales of commercial lighting products also depend significantly upon the level of new building construction. Construction levels are affected by housing market trends, interest rates, and the weather. Because of the seasonality of construction, our sales of swimming pool and commercial lighting products, and thus our overall revenues and income, have tended to be significantly lower in the first quarter of each year. Various economic and other trends may alter these seasonal trends from year to year, and we cannot predict the extent to which these seasonal trends will continue. We believe our business has been favorably impacted by recent strength in the overall U.S. economy. If the U.S. economy softens, our operating results will probably suffer. In the fourth quarter of 1998, we introduced two major new products. Our Pool & Spa product called the Fiberstars Lifetime Illuminator(TM) is expected to outperform similar types of illuminators in the marketplace. The Model 601 illuminator for the Commercial Lighting market will replace and is expected to outperform and be less costly than our current brightest illuminator Model 501. We could have difficulties manufacturing these new products as a result of our inexperience with them. Also, it is difficult to predict whether the market will accept either of these new products. If either of these new products fails to meet expectations, our operating results will be adversely affected. Competition is increasing in a number of our markets. A number of companies offer directly competitive products, including fiber optic lighting products for downlighting, display case and water lighting, and neon and other lighted signs. Our competitors include some very large and well established companies such as [Philips, Schott, 3M, Bridgestone, Mitsubishi, Osram/Siemens and Rohm & Haas/Advanced Lighting Technologies]. All of these companies have substantially greater financial, technical and marketing resources than we do. We anticipate that any future growth in fiber optic lighting will be accompanied by continuing increases in competition, which could accelerate growth in the market for fiber optic lighting, but which could also adversely affect our operating results to the extent we do not compete effectively. We were awarded our ninth patent in the fourth quarter of 1998. However, we believe the success of our business depends primarily on our continued technical innovation, marketing abilities and responsiveness to customer requirements, rather than on patents, trade secrets, trademarks, copyrights and other intellectual property rights. Nevertheless, we have a policy of seeking to protect our intellectual property through, among other things, the prosecution of patents with respect to certain of our technologies. There are many issued patents and pending patent applications in the field of fiber optic technology, and certain of our competitors hold and have applied for patents related to fiber optic lighting. Although to date we have not been involved in litigation challenging our intellectual property rights or asserting intellectual property rights of others, we have in the past received communications from third parties asserting rights in our patents or that our technology infringes intellectual property rights held by such third parties. Based on information currently available to use we do not believe that any such claims involving our technology or patents are meritorious. However, we may be required to engage in litigation to protect our patent rights or to defend against the claims of others. In the event of litigation to determine the validity of any third party claims or claims by us against such third party, such litigation, whether or not determined in our favor, could result in significant expense. Our business is subject to additional risks that could materially and adversely affect our future business, including: o manufacturing risks, including the risks of shortages in materials or components necessary to our manufacturing and assembly operations, and the risks of increases in the prices of raw materials and components; o sales and distribution risks, such as risks of changes in product mix or distribution channels that result in lower margins; o risks of the loss of a significant distributor or sales representative; o risks of the loss of a significant customer or swimming pool builder; o risks of the effects of volume discounts that we grant from time to time to our larger customers, including reduced profit margins; o risks of product returns and exchanges; in this regard, as noted above, we have increased our warranty reserve in the fourth quarter of 1998 in response to evidence of defective lamps in certain of our products. We cannot assure you we will not experience similar component problems in the future that could also require increased warranty reserves and manufacturing costs. o risks associated with product development and introduction problems, such as increased research, development and marketing expenses associated with new product introductions; and o risks associated with delays in the introduction of new products and technologies, including lost sales and loss of market share. Year 2000 Compliance Many currently installed computer systems and software products are not capable of distinguishing 20th century dates from 21st century dates. As a result, in less than one year, computers systems and/or software used by many companies in a very wide variety of applications will experience operating difficulties unless they are modified or upgraded to adequately process information involving, related to or dependent upon the century change. Significant uncertainty exists in the software and information services industries concerning the scope and magnitude of problems associated with the century change. In light of the potentially broad effects of the year 2000 on a wide range of business systems, the Company's products and services may be affected. The Company utilizes and is dependent upon data processing computer hardware and software to conduct its business, and in 1998 completed an upgrade of hardware and software at an approximate cost of $30,000. The Company has completed its assessment of its own computer systems and based upon this assessment, the Company believes its computer systems are "Year 2000 compliant;" that is, capable of adequately distinguishing 21st century dates from 20th century dates. However, there can be no assurance that the Company has timely identified or will timely identify and remediate all significant Year 2000 problems in its own computer systems, that remedial efforts subsequently made will not involve significant time and expense, or that such problems will not have a material adverse effect on the Company's business, operating results and financial condition. If unforeseen internal disruptions occur, the Company believes that its existing disaster recovery program, which includes the manual processing of certain key transactions, would significantly mitigate the impact. The Company has made only limited efforts to determine the extent of and minimize the risk that the computer systems of the Company's suppliers or customers are not Year 2000 compliant, or will not become compliant on a timely basis. The Company expects that the process of making inquiries with these customers and suppliers will be ongoing through the end of 1999. If Year 2000 problems prevent any of the Company's suppliers from timely delivery of products or services required by the Company, the Company's operating results could be materially adversely affected. However, the Company currently estimates that its costs to address Year 2000 issues relating to its suppliers will not be material, and that these costs will be funded from its operating cash flows. The Company has identified and will continue to identify alternative suppliers in the event its preferred suppliers become incapable of timely delivering products or services required by the Company. The Company's suppliers are generally locally or regionally based, which tends to lessen the Company's exposure from the lack of readiness of any single supplier. The Company may also face delays in receipt of payments from customers with unresolved Year 2000 problems, and such delays could materially adversely affect the Company's operating results. To the extent any such delays are significant or protracted, the Company's quarterly results would be adversely affected. The Company intends to continually reassess this risk as it receives communications about the status of its customers with regard to Year 2000 issues, and if necessary, adjust its account sales and policies accordingly. Year 2000 costs relating to the Company's own computer systems including consulting fees and costs to remediate or replace hardware and software as well as non-incremental costs resulting from redeployment of internal resources are estimated to be immaterial. The Company is not able to accurately estimate potential costs associated with the Year 2000 issues of its customers and suppliers, and is in the process of verifying that these companies will be year 2000 compliant by the end of 1999. There can be no assurance that the estimated costs for remediating the Company's own systems as well as estimated costs associated with the potential non-compliance of its customers and suppliers are correct, and actual results could differ materially from these estimates. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer costs, and similar uncertainties. Item 7. Financial Statements The financial statements and related notes thereto required by this item are listed and set forth in a separate section of this report following the index to exhibits. Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. 9 PART III Item 9. Directors and Executive Officers of the Registrant The information required by this Item regarding directors and nominees is incorporated herein by reference to the information in the Company's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be held on May 12, 1999 (the "Proxy Statement") under the caption "PROPOSAL NO. 1: ELECTION OF DIRECTORS." The executive officers of the Company who are not directors, and their ages as of December 31, 1998, are as follows: Name Age Position ---- --- -------- George K. Awai 43 Vice President, Research and Development Barry R. Greenwald 52 Senior Vice President and General Manager, Pool Division J. Arthur Hatley 49 Vice President and General Manager, Commercial Lighting J. Steven Keplinger 39 Senior Vice President, Operations and Retail Fredrick N. Martin 55 Chief Operating Officer Robert A. Connors 50 Vice President, Finance, Chief Financial Officer - ---------- Mr. Awai joined the Company in October 1986 as Vice President, Engineering. Prior to joining the Company, Mr. Awai served as Senior Fiber Optics Engineering Supervisor at Advanced Cardiovascular Systems, Inc., a subsidiary of Eli Lilly engaged in research and development of medical devices, from August 1985 to October 1986. From December 1983 to August 1985, Mr. Awai served as Quality Assurance Optics Manager at Kaptron, Inc., a fiber optics manufacturing company. Mr. Awai served as Senior Optical Engineering Technician at Siemens Optoelectronics from August 1982 to December 1983, as Fiber Optics Laboratory Supervisor at Cooper Medical Devices, Inc. from May 1981 to July 1982, and as Senior Fiber Optics Technician at Olympus Corporation from September 1979 to May 1981. Mr. Greenwald joined the Company in October 1989 as General Manager, Pool Division. He became Vice President in September 1993 and Senior Vice President in February 1997. Prior to joining the Company, Mr. Greenwald served as National Sales Manager at Aquamatic, a swimming pool accessory company, from August 1987 to October 1989. From May 1982 to August 1987, Mr. Greenwald served as National Sales Manager at Jandy Inc., a swimming pool equipment company. Mr. Hatley joined the Company in July 1995 as National Sales Manager, Commercial Lighting Division. He was promoted to General Manager in January 1996 and was named Vice President in December 1996. Prior to joining the Company, Mr. Hatley served in progressive sales management capacities for Reggiani and Capri Lighting companies. Mr. Hatley was previously a commercial lighting agency principal and also served at Graybar Electric, a national lighting and electrical products distributor. Mr. Keplinger joined the Company in August 1988 as Manager of Operations. He became Vice President in 1991 and Senior Vice President in February 1997. From June 1986 to August 1988, Mr. Keplinger was a sales representative at Leemah Electronics, an electronics manufacturing company. From February 1983 10 to June 1986, Mr. Keplinger was a sales manager with California Magnetics Corp, a custom transformer manufacturing company. Mr. Keplinger is also a director of Fiberstars Australasia Pty. Ltd. Mr. Martin joined the Company in March 1997 as Senior Vice President responsible for Engineering, R&D and Commercial Lighting sales and marketing and was promoted to Chief Operating Officer in 1998. From May 1994 to February 1997, Mr. Martin was general partner in a retail business. From 1989 to 1993, Mr. Martin was President and Chief Executive Officer of Progress Lighting. Prior to that, he served as Executive Vice President of sales & marketing for USI Lighting, a large lighting fixture and controls company, and as President of Prescolite, a lighting fixture company. Mr. Connors joined the Company in July 1998 as Vice President, Finance, Chief Financial Officer. From 1984 to 1998, Mr. Connors held a variety of positions for Micro Focus Group Plc, a software company, including Chief Financial Officer and Chief Operating Officer. Prior to that, he held senior finance positions with Eagle Computer and W. R. Grace. Item 10. Executive Compensation The information regarding executive compensation required by Item 10 is incorporated herein by reference to the information in the Proxy Statement under the caption "Executive Compensation." Item 11. Security Ownership of Certain Beneficial Owners and Management The information regarding security ownership of certain beneficial owners and management required by Item 11 is incorporated herein by reference to the information in the Proxy Statement under the caption "Security Ownership of Principal Shareholders and Management." Item 12. Certain Relationships and Related Transactions The information regarding certain relationships and related transactions required by Item 12 is incorporated herein by reference to the information in the Proxy Statement under the caption "Certain Transactions." Item 13. Exhibits and Reports on Form 8-K (a) Reference is made to the Index to Exhibits that begins on page 12 of this report. (b) Form 8-K filed on December 4, 1998, is included as Exhibit 10.27 and is included in the Index to Exhibits that begins on page 12 of this report. 11 INDEX TO EXHIBITS (Item 13(a)) Exhibit Number Document - ------ -------- 3.1 Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 3.2 Bylaws of Registrant, including all amendments (incorporated by reference to Exhibit 3.2 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994). 3.3 Amendment to Bylaws of Registrant, dated as of December 1, 1995 (incorporated by reference to Exhibit 3.3 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1995). 10.0 Form of warrant issued to the Underwriters in the Company's initial public offering (incorporated by reference to Exhibit 1.1 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994) 10.1+ Form of Indemnification Agreement for directors and officers of the Registrant (incorporated by reference to Exhibit 10.1 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.2+ 1988 Stock Option Plan, as amended, and forms of stock option agreement (incorporated by reference to Exhibit 10.2 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.3+ 1994 Stock Option Plan, as amended, and forms of stock option agreement (incorporated by reference to Exhibit 10.3 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.4+ 1994 Employee Stock Purchase Plan and form of subscription agreement (incorporated by reference to Exhibit 10.4 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.5+ 1994 Directors' Stock Option Plan and form of stock option agreement (incorporated by reference to Exhibit 10.5 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.6 Registration Rights Agreement dated as of June 27, 1990, between the Registrant and certain holders of the Registrant's capital stock, as amended by Amendment No. 1 dated as of February 6, 1991 and Amendment No. 2 dated as of April 30, 1994 (incorporated by reference to Exhibit 10.10 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.7 Amendment No. 3 to Registration Rights Agreement to include Warrant shares as Registerable Securities (incorporated by reference to Exhibit 1.2 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.8+ Stock Purchase Agreement and related Promissory Note between David N. Ruckert and the Registrant dated as of December 9, 1987, as amended (incorporated by reference to Exhibit 10.14 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 12 10.9+ Common Stock Purchase Warrant dated as of June 27, 1988 issued by the Registrant to Philip Wolfson (incorporated by reference to Exhibit 10.15 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.10 Lease Agreement dated December 20, 1993 between the Registrant and Bayside Spinnaker Partners IV (incorporated by reference to Exhibit 10.19 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.11 Form of Agreement between the Registrant and independent sales representatives (incorporated by reference to Exhibit 10.20 in the Registrant's Registration Statement on Form SB-2 (Commission File No. 33-79116-LA) which became effective on August 17, 1994). 10.12+ Consulting Agreement dated August 25, 1994 between the Registrant and Philip Wolfson, M.D. (incorporated by reference to Exhibit 10.17 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994). 10.13* Distribution Agreement dated March 21, 1995 between the Registrant and Mitsubishi International Corporation (incorporated by reference to Exhibit 10.18 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994). 10.14* Three (3) Year Supply Agreement dated March 21, 1995 between the Registrant and Mitsubishi International Corporation (incorporated by reference to Exhibit 10.19 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994). 10.15 Stock Purchase Agreement dated March 21, 1995 among the Registrant, Mitsubishi International Corporation and Mitsubishi Corporation (incorporated by reference to Exhibit 10.20 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994). 10.16+ Consulting Agreement dated as of December 14, 1995, between Registrant and Michael D. Ernst (incorporated by reference to Exhibit 10.21 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1995). 10.17 Distribution Agreement dated as of February 21, 1996, between the Registrant and Fiberoptic Medical Products, Inc. (incorporated by reference to Exhibit 10.24 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1995). 10.21 Amendment to 1994 Stock Option Plan, effective as of December 6, 1996 (incorporated by reference to Exhibit 10.21 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996). 10.22 Promissory Note dated as of October 7, 1996, issued in favor of the Registrant by Steve Keplinger (incorporated by reference to Exhibit 10.22 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996). 10.23 Promissory Note dated as of March 25, 1997, issued in favor of the Registrant by Barry Greenwald (incorporated by reference to Exhibit 10.23 in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996). 10.24* Amended and Restated Three (3) Year Supply Agreement dated March 31, 1998 between the Registrant and Mitsubishi International Corporation (incorporated by reference in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997). 13 10.25 Rental Agreement dated February 1, 1998 between the Registrant and Signature Floors. 10.26 Promissory Note dated as of March 15, 1998, issued in favor of the Registrant by Barry Greenwald 10.27 Consulting Agreement dated November 1, 1997 between the Registrant and Barry A. Nelson. 10.29 Loan Agreement dated June 28, 1998, between the Registrant and Wells Fargo Bank. 10.30 Term Commitment Note of the Registrant dated as of June 28, 1998, to Wells Fargo Bank. 10.31 Revolving Line of Credit Note of the Registrant dated as of June 28, 1998, to Wells Fargo Bank 10.32 Asset Purchase Agreement by and among FibreOptics International, Inc., a Washington corporation, and the Registrant dated August 31, 1998. 10.33 Sale and Purchase Agreement dated as of November 19, 1998, by and among Fiberstars, Inc., Hillgate (4) Limited, Crescent Lighting Limited, Michael Beverly Morrison and Corinne Bertrand. 10.34 Purchase and Take-over Agreement between Frau Claudia Mann, acting for LBM Lichtleit-Fasertechnik, Claudia Mann and Fiberstars Deutschland GmbH and Bernhard Mann. 10.35* Asset Purchase Agreement dated as of December 30, 1998, between Respironics, Inc. and Fiberstars, Inc. 10.36 Lease Agreement dated November 23, 1998 between Registrant and Catellus Development Corporation. 10.37 Lease Agreement dated September 15, 1998 between Resistrant and Harsch Investment Corp. 10.38 Memorandum of Understanding between Registrant and Water Quality Management, Inc. dated January 22, 1999. 10.39 Promissory Note dated June 19, 1998 between Registrant and Fredrick N. Martin 10.40 Promissory Note dated March 25, 1999 between Registrant and J. Steven Keplinger 23.1 Consent of Independent Accountants. 27.1 Financial Data Schedule * Confidential treatment requested. + Management Compensatory Plan or Arrangement 14 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized, on the 31st day of March, 1999. FIBERSTARS, INC. By: /s/ DAVID N. RUCKERT --------------------------------- David N. Ruckert Chief Executive Officer (Principal Executive Officer) In accordance with the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ DAVID N. RUCKERT Chief Executive Officer and March 31, 1999 - ---------------------------- Director (Principal David N. Ruckert Executive Officer) /s/ ROBERT A. CONNORS Chief Financial Officer March 31, 1999 - ---------------------------- (Principal Accounting Officer) Robert A. Connors /s/ JOHN B. STUPPIN Director March 31, 1999 - ---------------------------- John B. Stuppin /s/ THEODORE L. ELIOT, JR Director March 31, 1999 - ---------------------------- Theodore L. Eliot, Jr. /s/ MICHAEL FEUER, PH.D. Director March 31, 1999 - ---------------------------- Michael Feuer, Ph.D. /s/ B.J. GARET Director March 31, 1999 - ---------------------------- B.J. Garet /s/ WAYNE R. HELLMAN Director March 31, 1999 - ---------------------------- Wayne R. Hellman /s/ PHILIP WOLFSON Director March 31, 1999 - ---------------------------- Philip Wolfson 15 FIBERSTARS, INC. CONSOLIDATED BALANCE SHEETS, December 31, 1998 and 1997 (amounts in thousands except share and per share amounts) ASSETS 1998 1997 -------- -------- Current assets: Cash and cash equivalents $ 1,290 $ 523 Short-term investments 4,597 Accounts receivable, net of allowances for doubtful accounts of $370 in 1998 and $293 in 1997 5,210 2,525 Notes and other receivables 771 161 Inventories 4,179 3,068 Prepaids and other current assets 369 373 Deferred income taxes 507 677 -------- -------- Total current assets 12,326 11,924 Fixed assets, net 1,522 1,003 Investment in joint venture 18 40 Goodwill 4,403 Other assets 566 103 Deferred income taxes 89 54 -------- -------- Total assets $ 18,924 $ 13,124 ======== ======== LIABILITIES Current liabilities: Accounts payable $ 2,598 $ 1,068 Accrued liabilities 2,198 1,318 Current portion of long-term debt 107 13 -------- -------- Total current liabilities 4903 2,399 Long-term debt, less current portion 667 17 -------- -------- Total liabilities 5,570 2,416 -------- -------- Commitments and contingencies (Note 9) SHAREHOLDERS' EQUITY Preferred stock, par value $0.0001 per share: Authorized:2,000,000 shares in 1998 and 1997 Issued and outstanding :no shares in 1998 and 1997 Common stock, par value $0.0001 per share: Authorized:30,000,000 shares in 1998 and 1997 Issued and outstanding: 3,952,601 shares in 1998 and 3,509,474 shares in 1997 -- -- Additional paid-in capital 13,930 12,035 Notes receivable from shareholders (86) (75) Accumulated deficit (490) (1,252) -------- -------- Total shareholders' equity 13,354 10,708 -------- -------- Total liabilities and shareholders' equity $ 18,924 $ 13,124 ======== ======== The accompanying notes are an integral part of these financial statements. F-1 FIBERSTARS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1998, 1997 and 1996 (amounts in thousands except share and per share amounts) 1998 1997 1996 ------- ------- ------- Net sales $22,682 $17,871 $15,576 Cost of sales 14,136 10,047 9,032 ------- ------- ------- Gross profit 8,546 7,824 6,544 ------- ------- ------- Operating expenses: Research and development 1,283 1,165 962 Sales and marketing 5,381 4,393 3,728 General and administrative 1,675 1,419 1,254 ------- ------- ------- Total operating expenses 8,339 6,977 5,944 ------- ------- ------- Income from operations 207 847 600 Other income (expense): Equity in joint ventures' income (loss) (22) (12) 8 Divestiture 801 Interest and other income 224 248 252 Interest expense (1) (2) (6) ------- ------- ------- Income before provision for income taxes 1,209 1,081 854 Provision for income taxes (447) (437) (343) ------- ------- ------- Net income $ 762 $ 644 $ 511 ======= ======= ======= Net income per share - basic $ 0.21 $ 0.19 $ 0.15 ======= ======= ======= Shares used in per share calculation - basic 3,623 3,446 3,398 ======= ======= ======= Net income per share - diluted $ 0.21 $ 0.18 $ 0.14 ======= ======= ======= Shares used in per share calculation - diluted 3,695 3,597 3,539 ======= ======= ======= The accompanying notes are an integral part of these financial statements. F-2 FIBERSTARS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended December 31, 1998, 1997 and 1996 (in thousands)
Notes Common Stock Additional Receivable ----------------- Paid-In from Accumulated Shares Amount Capital Shareholders Deficit Total ------ ------ ------- ------------ ------- ----- Balances, January 1, 1996 3,381 $ -- $ 11,848 $(75) $(2,407) $ 9,366 Exercise of common stock options 7 9 9 Issuance of common stock under employee stock purchase plan 9 32 32 Issuance of common stock pursuant to exercise of warrants 16 14 14 Net Income 511 511 ----- ------ -------- ---- ------- ------- Balances, December 31, 1996 3,413 -- 11,903 (75) (1,896) 9,932 Exercise of common stock options 88 97 97 Issuance of common stock under employee stock purchase plan 9 35 35 Net income 644 644 ----- ------ -------- ---- ------- ------- Balances, December 31, 1997 3,510 -- 12,035 (75) (1,252) 10,708 Exercise of common stock options 46 164 164 Issuance of common stock under employee stock purchase plan 10 35 35 Issuance of common stock pursuant to exercise of warrants 12 11 (11) 0 Issuance of common stock for acquisitions 405 1,685 1,685 Net income 762 762 ----- ------ -------- ---- ------- ------- Balances, December 31, 1998 3,983 $ -- $ 13,930 $(86) $ (490) $13,354 ===== ====== ======== ==== ======= =======
The accompanying notes are an integral part of these financial statements. F-3 FIBERSTARS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 ------- ------- ------- Cash flows from operating activities: Net income $ 762 $ 644 $ 511 ------- ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 647 453 322 Provision for doubtful accounts receivable 77 76 56 Deferred income taxes 135 407 343 Equity in joint venture 22 12 (8) Changes in assets and liabilities: Accounts receivable, trade (1,072) 2 (63) Inventories (275) (900) (264) Prepaids and other current assets 36 (192) (5) Other assets (463) 19 (53) Accounts payable 240 101 (131) Accrued liabilities 671 196 145 ------- ------- ------- Total adjustments 18 174 342 ------- ------- ------- Net cash provided by operating activities 780 818 853 ------- ------- ------- Cash flows from investing activities: Sale of short-term investments 4,597 Purchase of short-term investments (1,282) (869) Acquisition of business, net of cash acquired (3,232) Loans made under notes receivable (610) (30) (161) Acquisition of fixed assets (479) (624) (400) Sale of investment in joint venture 298 ------- ------- ------- Net cash provided by (used in) investing activities 276 (1,936) (1,132) ------- ------- ------- Cash flows from financing activities: Proceeds from issuances of common stock 199 132 55 Repayment of long-term debt (488) (11) (12) ------- ------- ------- Net cash provided by (used in) financing activities (289) 121 43 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 767 (997) (236) Cash and cash equivalents, beginning of year 523 1,520 1,756 ------- ------- ------- Cash and cash equivalents, end of year $ 1,290 $ 523 $ 1,520 ======= ======= ======= Supplemental Information: Interest paid $ 1 $ 2 $ 6 Income taxes paid $ 66 $ 24 $ 38 The Company purchased certain businesses during 1998. In conjunction with the acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 7,649 Cash paid for capital stock (3,232) Capital stock issued (1,685) ------- Liabilities assumed $ 2,732 ------- The accompanying notes are an integral part of these financial statements. F-4 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations: Fiberstars, Inc. (the Company) develops and assembles lighting products using fiber optic technology for commercial lighting and swimming pool and spa lighting applications. The Company markets its products for worldwide distribution primarily through independent sales representatives, distributors and swimming pool builders. 2. Summary of Significant Accounting Policies: Basis of Consolidation: The consolidated financial statements include the accounts of Fiberstars, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash Equivalents: The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. Short-Term Investments: Short-term investments consist of debt securities with remaining maturity of more than three months when purchased. The Company has determined that all of its debt securities should be classified as available-for-sale. The difference between the cost basis and the market value of the Company's investments was not material at December 31, 1998 and 1997. The Company's investments at December 31, 1998 and 1997 primarily consist of corporate notes with maturities of one year or less. Short-term investments are held by one investment bank as of December 31, 1998. Inventories: Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. F-5 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued: Investments in Joint Ventures: The Company records its investments in joint ventures under the equity method of accounting. Fair Value of Financial Instruments: Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of long-term debt obligations also approximates fair value. Revenue Recognition: The Company recognizes sales upon shipment. Depreciation and Amortization: Fixed assets are stated at cost and depreciated by the straight-line method over the estimated useful lives of the related assets (two to five years). Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or the lease term, whichever is less. Certain Risks and Concentrations: The Company invests its excess cash in deposits and high-grade short-term securities with two major banks. The Company sells its products primarily to commercial lighting distributors and residential pool distributors and pool installation contractors in North America, Europe and the Far East. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Although the Company maintains allowances for potential credit losses that it believes to be adequate, a payment default on a significant sale could materially and adversely affect its operating results and financial condition. At December 31, 1998, one customer accounted for 22% of accounts receivable and at December 31, 1997, one customer accounted for more than 17% accounts receivable. One customer accounted for 13%, 13% and 10% of net sales in 1998, 1997 and 1996, respectively. F-6 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued: The Company currently buys all of its fiber, the main component of its products, from one supplier. Although there is a limited number of fiber suppliers, management believes that other suppliers could provide fiber on comparable terms. A change in suppliers, however, could cause delays in manufacturing and a possible loss of sales which would adversely affect operating results. Research and Development: Research and development costs are charged to operations as incurred. Income Taxes: The Company accounts for income taxes using the liability method under which deferred tax assets or liabilities are calculated at the balance sheet date using current tax laws and rates in effect. Earnings Per Share: The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128") effective December 31, 1997. SFAS 128 requires the presentation of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental shares upon exercise of stock options. All prior period earnings per share amounts have been restated to comply with SFAS 128. F-7 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued: Earnings Per Share, continued: In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts): Year Ended December 31, ---------------------------- 1998 1997 1996 ------ ------ ------ Numerator - Basic and Diluted EPS Net income $ 762 $ 644 $ 511 Denominator - Basic EPS Weighted average shares outstanding 3,623 3,446 3,398 ------ ------ ------ Basic earnings per share $ 0.21 $ 0.19 $ 0.15 ====== ====== ====== Denominator - Diluted EPS Denominator - Basic EPS 3,623 3,446 3,398 Effect of dilutive securities: Stock options and warrants 72 151 141 ------ ------ ------ 3,695 3,597 3,539 ------ ------ ------ Diluted earnings per share $ 0.21 $ 0.18 $ 0.14 ====== ====== ====== Options and warrants to purchase 584,626 shares, 371,705 shares and 421,095 shares of common stock were outstanding at December 31, 1998, 1997 and 1996, respectively, but were not included in the calculations of diluted EPS because their exercise prices were greater than the average fair market price of the common shares. Recent Pronouncements: In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires companies to capitalize qualifying software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on its financial statements and related disclosures. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard requires companies to expense the costs of start-up activities and organization F-8 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued: Recent Pronouncements, continued: costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company believes the adoption of SOP 98-5 will not have a material impact on its results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. SFAS 133 will be effective for fiscal years beginning after June 15, 1999. The Company does not currently hold derivative instruments or engage in hedging activities. In the first quarter of 1998, the Company adopted statement of financial accounting standards No. 130, ("SFAS 130"), "Reporting Comprehensive Income", which specifies the computation, presentation and disclosure requirements for comprehensive income. There was no impact on the Company's financial position, results of operation or cash flows as a result of adoption, and comprehensive and net income are the same. In 1998, the Company adopted statement of financial accounting standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 requires publicly held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and utilized by the Chief Operations decision maker. SFAS 131 also requires revenue geographic information and revenue with significant customers to be disclosed. The Company operates in one segment and will not be reporting product segment information but will report geographic and significant customer revenue. 3. Inventories (in thousands): December 31, -------------------- 1998 1997 ------ ------ Raw materials $2,780 $2,020 Finished goods 1,399 1,048 ------ ------ $4,179 $3,068 ====== ====== F-9 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Fixed Assets (in thousands): December 31, ------------------ 1998 1997 ------- ------- Equipment $ 2,823 $ 2,197 Furniture and fixtures 250 127 Computer software 452 242 Leasehold improvements 541 101 ------- ------- 4,066 2,667 Less accumulated depreciation and amortization (2,544) (1,664) ------- ------- $ 1,522 $ 1,003 ======= ======= 5. Acquisitions: In August 1998, the Company completed the acquisition of the net assets of Fibre Optics International, Inc. (FOI) for $865,000 consisting of $315,000 in cash and 122,350 shares of Fiberstars stock. FOI is a manufacturer and marketer of fiber optic-lighted signs, based in Seattle, Washington. In November 1998, the Company acquired the net assets of Lichberatung Mann (LBM), fiber optic lighting manufacturers and distributor headquartered near Munich, Germany. Also in November 1998, the Company purchased the net assets of Crescent Lighting, Ltd. (Crescent), which is a fiber optic lighting manufacturer and distributor based in Newbury, England. The consideration given for both the European acquisitions was $2,875,000 in cash and 282,386 shares of Fiberstars stock, or an aggregate of $4,013,000. All three acquisitions were accounted for as purchases. Accordingly, the purchase price was allocated to the net assets acquired based on their estimated fair market values. In connection with the acquisitions, the Company recorded goodwill of $4,466,000 which is being amortized on a straight line basis over ten years. The following table presents the unaudited pro forma results assuming the Company had acquired FOI, LBM and Crescent at the beginning of fiscal years 1997 and 1998, respectively. Net income and diluted earnings per share amounts have been adjusted to include goodwill amortization of $447,000 for the twelve months ended December 31, 1997 and 1998. This information may not necessarily be indicative of the future combined results of the Company. Year Ended December 31, ----------------------- 1998 1997 ------- ------- Revenues $28,240 $24,184 Net income 414 702 Diluted earnings per share $ 0.10 $ 0.18 Basic earnings per share $ 0.10 $ 0.18 F-10 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Joint Venture: Fiberoptic Medical Products, Inc. In February 1996, the Company entered into an agreement to sell its equity in Fiberoptic Medical Products, Inc. (FMP) for the net book value of approximately $300,000. Fiberstars Australasia Pty. Ltd: The Company participates in a joint venture with Fiberstars Australasia Pty. Ltd., to market lighting products using fiberoptic technology in Australia and New Zealand. The Company maintains a 46.5% interest in Fiberstars Australasia. The Company recorded sales to Fiberstars Australasia totaling $137,000, $259,000 and $234,000, for the years ended December 31, 1998, 1997 and 1996, respectively. Accounts receivable from Fiberstars Australasia Pty. Ltd. as of December 31, 1998 and 1997 were $130,887 and $67,752, respectively. The following represents condensed financial information (unaudited) of Fiberstars Australasia as of December 31, 1998 and 1997 and for the years then ended, and combined information of FMP and Fiberstars Australasia for the year ended December 31, 1996 (in thousands): December 31, ------------------ 1998 1997 ---- ---- Current assets $ 193 $ 208 Property and other assets 64 37 ----- ----- $ 257 $ 245 ===== ===== Current liabilities $ 227 $ 172 Issued capital 108 108 Accumulated deficit (78) (35) ----- ----- $ 257 $ 245 ===== ===== December 31, ---------------------------- 1998 1997 1996 ---- ---- ---- Revenue $ 569 $ 589 $566 Expenses 620 626 545 ----- ----- ---- Net income (loss) $ (51) $ (37) $ 21 ===== ===== ==== F-11 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Accrued Liabilities (in thousands): December 31, ----------------- 1998 1996 ---- ---- Sales commissions and incentives $1,003 $ 735 Accrued warranty expense 325 218 Accrued legal and accounting fees 372 99 Other 498 266 ------ ------ $2,198 $1,318 ====== ====== 8. Lines of Credit: On June 28, 1998, the Company entered into the following borrowing arrangements with its bank: a) A $1,000,000 revolving line of credit expiring June 28, 1998, bearing interest at prime plus 0.125% (8.625% at December 31, 1997). Borrowings under this line are uncollateralized, and the Company must maintain zero balance for at least 30 consecutive days during each fiscal year. b) A $500,000 term loan commitment to finance equipment purchases, expiring June 28, 1999. Borrowings bear interest at prime plus 0.50% (9% at December 31, 1998). Under this note, the Company may finance up to 80% of the cost of the new equipment and 75% of the cost of used equipment. The note is collateralized by a security interest in all equipment financed with the proceeds. Interest only is payable monthly until June 28, 1999, after which the principal plus interest is repayable in 36 monthly installments. There were no amounts outstanding at December 31, 1998. The Company is required to maintain certain financial ratios on a quarterly basis, including specified levels of working capital and tangible net worth. c) A (pound) 250,000 bank overdraft agreement with Lloyds Bank Plc which is reviewed again in November 1999. There were no borrowings against this facility at December 31, 1999. d) A DM 1,150,000 bank borrowing facility in Germany with Sparkasse Newmarket Bank. There was DM 886,497 in borrowings against this facility as of December 31, 1998. DM 450,000 of this facility terminates in 2003 and DM 700,000 terminates in 2008. 9. Commitments and Contingencies: The Company occupies manufacturing and office facilities under operating leases expiring in 1999 under which it is responsible for related maintenance, taxes and insurance. Minimum lease commitments under the leases are as follows (in thousands): F-12 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Minimum lease commitments ------------------------- 1999 $ 581 2000 701 ------ Total minimum lease payments $1,282 ------ Rent expense approximated $388,000, $322,000 and $318,000, for the years ended December 31, 1998, 1997 and 1996, respectively. The Company is engaged in certain legal and administrative proceedings incidental to its normal business activities. While it is not possible to determine the ultimate outcome of these actions at this time, management believes that any liabilities resulting from such proceedings, or claims which are pending or known to be threatened, will not have a material adverse effect on the Company's financial position or results of operations. 10. Shareholders' Equity: Common Stock: The notes receivable from shareholders for common stock bear interest at a rate of 9% and are payable ten years from the date of issuance. Under the terms of certain agreements with the Company, the holders of approximately 1,489,000 shares of common stock have certain demand and piggyback registration rights. All registration expenses generally would be borne by the Company. Warrants: The Company has issued warrants to purchase shares of its common stock to certain directors and consultants of the Company. These warrants, which were granted at the fair market value of the common stock at the date of grant as determined by the Board of Directors, expire on varying dates through 1999. In connection with its public offering in August 1994, the Company issued to the underwriters, RvR Securities Corp. and Van Kasper & Company, warrants (the Underwriters' warrants) to purchase up to 100,000 shares of the Company's common stock at an exercise price equal to 120% of the initial offering price of $4.50 per share. The Underwriters' warrants are exercisable for a period of five years from the date of the public offering expiring on August 18, 1999. F-13 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warrant activity comprised: Warrants Outstanding ------------------------------- Exercise Shares Price Amount ------ ----- ------ (in thousands) Balances, December 31, 1995 12,6666 $0.90-$5.40 $ 564 Warrants exercised (15,625) $0.90 (14) ------- ----- Balances, December 31, 1996 and 1997 111,041 $0.90-$5.40 $ 550 Warrants exercised/cancelled (11,041) $0.90 (10) ------- ----- Balances, December 31, 1998 100,000 $5.40 $ 540 ======= ===== At December 31, 1998, 100,000 outstanding warrants were exercisable. The Company has reserved 100,000 shares of common stock for issuance upon exercise of the common stock warrants. 1988 Stock Option Plan: Upon adoption of the 1994 Stock Option Plan (see below), the Company's Board of Directors determined to make no further grants under the 1988 Stock Option Plan (the 1988 Plan). Upon cancellation or expiration of any options granted under the 1988 Plan, the related reserved shares of common stock will become available instead for options granted under the 1994 Stock Option Plan. 1994 Stock Option Plan: At December 31, 1998, an aggregate of 1,350,000 shares of the Company's common stock are reserved for issuance under the 1994 Stock Option Plan to employees, officers, directors and consultants at prices not lower than the fair market value of the common stock of the Company on the date of grant. Options granted may be either incentive stock options or nonstatutory stock options. The plan administrator (the Board of Directors or a committee of the Board) determines the terms of options granted under the plan including the number of shares subject to the option, exercise price, term and exercisability. 1994 Directors' Stock Option Plan: At December 31, 1998, a total of 200,000 shares of common stock has been reserved for issuance under the 1994 Directors' Stock Option Plan. The plan provides for the granting of nonstatutory stock options to nonemployee directors of the Company. F-14 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Shareholders' Equity, continued: Activity Under the Stock Option Plans: Option activity under all plans comprised: Options Outstanding ------------------------------ Weighted Options Average Available Exercise for Number Price Grant of Shares Per Share Amount ----- --------- --------- ------ (in thousands) Balances, December 31, 1995 200,842 544,203 $3.83 $2,137 Additional shares reserved 500,000 Granted (299,050) 299,050 $4.99 1,455 Canceled 49,892 (49,892) $5.15 (216) Exercised (7,188) $1.04 (9) -------- --------- ------ Balances, December 31, 1996 451,684 786,173 $4.10 3,367 Granted (355,600) 355,600 $4.93 1,866 Canceled 22,724 (22,724) $4.83 (114) Exercised (87,791) $0.99 (97) -------- --------- ------ Balances, December 31, 1997 118,808 1,031,258 5,022 Additional shares reserved 550,000 Granted (282,500) 282,500 $4.49 1,088 Canceled 18,284 (18,284) $4.74 (90) Exercised (45,790) $3.54 (164) -------- --------- ------ Balances, December 31, 1998 404,592 1,249,684 $5,856 ======== ========= ====== At December 31, 1998, 1997 and 1996, options to purchase 623,169, 436,497 and 372,818 shares of common stock, respectively were exercisable at weighted average fair values of $4.78, $4.44 and $3.46, respectively. F-15 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Shareholders' Equity, continued: Activity Under the Stock Option Plans:
OPTIONS OPTIONS CURRENTLY OUTSTANDING EXERCISABLE ------------------------------------------------- ---------------------- Weighted Average Weighted Weighted Number Remaining Average Average Exercise of Shares Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ----------- -------- ----------- -------- (in thousands) (in years) (in thousands) $0.90-$0.90 67 3.3 $0.90 67 $0.90 $3.60-$4.63 377 5.3 $4.99 108 $4.43 $4.75-$4.75 262 3.0 $4.75 111 $4.75 $5.13-$5.88 484 3.1 $5.49 277 $5.51 $6.25-$6.50 60 2.1 $6.49 60 $6.46
1994 Employee Stock Purchase Plan: At December 31, 1998, a total of 50,000 shares of common stock has been reserved for issuance under the 1994 Employee Stock Purchase Plan. The plan permits eligible employees to purchase common stock through payroll deductions at a price equal to the lower of 85% of the fair market value of the Company's common stock at the beginning or ending of the offering period. Employees may end their participation at any time during the offering period, and participation ends automatically on termination of employment with the Company. At December 31, 1998, 39,382 shares had been issued under this plan. Stock-Based Compensation: The Company has adopted the disclosure only provision of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." The Company, however, continues to apply APB 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for options granted under the Stock Option Plans nor for shares issued under the Employee Stock Purchase Plan. Had compensation cost for these plans been determined based on the fair value of the options at the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of SFAS 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts): F-16 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Shareholders' Equity, continued: December 31, ------------------------- 1998 1997 1996 ---- ---- ---- Net income - as reported $ 762 $ 644 $ 511 ===== ===== ===== Net income - pro forma $ 538 $ 480 $ 422 ===== ===== ===== Basic earnings per share - as reported $0.21 $0.19 $0.15 ===== ===== ===== Basic earnings per share - pro forma $0.15 $0.14 $0.12 ===== ===== ===== Diluted earnings per share - as reported $0.21 $0.18 $0.14 ===== ===== ===== Diluted earnings per share - pro forma $0.15 $0.13 $0.12 ===== ===== ===== As the provisions of SFAS 123 are only applied to stock options granted after January 1, 1995 in the above pro forma amounts, the impact of the pro forma stock compensation cost will likely continue to increase, as the vesting period for the Company's options and the period over which compensation is charged to expense is generally four years. The fair value of each option grant is estimated on the date of grant using a type of Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: 1998 1997 1996 ---- ---- ---- Fair value of options issued $1.72 $2.38 $1.39 Exercise price $3.80 $5.20 $4.80 Expected life of option 3.88 years 3.91 years 3.89 years Risk-free interest rate 4.82% 6.00% 6.11% Expected volatility 50% 50% 23% 11. Income Taxes The components of the provision for income taxes are as follows (in thousands): Years Ended December 31, -------------------------------- 1998 1997 1996 ---- ---- ---- Current: Federal $(265) $ (20) $ (23) State (47) (10) (1) ----- ----- ----- (312) (30) (24) ----- ----- ----- Deferred: Federal (115) (386) (303) State (20) (21) (16) ----- ----- ----- (135) (407) (319) ----- ----- ----- Provision for income taxes $(447) $(437) $(343) ===== ===== ===== F-17 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes, continued: The principal items accounting for the difference between income taxes computed at the United States statutory rate and the provision for income taxes reflected in the statements of operations are as follows: Years Ended December 31, ------------------------- 1998 1997 1996 ---- ---- ---- United States statutory rate (34.0)% (34.0)% (34.0)% State taxes (net of federal tax benefit) (5.5) (3.9) (5.5) Other (2.5) (2.5) (0.6) ----- ----- ----- (37.0)% (40.4)% (40.1)% ===== ===== ===== The tax effects of temporary differences that give rise to significant portions of the deferred tax asset are as follows (in thousands): Years Ended December 31, ------------------------ 1998 1997 ---- ---- Allowance for doubtful accounts $ 126 $ 117 Accrued expenses and other reserves 606 352 Depreciation and amortization 60 (31) General business credits 215 Net operating loss carryforwards 95 Installment sales (213) Other 17 (17) ----- ----- Total deferred tax asset $ 596 $ 731 ===== ===== The deferred tax is not reduced by a valuation allowance as management believes it will fully realize the benefit from its deferred tax assets. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. F-18 FIBERSTARS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Segments and Geographic Sales: The Company has adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information", effective for fiscal years beginning after December 31, 1997. SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 ("SFAS 14"), "Financial Reporting for Segments of a Business Enterprise". SFAS 131 changes current practice under SFAS 14 by establishing a new framework on which to base segment reporting and also requires interim reporting of segment information. The Company operates in a single industry segment that manufactures, markets and sells fiber optic lighting products. The Company markets its products for worldwide distribution primarily through independent sales representatives, distributors and swimming pool builders in North America, Europe and the Far East. A summary of geographic sales is as follows (in thousands): Year Ended December 31, --------------------------------- 1998 1997 1996 ---- ---- ---- U.S. Domestic $18,912 $14,736 $13,294 European subsidiaries 768 0 0 Export 3002 3,135 2,282 ------- ------- ------- $22,682 $17,871 $15,576 ======= ======= ======= 13. Employee Retirement Plan: The Company maintains a 401(k) profit sharing plan for its employees who meet certain qualifications. The Plan allows eligible employees to defer up to 15% of their earnings, not to exceed the statutory amount per year on a pretax basis through contributions to the Plan. The Plan provides for employer contributions at the discretion of the Board of Directors; however, no such contributions were made in 1998, 1997 and 1996. 14. Related Party Transactions: During 1998 and 1997, the Company advanced a total of $30,000 in each year to certain officers by way of promissory notes. The notes are collateralized by certain issued or potentially issuable shares of the Company's common stock. The notes bear interest at rates ranging from 6% to 8% per annum and are repayable at various dates through April, 1999. At December 31, 1998 and 1997, $196,000 and $161,000 were outstanding and included with notes receivable. F-19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Fiberstars, Inc. Fremont, California In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Fiberstars, Inc. and its subsidiaries (the Company) at December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. San Jose, California February 4, 1999 F-20 EX-10.32 2 ASSET PURCHASE AGREEMENT ================================================================================ ASSET PURCHASE AGREEMENT by and among FIBRE OPTICS INTERNATIONAL, INC., (a Washington corporation) DOUGLAS S. CARVER, DAVE M. CARVER and FIBERSTARS, INC. (a California corporation) Dated as of August 31, 1998 ================================================================================
ARTICLE I PURCHASE AND SALE OF ASSETS...................................................................1 1.1 Purchase and Sale of Acquired Assets..........................................................1 1.2 No Buyer Assumption of Liabilities............................................................2 1.3 Purchase Price for Acquired Assets............................................................2 1.4 Closing.......................................................................................2 1.5 Purchase Price Allocation.....................................................................3 1.6 Sales Tax.....................................................................................3 ARTICLE II CERTAIN REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS.............................4 2.1 Organization, Standing and Power..............................................................4 2.2 Authority.....................................................................................4 2.3 Subsidiaries..................................................................................5 2.4 Valid Ownership Effective Transfer of Necessary Rights........................................5 2.5 Financial Statements..........................................................................5 2.6 Absence of Certain Changes or Events..........................................................5 2.7 Absence of Liabilities........................................................................6 2.8 Litigation....................................................................................6 2.9 Restrictions on Business Activities...........................................................6 2.10 Real Property.................................................................................6 2.11 Inventory.....................................................................................7 2.12 Capital Equipment and Hard Assets.............................................................7 2.13 Proprietary Rights............................................................................7 2.14 Taxes.........................................................................................8 2.15 Employee Matters..............................................................................8 2.16 Compliance With Laws..........................................................................8 2.17 Environmental Matters.........................................................................9 2.18 Brokers' and Finders' Fees....................................................................9 2.19 Contracts.....................................................................................9 2.20 Insurance....................................................................................10 2.21 Customers....................................................................................10 2.22 Investment in Buyer Shares...................................................................11 2.23 Representations Complete.....................................................................11 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER......................................................12 3.1 Organization, Standing and Power.............................................................12 3.2 Authority....................................................................................12 3.3 Validity of Buyer Shares.....................................................................12 3.4 Litigation...................................................................................12 3.5 Compliance With Laws.........................................................................12 3.6 Public Information...........................................................................13 3.7 Brokers' or Finders' Fees....................................................................13 3.8 Representations Complete.....................................................................13 TABLE OF CONTENTS Page ---- ARTICLE IV COVENANTS OF THE PARTIES.....................................................................14 4.1 Representations and Warranties...............................................................14 4.2 Access to Documents..........................................................................14 4.3 Transition Services Performed by Dave M. Carver..............................................14 4.4 Covenant Not to Compete......................................................................14 4.5 No Publicity; Confidentiality................................................................15 4.6 Employee Matters.............................................................................15 4.7 Trademark Renewal............................................................................15 4.8 Piggyback Registration.......................................................................15 4.9 Post-Closing Buyer Covenants.................................................................16 4.10 Reasonable Best Efforts; Further Assurances..................................................16 ARTICLE V ESCROW; INDEMNIFICATION......................................................................16 5.1 Escrow Fund..................................................................................16 5.2 Indemnification..............................................................................16 5.3 Indemnification Procedure....................................................................17 ARTICLE VI CONDITIONS TO CLOSING........................................................................17 6.1 Buyer's Conditions to Closing................................................................17 6.2 Seller's Conditions to Closing...............................................................19 ARTICLE VII GENERAL PROVISIONS...........................................................................20 7.1 Survival at Closing..........................................................................20 7.2 Specific Performance.........................................................................20 7.3 Notices......................................................................................20 7.4 Interpretation...............................................................................21 7.5 Counterparts.................................................................................22 7.6 Entire Agreement; Nonassignability; Parties in Interest......................................22 7.7 Severability.................................................................................22 7.8 Remedies Cumulative..........................................................................22 7.9 Governing Law................................................................................22 7.10 Rules of Construction........................................................................22 7.11 Amendments and Waivers.......................................................................23 7.12 Expenses.....................................................................................23
-ii- ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into as of August 31, 1998, by and among Fibre Optics International, Inc., a Washington corporation ("Seller"), Douglas S. Carver and Dave M. Carver (collectively, the "Shareholders"), and Fiberstars, Inc., a California corporation ("Buyer") (the Seller, Shareholders and Buyer collectively referred to as the "Parties"). RECITALS A. Seller has been engaged in the build-to-order manufacturing, sale and shipping of fiberoptics, lighting and signage business (the "Seller's Business"). B. Seller wishes to sell to Buyer and Buyer wishes to purchase from Seller, on the terms and for the consideration provided below, all the assets relating to the Seller's Business as provided in this Agreement pursuant to the closing of the transactions contemplated by this Agreement (the "Closing") on the Closing Date (as defined in Section 1.4) (such transactions contemplated by this Agreement being referred to as the "Acquisition"). C. The Shareholders and Boards of Directors of Seller and Buyer believe it is in the best interests of their respective companies and the shareholders of their respective companies that Seller sell to Buyer for the consideration set forth below all the Acquired Assets (as defined hereafter) and, in furtherance thereof, have approved same. D. Seller and Buyer desire to make certain representations, warranties and other agreements in connection with the Acquisition. E. The Shareholders, as inducement for the Buyer to enter into this Agreement with Seller, desire to make certain representations, warranties and other agreements in connection with the Acquisition. NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and for other good and valuable consideration, the Seller, Shareholders and Buyer, intending to be legally bound, agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS 1.1 Purchase and Sale of Acquired Assets. Subject to the terms and conditions contained in this Agreement, Seller agrees to sell, assign, transfer and deliver to Buyer, and Buyer agrees to purchase and accept from Seller, all of Seller's right, title and interest in or to the Acquired Assets as set forth on Schedule 1.1 attached hereto (together, the "Acquired Assets"), free and clear of all liens, security interests, pledges, charges, claims, options, rights, defects in title, restrictions or encumbrances of any kind or character whatsoever ("Encumbrances", each 1 an "Encumbrance" ) on the Closing Date; other than those permitted Encumbrances set forth on Section 2.4 of the Seller Disclosure Schedule (as defined hereafter). 1.2 No Buyer Assumption of Liabilities. Buyer shall not assume any liabilities or obligations of any nature (matured or unmatured, fixed or contingent) of Seller pursuant to this Agreement or the transactions contemplated hereby other than (i) current liabilities accumulated in the normal course of business which are itemized on the most recent balance sheet provided in the Most Recent Balance Sheet (as defined in Section 2.5) to the Buyer as part of Schedule 2.5 to this Agreement or (ii) future obligations under assumed contracts expressly assumed by the Buyer as set forth on Schedule 1.2 (the "Assumed Contracts") attached hereto, except payables to any shareholders, if applicable. 1.3 Purchase Price for Acquired Assets. The Buyer agrees to pay Eight Hundred Sixty Five Thousand U.S. Dollars ($865,000) (the "Purchase Price"), to the Seller, at the Closing on the terms and subject to the conditions set forth in this Agreement, by delivery of: (i) a cash payment by wire transfer of immediately available funds to such account as is specified by Seller, in the amount equal to Three Hundred Fifteen Thousand and 05/100 U.S. Dollars ($315,000.05); (ii) 103,108 shares of common stock of Buyer (the "Shares") issued in the name of Fibre Optics International, Inc. and valued in the aggregate amount of Four Hundred Sixty-Three Thousand Five Hundred One and 39/100 U.S. Dollars ($463,501.39) based upon the average of the closing price per share on the ten (10) trading days immediately preceding the Closing (such price being $4.4953 per share, the "Closing Price"); (iii) a deposit into escrow of 19,242 shares of common stock of Buyer issued in the name of Fibre Optics International, Inc. and valued in the aggregate amount of Eighty-Six Thousand Four Hundred Ninety-Eight and 56/100 U.S. Dollars ($86,498.56) based upon the Closing Price (the "Escrow Shares") in accordance with Section 5.1 below (all Escrow Shares and Shares collectively the "Buyer Shares"). 1.4 Closing. (a) Closing. The Closing shall be held at the offices of Gray Cary Ware & Freidenrich LLP, at 100 Congress Avenue, Suite 1440, Austin, Texas 78701 or at such time and place as may be mutually agreed upon by the Parties to this Agreement, at 10:00 a.m. on August 31, 1998 (the "Closing Date"). 2 (b) Delivery At Closing. At the Closing: (i) Seller shall deliver to Buyer an Assignment and Bill of Sale in the form attached hereto as Exhibit A duly transferring the Acquired Assets to Buyer (the "Bill of Sale"). (ii) Buyer shall deliver to Seller the Purchase Price as set forth in Section 1.3 above. (iii) Seller and Buyer shall deliver or cause to be delivered to one another such other certificates, instruments and documents necessary or appropriate to evidence the due execution, delivery and performance of this Agreement as set forth in Sections 6.1(f) and 6.2(e) below. (iv) Seller shall deliver all books and records of Seller regarding the Acquired Assets, including, without limitation, such operating manuals and records necessary for Buyer to own and operate the Acquired Assets in the ordinary course in Seller's possession or control. (v) Seller, through its officers, agents and employees, will put Buyer into full possession and enjoyment of all tangible Acquired Assets, terms FOB Seller, unless Buyer otherwise specifies in writing that title and risk of loss pass outside of California. (c) Taking of Necessary Action; Further Action. If, at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest Buyer with full right, title and possession to all Acquired Assets, the officers and directors of Seller are fully authorized in the name of Seller or otherwise to take, and will take all such lawful and necessary and/or desirable action (including without limitation obtaining any required consents or approvals). 1.5 Purchase Price Allocation. The Seller and Buyer agree to allocate the Purchase Price (and all other capitalizable costs) among the Acquired Assets for all purposes (including financial accounting and tax purposes) in accordance with the allocation schedule attached hereto as Exhibit B. 1.6 Sales Tax. The Seller agrees that it promptly shall pay all sales or similar taxes required to be paid by reason of the sale by the Seller to the Buyer of the Acquired Assets pursuant to this Agreement, based upon the allocation provided for in Exhibit B. 3 ARTICLE II CERTAIN REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS In this Agreement, any reference to any event, change, condition or effect being "material" with respect to any entity or group of entities means any material event, change, condition or effect related to the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations or results of operations of such entity or group of entities. In this Agreement, any reference to a "Material Adverse Effect" or "Material Adverse Change" with respect to any entity or group of entities means any event, change or effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business, operations, results of operations or prospects of such entity and its subsidiaries, taken as a whole. In this Agreement, any reference to a party's "knowledge" means such party's actual knowledge. Except as set forth on Schedule 2 (the "Seller Disclosure Schedule," whereby the exceptions will be arranged in sections corresponding to the numbered representations and warranties set forth in this Article II), the Seller and the Shareholders, hereby each jointly and severally represent and warrant to Buyer the following as of the Closing Date: 2.1 Organization, Standing and Power. Seller is a corporation duly organized and validly existing under the laws of the State of Washington. Seller has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on such entity or the Acquired Assets. Seller has delivered a true and correct copy of its Articles of Incorporation and Bylaws or other charter documents, as applicable, each as amended to date, to Buyer. Seller is not in violation of any of the provisions of its Articles of Incorporation or Bylaws or equivalent organizational documents. 2.2 Authority. Seller has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Seller. This Agreement has been duly executed and delivered by Seller and constitutes the valid and binding obligations of Seller enforceable against Seller in accordance with its terms. The execution and delivery of this Agreement by Seller do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the organizational documents of Seller, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Seller or any of their respective properties or assets. No consent, approval, order or authorization of, or registration or declaration with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental 4 Entity") is required by or with respect to Seller in connection with the execution and delivery of this Agreement or the consummation of the Acquisition except for such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable securities laws. 2.3 Subsidiaries. Seller does not directly or indirectly own any equity or similar interest or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. 2.4 Valid Ownership Effective Transfer of Necessary Rights. (a) Ownership. Seller owns and has good and marketable title to all of the Acquired Assets free and clear of all Encumbrances, and has the rights to sell, assign, transfer, and deliver the Acquired Assets. (b) Effective Transfer of Necessary Rights. Upon the Closing, by means of this Agreement, together with the documents, instruments and agreements contemplated hereby, Seller will transfer good and marketable title to all Acquired Assets (including the Intellectual Property, as defined hereafter) to Buyer, free and clear of all Encumbrances. The Acquired Assets transferred to Buyer pursuant to this Agreement, and the documents, instruments and agreements contemplated hereby will include all necessary assets and intellectual property rights related to the Seller's Business, free and clear of all Encumbrances. 2.5 Financial Statements. Seller has delivered to Buyer the following financial statements for the Seller (collectively the "Financial Statements") which are attached hereto as Schedule 2.5: (a) unaudited consolidated balance sheets and statements of income as of and for the fiscal years ended June 30, 1996, June 30, 1997 and June 30, 1998 (the "Most Recent Fiscal Year End"); and (b) unaudited consolidated balance sheet for the purpose of a Closing balance sheet dated as of August 31, 1998 (the "Most Recent Balance Sheet"). 2.6 Absence of Certain Changes or Events. Since the Most Recent Fiscal Year End, Seller has conducted the Seller's Business in the ordinary and usual course and, without limiting the generality of the foregoing, has not: (i) suffered any Material Adverse Change; (ii) sold, leased, transferred or assigned any of its assets, tangible or intangible, other than for a fair consideration in the ordinary course of business; (iii) suffered any damage, destruction or loss, whether or not covered by insurance, in an amount exceeding Five Thousand U.S. Dollars ($5,000); 5 (iv) granted or agreed to make any increase in compensation payable to Seller's employees other than those occurring in the ordinary course of business consistent with Seller's past practices with respect to the Seller's Business; (v) permitted or allowed the Acquired Assets to be subjected to any Encumbrance of any kind; (vi) made any capital investment in, any loan to, or any acquisition of the securities or assets of any individual, partnership, corporation, association, trust, joint venture, unincorporated organization, or Governmental Entity in an amount exceeding Five Thousand U.S. Dollars ($5,000); (vii) issued any note, bond or other debt security or created incurred, assumed, or guaranteed any indebtedness for borrowed money or capitalized lease obligation either involving more than Five Thousand U.S. Dollars ($5,000) in the aggregate; (viii) made any changes in the accounting method or practices it follows, whether for general financial, or tax purposes, or any change in depreciation or amortization policy or rates adopted therein; (ix) made any cash withdrawals or disbursements from the Seller's accounts outside of its ordinary course of business; or (x) agreed to take any action described in this Section 2.6 outside of its ordinary course of business or which would constitute a breach of any of the representations contained in this Agreement. 2.7 Absence of Liabilities. Seller has no obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than as disclosed on the Most Recent Balance Sheet or as Assumed Contracts, and Buyer shall not assume any liabilities or obligations of Seller as a result of its purchase of the Acquired Assets. 2.8 Litigation. There is no private or governmental action, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of Seller, threatened against Seller (with respect to the Seller's Business), or that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement. 2.9 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon Seller which has or could reasonably be expected to have the effect of prohibiting or impairing Buyer's future operation of the Seller's Business. 2.10 Real Property. Schedule 1.1 contains descriptions of all real property owned by Seller or used or held for use in connection with the Seller's Business and leases or licenses or other rights to possession of any real property so used or held (collectively the "Real Property"). Seller has delivered to Buyer correct and complete copies of any leases or subleases related to 6 such Real Property. With respect to the Real Property, Seller has good and marketable title to their interest in such Real Property, free and clear of all Encumbrances, except for liens to be released prior to or at Closing, if applicable, or those Encumbrances of record that are usual or customary. With respect to each lease (i) the leases are in full force and effect, and are valid, binding and enforceable in accordance with their respective terms, (ii) all accrued and currently payable rents and other payments required by such leases have been paid, (iii) Seller is not in default in any respect under any such leases and no notice of default or termination has been given or received, and (iv) Seller has not violated any term or condition under any such lease. No third-party consent or approval is required for the assignment of any such lease to Buyer, or for the consummation of the transactions contemplated herein. To the extent that any third-party consent or approval is required, such consent or approval shall be provided by Seller to Buyer prior to the Closing Date. Seller shall obtain appropriate estoppel letters with respect to any other persons or entities with an interest in the Leased Property, in a form reasonably satisfactory to Buyer. 2.11 Inventory. The inventory included in the Acquired Assets (including raw materials, work in progress and finished goods) is as set forth on Schedule 1.1 and constitutes substantially all of the inventory relating to the Seller's Business. Such inventory is identified as to those items which are consistent with the current version of the Seller's Business product(s) and those items which are either inconsistent with such current version or otherwise obsolete or damaged. Seller has also identified on Schedule 1.1 all inventory that is on loan or consignment to customers, sales offices or design centers of the Seller's Business and the location of such inventory. 2.12 Capital Equipment and Hard Assets. All tangible assets listed on Schedule 1.1 are in substantially good condition and repair and are adequate for the uses to which they are being put or would be put in the ordinary course of business consistent with industry standards. 2.13 Proprietary Rights. (a) Seller neither owns nor is licensed under any patents or patent applications. Seller owns all rights, titles and interest in and to or has obtained licenses, whenever necessary and appropriate, to use all technology, software, software tools, know-how, processes, trade secrets, trade names, copyrights and other proprietary rights included in the Acquired Assets. Schedule 2.13 contains an accurate and complete description of (i) all trademarks and tradenames in or related to the Acquired Assets, and a list of all licenses and other agreements relating thereto, and (ii) a list of all licenses and other know-how, or processes that Seller is licensed or otherwise authorized by such third parties to use, market, distribute or incorporate into the Acquired Assets (such software, technology, know-how and processes are collectively referred to as the "Third Party Technology"). No claims have been asserted against Seller (and Seller is not aware of any claims which are likely to be asserted against it or which have been asserted against others) by any person challenging or questioning the validity or effectiveness of any license or agreement relating thereto. To the best knowledge of Seller, none of the Acquired Assets nor the use of any trademarks, tradenames, copyrights, software, technology, know-how or processes contained in the Acquired Assets infringes on the rights of, 7 constitutes misappropriation of, or in any way involves unfair competition with respect to, any proprietary information or intangible property right of any third person or entity, including without limitation any patent, trade secret, copyright, trademark or tradename. (b) Except as set forth in Schedule 2.13, Seller has not granted any third party any right to manufacture, reproduce, distribute, market or exploit any of the Acquired Assets or any adaptations, translations, or derivative works based on the Acquired Assets or any portion thereof. (c) All designs, drawings, specifications, source code, object code, documentation, flow charts and diagrams incorporating, embodying or reflecting any of the Acquired Assets at any stage of their development were written, developed and created solely and exclusively by employees of Seller without the assistance of any third party or entity or were created by third parties who assigned ownership of their rights to Seller in valid and enforceable consultant confidentiality and invention assignment agreements. Seller has kept secret and has not disclosed the source code for the software included within the Acquired Assets to any person or entity other than certain employees of Seller who are subject to the terms of a binding confidentiality agreement with respect thereto. Seller has taken all appropriate measures to protect the confidential and proprietary nature of such software. 2.14 Taxes. Seller has timely filed within the time period for filing or any extension granted with respect thereto all federal, state, local and other returns and reports relating to any and all taxes or any other governmental charges, obligations or fees for taxes and any related interest or penalties ("Tax" or "Taxes") required to be filed by it with respect to the Seller's Business and the Acquired Assets and such returns and reports are true and correct. The Company has withheld and paid all Taxes required to be withheld and paid, with respect to (i) such returns and reports, (ii) all employees, independent contractor, shareholder, or other third party related to the Seller's Business, and (iii) all sales, use and similar Taxes. No income, sales, use or similar Tax return or report of the Company has been examined or audited by the Internal Revenue Service or any state taxing authority. There are no pending or, to the best of the Company's knowledge, threatened audits, examinations, assessments, asserted deficiencies or claims for additional Taxes. 2.15 Employee Matters. Seller has no employee or consultant benefit plans or agreements, and to the extent it has had any of the foregoing in the past, Seller has no liabilities or obligations relating in any way whatsoever to the same. 2.16 Compliance With Laws. Seller has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation (including, without limitation, laws and regulations relating to labor matters) with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect on Seller. Seller has obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which Seller currently operates or holds 8 any interest in any of its properties or (ii) that is required for the operation of Seller's business or the holding of any such interest (collectively referred to as "Seller Authorizations"), and all of such Seller Authorizations are in full force and effect, except where the failure to obtain or have any such Seller Authorizations could not reasonably be expected to have a Material Adverse Effect on Seller or the Acquired Assets. 2.17 Environmental Matters. (a) To the best of Shareholders' knowledge, Seller has complied in all material respects with all federal, state and local environmental laws, rules and regulations as in effect on the date hereof applicable to the Seller's Business and its operations. To the best of Seller's and Shareholders' knowledge, no hazardous or toxic waste, substance, material or pollutant (as those or similar terms are defined under the Comprehensive Environmental Response, Compensation and Liability act of 1980, as amended, 42 U.S.C. ss.ss.9601 et seq., Toxic Substances Control Act, 15 U.S.C. ss.ss.2601 et seq., or any other applicable federal, state and local environmental law, statute, ordinance, order, judgment, rule or regulation relating to the environment or the protection of human health ("Environmental Laws")), have been released, emitted or discharged or are currently located in, on, under, or about the real property on which the Acquired Assets are situated or contained in the tangible personal property included in the Acquired Assets. To the best of Shareholders' knowledge, the Acquired Assets and Seller's use thereof are not in violation of any Environmental Laws or any occupational, safety and health or other applicable law now in effect. Seller shall be, as of the Closing Date and thereafter, solely responsible for all environmental liabilities, of whatever kind and nature, arising out of or attributable to the operation or ownership of the Acquired Assets prior to the Closing Date. (b) No Notice of Lack of Compliance with Environmental Laws. Neither Seller nor the Shareholders have been notified by any governmental authority of any violation by Seller or the Shareholders of any Environmental Laws. 2.18 Brokers' and Finders' Fees. Seller has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby. 2.19 Contracts. (a) Schedule 2.19 lists all contracts (collectively the "Contracts", each a "Contract" ) currently in force with any third party, including but not limited to, (i) agreements, contracts or commitments that call for fixed and/or contingent payments or expenditures by or to the Seller of more than Five Thousand Dollars ($5,000); or (ii) agreements, contracts or commitments with officers, employees, agents, consultants, advisors, salesmen, sales representatives, distributors or dealers that are not cancelable by it on notice of not longer than thirty (30) days and without liability, penalty or premium; or (iii) agreement to loan or advance any sums to any person, any line of credit, standby financing, revolving credit or other similar financing arrangement of any sort. 9 (b) Seller is not restricted by agreement from carrying on its business anywhere in the world. (c) Except as set forth on Schedule 2.19, Seller is not under any liability or obligation, and no such outstanding claim has been made, with respect to the return of inventory or merchandise in the possession of wholesalers, distributors, retailers, or other customers, except such liabilities, obligations and claims as, in the aggregate, do not exceed Five Thousand Dollars ($5,000). (d) Seller has not guaranteed any obligations of other persons or made any agreements to acquire or guarantee any obligations of other persons. (e) All material contracts, agreements and instruments to which Seller is a party are valid, binding, in full force and effect, and enforceable by Seller in accordance with their respective terms. No such material contract, agreement or instrument contains any material liquidated damages, penalty or similar provision. To the best of Seller's knowledge, no party to any such material contract, agreement or instrument intends to cancel, withdraw, modify or amend such contract, agreement or arrangement. No Contract requires any third party's consent, approval or waivers in connection with the execution and delivery of this Agreement or the consummation of the Acquisition. To the extent that any third-party consent or approval is required, such consent or approval shall be provided by Seller to Buyer prior to the Closing Date. (f) Seller is not in default under or in breach or violation of, nor, to Seller's knowledge, is there any valid basis for any claim of default by Seller under, or breach or violation by Seller of, any contract, commitment or restriction to which Seller is a party or to which it or any of its properties is bound, where such defaults, breaches, or violations would, in the aggregate, have a Material Adverse Effect on the operations, assets, financial condition or prospects of Seller. To the best of Seller's knowledge, no other party is in default under or in breach or violation of, nor is there any valid basis for any claim of default by any other party under or any breach or violation by any other party of, any material contract, commitment, or restriction to which Seller is bound or by which any of its properties is bound, where such defaults, breaches, or violations would, in the aggregate, have a Material Adverse Effect on the operations, assets, financial condition or prospects of Seller. 2.20 Insurance. Seller maintains insurance policies providing general coverage for full replacement value against risks commonly insured against. All of such policies are in full force and effect and Seller is not in breach or default of any provision thereof and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification or acceleration, under such policies. Seller has not received notice from any issuer of any such policies of its intention to cancel, terminate or refuse to renew any policy issued by it. 2.21 Customers . Seller has provided Buyer with a list of substantially all customers of the Seller's Business for the last three (3) years, together with a schedule of such customers' orders and specifying which orders (whether for revenue or not) have not yet been filled, and of 10 those orders which have been filled, those as to which revenue has been recognized, the amount (if any) of cash collected and the amount of revenue deferred. Additionally, Seller has provided Buyer, for each listed customer order, a brief description of the status of that installation and any further commitments, contingencies, milestones or customer expectations with regard to that order. 2.22 Investment in Buyer Shares. (a) Seller (i) understands that the Buyer Shares have not been and will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any state securities laws, and are being acquired in reliance upon federal and state exemptions from registration requirements thereof, (ii) is acquiring the Buyer Shares solely for its own account for investment purposes, and not with a view to the distribution thereof, (iii) is a sophisticated investor with knowledge and experience in business and financial matters as to be capable of evaluating the merits and risks of an investment in Buyer, (iv) acknowledges that it has received all information it desires concerning Buyer, its common stock and any other matter it deems relevant or material to evaluating the merits and risks inherent in holding the Buyer Shares, (v) is able to bear the economic risk of investment and lack of liquidity inherent in holding the Buyer Shares. (b) Seller understands that the Buyer Shares may not be sold, transferred or otherwise disposed of without registration under the Securities Act or reliance upon an exemption therefrom, and that in the absence of an effective registration statement covering the Securities or an available exemption from registration under the Securities Act, the Buyer Shares must be held until a transfer or disposition of the Buyer Shares is otherwise permitted pursuant to the Securities Act or applicable state securities laws. To the extent applicable, each certificate or other document evidencing any of the Buyer Shares shall be endorsed with the following restrictive legend: "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF, OR EXEMPTION THEREUNDER, UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT." 2.23 Representations Complete. None of the representations or warranties made by Seller herein or in any Schedule hereto, or certificate furnished by Seller pursuant to this Agreement, when all such documents are read together in their entirety, contains any untrue statement of a material fact, or omits any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. 11 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER 3.1 Organization, Standing and Power. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Buyer has the corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect on Buyer. Buyer is not in violation of any of the provisions of its Articles of Incorporation or Bylaws or equivalent organizational documents. 3.2 Authority. Buyer has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms. The execution and delivery of this Agreement by Buyer does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the Articles of Incorporation or Bylaws of Buyer or any of its subsidiaries, as amended, or (ii) any material mortgages indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Buyer or any of its respective properties or assets. No consent, approval, order or authorization of, or registration or declaration with, any Governmental Entity is required by or with respect to Buyer in connection with the execution and delivery of this Agreement or the consummation of the Acquisition except for such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable securities laws. 3.3 Validity of Buyer Shares. The Buyer Shares, when issued and delivered to Seller in accordance with this Agreement, will be duly authorized, validly issued, fully paid and nonassessable. 3.4 Litigation. There is no private or governmental action, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of Buyer, threatened against Buyer, or that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement. 3.5 Compliance With Laws. Buyer has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation (including, without limitation, laws and regulations relating to labor matters) with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not, individually or in the aggregate, be 12 reasonably expected to have a Material Adverse Effect on Buyer. Buyer has obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which Buyer currently operates or holds any interest in any of its properties or (ii) that is required for the operation of Seller's business or the holding of any such interest, and all of such authorizations are in full force and effect, except where the failure to obtain or have any such authorizations could not reasonably be expected to have a Material Adverse Effect on Buyer. 3.6 Public Information. (a) The Buyer shall make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after 90 days following the effective date of the first registration of the Company under the Securities Act of an offering of its securities to the general public. (b) The Buyer shall file with the Securities Exchange Commission (the "Commission") in a timely manner all reports and other documents the Commission may prescribe under Section 13(a) or 15(d) of the Exchange Act at any time after the Buyer has become subject to such reporting requirements of the Exchange Act. (c) The Buyer shall furnish to a holder and/or a prospective purchaser of such Shares or Escrow Shares (a "Holder"), forthwith upon request (i) a written statement by the Buyer as to its compliance with the reporting requirements of Rule 144 under the Securities Act (at any time from and after 90 days following the effective date of the first registration statement of the Company for an offering of its securities to the general public) and of the reporting requirements of the Exchange Act (at any time after it has become subject to such reporting requirements), (ii) a copy of the most recent annual or quarterly report of the Company, (iii) any other reports and documents necessary to satisfy the information-furnishing condition to offers and sales under Rule 144A under the Securities Act, and (iv) such other reports and documents as a Holder of any Shares or Escrow Shares reasonably requests to avail itself of any rule or regulation of the Commission allowing such Holder to sell any such securities without registration. 3.7 Brokers' or Finders' Fees. Buyer is not a party to, or in any way obligated under, and has no knowledge of, any contract or outstanding claim for the payment of any broker's or finder's fee in connection with the origin, negotiation, execution or performance of this Agreement, the nonpayment of which could result in the placement of a lien or other encumbrance on the Acquired Assets, or a claim against Buyer or its affiliates. 3.8 Representations Complete. None of the representations or warranties made by Buyer herein or in any Schedule hereto, or certificate furnished by Buyer pursuant to this Agreement, when all such documents are read together in their entirety, contains any untrue statement of a material fact, or omits any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. 13 ARTICLE IV COVENANTS OF THE PARTIES 4.1 Representations and Warranties. On or after the Closing, Buyer, Seller or each of the Shareholders shall give detailed written notice to the other parties promptly upon learning of any fact which would render untrue any of the Party's representations or warranties contained in this Agreement or the information contained in any Schedule to this Agreement. 4.2 Access to Documents. If, after the Closing Date, (i) in order to properly prepare its tax returns or other documents or reports required to be filed with governmental authorities or its financial statements; (ii) in connection with any threatened or pending litigation or claim which involves or may involve Buyer; or (iii) for any other reasonable purpose, it is necessary that Buyer be furnished with additional information or documents relating to the Acquired Assets and such information or documents are in the possession of Seller or Shareholders, and can reasonably be furnished to Buyer, Seller or Shareholders shall, upon written request therefor, promptly furnish such information or documents to Buyer. Buyer shall reimburse the Seller or Shareholders providing such information or documents for the cost of copying or shipping any requested documents. 4.3 Transition Services Performed by Dave M. Carver. The Buyer hereby agrees to pay Dave M. Carver an hourly rate of $50 per hour for work performed by Dave M. Carver on behalf of the Seller which is (i) reasonable and appropriate for the transition and continuation of the Seller's Business and (ii) authorized by the Chief Financial Officer of the Buyer or such officer that Buyer may designate from time to time prior to the work being performed. Dave M. Carver shall be responsible for providing a good-faith report of such work performed and hours worked to such officer of the Buyer. 4.4 Covenant Not to Compete. As of the Closing Date, Dave M. Carver, by executing this Agreement, hereby agrees to enter into a five (5) year non-compete agreement covering the geographic territory in which the Seller currently does business, which agreement shall preclude solicitation or hiring of former employees of Seller hired by Buyer without Buyer's prior written consent, and further agrees that for a period of five (5) years from the Effective Date he will not, directly or indirectly, individually or as an owner, partner, shareholder, joint venturer, employee, consultant, principal, agent, trustee or licensor, or in any other similar capacity whatsoever of or for any person, firm, partnership, company or corporation (other than Buyer), (a) own, manage, consult with, operate, sell, control or participate in the ownership, management, operation, sales or control of (i) any business that competes with the business of Buyer (whether through stand-alone products or broader products that include equivalent functionality), and/or (ii) any business engaged in the design, research, development, marketing, sales, manufacturing or licensing of products that are substantially similar to or competitive with any products of Buyer (whether through stand-alone products or broader products that include equivalent functionality); (b) accept to provide consulting services on behalf of a customer of Buyer with the intent or purpose of depriving Buyer of business performed by Buyer by transferring such work to a department, division or affiliate of the customer or to a third party; or (c) request or advise any of the 14 customers, suppliers or other business contacts of Buyer to withdraw, curtail, cancel or not increase their business with Buyer. 4.5 No Publicity; Confidentiality. Without the consent of the other party, which consent may be granted by David Ruckert on behalf of Buyer, and Doug Carver on behalf of Seller, none of the Parties shall reveal the existence of or contents of this Agreement or make any internal or public announcements except to their respective professional advisors or as otherwise required by applicable law. The Parties acknowledge and agree that all confidential material or information delivered as part of any due diligence performed by the Parties shall be kept completely confidential by the Parties and the Parties' respective agents, representatives, or employees to any third party in any manner whatsoever, in whole or in part, without the prior written consent of the other party or by order of a court of competent jurisdiction. Each of the Parties agree to undertake reasonable precautions to safeguard and protect the confidentiality of all such confidential information, to accept responsibility for any breach of this Agreement by itself, or representatives or members of its organization, and at its sole expense to take all reasonable measures (including but not limited to court proceedings) to restrain its representatives or members of its organization from prohibited or unauthorized disclosure or uses of confidential information. 4.6 Employee Matters. At the Closing Date, Buyer agrees to enter into an employment agreement with Doug Carver in substantially the form attached hereto as Exhibit C (the "Employment Agreement"). 4.7 Trademark Renewal. Within 30 days of the Closing Date, the Seller on behalf of the Seller or Buyer (as mutually determined by the Parties) shall have filed or shall have cause to be filed an application for registration for the trademark as originally issued under Registration Number 1536793 for the design mark "Fibre Optics International, Inc." with the United States Patent and Trademark Office (the "Trademark Renewal"); provided that all reasonable costs (including attorney's fees) associated to such Trademark Renewal shall be borne by the Seller and the Shareholders. 4.8 Piggyback Registration. (a) Notice of Registration. If, at any time after the one-year anniversary and before the two-year anniversary of the Closing Date, Buyer shall determine to register any of its equity securities, either for its own account or for the account of a security holder or holders, other than a registration relating solely to employee benefit plans or a registration relating solely to a Rule 145 transaction, Buyer will: (i) promptly give written notice to Seller or the Shareholders, if applicable, for so long as it continues to hold the registration rights contained herein (each for the purposes of this Section 4.7, a "Holder"), and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Buyer 15 Shares specified in a written request or requests, made within thirty (30) days after receipt of such written notice from Buyer, by any Holder. (b) Right to Terminate Registration. The registration rights granted under this Section 4.7 are solely piggyback in nature, and the Buyer shall have the right to terminate or withdraw any registration initiated by it under this Section 4.7 prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. 4.9 Post-Closing Buyer Covenants. In accordance with Buyer's Stock Option Plan, a copy of which has been provided to Seller, and Buyer's policy for granting options, Buyer hereby agrees to (i) grant an option to purchase 7,500 shares of common stock of the Buyer to Steve Fancher and (ii) grant options to Douglas S. Carver under the Employment Agreement at the next meeting of the Board Compensation Committee of the Buyer to be held as soon as reasonably practicable after the Closing Date. 4.10 Reasonable Best Efforts; Further Assurances. Each of the Parties to this Agreement shall use its or their reasonable best efforts to effectuate the transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions to closing under this Agreement. Each party hereto, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. ARTICLE V ESCROW; INDEMNIFICATION 5.1 Escrow Fund. As soon as practicable after the Closing, the Escrow Shares shall be deposited in an escrow with the Bank of San Francisco (or other institution selected by Buyer with the reasonable consent of Seller) as escrow agent (the "Escrow Agent"), such deposit to constitute the "Escrow Fund" and to be governed by the terms set forth herein and in the escrow agreement attached hereto as Exhibit D (the "Escrow Agreement"). The Escrow Fund shall be available to compensate Buyer pursuant to the indemnification obligations of Seller set forth in this Agreement, with respect to Damages (as defined below) arising by reason of Seller's failures under Section 5.2 hereafter. The Escrow Fund shall act as partial security for Seller's indemnification obligations set forth in this Agreement, but shall not serve as Buyer's exclusive remedy with respect thereto. The Escrow Fund shall be released upon the later of (i) February 28, 1999 and (ii) completion of delivery of all Acquired Assets by Seller to Buyer (the "Escrow Period"), as provided in and subject to the terms of the Escrow Agreement. 5.2 Indemnification. (a) Indemnification by Seller and Shareholders. Subject to the limitations set forth in this Article V, Seller and Shareholders, jointly and severally, will defend, indemnify, and 16 hold harmless Buyer and its respective officers, directors, agents and employees, and each person, if any, who controls or may control Buyer within the meaning of the Securities Act (individually, an "Indemnified Person" and collectively, "Indemnified Persons"), and shall reimburse Indemnified Persons, for, from and against any and all losses (which shall include any diminution in value), costs, damages, liabilities and expenses arising from claims, demands, actions and causes of action, including, without limitation, reasonable legal fees, (collectively, "Damages") arising out of (i) any misrepresentation or breach of or default in connection with any of the representations, warranties, covenants and agreements given or made by Seller or Shareholders in this Agreement, or any exhibit or other schedule to this Agreement, or (ii) transactions, events, acts or omissions of or by Seller or Shareholders relating to the Seller's Business on or before the Closing. (b) Indemnification by Buyer. Subject to the limitations set forth in this Article V, Buyer shall defend, indemnify and hold harmless Seller and the Shareholders, and shall reimburse Seller and the Shareholders, for, from and against all Damages arising out of any misrepresentation or breach of or default in connection with any of the representations, warranties, covenants or agreements given or made by Buyer in this Agreement or any exhibit or other schedule to this Agreement. (c) Limitations. In no event shall the liability under Sections 5.2(a) or (b) exceed the amount of the Purchase Price (such that the Buyer Shares shall remain valued at the Closing Price); provided, however, to the extent Buyer Shares are valued less than the Closing Price at the time in which indemnification is sought, Buyer's remedy as to the amount of the Purchase Price shall be limited to that amount which takes into account such value of the Buyer Shares. (d) Threshold. Buyer will not be entitled to make a claim against Seller or the Shareholders under Section 5.2(a) and the Seller or Shareholders will not be entitled to make a claim against the Buyer under Section 5.2(b) unless and until the aggregate amount of indemnifiable losses incurred exceeds Ten Thousand U.S. Dollars ($10,000). At such time, such aggregate threshold amount shall be fully and completely subject to all prior claims and, for purposes of Buyer's claims, payable from the Escrow Fund subject to the terms and conditions of the Escrow Agreement. (e) Indemnification Procedure Proceeding Against the Escrow Fund. All claims for indemnification asserted against the Escrow Fund shall be asserted and resolved as set forth in the Escrow Agreement. ARTICLE VI CONDITIONS TO CLOSING 6.1 Buyer's Conditions to Closing. The obligations of Buyer hereunder are subject to fulfillment or satisfaction, on and as of the Closing, of each the following conditions (any one or more of which may be waived by the Buyer): 17 (a) Representations and Warranties. Each of the representations and warranties Seller and Shareholders have set forth in Article II above shall be true and correct in all material respects at and as of the Closing Date. (b) Performance. All of the terms, covenants and conditions of this Agreement to be complied with and performed by the Seller and Shareholders at or prior to the Closing shall have been duly complied with and performed in all material respects. (c) No Injunction. There shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction restraining or prohibiting the consummation of the transactions contemplated hereby. (d) No Proceeding or Litigation. There shall not be threatened, instituted or pending any suit, action, investigation, inquiry or other proceeding against any party hereto by or before any governmental entity requesting or looking toward an order, judgment or decree that (i) restrains or prohibits the consummation of the transactions contemplated hereby, or (ii) would have a material adverse effect on Buyer's ability to exercise control over or manage the Acquired Assets or the Seller's Business after the Closing. (e) Consents. All material written consents, approvals, assignments, waivers or authorizations, including Seller Authorizations and other consents scheduled hereto, that are required to be obtained as a result of the transactions contemplated by this Agreement or for the continuation in full force and effect of any of the Contracts shall have been obtained. (f) Delivery of Deliverables. Seller and Shareholders shall deliver or cause to be delivered each of the following deliverables, duly executed and/or reasonably satisfactory in form and substance to Buyer, to Buyer at the Closing: (i) the Acquired Assets by making the Acquired Assets available to Buyer; (ii) a certificate signed by the President of the Seller to the effect that each of the conditions specified above in Section 6.1(a)-(d) is satisfied in all material respects; (iii) all required third party and Governmental Entity consents in accordance with Section 6.1(e); (iv) the executed opinion of Bulivant Houser Bailey, P.C., as Seller's Counsel, dated as of the Closing Date and substantially in the form attached as Exhibit E hereto; (v) executed copies of the Bill of Sale, the Employment Agreement, a Certification of Non Foreign Status completed by the Seller, and the Escrow Agreement; (vi) a certificate, signed by the Secretary of Seller, certifying as to the truth and accuracy of and attaching copies of all board of directors resolutions adopted in connection with the Acquisition; and 18 (vii) completed Schedules to this Agreement, as applicable to the Seller and/or Shareholders. (g) Other Matters. All actions required to be taken by Sellers and Shareholders in connection with consummation of the transactions contemplated hereby and all certificates, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to Buyers. 6.2 Seller's Conditions to Closing. The obligations of Seller hereunder are subject to fulfillment or satisfaction, on and as of the Closing, of each of the following conditions (any one or more of which may be waived by Seller, but only in a writing signed by Seller): (a) Representations and Warranties. Each of the representations and warranties Buyer has set forth in Article III above shall be true and correct in all material respects at and as of the Closing Date. (b) Performance. All of the terms, covenants and conditions of this Agreement to be complied with and performed by the Buyer at or prior to the Closing shall have been duly complied with and performed in all material respects. (c) No Injunction. There shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction restraining or prohibiting the consummation of the transactions contemplated hereby. (d) No Proceeding or Litigation. There shall not be threatened, instituted or pending any suit, action, investigation, inquiry or other proceeding against any party hereto by or before any governmental entity requesting or looking toward an order, judgment or decree that restrains or prohibits the consummation of the transactions contemplated hereby. (e) Delivery of Deliverables. Buyer shall deliver each of the following Deliverables, duly executed and/or reasonably satisfactory in form and substance to Buyer, to Buyer at the Closing: (i) the Purchase Price in the form and manner required under Section 1.3 above; (ii) the executed opinion of Gray Cary Ware & Freidenrich LLP, counsel to Buyer, in substantially the form attached hereto as Exhibit F; (iii) executed copies of the Escrow Agreement, the Employment Agreement, and the resale certificate, in substantially the form attached hereto as Exhibit G (the "Resale Certificate"); (iv) a certificate signed by an authorized officer of the Buyer to the effect that each of the conditions specified above in Section 6.2(a)-(b) is satisfied in all material respects; 19 (v) a certificate, signed by the Secretary of Buyer, certifying as to the truth and accuracy of and attaching copies of all board of directors resolutions adopted in connection with the Acquisition; and (vi) completed Schedules to this Agreement, as applicable to the Buyer. (f) Other Matters. All actions required to be taken by Buyer in connection with consummation of the transactions contemplated hereby and all certificates, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to Seller. ARTICLE VII GENERAL PROVISIONS 7.1 Survival at Closing. The representations, warranties and agreements set forth in this Agreement shall survive the Closing, except the representations, warranties and/or agreements set forth in Article II, Article III and Article IV shall survive until the latest of (i) the second anniversary of the Closing; (ii) with respect to Section 2.13 (Taxes) the expiration of all applicable statutes of limitations; and (iii) final resolution of any pending claim under Article VI (but only as to such pending claim or claims). 7.2 Specific Performance. The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Moreover, each party's obligation under this Agreement is unique. If any party should default in its obligations under this Agreement, the Parties each acknowledge that it would be extremely impracticable to measure the resulting damages. It is accordingly agreed that the Parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the U.S. or any state having jurisdiction, this being in addition to any other remedy to which they are entitled in law or in equity. 7.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the Parties at the following address (or at such other address for a party as shall be specified by like notice): 20 (a) if to Seller or any of the Shareholders to: Fibre Optics International, Inc. 309 S. Cloverdale Street Bldg. D-2 Seattle, Washington 98108 Attention: Douglas S. Carver, President Facsimile No.: (206) 762-3503 Telephone No.: (206) 762-2922 with a copy to: Bulivant Houser Bailey, P.C. 1601 Fifth Avenue, Suite 2400 Seattle, Washington 98101-1618 Attention: Douglas A. Luetjen, Esq. Facsimile No.: (206) 386-5130 Telephone No.: (206) 292-8930 (b) if to Buyer, to: Fiberstars, Inc. 2883 Bayview Drive Fremont, California 94538 Attention: David N. Ruckert, Chief Executive Officer Facsimile No.: (510) 490-0947 Telephone No.: (510) 490-0719 with a copy to: Gray Cary Ware & Freidenrich 100 Congress Avenue, Suite 1440 Austin, Texas 78701 Attention: Paul E. Hurdlow, Esq. Facsimile No.: (512) 457-7070 Telephone No.: (512) 457-7020 7.4 Interpretation. When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning, or interpretation of this Agreement. 21 7.5 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Parties, it being understood that all Parties need not sign the same counterpart. 7.6 Entire Agreement; Nonassignability; Parties in Interest. This Agreement and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto, including the Exhibits and the Schedules, (a) constitute the entire agreement among the Parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof, (b) are not intended to confer upon any other person any, rights or remedies hereunder; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided. 7.7 Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the Parties hereto. The Parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 7.8 Remedies Cumulative. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 7.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts of law. Each of the Parties hereto irrevocably consents to the exclusive jurisdiction of any court located within the State of California, in connection with any matter based upon or arising out of this Agreement or the matters contemplated herein, agrees that process may be served upon them in any manner authorized by the laws of the State of California for such persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. 7.10 Rules of Construction. The Parties agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 22 7.11 Amendments and Waivers. No amendment of any provisions of this Agreement shall be valid unless it is in writing and signed by Buyer and Seller. No waiver by Buyer or Seller of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any such prior or subsequent occurrence. 7.12 Expenses. Whether or not the Acquisition is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including, without limitation, the fees and expenses of its advisers, accountants and legal counsel) shall be paid by the party incurring such expense. (The remainder of this page is intentionally left blank.) 23 IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized, all as of the date first written above. FIBRE OPTICS INTERNATIONAL, INC., a Washington corporation By: /s/ DOUGLAS S. CARVER --------------------------------------------- Douglas S. Carver President FIBERSTARS, INC., a California corporation By: /s/ DAVID N. RUCKERT --------------------------------------------- David N. Ruckert Chief Executive Officer SHAREHOLDERS: --------------------------------------------- /s/ DOUGLAS S. CARVER DOUGLAS S. CARVER --------------------------------------------- /s/ DAVE M. CARVER DAVE M. CARVER [SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT] EX-10.34 3 PURCHASE AND TAKE-OVER AGREEMENT Purchase and Take-over Agreement Between: Frau Claudia Mann of Am Arzberg 25, 92345 Toging/Altmuhltal, acting for LBM Lichtleit-Fasertechnik Claudia Mann, registered at the Commercial Register with the Local Court of Nuremberg HRA 11129 "the Seller" and the firm Fiberstars Deutschland GmbH in Munich, represented by its Managing Director, Herr Bernhard Mann "the Buyer" and Herr Bernhard Mann of Am Arzberg 25, 92345 Toging/Altmuhltal "the Participant" Preamble The Seller conducts business as a sole trader and is principally engaged in the development and distribution of applications and refinement products in the area of light and fibre optical cable technology. The business possesses special know-how acquired over several years in these above business areas. The Buyer is interested in acquiring from the Seller the goods set out in this Agreement to be drawn from its capital and going concern assets as well as particular legal and long-term debt arrangements which are set out in this Agreement In the light of this the parties agree the following specific terms Part A 1 Purchase Purchase and Takeover Property (assets) 1. The subject matter of this Agreement shall be all economic assets set out in the interim accounts of the Seller as at 31 August 1998 (Appendix 1) and those acquired up to the Completion Date, except in so far as they have been disposed of before the Completion Date in the ordinary course of business or for any other reason ceased to be part of the business assets Excluded from this Agreement shall 1 be the property situated at Arzberg 25, 92345 Toging/AltmUhltal, which is being withdrawn by the Seller and transferred into her private assets. 2. The following items shall be included as business assets in particular: (a) the business premises in Berching, Gutenbergstraf3e 5, registered with the local court, Neumarkt i.d. Opf. for Pollanten, Vol. 26, p. 1052, plot no. 688/11, 0,3369 hectares, including the building in construction and fixtures and fittings (extract from Land Register at Appendix 2) (b) all technical equipment and machinery, works and business equipment including furniture of business offices, tools, spare parts and related equipment (c) all raw, ancillary and business materials, unfinished products, unfinished services, completed products, completed goods and other similar items (d) all licences, intellectual property rights, copyrights and similar rights, regardless whether these are legally protected or not, in particular design patents, utility patents, marks and trademarks rights, inventions, trade secrets and technical know-how together with all user and application rights linked to these business assets and the rights set out in accordance with the interim accounts as at 31 August 1998 (Appendix 1) (e) all business assets of a lower economic value in so far as they are not included in any of the above business assets (f) all sums due from invoices rendered and performance of agreements, in particular sums due arising from suspended transactions and orders in hand, and further all claims arising from income tax, trade tax and turnover tax + VAT and any social security contributions to be recovered or made (g) the customer lists and all business and book keeping documents from the commencement of the business The Buyer will keep in safe custody all documents which the Seller has a legal duty to keep during the prescribed period and the Buyer agrees to keep these documents readily available for the Seller at any time. The Buyer shall not make any alterations to the accounting documents without the Seller's consent. 2 Transfer of Assets 1. Seller and buyer have agreed that possession and legal ownership of the above business assets, subject to the reservation in particular on the real property, shall be 2 transferred by the Seller to the Buyer. The Seller shall transfer to the Buyer possession and legal ownership of the above business assets. 2. In so far as the Seller is not in possession of the business assets to be sold, the Seller shall assign all claims for delivery up arising from rights of ownership or possession. In the event that business assets which are sold under this Agreement are disposed of subject to retention of title, the Seller shall assign to the Buyer all rights assigned to her from the sale-on of the business assets. Similarly all reversionary interests which entitle the Seller to claim legal business or possession of any business assets shall be assigned to the Buyer. The Buyer accepts this assignment. 3. The Buyer and Seller have agreed that all other claims and rights to be acquired by the Buyer shall similarly be transferred to the Buyer. The Seller therefore assigns these claims and rights to the Buyer. The Buyer accepts the assignment. Included (but not limited to this) is the assignment of all rights relating to guarantees, warranties, securities, performance bonds and other obligations of third parties, in so far as they relate to the sold capital and going concern assets or are otherwise linked to the business of the Seller. 4. The Buyer and Seller shall transfer to the Seller the property to be sold under this Agreement and situated at Berching, Gutenbergstral3e 5, registered with the local court Neumarkt i.d. Opf. for Pollanten, Vol. 26, p. 1052, including the building in construction and fixtures and fittings, by way of a special declaration of conveyance in accordance with part B of this Agreement (transfer of land). Risk, use and burden of transfer of title to the land shall pass to the Buyer upon expiry of the Completion Date, regardless of the registration of change of ownership at the Land Register. The decisive test for the conveyance shall be the contents and encumbrances of the Land Register in accordance with the copy at Appendix 2 of this Agreement. In the event that any other charges are registered, which take priority over this special declaration of conveyance, which the Buyer has not expressly agreed to take over under this Agreement, then the Buyer shall have an extra-ordinary right of rescission from this Agreement in its entirety. 3 Purchases and Takeover of Liabilities (Liabilities) 1. The objects of this Agreement shall include only those liabilities set out below and listed in the interim accounts of the Seller as at 31 August 1998 (Appendix 1), including any special contingency reserves for future or uncertain liabilities and any adjustments made up to the Completion Date in the ordinary course of business. The loan (account no 804 63564) with the Bayerische Vereinsbank for the property Am Arzberg 25, 92345 Toging/Altmuhital which will be transferred to the Seller shall not be included as a liability. The Buyer shall take over the following: 3 (a) the Buyer shall take over liabilities from deliveries and performance of agreements in accordance with the interim accounts of the Seller as at 31 August 1998 (Appendix 1), in so far as these have not been fulfilled or extinguished up to the Completion Date by payment or in some other way; and also any new liabilities from such deliveries and performances of agreement arising up to the Completion Date in the ordinary course of business (b) the Buyer shall take over liabilities for trade, turnover and income tax as well as social security contributions in accordance with the interim accounts as at 31 August 1998 (Appendix 1) in so far as these have not been fulfilled or extinguished by the Completion Date either by payment or in some other way; and also new liabilities in relation to these taxes and social security contributions arising up to the Completion Date in the ordinary course of business (c) the Buyer shall take over all responsibilities and liabilities relating to the business as a going concern including usual business guarantees and performances bonds for deliveries and performance of agreements and releases the Seller from the above, even in so far as these are not apparent from the interim accounts as at 31 August 1998 (Appendix 1) (d) the Buyer shall take over all liabilities arising from the erection of the new building in Berching, including liabilities arising from contracts and legal obligations and liabilities for planning, developing and preparing the plot of each arising up to the Completion Date 2. The Buyer shall not take over any liabilities as against credit institutions. In particular the Buyer does not take over the loan of the Seller and the Participant as set out in the interim accounts as at 31 August 1998 (Appendix 1), the Deutsche Ausgleichsbank number 20040444, 622435, the Raiffeisenbank number 404444 and the Sparkasse Neumarkt-Parsberg (total value of the loans as at 31 August 1998 DM 994,598.89). The Buyer shall hold the Seller and the Participant as well as any third party who might be liable free from any claims arising from these loans and shall repay these loans on behalf and on the account of the Seller. This does not apply to the loan with the Bayerische Vereinsbank, no 80463564 for the property Am Arzberg 25, Toging/Altmuhltal which will be transferred to the Seller. The Seller shall hold the Buyer free from any liabilities arising from this loan. The Seller shall bear any compensation payments made for the early re-payment of the loan. 3 The Buyer shall not take over any other liabilities of the Seller. 4 Novation of Contracts 1. The Buyer and Seller agree that the following agreements entered into by the Seller shall be taken over by the Buyer on the expiry of the Day of Completion and continued with all related rights and obligations: 4 (a) employment and engagement agreements with employees of the business (Appendix 3) (b) agreements with commercial agents; the names of the commercial agents are listed at Appendix 4 to this Agreement; furthermore Appendix 4 contains a precedent agreement (c) the customer contracts (d) the leasing contracts relating to the business motor cars (Appendix 6 to this Agreement) (e) agreements concerning the acquisition, planning, development, erection and completion of the building of the business in Berching (Appendix 7) (f) agreements with estate agents, trustees and business consultants (g) the insurance contracts relating to the business, the site, and the building (Appendix 5) The Appendices 3, 4, 6, 7 and 5 are attached to this deed for information purposes only. Only the names of the commercial agents as listed in Appendix 4 are part of this deed, please refer to Appendix 4. 2. In the event that the rights and obligations from the above agreements do not pass to the Buyer under the general law, the Buyer hereby agrees to inform the relevant contract partner of the novation and assumption of liability by the Buyer and to obtain the consent of the contract partner so such novation. If consent is refused, the Buyer agrees to perform the contract in place of the Seller or to conduct it in an appropriate manner, and to hold the Seller free from any claims by the contract partner or third parties. 5 Completion Date/Legal Effect of commercial transfer 1. For the purposes of this agreement the Completion Date shall be the date of commercial transfer. The Completion Date for hand over shall be 31 October 1998. 2. The Seller agrees, from this date to permit the buyer unrestricted access to all business premises, to provide it with keys for the business and to transfer possession of all business assets and documents intended to pass to the Buyer. 3. On the Completion Date the risk of accidental damage or destruction of the business assets shall pass to the Buyer. 5 4. The Seller agrees to continue to operate the business from the Completion Date in accordance with usual business practice and to make extra-ordinary steps in the business management only with the prior consent of the Buyer. The Seller agrees in particular, other than in the ordinary course of business, that she shall not dispose of business assets without the consent of the Buyer and she will refrain from any steps which might impact negatively on the substance of the business. 5. From the Completion Date the business shall be continued in the name and on the account of the buyer. The results of the business for 1998 shall be for the account of the Seller up to Completion Date only; after the Completion Date they are to be attributed to the Seller. 6 Purchase Price 1. The Buyer agrees to pay to the Seller a total purchase price of DM2,250,000.00. 2. The basis for determining the purchase price is the assumption that the capital resources of the owner of the business LBM Lichtleit-Fasertechnik Claudia Mann amount to DM 0.00 on the balance sheet on the Completion Date. The total amount of the purchse price shall therefore be paid for the good-will of the Company. Until the Completion Date the Seller is entitled to withdrawals and payments which are necessary to ensure that her capital resources on the balance sheet amount to DM0.00 on the Completion Date. In doing so the transfer of the property of Am Arzberg 25, Toging/Altmuhital to the Seller and the mortgage for this property with Bayerische Vereinshank shall be taken into account. 3. The parties assume that the above agreed performance of the Buyer (purchase price and extinction of credit arrangements) will not be subject to turnover tax (VAT), as a transfer of an undertaking (paragraph 1 sub-paragraph 1 a German VAT Act). If, however, turnover tax becomes payable on the whole or part of the performance of the Seller, then the purchase price shall be understood to require statutory turnover tax (VAT) to be added. Turnover tax is due on the 10th day of the calendar month after the first due date for the purchase price. Payment shall only become due, if and when the Seller issues an invoice to the Buyer which is sufficient to entitle it to claim deduction of advance payment of the tax. The Buyer agrees to assign its claim for repayment of advance tax to the Seller using the form of assignment produced for this purpose by the Finanzverwaltung (German Finance Office). The Seller agrees to notify the relevant finance office about the assignment and to set off the relevant amount upon a demand for turnover tax by the Finance Office arising from the sale of the business assets under this Agreement against the assigned claim to a refund of input tax. The Buyer shall only be obliged to pay the turnover tax if the Finanzamt (Finance Office) refuses to allow the set off for reasons which are not the responsibility of the Seller. 6 If the Buyer's claim to an input tax refund is lower than the liability to pay value added tax at the completion date, then the Buyer is liable on demand to pay the difference to the Seller either directly, or to the Finanzamt. 4. The purchase price shall be subject to the following adjustments: (a) if contrary to the assumption of the parties to this contract the capital resources of the owner of the business on the balance sheet are not DM 0.00, this will lead to a decrease or increase of the purchase price depending on the negative or positive amount of capital resources appearing on the balance sheet. The decisive test for such adjustments shall be the Completion Accounts of the Seller to be prepared as at the Completion Date. The Completion Accounts shall be prepared in accordance with ordinary principles of accounting and the continuation of write-off and valuation policies used to date by the Seller, at her cost. The costs of the construction of the building which have arisen until the Completion Date shall be taken into account. The Buyer shall be entitled to look at all business papers and have the accounts checked by an accountant instructed by it. In the event of a dispute as to the correctness of the accounts, the written opinion of an accountant engaged by both parties as an arbitrator shall be decisive. If the parties cannot agree the identity of the arbitrator, then the arbitrator will be nominated by the Chamber of Industry and Commerce in Nurnberg (Nuremnberg) (b) if according to the Completion Accounts there is an increase in the purchase price, the Seller shall grant to the Buyer an interest-free loan for this amount to be repaid on or before 31 August 1999. The Buyer shall use any liquid assets of the purchased business for the redemption of the loan before the payment falls due, as far as this is in accordance with the rules of proper business management. Any part of the loan which has not been paid before 31 August 1999 is due on this date. (c) the purchase price will be reduced in the event that the annual profit at the end of the 1999 calendar year does not exceed DM 1,152,000.00. Annual profit is defined as the profit after deduction of corporation tax and municipal trade tax. The annual accounts shall be drafted in accordance with proper accounting principles and in accordance with the methods for depreciation and evaluation which have been used so far. The bonus itself and interest on capital replacing loans which have the effect of reducing the profit shall not be taken into consideration. Profit related contingency reserves as well as special tax deductions for depreciation and special allowances, which have a direct effect on the profit but which are not needed for business reasons, shall also not be taken into account in calculating the profit. Also excluded from the calculation are reductions in the profit due to a voluntary revaluation of the company's stock. The realisation at a profit of reserves, exceptional items of income and other accounting measures relating to the balance sheet are not to be taken into consideration when calculating the profit, provided they do not relate to the calculation of the profit made from operating business. The same applies to public subsidies. If the profit for 1999 falls below DM 1,152,000 7 then the purchase price will be reduced by the amount by which the profit falls short of DM 1,152,000 subject to a maximum reduction of DM 290,000. 5. The Seller shall produce the Completion Accounts together with profit and loss accounts within 3 months of the Completion Date and to provide a copy of these to the Buyer. The inventory required for preparation of the accounts shall be conducted on the Completion Date or on the previous day. The Buyer shall have the right to be represented by its agent when the inventory is prepared. The Buyer shall be supplied with all information and documents required to provide a full explanation. 7 Payment of Purchase Price The purchase price shall be paid as follows: 1. The sum of DM562,500 (Deutsche Mark: Five hundred and sixty two thousand, five hundred) shall be paid within 14 banking days after the Completion Date to the Seller by way of transfer of shares in Fiberstars Incorporated, which has its registered office in Fremont, California, USA, or by an assignment of equivalent pre-emption rights in these shares. The value of the shares will be calculated at the average of the share value on the NASDAQ market in the last 10 days before the completion date at the conversion rate of the US dollar to the Deutsche Mark on the completion date. 2. The sum of DM 1,687,500 is payable to the Seller in cash within 14 days of the Completion Date of this Agreement. 3. If the Buyer is in arrears with the payment or the transfer of the shares, then the outstanding amount shall be subject to interest without further demand with effect from the first banking day after the due date at the FIBOR interest rate (1 month) plus 3%, if no higher or lower damages attributable to the delay can be proven. 4. The transfer of the shares according to para 7.1 and the payment of the purchase price according to para 7.2 will be made step by step against a non-recourse non-recallable guarantee, valid until 30.06.2000 in the sum of DM 290,000, provided by the Seller from a major German bank or Savings Institution. The guarantee will secure the Buyer's claims in relation to the purchase price according to para 6.4 and the guarantees and damages claims pursuant to para 10 of this contract. Claims under the guarantee must be made during the limitation period defined by the contract. The Sellers will be responsible for the costs of providing the guarantee. 8 8 Assurances by the Seller The Seller hereby confirms that the following statements are true (objective test) and complete: 1. Annual Accounts (a) the annual accounts since 1992 and the interim accounts as at 31 August 1998 with explanatory notes, in so far as there are any, have been prepared in accordance with the provisions of commercial law and generally recognised principles of ordinary book keeping and accounting and convey a view of the assets, finance and earnings position of the business as at the end of the relevant accounting period which corresponds to reality (b) at the relevant accounting dates the business had no liabilities beyond the liabilities accounted for or set out as contingent liabilities (c) the business has no direct or indirect obligations to pay pensions, invalidity benefits, sickness benefits, dependents' benefits or any other care obligations towards present or former employees or third parties and has assumed no such liabilities, quite apart from the question of whether the rights of the persons so entitled arising from these obligations are forfeitable or not. 2. Real Property and other real proprietary rights (a) the Seller of the property is the sole beneficial owner with full authority to dispose and sell the property. Details about the description of the property and charges in parts 2 and 3 of the relevant Land Register entry are correct and correspond to details in Land Register Extract. (Appendix 2) (b) upon transfer of the property, the Buyer shall acquire complete, unrestricted and unburdened ownership, apart from registration at parts 2 and 3. Rights arising from Real Estate mortgages registered at part 3 shall be extinguished by payment to the lending bank (see above at 3(2). The charges will be allowed to be deleted step by step once the respective mortgages have been redeemed (c) the Seller has made no application for amendment of the Land Register. No such amendments have been approved (d) the premises sold including all buildings, fixtures and fittings and exterior equipment are in accordance with all necessary planning permissions and development regulations. (e) the Seller has confirmed that all, development costs which have fallen due for payment until 10 November 1998 in the total sum of DM 3 5.000 have been paid in full. The building under construction including all fixtures and 9 fittings is in the condition as defined in Appendix 7 on the Completion Date. The most important contracts for the construction of the building including any development measures by the owner of the site are included Appendix 7. The contracts have been concluded, and have not been terminated. The total costs for the acquisition of the land, the construction of the building to a stage at which it can be moved into and business can be commenced are estimated by the Seller at DM 1,116,325.00 including the amount already paid but exclusive of the amount of DM 50,000 for any unforeseen costs which may arise. (f) there are no unfulfilled requisitions of insurance companies, of the Technical Standards Authority (TUV), of the professional co-operative (Berufsgenossenschaft), of the Trade Supervision Office (Local Authority) or any other authorities; and such requisitions or orders have not been threatened. The land and related exterior equipment, buildings and fixtures and fittings have been insured in accordance with details set out in Appendix 5 of this Agreement (g) stamp duty and property tax due until the Completion Date have been paid 3. Other assets (a) The Seller is the sole, unrestricted owner with free power to sell and dispose of all business assets to be transferred to the Buyer under this Agreement. This does not include restrictions which are part of the ordinary course of business such as retention of title by suppliers or guarantee agreements given to banks as security for loans taken out by the Seller (b) the insurance agreements listed in Appendix 5 are valid. They have been properly concluded and they have not been terminated. In particular there is a business insurance covering a maximum amount of DM 3,000,000 for each claim for personal injuries and a maximum amount of DM 1,000,000 for each claim for property damages. (c) the Seller is registered as the owner of the following trademarks and industrial property rights: LBM Lichtleitfasertechnik Claudia Mann -R- The Seller assigns all rights of use and exploitation for the above trade marks and industrial property rights to the Buyer as far as this is possible according to German law and grants the right of use to the Buyer. 10 4. Taxes and other deduction (a) the Seller has made all requisite declarations for tax, contributions and any public deductions up to the Completion Date, in so far as these relate to the business in accordance with the proper formalities and time limits. (b) all taxes, tax deduction, ancillary claims, interest, surcharges and penalties, contributions, in particular social security contributions and other official deductions, which relate to the business and fall within the period up to the Completion Date, have been paid or will be paid by the Completion Date fully or covered by reserves or in some other way. 5. Employees and commercial agents (a) Appendix 3 of this Agreement contains a complete list of all employees of the business and a complete summary of their activities, their salary and any ancillary benefits (including bonus payments, turnover or profit shares, payments in accordance with the Employee Inventions Act, etc) and all rights and other payments which exceed the minimum required by law (including but not restricted to contractual periods and tennination periods) (b) apart from the commercial agents set out at Appendix 4 to this Agreement, there are no commercial agency agreements or distribution agreements, territorial arrangements or other agreements which relate to the distribution of products or services of the business. All commercial agents conduct their own agencies and are not engaged in activities for the business either openly or in an undisclosed manner. 6. Contracts With the exception of agreements set out in this agreement and listed at Appendices 2 to 7, the business has no (a) contracts entitling the Seller, an employee or any third party to participate in the turnover or profit of the business; this does not include commission payable for the introduction of business, which is individually paid to a third party for arranging contracts. (b) purchase agreements or framework agreements with suppliers concluded outside the usual scope of business or with a duration exceeding 12 months (c) agreements for the purchase or leasing of capital assets with a value of more than DM 50,000 each 11 (d) agreements for the sale of capital assets outside the usual scope of business (e) agreements giving any creditor a right of mortgage, security (with the exception of statutory mortgages and usual retentions of title) or similar rights over business assets (f) letters of comfort, performance bonds, guarantees or other agreements which set up liability for the obligations of third parties, except for liabilities entered into for reasons of business policy e.g. because they are favourable to business requirements in the ordinary course of the business and which do not exceed the total amount of DM 20,000 (g) licensing agreements, know-how agreements or any other agreements for the use of copyright in which the business is a user or a party guaranteeing use, in particular agreements for the use or transfer of business specific computer software and other business specific computer services (h) rental, lease, leasing, service, supply, service or other agreements for a duration of more than 6 months or which can lead to claims against the business of more than DM 20,000 per annum in each contract, with the exception of agreements for public services (i) subsidies, premiums, investment surcharges or any other surcharges by national, local or other government offices which may be reclaimed from the Buyer (j) agreements with estate agents, business consultants (k) insurance agreements (1) agreements which exclude or restrict the right of the business to engage in particular business areas or to enter into agreements with competitors 7. With the exception of the court proceedings and dispute with public authorities set out at Appendix 10 to this Agreement, there are no legal proceedings or disputes involving a claim of more than DM 10,000, including arbitration proceedings. There are no court or administrative court proceedings or investigations pending or threatened against the business, involving a claim of more than DM 10,000, for which the Buyer could be liable to intervene. 9 Assurances Furthermore, the Seller guarantees the following to the best of his knowledge and belief: 12 1. To the Seller's knowledge the building which is being constructed has no material defects, in particular as regards the roofing and structure of the building or damp related damages. The Seller has no knowledge of dangerous waste from the past or contamination of the building concerning the property. 2. Items of capital assets including intangible assets, for example software, regardless of whether these have been included in the accounts or not, are to the best knowledge and belief of the Seller in proper, functional condition ready for operating; excluded, however, is normal wear and tear. They have been properly and regularly repaired and cared for and inspected. 3. The business has obtained all official and other consents, which are necessary to conduct business as it is presently being run. Court decisions or official steps which might result in restrictions or limitations in the methods or extent of activities of the business, have not been taken and are not threatened or expected. 4. The Seller has provided to the Buyer complete and accurate information about the business in the course of the business negotiations. 5. With regard to the transfer of shares in accordance with 7.1 the Seller is bound to adhere to the obligations contained in the Representation Letter (Appendix 11) and to confirm this Representation Letter to the Buyer by signature. Please refer to Appendix 11; the English text has only been attached for information purposes and is not part of the deed. 10 Warranty and damages 1. Instead of all statutory warranties and claims for damages and in place of all claims which could arise from a challenge to the validity of this Agreement because of the absence of an economically material characteristic or the nullification of the underlying business purpose, the Buyer shall only be entitled to the following remedies: remedying the defect, claiming a reduction of the purchase price, or claiming damages. These remedies are regulated as follows: Reversing this agreement and ss. ss.460 to 464 BGB shall be excluded with the exception of ss.463 2 nd ence BGB (Liability due to malicious misrepresentation). All claims for remedying the defect, claiming a reduction in price or claims for damages shall be made as follows: (a) in the event of a breach of or non-compliance with the assurances given by the Seller, the Buyer shall be obliged -- provided this is in accordance with para 8 and para 9 not excluded or unreasonable in the circumstances -- to allow the Seller a reasonable period, but at least 14 days, to remedy the matter 13 in accordance with this Agreement. Such declaration must be made in writing and must be delivered to the Seller at latest within 1 month after the Buyer becomes aware of the breach of this Agreement. For claims of tax liabilities or fees the time-limit can be extended on application of the Seller, provided the Buyer can arrange an extension of the time-limit himself without any detriment to him (b) if circumstances do not permit correction, or should it be unreasonable, or if the Seller refuses to correct or fails to act within a reasonable period agreed, then the Buyer shall be entitled to demand a reduction of the price or damages in the form of cash (c) any claims for a reduction in price or damages under para 6.4 and 6.8 shall subsist independent of the fault on the part of the Seller. They shall be based solely on the difference in value of the purchased objects which arises to the disadvantage of the Buyer upon non compliance with warranties and/or negative variation of the business assets as guaranteed by para 6.4 and 6.8 (d) any claims for a reduction in price or damages which are based on the warranties given at para 9 depend on proof of liability of the Seller. Otherwise the liability is to be established in accordance with para 10..1 c) 2nd sentence 2. The Buyer is entitled to choose between the remedy of reduction of the purchase price and damages. If the Buyer chooses the reduction of the purchase price, he is entitled to the difference between the value of the business assets guaranteed by this Agreement and the actual value of the business reduced by breach of the warranty. If the Buyer decides to claim damages he may claim damages for an amount which is necessary, taking into account its duty to mitigate (ss.254 BGB -- German Civil Code) in order to create a condition which accords to this Agreement, in other words in order to put the Buyer in such a position as it would have been in if the assurances of the Seller had been complied with in full. This shall also cover reasonable costs of securing evidence and legal and tax advice in connection with the claim for damages. 3. With regard to the consequential losses which arise from breach of or non-compliance with the assurances, the Seller shall be liable in the same way as for direct losses resulting from assurances which have not been complied with. 4. Claims for a reduction of the purchase price or damages shall only exist if the reduction in value of the business assets or the amount of damages exceeds DM 10,000. Claims are limited to a maximum amount of DM 1,000,000. 5. All claims for damages and reduction in price which the Buyer has under this Agreement shall be time barred as from 31 December 1999 with the exception of the claims for the reduction of the purchase price referred to in 6.4.c which shall be 14 time barred as from 30 June 2000. This time limit shall not apply to claims arising from outstanding tax or fee payments. These are time barred after the expiry of 12 months from the time notice of the outstanding payment is given. Time limitation shall be interrupted by any written notice of defect, complaint of defect or claim of the Seller to the Buyer to bring matters into line with this Agreement. The limitation period shall be interrupted whilst the Seller is remedying the defect. For limitation purposes, time shall restart after the interruption with regard to the defect which has been complained of if the Buyer has received a declaration of the Seller to the effect that the remedy has been completed or declined, but at the latest six months after notification of the defect. If there has been a successful interruption of the time limit the remainder of the limitation time is a period of at least 3 months. 6. Circumstances which have been noted when preparing accounts for the Completion date, including their effect on the purchase price, cannot be taken into account again when calculating claims for damages or breach of warranty claims. Circumstances which the Buyer was aware of on Completion are no basis for claims for damages or claims for reducing the purchase price. 11 Prohibition of competition for the Participant The Participant shall cease his business activity as a sole trader for the business Lichtberatung Mann on the Completion Date. 12 Use of name The Buyer and its legal successors in title shall be entitled to continue to use the name of the Seller's firm, namely LBM Lichtleit-Fasertechnik without adding the words Claudia Mann. 15 Part B Conveyance of Real Property 13 Land Register Entries 1. The Seller is registered as the owner of "the property" at the Land Registry of the Local Court of Neumarkt i. d. Opf. for Pollanten, Vol. 26, p. 1052, plot no. 688/11, size 0.3369 hectares. 2. The following charges are registered: S. II no charges S. III mortgage of DM 700.000- for the Sparkasse Neumarkt i.d. Opf -- Parsberg. 3. The entries at the Land Register are in accordance with Appendix 2 which has been attached for information purposes only. 14 Conveyance and Land Registry Declarations 1. Subject of the conveyance and the following Land Registry Declaration is the property described in S. B ss. 1. 2. The Seller and the Buyer agree to register a caution to guarantee the transfer of the property to the Buyer. They also authorise the discharge of this entry of notice for the time the change in ownership is registered provided no entries are made or applied for without the Buyer's consent prior to the transfer. 3. The charges entered into under s. II and s. III of the Land Register will subsist and be taken on by the Buyer. 4. All rights of ownership of the property will be transferred to the Buyer. With regard to the subsisting charges it is referred to Part A para 3.1. The notary has pointed out that it might be necessary to change the class of use; the participants agreed to take care of this 5. The right of application for the parties involved is excluded. The notary shall be authorised to make the application resulting from this document for entering the caution to guarantee the transfer and the change in ownership at the Land Registry. The notary shall also be authorised to make restricted or separate applications or to withdraw the applications. 16 6. The notary is instructed to only apply for the change in ownership once there is proof for the payment of the purchase price in accordance with Part A para 7 (2) and (2). The change of ownership shall not depend on the payment of interest on defaulted payment. The Seller shall confirm the payment of the purchase price to the notary on her own initiative. Until then deed shall be drafted without the conveyance. 15 Transfer of risks The possession, use, danger and liabilities arising from the ownership of the property including all obligations arising from insurance agreements concerning the property as well as the legal duty to maintain the property safe are transferred onto the Buyer on the Completion Date in accordance with Part A para 5. 16 Guarantee 1. The ownership of the property is transferred without guaranteeing a specific size of the area transferred. 2. The Seller guarantees that the property is transferred without any private liabilities or restrictions which a have not been registered at the Land Registry other than those stipulated in this Agreement. The Seller also guarantees that the property free of any interest, tax or other payments. 3. This guarantee is given by the Seller in accordance with the provisions A paras 8 and 9. 17 Taxes and fees 1. Each party shall bear its own costs and expenses in connection with the preparation, conclusion and performance of this agreement and the conveyance of the real property, including all fees and disbursements for courts and advisors. 2. The property tax payable upon completion of the conveyance shall be paid by the Buyer. 17 3. All other taxes, fees and disbursements, which may arise in connection with the purchase of the business assets shall be borne by the parties in to the Agreement in equal shares. Any VAT (turnover tax) is excluded from this. Para 6 (3) shall apply. 4. The Court with jurisdiction for any disputes arising under this Agreement shall be at Munich. 18 Confidentiality The parties agree to treat all information which they have received or exchanged in connection with this agreement as confidential and shall not pass such information to any third party. Part C 19 Miscellaneous 1. This agreement shall be subject to the Law of the Federal Republic of Germany. 2. The Court with jurisdiction for any disputes arising under this Agreement shall be at Munich as far as this is can be agreed in this way, otherwise it shall be at the location of the registered office of the Buyer. 3. If any provision of this Agreement should be invalid partly or as a whole, this shall not have any impact on the validity or feasibility of the rest of the provisions. The invalid provision shall be replaced by a valid and feasible provision which has the same economic purpose as the provision which was originally agreed without being invalid or not feasible itself. 4. All changes to this Agreement have to be made in writing and shall be certified by a notary if necessary. 5. All expressions of intent, information or messages which are necessary for the carrying out of this Agreement shall be notified in writing to the parties of the contract. Sending messages per telefax, telex or courier shall be allowed. Declarations, messages or information shall be deemed to have arrived, if they have been sent to the following address: 6. Claudia Mann, Am Arzberg 25, Toging/Altmuhltal; 7. Fiberstars Incorporated, David Ruckert, 2883 Bayview Drive, Fremont, California 94538 USA. EX-10.35 4 ASSET PURCHASE AGREEMENT EXECUTION VERSION ----------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ASSET PURCHASE AGREEMENT by and between RESPIRONICS, INC. and FIBERSTARS, INC. Dated as of December 30, 1998 RELATING TO FIBER OPTIC PHOTOTHERAPY SYSTEM AND RELATED ASSETS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table of Contents ARTICLE I Agreements to Sell and Purchase ......................... 1 1.01. Agreement to Sell Assets ................................ 1 1.02. Purchase Price .......................................... 2 1.03. Allocation of Purchase Price ............................ 2 1.04. No Assumption of Any Liabilities by Buyer ............... 2 ARTICLE II The Closing ............................................. 2 2.01. The Closing ............................................. 2 ARTICLE III Representations and Warranties of Seller ................ 3 3.01. Organization ............................................ 3 3.02. Due Authorization of Transaction Documents .............. 3 3.03. Title to Assets, No Liens ............................... 3 3.04. No Conflict ............................................. 3 3.05. No Contracts ............................................ 3 3.06. No Licenses, Permits, Authorizations or Equipment ....... 3 3.07. Taxes, Tax Returns and Audits ........................... 3 3.08. Notice of Violations .................................... 4 3.09. No Litigation ........................................... 4 3.10. No Infringement or Adverse Claims ....................... 4 3.11. No Other Intellectual Property Rights ................... 4 3.12. Year 2000 Compliance .................................... 4 3.13. Liability for Finder's Fees ............................. 4 ARTICLE IV Representations and Warranties of Buyer ................. 4 4.01. Organization ............................................ 4 4.02. Due Authorization of Transaction Documents .............. 5 4.03. Liability for Finder's Fees ............................. 5 4.04. No Conflict 5 ARTICLE V Pre-Closing Covenants of Seller ......................... 5 5.01. Certain Prohibited Transactions ......................... 5 5.02. Access to Premises and Information ...................... 6 5.03. Reasonable Commercial Efforts ........................... 6 ARTICLE VI Pre-Closing Covenants of Buyer .......................... 6 6.01. Reasonable Commercial Efforts ........................... 6 ARTICLE VII Post-Closing Covenants .................................. 6 7.01. Prohibition on Competition by Seller .................... 6 7.02. Consulting and Assistance From Seller ................... 7 7.03. Delivery of Technical Documentation and Other Assets .... 7 -1- 7.04. Existing Purchase Orders; Repair Service Components ..... 7 7.05. Prohibition on Competition by Buyer ..................... 7 ARTICLE VIII Conditions .............................................. 8 8.01. Mutual Conditions ....................................... 8 8.02. Conditions to the Obligations of Buyer .................. 8 8.03. Conditions to the Obligations of Seller ................. 8 ARTICLE IX Indemnification ......................................... 9 9.01. Indemnification by Seller ............................... 9 9.02. Notice and Right to Defend Third Party Claims ........... 9 ARTICLE X Miscellaneous ........................................... 9 10.01. Expenses ................................................ 9 10.02. Survival of Representations, Warranties and Indemnity ... 9 10.03. Further Assurances ...................................... 10 10.04. Notices ................................................. 10 10.05. Postponement and Waiver ................................. 10 10.06. Termination ............................................. 11 10.07. Assignment .............................................. 11 10.08. Entire Agreement ........................................ 11 10.09. Invalidity .............................................. 11 10.10. Captions ................................................ 11 10.11. Counterparts ............................................ 11 10.12. Termination of Existing Distribution Agreement .......... 11 10.13. Governing Law ........................................... 12 EXHIBITS EXHIBIT A PHOTOTHERAPY SYSTEM/FIBERSTARS TECHNOLOGY/OPTOBLANKET PORTION EXHIBIT B BILL OF SALE AND ASSIGNMENT EXHIBIT C ALLOCATION OF PURCHASE PRICE EXHIBIT D FIBER OPTIC ILLUMINATOR BY PART NUMBER -ii- ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "Agreement") made and entered into as of December 30, 1998 by and between RESPIRONICS, INC., a Delaware corporation ("Buyer"), and FIBERSTARS, INC., a California corporation ("Seller"). WITNESSETH: WHEREAS, Seller wishes to sell, and Buyer wishes to purchase, the fiber optic phototherapy system described on Exhibit A attached hereto (the "Phototherapy System") and all the assets of Seller directly relating thereto (including without limitation all products, technical know-how, intellectual property rights, technical documentation, inventory and goodwill related thereto), upon the terms and conditions contained herein, in exchange for the consideration described herein; and NOW, THEREFORE, the parties hereto, each intending to be legally bound hereby, covenant and agree as follows: ARTICLE I Agreements to Sell and Purchase 1.01. Agreement to Sell Assets. (a) Upon the terms and subject to the conditions of this Agreement, Seller agrees to sell, convey, assign, transfer and deliver to Buyer, and Buyer agrees to purchase and acquire, the Phototherapy System and all the assets, properties, rights and interests, tangible and intangible and including all associated goodwill, of the Seller directly relating thereto (the Phototherapy System and all such other assets, properties, rights, interests and goodwill collectively being referred to as the "Assets"). Without limiting the generality of the foregoing, the Assets shall include the following: (i) The fiber optic illuminators identified on Exhibit D attached hereto and contained in the Phototherapy System and any other devices, products or other developments arising out of the Phototherapy System, and any improvements thereto (the "Products"). (ii) The optoblanket portion of the Phototherapy System and any improvements thereto (the "Optoblanket"). (iii) All information and know-how which is used in connection with the Phototherapy System or relating to the design, tooling, manufacture, testing, engineering, servicing, marketing, distribution and use of the Products and the Optoblanket, including without limitation all confidential information, trade secrets, inventions, technical data, research and development data, processes and formulations, manufacturing and production know-how and experience, management know-how, training programs, engineering and other drawings, specifications, schemes, guidelines, procedures, policies, performance criteria, operating instructions, operating and maintenance manuals and brochures, technology, technical information, software (including all source code and object code, software design and validation documents), engineering and functional specifications, promotional literature, technical rights and information (the "Technical Know-How"). (iv) All patent and other intellectual property rights, all copyrights and mask work rights and all marketing, manufacturing and distribution rights related to the Phototherapy System, including all improvements thereof and thereto, together with the goodwill associated therewith and any and all past, present and future legal causes of action and choses in action related thereto, that Seller has a right to bring (the "Intellectual Property Rights"). (v) All technical documentation and drawings in any media of any type, including machine readable and tangible format, embodying information regarding, or documentation of, the Phototherapy System (the "Technical Documentation"). (vi) All existing inventory of Products and Optoblankets owned or held by or on behalf of Seller as well as all work-in-process, parts, spare parts and raw materials related thereto. (b) Seller shall retain, and Buyer shall not purchase, any assets, properties, rights and interests of Seller other than the Assets. 1.02. Purchase Price. In consideration for the sale of the Assets, Buyer shall pay to Seller the sum of $826,000 (the "Purchase Price"). The Purchase Price shall be paid to Seller in four (4) equal quarterly installments, with the first such quarterly installment to be paid on the Closing Date. All payments shall be made by Buyer by wire transfer to an account designated by Seller in writing. 1.03. Allocation of Purchase Price. The parties shall agree upon and jointly prepare and attach to this Agreement as Exhibit C, as of the Closing Date, an allocation of the Purchase Price reflecting the allocation of the Purchase Price to the Assets as negotiated by the parties. Within 60 days of the Closing Date, Buyer shall prepare an IRS Form 8594 reflecting the allocation of the Purchase Price. The parties shall to use the allocations on Exhibit C and IRS Form 8594 for all tax purposes, including the preparation of federal and state income tax returns. For purposes of the preparation of Form 8594, the name, address and taxpayer identification number of the parties shall be as listed in Section 10.04. 1.04. No Assumption of Any Liabilities by Buyer. Buyer shall not assume or be required to pay, perform or discharge any liabilities and obligations of Seller as a result of the transactions contemplated by this Agreement. ARTICLE II Closing 2.01. The Closing. The consummation of the transactions contemplated by this Agreement shall constitute the "Closing." The Closing shall take place at such time and place and on such date as shall be mutually agreed upon by Seller and Buyer, which date shall constitute the "Closing Date." -2- ARTICLE III Representations and Warranties of Seller Seller represents and warrants to Buyer as follows: 3.01. Organization. Seller is duly organized, validly existing and in good standing under the laws of the State of California, with all necessary corporate power and authority to own and lease its properties, to carry on its business as and where such properties are now owned or leased and such business is now being conducted, except where the failure to do so would not have a material adverse effect on Seller. 3.02. Due Authorization of Transaction Documents. Seller has full power and authority and has taken all necessary action to execute and deliver this Agreement, the Bill of Sale and Assignment (as defined below) and the Transfer Instruments (as defined below; individually a "Transaction Document" and collectively, the "Transaction Documents") to which it is a party, and to perform all the terms and conditions hereof and thereof to be performed by Seller. Each Transaction Document to which it is a party is the valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 3.03. Title to Assets. No Liens. Seller has good title to all of the Assets, free and clear of all liens, security interests, charges, claims and encumbrances of every kind and nature (collectively, "Liens"), and will convey the same to Buyer free and clear of any Liens. Seller possesses all right and title to the Assets and all intellectual property rights therein and has the right to transfer same to Buyer. 3.04. No Conflict. The execution and delivery of each Transaction Document by Seller, the consummation of the transactions contemplated thereby by Seller and the fulfillment of and compliance with the terms and provisions thereof by Seller do not and will not (a) violate any provision of law or administrative regulation or any judicial or administrative order, award, judgment or decree applicable to Seller, (b) conflict with, result in a breach of, constitute a default under or accelerate or permit the acceleration of the performance required by, any agreement or instrument to which Seller is a party or by which Seller is bound, (c) result in the creation of any Lien upon any of the Assets or (d) terminate or give any party thereto the right to terminate any such agreement or instrument. 3.05. No Contracts. Except for this Agreement and the Distribution Agreement between Seller and Fiberoptic Medical Products, Inc. ("FMP") dated as of February 21, 1996 (as amended on June 27, 1996, the "Existing Distribution Agreement"), Seller is not a party to or subject to any contract or agreement, whether written or oral, relating to or affecting the Assets. 3.06. No Licenses. Permits. Authorizations or Equipment. There are no approvals, authorizations, consents, licenses, franchises, orders and other permits of, and filings with, any governmental authority, whether foreign, Federal, state or local, nor any equipment, hardware or software not included as part of the Assets, which are required for the use, manufacture, distribution and sale of the Assets. 3.07. Taxes. Tax Returns and Audits. All foreign, Federal, state and local income, use, sales, franchise, employment, real and personal property tax returns relating to the Assets required to be filed by or on behalf of Seller have been duly filed, or extensions have been obtained, and all such taxes, -3- assessments and levies shown thereon to be due and payable have been duly paid or are being contested by Seller in good faith. 3.08. Notice of Violations. Seller has not received any written notice from any governmental authority of any violation of any law, statute, ordinance or regulation relating to the Assets. 3.09. No Litigation. There is no suit, claim, action or proceeding at law or in equity (whether or not purportedly on behalf of or against Seller) pending or, to the knowledge of Seller, threatened relating to the Assets or which could affect or apply to the Assets. 3.10. No Infringement or Adverse Claims. The Assets do not infringe any right of any person under any federal, state or foreign patent, copyright, trademark, trade secret or other intellectual property laws. There are no adverse claims of ownership in or to any of the Assets or any rights in or to any of the Assets and, to Seller's knowledge, there do not exist any facts that would support a claim that Seller's use or practice of any of the Assets has infringed or violated any intellectual property rights or other rights of any other person. The use, manufacture, distribution and sale of the Phototherapy System, including without limitation the Products and the Optoblanket, will not infringe or violate any intellectual property rights of any person. 3.11. No Patents or Other Intellectual Property Rights. The Intellectual Property, Technical Know-How and the Technical Documentation constitute all of the intellectual property rights necessary for the use, manufacture, distribution and sale of the Phototherapy System, including without limitation the Products and the Optoblanket. There are no patents on or applicable to the Phototherapy System, including without limitation the Products or the Optoblanket, and there are no third party intellectual property rights, technology, know-how, software or other property rights which are necessary or material to the use, manufacture, distribution and sale of the Phototherapy System, including without limitation the Products and the Optoblanket. Seller does not own or license any patents, trademarks, copyrights or other intellectual property rights which are used in connection with the Assets or are necessary for the manufacture, distribution and sale of the Phototherapy System, including the Products or the Optoblanket. 3.12. Year 2000 Compliance. To Seller's knowledge, the Assets (including without limitation any computer hardware or software or embedded chips incorporated in the Assets) are Year 2000 Compliant. As used herein, "Year 2000 Compliant" means all Assets (including without limitation any computer hardware or software or embedded chips incorporated in the Assets) operate without error relating to or caused by date data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century or leap years. 3.13. Liability for Finder's Fees. No liability for brokerage fees, finder's fees, agent's commissions or other similar forms of compensation in connection with this Agreement or any transaction contemplated hereby has been incurred by Seller. ARTICLE IV Representations and Warranties of Buyer Buyer represents and warrants to Seller as follows: 4.01. Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with all necessary corporate power and authority to own -4- and lease its properties, to carry on its business as and where such properties are now owned or leased and such business is now being conducted, except where the failure to do so would not have a material adverse effect on Buyer. 4.02. Due Authorization of Transaction Documents. Buyer has full corporate power and has taken all necessary corporate action to execute, deliver and consummate the Transaction Documents to which it is a party and to perform all the terms and conditions thereof to be performed by it. Each Transaction Document to which it is a party is the valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 4.03. Liability for Finder's Fees. No liability for brokerage fees, finder's fees, agent's commissions or other similar forms of compensation in connection with this Agreement or any transaction contemplated hereby has been incurred by Buyer. 4.04. No Conflict. The execution and delivery of each Transaction Document by Buyer, the consummation of the transactions contemplated thereby by Buyer and the fulfillment of and compliance with the terms and provisions thereof by Buyer do not and will not (a) violate any provision of law or administrative regulation or any judicial or administrative order, award, judgment or decree applicable to Buyer or (b) conflict with, result in a breach of or constitute a default under any agreement or instrument to which Buyer is a party or by which Buyer is bound. ARTICLE V Pre-Closing Covenants of Seller 5.01. Certain Prohibited Transactions. (a) Except as otherwise agreed to in writing by Buyer, from and after the date hereof and until the Closing Date, Seller shall: (i) Maintain the Assets in generally the same repair, order and condition as on the date hereof consistent with Seller's practice prior to the date hereof, and deliver such Assets to Buyer on the Closing Date in such condition, ordinary wear and tear excepted; (ii) Maintain in force insurance policies with respect to the Assets in amounts and on terms substantially equivalent to those in effect on the date hereof; and (iii) Not enter into any contracts or agreements or other transactions with respect to the Assets. (b) Seller shall promptly notify Buyer in writing of the occurrence of any matter or event prior to the Closing Date which is material and adverse to the Assets. (c) Seller shall not solicit, encourage or accept any proposal from any other person for the acquisition of all or any portion of the Assets (other than sales of inventory of Products and Optoblankets to FMP under the Existing Distribution Agreement in the ordinary course of business). -5- 5.02. Access to Premises and Information. Seller will permit Buyer and its authorized representatives to have full access to the premises, officers, directors, employees and books and records of Seller relating to the Assets as Buyer may request. No investigation or inquiry made by Buyer pursuant to this Section 5.02, or made heretofore, shall in any way affect or diminish the representations and warranties made by Seller in this Agreement. 5.03. Reasonable Commercial Efforts. Seller shall use their reasonable commercial efforts to cause the conditions of closing set forth in Sections 8.01 and 8.02 to be satisfied as soon as practicable and in any event before December 31, 1998. ARTICLE VI Pre-Closing Covenants of Buyer 6.01. Reasonable Commercial Efforts. Buyer will use reasonable commercial efforts to cause the conditions of closing set forth in Sections 8.01 and 8.03 to be satisfied. ARTICLE VII Post-Closing Covenants 7.01. Prohibition on Competition by Seller. (a) For a period of seven (7) years from the Closing Date (the "Noncompetition Term"), Seller shall not, directly or indirectly, engage or invest in, own, manage, operate, finance, control or participate in the ownership, management, operation, financing or control of, be associated with or in any manner connected with, lend its name to, lend its credit to or render services or advice to, any business whose products or activities compete in the medical market in whole or in part with the Assets worldwide; provided, that Seller may purchase or otherwise acquire up to (but not more than) one percent (1%) of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934. Seller agrees that this covenant is reasonable with respect to its duration, geographical area and scope. (b) During the Noncompetition Term, Seller will not, directly or indirectly, either for itself or any other Person, solicit the business of any Person known to Seller to be a customer of Buyer (whether or not Seller had personal contact with such Person) with respect to products, services or activities which compete in whole or in part with the Assets. (c) In the event of a breach of Seller of any covenant set forth in Sections 7.0 1(a) or (b), the term of such covenant will be extended by the period of the duration of such breach. (d) If Seller breaches the covenants set forth in Sections 7.01(a) or (b), Buyer will be entitled to the following remedies: (i) Damages from Seller; and (ii) In addition to its right to damages and any other rights it may have, to obtain injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of Sections 7.0 1(a) or (b), it being agreed -6- that money damages alone would be inadequate to compensate Buyer and would be an inadequate remedy for such breach. (e) The existence of any claim or cause of action against Buyer, whether predicated on this Agreement or otherwise, shall not constitute a defense to enforcement by the Buyer of Sections 7.01(a) or (b). (f) It is the intention of the parties that the provisions of Sections 7.01(a) and (b) hereof shall be enforceable to the fullest extent permissible under applicable law, but that the unenforceability (or modification to conform to such law) of any provision or provisions thereof shall not render unenforceable, or impair, the remainder thereof or of any other provision of this Agreement. If any provision or provisions of Section 7.01(a) or (b) hereof shall be deemed invalid or unenforceable, either in whole or in part, this Agreement shall be deemed amended to delete or modify, as necessary, the offending provision or provisions and to alter the bounds thereof in order to render it valid and enforceable. (g) Notwithstanding the provisions of Sections 7.0 1(a) and (b), Buyer hereby acknowledges that Seller may manufacture, sell or license fiber optic products other than the Assets so long as the manufacture, sale and/or licensing of such other fiber optic products does not violate the provisions of Sections 7.01(a) and (b). 7.02. Consulting and Assistance From Seller. For a period of one (1) year from and after the Closing, Seller shall provide consulting services and assistance to Buyer, on a time and materials basis, in connection with the use of the Assets and the use, manufacture, distribution and sale of the Phototherapy System, including without limitation the Products and the Optoblanket, as reasonably requested by Buyer from time to time. 7.03. Delivery of Technical Documentation and Other Assets. No later than two (2) weeks after the Closing, Seller shall deliver to Buyer, at Seller's cost, the Technical Documentation and other Assets at such address or addresses as Buyer shall designate. 7.04. Existing Purchase Orders; Repair Components. (a) Seller shall fulfill and perform on a timely basis all of its obligations under existing purchase orders submitted by Buyer on or before the Closing Date for Products, Optoblankets and/or repair components in accordance with the terms of such purchase orders. (b) For a period of one (1) year after the Closing, Seller agrees to provide repair components with respect to use, manufacture, distribution and sale of the Phototherapy System, including without limitation the Products and the Optoblanket, pursuant to purchase orders submitted by Buyer on substantially the same terms as such components are provided as of the date of this Agreement. 7.05. Prohibition on Competition by Buyer. During the Noncompetition Term, Buyer shall not manufacture, sell or license the Assets for use in markets other than the market for medical products worldwide. Buyer agrees that this covenant is reasonable with respect to its duration, geographical area and scope. -7- ARTICLE VIII Conditions 8.01. Mutual Conditions. The obligations of Seller and Buyer to consummate this Agreement and the transactions contemplated hereby are subject to the fulfillment, prior to or at the Closing, of the following condition precedent: (a) No Legal Bar. No governmental department, court, agency or commission shall have instituted or notified Buyer or Seller of its intention to institute any suit or proceeding to restrain or enjoin the consummation of this Agreement or the transactions contemplated hereby or to nullify or render ineffective this Agreement or such transactions if consummated, and no order or decree so restraining or enjoining such consummation shall be in effect. 8.02. Conditions to the Obligations of Buyer. The obligation of Buyer to consummate this Agreement and the transactions contemplated hereby are subject to the fulfillment, prior to or at the Closing, of the following conditions precedent: (a) Accuracy of Representations and Warranties. The representations and warranties of Seller herein contained shall have been true when made and, in addition, shall be true on and as of the Closing Date in all material respects (provided, that for purposes of indemnification under Section 9.01, such materiality shall not be applicable) with the same force and effect as though made on and as of the Closing Date. Buyer shall have received a certificate dated the Closing Date signed by Seller certifying, in such detail as Buyer may reasonably request, to the fulfillment of this condition. (b) Performance of Agreements. Seller shall have performed all obligations required to be performed by it hereunder at or prior to Closing. Buyer shall have received a certificate dated the Closing Date signed by Seller certifying, in such detail as Buyer may reasonably request, to the fulfillment of this condition. (c) Instruments of Transfer and Assumption of Liabilities. Seller shall have executed and delivered to Buyer a Bill of Sale and Assignment annexed hereto as Exhibit B, and such other bills of sale, assignments, endorsements and other instruments, reasonably satisfactory to Buyer, as shall be effective to vest in Buyer all of Seller's right, title and interest in and to the Assets (collectively, the "Transfer Instruments"). (d) Material Adverse Change. No material adverse change shall have occurred to the Assets between the date of this Agreement and the Closing Date. 8.03. Conditions to the Obligations of Seller. The obligations of Seller to consummate this Agreement and the transactions contemplated hereby are subject to the fulfillment, prior to or at the Closing, of the following conditions precedent: (a) Accuracy of Representations and Warranties. The representations and warranties of Buyer herein contained shall have been true when made and, in addition, shall be true on and as of the Closing Date in all material respects with the same force and effect as though made on and as of the Closing Date. Seller shall have received a certificate dated the Closing Date signed by Buyer certifying, in such detail as Seller may reasonably request, to the fulfillment of this condition. (b) Performance of Agreements. Buyer shall have performed all obligations required to be performed by it hereunder at or prior to the Closing. Seller shall have received a certificate dated the -8- Closing Date signed by Buyer certifying, in such detail as Seller may reasonably request, to the fulfillment of this condition. ARTICLE IX Indemnification 9.01. Indemnification by Seller. Seller hereby indemnifies and holds Buyer and its directors, officers, employees, corporate affiliates and agents ("Buyer's Indemnified Persons") harmless from and against any and all loss, cost, damage and expense, including but not limited to reasonable attorneys' fees and expenses of litigation (collectively, "Losses"), suffered or incurred by any Buyer's Indemnified Person (a) for nonperformance by Seller of any of its obligations hereunder, (b) for any breach (not expressly waived in writing) of the representations, warranties, covenants or agreements made hereunder by Seller, (c) arising from any liability or obligation of Seller, (d) arising from Seller's ownership, use and operation of the Assets prior to the Closing Date and (e) arising from any infringement or alleged infringement of any patent, copyright, trademark, trade secret or other intellectual property right or law by any of the Assets. In addition, Seller agrees to indemnify Buyer's Indemnified Persons, and to hold Buyer's Indemnified Persons harmless from and against any all claims, loss, damage, liability, cost or expense whatsoever (including all reasonable attorney's fees and expenses of litigation) resulting to any Buyer's Indemnified Person by reason of or arising out of noncompliance with the bulk transfer provisions of the Uniform Commercial Code or any comparable state law to which the transactions contemplated hereby are subject. 9.02. Notice and Right to Defend Third Party Claims. Promptly, upon receipt of notice of any claim, demand or assessment or the commencement of any suit, action or proceeding in respect of which indemnity may be sought, any Buyer's Indemnified Person seeking indemnification (the "Indemnitee") will give notice thereof to the party from whom indemnification is sought (the "Indemnitor"), within sufficient time to enable the Indemnitor to respond to such claim or answer or otherwise plea in such action. Except to the extent that the Indemnitor is materially and substantially prejudiced thereby, the omission of such Indemnitee so to notify promptly the Indemnitor of any such claim, demand, assessment, suit, action or proceeding shall not relieve the Indemnitor from any liability which it may have to the Indemnitee. The Indemnitor will be entitled to participate in and, to the extent that it may elect to do so, to assume the defense, conduct or settlement thereof, using counsel approved by the Indemnitee, which approval will not unreasonably be withheld. The Indemnitee will cooperate with the Indemnitor in connection with any such claim, demand, assessment, suit, action or proceeding. The Indemnitor shall not settle or compromise any such claim, demand, assessment, suit, action or proceeding without the prior written consent of the Indemnitee, unless the Indemnitor provides the Indemnity with a full release from all adverse parties releasing the Indemnitee from any liability and the Idemnitee is not required to pay any amounts or take or refrain from taking any actions as a result thereof. ARTICLE X Miscellaneous 10.01. Expenses. Seller and Buyer shall bear all expenses incurred by each of them in connection with the negotiation, preparation, execution and performance of this Agreement and the other Transaction Documents. 10.02. Survival of Representations. Warranties and Indemnity. The representations and warranties of each party hereto which are contained herein or in any certificate or other document -9- delivered pursuant hereto and the indemnification obligations of Seller hereunder shall survive the Closing for a period of two (2) years from the Closing Date, except with respect to Sections 3.03 (which shall survive indefinitely) and 3.07 (which shall survive for the applicable statute of limitations). 10.03. Further Assurances. At any time or from time to time after the Closing, at the Buyer's request, Seller shall execute and deliver to Buyer such other instruments and take such other actions as are reasonably necessary in order to more effectively transfer, convey and assign to the Purchaser, and to confirm the Purchaser's title to, all Assets and to put Buyer in actual possession and operating control of the Assets. On and after the Closing Date, Seller and Buyer shall take all appropriate action and execute all documents, instruments or conveyances of any kind which may be necessary or advisable to carry out any of the provisions hereof and to consummate the transactions contemplated hereby. 10.04. Notices, All notices, demands and other communications which may or are required to be given hereunder or with respect hereto shall be in writing, shall be given either by personal delivery or by certified mail, return receipt requested, and shall be deemed to have been given or made when personally delivered or when received via certified mail, addressed to the respective parties as follows: (a) If to Seller: Fiberstars, Inc. 2863 Bayview Drive Fremont, CA 94538 Attn: Robert A. Connors Seller's EN:_______ or to such other address as Seller may from time to time designate by notice to Buyer with respect tofuture notices, demands and other communications to Seller; (b) if to Buyer: Respironics, Inc. 1501 Ardmore Blvd. Pittsburgh, PA 15221 Attn: General Counsel Buyer's EN: 25-1304989 or to such other address as Buyer may from time to time designate by notice to Seller with respect to future notices, demands and other communications to Buyer. 10.05. Postponement and Waiver. Any postponement or waiver pursuant to this Agreement shall be in writing and shall be effective only in the specific instance and for the purpose for which given. No failure or delay on the part of any party in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies expressly specified in this Agreement are cumulative and are not exclusive of any rights or remedies which any party would otherwise have. -10- 10.06. Termination. (a) This Agreement may be terminated at any time prior to the Closing Date: (i) by mutual agreement of Seller and Buyer; and (ii) by Buyer, on the one hand, and Seller, on the other hand, if the Closing shall not have occurred on or before March 31, 1999; provided, that this Agreement may not be so terminated by Buyer or by Seller if the party seeking to terminate is in material breach of its obligations hereunder. 10.07. Assignment. This Agreement shall not be assignable by any party hereto, except that Buyer may assign this Agreement to any affiliate of Buyer. 10.08. Entire Agreement. This Agreement constitutes the entire agreement between the parties, and supersedes any and all other agreements between the parties relating to the subject matter hereof. 10.09. Invalidity. In the event that any one or more of the provisions contained in this Agreement, or in any other instrument referred to herein, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any such other instrument. 10.10. Captions. The captions of Articles and Sections hereof are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement. 10.11. Counterparts. This Agreement may be executed simultaneously in two or more counterparts and upon facsimiles, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 10.12. Termination of Existing Distribution Agreement. Effective as of the Closing Date, the Existing Distribution Agreement between Seller and FMP be and it hereby is terminated and no further force and effect, except for these provisions of the Existing Distribution Agreement which by their terms survive termination and the right of first refusal contained in Section 16.03 which now rests with Buyer as FMP's corporate parent. [Signature Page follows] -11- 10.13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. WITNESS the due execution of this Asset Purchase Agreement as of the day and year first above written. RESPIRONICS, INC., as Buyer By ------------------------------ Title SR VP --------------------------- FIBERSTARS, INC., as Seller By ------------------------------ Title Chief Operating Officer ---------------------------- -12- 10.13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. WITNESS the due execution of this Asset Purchase Agreement as of the day and year first above written. RESPIRONICS, INC., as Buyer By ----------------------------------- Title --------------------------------- FIBERSTARS, INC., as Seller By ----------------------------------- Title --------------------------------- -12- Exhibit A to Asset Purchase Agreement PHOTOTHERAPY SYSTEM/FIBERSTARS TECHNOLOGY/OPTOBLANKET PORTION The Fiber Optic Optoblanket Phototherapy System has been designed for replacement of belitites in the treatment of hyperbilirubinomia (jaundice). It has been developed for the purpose of lowering the serumbilirubin in a newborn child. The optoblanket system utilizes a light to disintegrate the bilirubin so that it can be easily discharged from the baby's body. The optoblanket system consists of two parts: the fiber optic illuminator, which acts as the light source for the system, and the light-emitting fiber optic blanket ("optoblanket"), which spreads the phototherapy light laterally onto the baby's body for the treatment. Optoblanket Portion: The optoblanket is composed of a bundle of fibers whose ends have a polished finish and are encircled together. The phototherapy can be performed by wrapping the optoblanket onto the baby's body directly. The optoblanket is attached to the lightbox. Fiber Optic Illuminator/Fiberstars Technology: Fiberstars manufactures several fiber optic illuminator variations which incorporate Fiberstars patents and/or proprietary technology and are designed specifically for the Phototherapy System. Engineering designs for the accurate light alignment, ventilation and cooling, and filtering for the proper light spectrum have been created for this system. An appropriate light level can thus be generated and efficiently coupled into the fiber bundle. The Phototherapy System includes, but is not limited to, products with the following Specifications: A-1 ILLUSTRATIVE SPECIFICATIONS Illuminator: Size: 12.13" W X 9.57" D X 4.5"H Weight: 14.8 pounds Model: MD-1000 and MD-2000 Fiberoptic Cable: Length: 5ft. from tip to boot Fiberoptic Panel: Overall Pad Size - Standard: 4" X 15" (Excluding the Boot) Illuminated Area - Standard: 3" X 14" Overall Pad Size - Neonatal: 5" X 7" Illuminated Area - Neonatal: (Excluding the Boot) 4" X 6" Optical Filter: Light Bandwidth: 400 to 550 nanometers Infrared (590 - 1100 nm) and Ultraviolet (200-370 nm) is reduced to less than 1% with the help of Dichroic Reflector and Filter. Irradiance Level: Standard Panel - Level I Setting: 10uW/cm2/nm* Standard Panel - Level H Setting: l5uW/cm2/nm* Neonatal Panel - Level I Setting: 25uW/cm2/nm* Neonatal panel - Level II Setting: 35uW/cm2/nm* ** Minimum Average Irradiance level of the illuminated area when the illuminator is operated at 115 V ac. Illuminator Lamp: Lamp Type: 150W 21V Quartz Halogen, Fiberoptic Medical Products Part No. FS-1 10 Lamp Life: 400 hours depending on the Irradiance Level Selector.** * This is an average lamp life theoretically calculated as per the ANSI standards when the illuminator is operated at 115 V ac. Electrical Specification: Operating Voltage: 110-120 V ac Chassis Leakage Current: Less than 50 ?A Wattage: 200 W Ground Impedance: Less than 0.1 Ohm Environmental Operating Temperatures: 15 degrees C to 30 degrees C (59 degrees F to 86 degrees F) Humidity: 0 - 88 more or less 2% Relative Humidity at 32 more or less 2 degrees C Storage Temperature: 0 degrees C to 45 degrees C (32 degrees F to 113 degrees F) Storage Standard: U.L. listed for the U.S. as Medical and Dental Equipment *UL 544) and Health Care Applicant (UL 1431) standards; and, for Canada market as per Electromedical Equipment (C22.2 No: 125) standards. A-2 Illuminator: Model: MD-2000-I Size: 12.13" WX 9.57" DX4.5" H Weight: 14.8 pounds Fiberoptic Panels: Model: EG-2000 Standard Panel Overall Pad Size - Standard: 4"X15" (excluding the boot) Illuminated Area - Standard: 3"X14" Model: EG-2000N (Neonatal Panel) Overall Pad Size - Neonatal: F"X7" (excluding the boot) Illuminated Area - Neonatal: 4"X6" Fiberoptic Cable: For both the panels Length: 5 ft. from tip to boot Optical Filter: Light Bandwidth: 400 to 550 nanometers Infrared (590-1100 nm) and Ultraviolet (200-370 nm) is reduced to less than 1% with the help of Dichroic Reflector and Filter. Irradiance Level: Standard Panel - Level I Setting: 1OgW/cm2/nm* Standard Panel - Level II Setting: 15gW/cm2/nm* Neonatal Panel - Level I Setting: 2SgW/cm2/nm* Neonatal Panel - Level II Setting: 35gW/cm2/nm* *Minimum Average irradiance level of the illuminated area when the illuminator is operated at 100/120/220/240 V-. illuminator Lamps: Lamp Type: 150 W, 2 V Quartz Halogen, Fiberoptic Medical Products Part No. FS- 110 Lamp Life: 400 hours depending on the Irradiance Level Selector.** **This is an average lamp life theoretically calculated as per the ANSI standards when the illuminator is operated as 100/1 20/220/240V-. Electrical Specifications: Rated Voltage/Frequency: 100/120/220/240V-, 50/60 H2 Rated Input: 200 Watts Chassis Leakage Current: Less than 50muA (Meets JEC requirements) Ground Impedance: Less than 0.1 Ohm Mode of Operation: Continuous Fuse Ratings: For 100/120 V-Applications: Use T 2.5A, 250 V fuse For 200/240 V-Applications: Use T 1.25A, 250 V fuse Classification: Protection Class: Class I Protection Type: Type BF A-3 Environmental Conditions: Transport & Storage: 1 Ambient Temperature Range: -40a to +700C 2 Relative Humidity Range, including Condensation: 10% to 100% 3 Atmospheric Pressure Range: 500 hPa to 1060 hPa Operation: 1 Ambient Temperature Range: +150C to +300C 2 Relative Humidity Range: 0 to 88+2% at 32+20C Protection Against Ingress of Water: Ordinary (IPXO) Safety Standards: Product is tested and certified by TUV Product Service Inc. in accordance to: IEC 601-1:1988 Amendment 1 to IEC 601-1:1990 Med GV Standard Features: Dual Lamp Carousel Dual Irradiance Selector Switch Light Emission Shutter Thermal Cut-off Switch Line Interrupt Switch Primary and Secondary Fused Panel Locking Device A-4 Exhibit B to Asset Purchase Agreement BILL OF SALE AND ASSIGNMENT For good and valuable consideration, receipt of which by FIBERSTARS, NC., a California corporation ("Seller"), is hereby acknowledged, and pursuant to the Asset Purchase Agreement dated as of December 30, 1998 (the "Agreement"), between Seller and RESPIRONICS, NC., a Delaware corporation ("Buyer"), Seller hereby grants, assigns and transfers to Buyer, its legal successors and assigns, the Assets, as defined in the Agreement, consisting generally (without limiting or varying the terms of the Agreement) of the Phototherapy System (as defined in the Agreement) and all assets (personal, tangible and intangible) and properties of Seller relating to the Phototherapy System (as more fully defined in the Agreement, the "Assets"), to have and to hold the same unto Buyer, its successors and assigns forever. Seller warrants and represents to Buyer that Seller is the lawful owner of the Assets, free from any claim of ownership or Lien (as defined in the Agreement) of any others; Seller will defend Buyer's title to the Assets against any claims of Liens or ownership whatsoever. Seller agrees to take any and all such further action and execute and deliver any and all such further documents as may be reasonably necessary, in Buyer's reasonable opinion, to vest title to the Assets in Buyer. Dated: December 30, 1998 FIBERSTARS, INC. By: --------------------------------- Title: --------------------------------- B-l Exhibit C to Asset Purchase Agreement ALLOCATION OF PURCHASE PRICE [See attached.] C-1
Form 8594 ??? No. 1545-1021 (??????????) Asset Acquisition Statement ------------------------ Under Section 1060 Department of the Treasury Attachement Internal Revenue Service ??????????? No. 61 - ----------------------------------------------------------------------------------------------------- Name as shown on return Identification number as shown on return RESPIRONICS, INC. 25-1304989 - ----------------------------------------------------------------------------------------------------- Check the box that identifies you [x]Buyer [ ]Seller - ----------------------------------------------------------------------------------------------------- Part I General Information - To be completed by filers. - ----------------------------------------------------------------------------------------------------- 1 Name of other party to the transaction Other party's identification number FIBERSTARS, INC. 94-3021850 - ----------------------------------------------------------------------------------------------------- Address (number, street and room or suite no.) 2883 AVIEW DRIVE - ----------------------------------------------------------------------------------------------------- City or town, state, and ZIP code FREMONT, CA 94538 - ----------------------------------------------------------------------------------------------------- 2 Date of sale 3 Total Sale Price DECEMBER 30, 1998 826,000 - ----------------------------------------------------------------------------------------------------- Part II Assets Transferred - To be completed by all filers of an original statement - ----------------------------------------------------------------------------------------------------- 4 Assets Aggregate Fair Market Value (Actual Amount for Class I) Allocation of Sales Price - ----------------------------------------------------------------------------------------------------- Class I $ $ - ----------------------------------------------------------------------------------------------------- Class II $ $ - ----------------------------------------------------------------------------------------------------- Class III $ $ - ----------------------------------------------------------------------------------------------------- Class IV $ 826,000 $ 826,000 - ----------------------------------------------------------------------------------------------------- Total $ 826,000 $ 826,000 - ------------------------------------------------------------------------------------------------------ 5 Did the buyer and seller provide for an allocation of the sales price in the sales contract or in another written document signed by both parties? .................................... [ ]Yes [ ]No If "Yes," are the aggregate fair market values listed for each of asset Classes I, II, III and IV the amounts agreed upon in your sales contracts or in a separate written document? .... [ ]Yes [ ]No - ------------------------------------------------------------------------------------------------------ 6 In connection with the purchase of the group of assets, did the buyer also purchase a license of a covenant not to compete or enter into a lease agreement, employment contract, management contract or similar arrangement with the seller (or managers, directors, officers or employees of the seller)? ..................................................................... [ ]Yes [ ]No If "Yes," specify (a) the type of agreement, and (b) the maximum amount of consideration (not including interest) paid or to be paid under the agreement. See the instructions for line 6. - ------------------------------------------------------------------------------------------------------ a) COVENANT NOT TO COMPETE - ------------------------------------------------------------------------------------------------------ B) NO SPECIFIED AMOUNT; COVENANT INCLUDED IN SALES CONTRACT - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ For Paperwork Reduction Act Notice, see instructions. Form 8594 (Rev. 1-96) Form 8594 (Rev. 1-96) Page 2 - ------------------------------------------------------------------------------------------------------ Part III Supplemental Statement - To be completed only if amending an original statement of previously filed supplemental statement because of an increase or decrease in consideration. - ------------------------------------------------------------------------------------------------------ 7 Assets Allocation of Sales Price Income or (Decrease) Redetermined Allocation of Sales Price as Previously Reported - ------------------------------------------------------------------------------------------------------ Class I $ $ $ - ------------------------------------------------------------------------------------------------------ Class II $ $ $ - ------------------------------------------------------------------------------------------------------ Class III $ $ $ - ------------------------------------------------------------------------------------------------------ Class IV $ $ $ - ------------------------------------------------------------------------------------------------------ Total $ $ $ - ------------------------------------------------------------------------------------------------------ 8 Reason(s) for increase or decrease. Attach additional sheets if more space is needed. - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ 9 Tax year and tax return form number with which the original Form 8594 and any supplemental statements were filed. - ------------------------------------------------------------------------------------------------------
Exhibit D to Asset Purchase Agreement FIBER OPTIC ILLUMINATOR BY PART NUMBER MD-1000 MD-2000 DM-2000-I Plus parts therto for waranty replacements D-1 EX-10.36 5 MULTI-TENANT INDUSTRIAL TRIPLE NET LEASE MULTI-TENANT INDUSTRIAL TRIPLE NET LEASE ----------------------------------------
Effective Date: November __, 1998 (The date set forth below Landlord's signature.) BASIC LEASE INFORMATION ----------------------- Landlord: CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation Landlord's Address 201 Mission Street For Notice: San Francisco, California 94105 Attn: Asset Management Telephone: (415) 974-4500 Fax: (415) 974-4687 Landlord's Address File #1918 For Payment of Rent: P.O. Box 61000 San Francisco, California 94161-1918 Tenant: FIBERSTARS, INC., a California corporation Tenant's Address 2883 Bayview Drive For Notice: Fremont, California 94538 Attn: Chief Financial Officer Telephone: (510) 490-0719 Fax: (510) 490-0947 Project: Pacific Commons, Fremont, California, a master planned development approved by the City of Fremont with a maximum development potential of approximately 8.3 million square feet Building: Building 6 containing approximately 60,000 rentable square feet Premises: Approximately 60,000 rentable square feet as shown in Exhibit A. --------- Premises Address: Street: [To be determined by the Building Department of the City of Fremont] City and State: Fremont, California 94538 Tax Parcel: [To be determined upon final subdivision] Term: Seven (7) years Estimated Commencement July 1, 1999 Date: Base Rent Per Month: Monthly Base Rent/Rentable Months of Term Monthly Base Rent Square Foot -------------- ----------------- ----------- 1-12 $49,800.00 $0.83 $0.85 13-24 $51,000.00 25-36 $52,800.00 $0.88 37-48 $55,800.00 $0.93 49-60 $58,800.00 $0.98 61-72 $61,800.00 $1.03 73-84 $64,800.00 $1.08 Tenant's Share of Building 100% Operating Expenses: Tenant's Share of Project A fraction, the numerator of which is the number of acres contained in the Operating Expenses legal parcel on which the Building is situated and the denominator of which is the number of developed acres in the Project as of any Adjustment date (as defined in Section 7.2 of the Lease) Security Deposit: $64,800.00 Broker: Landlord's Broker: Colliers Parrish International, Inc. Tenant's Broker: Colliers Parrish International, Inc. Lease Year: Shall refer to each three hundred sixty-five (365) day period during the Term commencing on the Commencement Date and on each anniversary thereof. Permitted Uses: Assembly of fiber-optic lighting systems, related storage and distribution (including storage and distribution of similar items, subject to the provisions of Section 11 of this Lease), and general office uses; no other uses shall be permitted without the prior written consent of Landlord Parking Spaces: Tenant shall have the right to use one hundred sixty-eight (168) parking spaces within the Project. Options: One (1) five-year option to renew. ADDENDUM EXHIBITS -ii- A Premises B Work Letter C Commencement Date Memorandum D Insurance Certificate E Prohibited Uses F Rules and Regulations G Estoppel Certificate H Nondisturbance Agreement The Basic Lease Information set forth above and the Addendum and Exhibits attached hereto are incorporated into and made a part of the following Lease. Each reference in this Lease to any of the Basic Lease Information shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Basic Lease Information and the provisions of the Lease, the latter shall control. LANDLORD (_______) AND TENANT (_______) AGREE. initial initial
-iii- Table of Contents
Page ---- 1. PREMISES.................................................................................................1 1.1 Premises........................................................................................1 1.2 Common Area.....................................................................................1 1.3 Reserved Rights.................................................................................1 2. TERM.....................................................................................................2 2.1 Commencement Date...............................................................................2 2.2 Possession......................................................................................2 3. RENT.....................................................................................................2 3.1 Rent............................................................................................2 3.2 Late Charge and Interest........................................................................3 3.3 Security Deposit................................................................................3 4. UTILITIES................................................................................................4 5. TAXES....................................................................................................4 5.1 Real Property Taxes.............................................................................4 5.2 Definition of Real Property Taxes...............................................................4 5.3 Personal Property Taxes.........................................................................5 6. OPERATING EXPENSES.......................................................................................5 6.1 Operating Expenses..............................................................................5 6.2 Definition of Operating Expenses................................................................5 7. ESTIMATED EXPENSES.......................................................................................7 7.1 Payment.........................................................................................7 7.2 Adjustment......................................................................................8 7.3 Tenant's Audit Rights...........................................................................8 8. INSURANCE................................................................................................9 8.1 Landlord........................................................................................9 8.2 Tenant..........................................................................................9 8.3 General........................................................................................10 8.4 Indemnity......................................................................................11 8.5 Exemption of Landlord from Liability...........................................................11 9. REPAIRS AND MAINTENANCE.................................................................................12 9.1 Tenant.........................................................................................12 9.2 Landlord.......................................................................................13 10. ALTERATIONS.............................................................................................13 -iv- 10.1 Trade Fixtures; Alterations....................................................................13 10.2 Damage; Removal................................................................................14 10.3 Liens..........................................................................................14 10.4 Standard of Work...............................................................................14 11. USE.....................................................................................................14 12. ENVIRONMENTAL MATTERS...................................................................................15 12.1 Hazardous Materials............................................................................15 12.2 Indemnification................................................................................16 13. DAMAGE AND DESTRUCTION..................................................................................17 13.1 Casualty.......................................................................................17 13.2 Tenant's Fault.................................................................................19 13.3 Uninsured Casualty.............................................................................19 13.4 Waiver.........................................................................................19 13.5 Force Majeure..................................................................................20 14. EMINENT DOMAIN..........................................................................................20 14.1 Total Condemnation.............................................................................20 14.2 Partial Condemnation...........................................................................20 14.3 Award..........................................................................................20 14.4 Temporary Condemnation.........................................................................21 15. DEFAULT.................................................................................................21 15.1 Events of Defaults.............................................................................21 15.2 Remedies.......................................................................................22 15.3 Cumulative.....................................................................................23 16. ASSIGNMENT AND SUBLETTING...............................................................................25 17. ESTOPPEL, ATTORNMENT AND SUBORDINATION..................................................................27 17.1 Estoppel.......................................................................................27 17.2 Subordination..................................................................................27 17.3 Attornment.....................................................................................27 18. MISCELLANEOUS...........................................................................................28 18.1 General........................................................................................28 18.2 Signs ........................................................................................29 18.3 Waiver.........................................................................................29 18.4 Financial Statements...........................................................................30 18.5 Limitation of Liability........................................................................30 18.6 Notices........................................................................................30 18.7 Brokerage Commission...........................................................................30 18.8 Authorization..................................................................................31 18.9 Holding Over...................................................................................31 -v- 18.10 Joint and Several..............................................................................31 18.11 Covenants and Conditions.......................................................................31 18.12 Addenda........................................................................................31 18.13 Parking........................................................................................32
-vi- 1. PREMISES. 1.1 Premises. Landlord hereby leases to Tenant the Premises as shown on Exhibit A attached hereto, but excluding the Common Area (defined below) and any other portion of the Project. Tenant has determined that the Premises are acceptable for Tenant's use and Tenant acknowledges that, except as set forth in the Work Letter, neither Landlord nor any broker or agent has made any representations or warranties in connection with the physical condition of the Premises or their fitness for Tenant's use upon which Tenant has relied directly or indirectly for any purpose. By taking possession of the Premises, Tenant accepts the Premises "AS-IS" and waives all claims against Landlord of defect in the Premises, except as set forth in the Work Letter. 1.2 Common Area. Tenant may, subject to rules made by Landlord, use the following areas ("Common Area") in common with Landlord and other tenants of the Project: refuse facilities, landscaped areas, driveways necessary for access to the Premises, parking spaces and other common facilities designated by Landlord from time to time for the common use of all tenants of the Project. Except to the extent such actions materially adversely affect Tenant's express rights under this Lease, Landlord shall have the right, in Landlord's sole discretion, from time to time (i) to make changes to the Common Area, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscape areas, and walkways; (ii) to close temporarily any of the Common Area for maintenance purposes so long as reasonable access to the Premises remains available; (iii) to designate other land outside the boundaries of the Project to be part of the Common Area; (iv) to install, use, maintain, repair, alter, relocate or replace any Common Area or to add additional buildings and improvements to the Common Area; (v) to use the Common Area while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and (vi) to do and perform such other acts and make such other changes in, to or with respect to the Common Area and the Project as Landlord may, in the exercise of sound business judgment, deem to be appropriate or prudent. 1.3 Reserved Rights. Landlord reserves the right to enter the Premises for any reason upon reasonable notice to Tenant (except in case of an emergency) and/or to undertake the following all without abatement of rent or liability to Tenant: inspect the Premises and/or the performance by Tenant of the terms and conditions hereof; make such alterations, repairs, improvements or additions to the Premises as required hereunder; change boundary lines of the Common Areas; install, use, maintain, repair, alter, relocate or replace any pipes, ducts, conduits, wires, equipment and other facilities in the Building; grant easements on the Project, dedicate for public use portions thereof and record covenants, conditions and restrictions ("CC&Rs") affecting the Project and/or amendments to existing CC&Rs which do not unreasonably interfere with Tenant's use of the Premises or impose additional monetary or material nonmonetary obligations on Tenant; change the name of the Project; affix reasonable signs and displays; and, during the last nine (9) months of the Term, show the Premises to prospective tenants. -1- 2. TERM. 2.1 Commencement Date. The Term of the Lease shall commence ("Commencement Date") on the first day following the date on which the Premises are Substantially Complete (as hereinafter defined) and Landlord has delivered possession of the Premises to Tenant (provided, however, such date shall not be earlier than June 1, 1999), and the Lease shall continue in full force and effect for the period of time specified as the Term or until this Lease is terminated as otherwise provided herein. The Premises shall be deemed to be "Substantially Complete" on the earliest of the date on which: (1) both of the following are satisfied: (x) Landlord files or causes to be filed with the City in which the Premises are located (if required) and delivers to Tenant an architect's notice of substantial completion, or similar written notice that the Premises are substantially complete, and (y) a certificate of occupancy (or a reasonably substantial equivalent such as a signoff from a building inspector or a temporary certificate of occupancy) is issued for the Premises or (2) Tenant commences business operations in the Premises. Landlord shall arrange for the construction of certain Tenant Improvements (as defined in the Work Letter), if any, in accordance with and subject to the terms of the Work Letter attached hereto as Exhibit B. Tenant shall, upon demand after delivery of the Premises to Tenant, execute and deliver to Landlord a Commencement Date Memorandum in the form attached hereto as Exhibit C, which form shall also be executed by Landlord, acknowledging (i) the Commencement Date, (ii) the final square footage of the Premises and (iii) Tenant's acceptance of the Premises. Subject to the provisions of Paragraph 12 of the Work Letter, if the Premises are not Substantially Complete on the Estimated Commencement Date as extended by Force Majeure events and Tenant Delays (as defined in the Lease or Work Letter), this Lease shall remain in effect, Landlord shall not be subject to any liability, and the Commencement Date shall be delayed until the date the Premises are Substantially Complete. 2.2 Possession. Tenant's possession of the Premises during the period of time, if any, from the date on which Landlord tenders possession of the Premises to Tenant in a Substantially Completed condition (the "Possession Date") to the Commencement Date, shall be subject to all the provisions of this Lease and shall not advance the expiration date. Rent shall be paid for such period at the rate stated in the Basic Lease Information, prorated on the basis of a thirty (30) day month, and shall be due and payable to Landlord on or before the Commencement Date. Tenant shall upon demand acknowledge in writing the Possession Date in the form attached hereto as Exhibit C. 3. RENT. 3.1 Rent. Prior to the Commencement Date, Landlord will cause its architect to measure and certify in writing to Landlord the rentable square footage of the Premises, following which time the Base Rent, Tenant's Share and other figures based upon the rentable square footage of the Premises shall be adjusted to reflect the actual rentable square footage of the Premises. Except in the case of manifest error, the certification from Landlord's architect of the rentable square footage of the Premises shall be binding upon Landlord and Tenant. Tenant shall pay to Landlord, at Landlord's Address for Payment of Rent designated in the Basic Lease Information, or at such other address as Landlord may from time to time designate in writing to -2- Tenant for the payment of Rent, the Base Rent, without notice, demand, offset or deduction, in advance, on the first day of each calendar month. Landlord shall have no obligation to notify Tenant of any increase in Rent and Tenant's obligation to pay all Rent (and any increases) when due shall not be modified or altered by such lack of notice from Landlord. Acceptance of a payment of Rent which is less than the amount then due shall not be a waiver of Landlord's rights to the balance of such Rent, regardless of Landlord's endorsement of or deposit of any check so stating. It is intended that this Lease be a "triple net lease," and that the Rent to be paid hereunder by Tenant will be received by Landlord without any deduction or offset whatsoever by Tenant, foreseeable or unforeseeable. Except as expressly provided to the contrary in this Lease, Landlord shall not be required to make any expenditure, incur any obligation, or incur any liability of any kind whatsoever in connection with this Lease or the ownership, construction, maintenance, operation or repair of the Premises or the Project. Upon the execution of this Lease, Tenant shall pay to Landlord the first month's Base Rent. If the Term commences (or ends) on a date other than the first (or last) day of a month, Base Rent shall be prorated on a per diem basis with respect to the portion of the first month and/or last month within the Term. All sums other than Base Rent which Tenant is obligated to pay under this Lease shall be deemed to be additional rent due hereunder, whether or not such sums are designated "additional rent" and shall be due and payable to Landlord commencing on the Possession Date. The term "Rent" means the Base Rent and all additional rent payable hereunder. 3.2 Late Charge and Interest. The late payment of any Rent will cause Landlord to incur additional costs, including administration and collection costs and processing and accounting expenses and increased debt service ("Delinquency Costs"). If Landlord has not received any installment of Rent within five (5) days after written notice that such amount is due, Tenant shall pay a late charge of five percent (5%) of the delinquent amount, which is agreed to represent a reasonable estimate of the Delinquency Costs incurred by Landlord. In addition, all such delinquent amounts shall bear interest from the date such amount was due until paid in full at a rate per annum ("Applicable Interest Rate") equal to the lesser of (a) the maximum interest rate permitted by law or (b) five percent (5%) above the rate publicly announced by Bank of America, N.A. (or if Bank of America, N.A. ceases to exist, the largest bank then headquartered in the State of California) ("Bank") as its "Reference Rate." If the use of the announced Reference Rate is discontinued by the Bank, then the term Reference Rate shall mean the announced rate charged by the Bank which is, from time to time, substituted for the Reference Rate. Landlord and Tenant recognize that the damage which Landlord shall suffer as a result of Tenant's failure to pay such amounts is difficult to ascertain and said late charge and interest are the best estimate of the damage which Landlord shall suffer in the event of late payment. If a late charge becomes payable for any three (3) installments of Rent within any twelve (12) month period, then the Rent shall automatically become due and payable quarterly in advance. 3.3 Security Deposit. Upon the execution of this Lease, Tenant shall pay to Landlord the Security Deposit. The Security Deposit shall secure the full and faithful performance of each provision of this Lease to be performed by Tenant. Landlord shall not be required to pay interest on the Security Deposit or to keep the Security Deposit separate from Landlord's own funds. If Tenant fails to perform fully and timely all or any of Tenant's covenants and obligations hereunder, Landlord may, but without obligation, apply all or any portion of the Security Deposit -3- toward fulfillment of Tenant's unperformed covenants and/or obligations. If Landlord does so apply any portion of the Security Deposit, Tenant shall immediately pay Landlord sufficient cash to restore the Security Deposit to the amount of the then current Base Rent per month. Upon any increase in Base Rent during the Extension Term (as defined in the Addendum), if any, Landlord may require the Security Deposit to be increased by the amount of the increase in Base Rent per month. After Tenant vacates the Premises, upon the expiration or sooner termination of this Lease, if Tenant is not then in default, Landlord shall return to Tenant any unapplied balance of the Security Deposit. Should the Permitted Use be amended to accommodate a change in the business of Tenant or to accommodate a subtenant or assignee, Landlord shall have the right to increase the Security Deposit to the extent necessary, in Landlord's reasonable judgment, to account for any increased risk to the Premises or increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Tenant occurs during this Lease and following such change the financial condition of Tenant is, in Landlord's reasonable judgment, reduced, Tenant shall deposit such additional monies with Landlord as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. 4. UTILITIES. Tenant shall pay all charges for heat, water, gas, electricity, telephone and any other utilities used on or provided to the Premises. Landlord shall not be liable to Tenant for interruption in or curtailment of any utility service, nor shall any such interruption or curtailment constitute constructive eviction or grounds for rental abatement. In the event the Premises is not separately metered, Tenant shall have the option, subject to Landlord's prior written consent and the terms of this Lease, to cause the Premises to be separately metered at Tenant's cost and expense. If Tenant does not elect to cause the Premises to be separately metered, Tenant shall pay a reasonable proration of utilities, as determined by Landlord. 5. TAXES. 5.1 Real Property Taxes. Tenant shall pay to Landlord Tenant's Share of the Real Property Taxes in each calendar year (prorated on a per diem basis with respect to any partial calendar year during the Term); provided, however, Landlord may, at its election, require that Tenant pay any increase in the assessed value of the Project based upon the value of the Tenant Improvements (as defined in the Work Letter) relative to the value of the other improvements on or to the other buildings in the Project, as reasonably determined by Landlord. Upon Tenant's request, Landlord shall endeavor to provide Tenant with a breakdown of Landlord's determination of Tenant's increased share of Real Property Taxes resulting from the Tenant Improvements. 5.2 Definition of Real Property Taxes. "Real Property Taxes" shall be the sum of the following: all real property taxes, possessory-interest taxes, business or license taxes or fees, present or future Mello Roos assessments, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit and traffic charges, housing fund assessments, open space charges, childcare fees, school, sewer and parking fees or any other assessments, levies, fees, exactions or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen (including fees "in-lieu" of any such tax or assessment) which are assessed, -4- levied, charged, conferred or imposed by any public authority upon the Project (or any real property comprising any portion thereof) or its operations, together with all taxes, assessments or other fees imposed by any public authority upon or measured by any Rent or other charges payable hereunder, including any gross receipts tax or excise tax levied by any governmental authority with respect to receipt of rental income, or upon, with respect to or by reason of the development, possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, or documentary transfer taxes upon this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises, together with any tax imposed in substitution, partially or totally, of any tax previously included within the aforesaid definition or any additional tax the nature of which was previously included within the aforesaid definition, together with any and all costs and expenses (including, without limitation, attorneys, administrative and expert witness fees and costs) of challenging any of the foregoing or seeking the reduction in or abatement, redemption or return of any of the foregoing, but only to the extent of any such reduction, abatement, redemption or return. All references to Real Property Taxes during a particular year shall be deemed to refer to taxes accrued during such year, including supplemental tax bills regardless of when they are actually assessed and without regard to when such taxes are payable. The obligation of Tenant to pay for supplemental taxes shall survive the expiration or early termination of this Lease. Nothing contained in this Lease shall require Tenant to pay any franchise, corporate, estate or inheritance tax of Landlord, any income, profits or revenue tax or charge upon the net income of Landlord, any documentary transfer taxes except as expressly set forth above, or any penalties on any Real Property Taxes, unless caused by Tenant's failure to timely pay to Landlord Tenant's Share of the Real Property Taxes pursuant to the terms of this Lease. 5.3 Personal Property Taxes. Prior to delinquency, Tenant shall pay all taxes and assessments levied upon trade fixtures, alterations, additions, improvements, inventories and other personal property located and/or installed on the Premises by Tenant; and Tenant shall provide Landlord copies of receipts for payment of all such taxes and assessments. To the extent any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord. 6. OPERATING EXPENSES. 6.1 Operating Expenses. Tenant shall pay to Landlord Tenant's Share of the Building Operating Expenses and Tenant's Share of Project Operating Expenses in each calendar year (prorated on a per diem basis with respect to any partial calendar year during the Term). 6.2 Definition of Operating Expenses. "Operating Expenses" shall mean collectively the "Building Operating Expenses" and the "Project Operating Expenses". 6.2.1 Building Operating Expenses. "Building Operating Expenses" shall include all reasonable and necessary expenses incurred by Landlord in the ownership, operation, maintenance, repair and management of the Building and the legal parcel on which the Building is situated, including, but not limited to, (a) non-structural repairs to and maintenance of the roof (and roof membrane), skylights and exterior walls of the Building (including painting); -5- (b) insurance deductibles (which, with respect to any earthquake insurance which Landlord may carry, shall not exceed $10,000 with respect to any one insured event) and the costs relating to the insurance maintained by Landlord with respect to the Building, including, without limitation, Landlord's cost of any self insurance deductible or retention; (c) maintenance contracts for heating, ventilation and air-conditioning (HVAC) systems and elevators, if any; (d) maintenance, monitoring and operation of the fire/life safety and sprinkler system; (e) capital improvements made to or capital assets acquired for the Building after the Commencement Date that are intended to reduce Building Operating Expenses or are reasonably necessary for the health and safety of the occupants of the Building or are required under any governmental law or regulation, which capital costs, or an allocable portion thereof, shall be amortized over the anticipated useful life of the applicable improvement or asset as reasonably determined by Landlord, together with interest on the unamortized balance at the rate as may have been paid by Landlord on funds borrowed for the purpose of constructing or acquiring such capital improvements or assets; (f) repair, maintenance, utility costs and landscaping of the legal parcel on which the Building is situated, including, but not limited to, any and all costs of maintenance, repair and replacement of all parking areas (including bumpers, sweeping, striping and slurry coating), loading and unloading areas, trash areas, common driveways, sidewalks, outdoor lighting, signs, directories, walkways, parkways, landscaping, irrigation systems, fences and gates and other costs which are allocable to the legal parcel on which the Building is situated (provided, however, that if at any time during the Term of this Lease, one or more buildings in addition to the Building are located on such legal parcel, Tenant shall be responsible for a pro rata share of the costs described in this clause (f), which pro rata share shall be equal to a fraction, the numerator of which is the number of rentable square feet contained in the Building and the denominator of which is the number of rentable square feet contained in all of the buildings (including the Building) situated on such legal parcel); and (g) any other costs incurred by Landlord related to the Building and not related to the Project as a whole. Building Operating Expenses shall also include an administrative fee to Landlord for accounting and project management services relating to the Building in an amount equal to two percent (2%) of the sum of the gross rents received by Landlord from all of the tenants in the Building (for purposes of calculating such administrative fee the Building shall be deemed to be one hundred percent (100%) leased to tenants which are paying gross rent at the same rate as Tenant). Building Operating Expenses shall not include (i) replacement of or structural repairs to the roof or the exterior walls or any other structural repairs to the Building; (ii) repairs to the extent covered by insurance proceeds, or paid by Tenant or other third parties; (iii) alterations solely attributable to tenants of the Project other than Tenant; (iv) costs of abatement or remediation of Hazardous Materials (as defined in Section 12.1 below) brought upon, stored, used or disposed of in or about the Building by Landlord or by a particular tenant or occupant of the Project other than Tenant, its agents, employees, contractors, invitees, sublessees or assigns; (v) debt service payments related to any indebtedness encumbering the Building; (vi) costs of services furnished to some tenants of the Building which are not furnished to Tenant; (vii) legal fees, brokerage commissions or advertising costs associated with leasing the Building; (viii) legal fees associated with disputes with other tenants in the Building; (ix) Landlord's general overhead expenses not related to the Building; or (x) costs of capital improvements or capital assets except as expressly set forth in Section 6.2.1(e) above. -6- 6.2.2 Project Operating Expenses. "Project Operating Expenses" shall include all reasonable and necessary expenses incurred by Landlord in the ownership, operation, maintenance, repair and management of the Project and/or the Common Area, including, but not limited to, (a) repair, maintenance, utility costs and landscaping of the Common Area, including, but not limited to, any and all costs of maintenance, repair and replacement of all parking areas (including bumpers, sweeping, striping and slurry coating), loading and unloading areas, trash areas, common driveways, sidewalks, outdoor lighting, signs, directories, walkways, parkways, landscaping, irrigation systems, fences and gates and other costs which are allocable to the real property of which the Premises are a part; (b) insurance deductibles (which, with respect to any earthquake insurance which Landlord may carry, shall not exceed $10,000 with respect to any one insured event) and the costs relating to the insurance maintained by Landlord with respect to the Project including, without limitation, Landlord's cost of any self insurance deductible or retention; (c) trash collection, security services and the costs of any environmental inspections; (d) capital improvements made to or capital assets acquired for the Project after the Commencement Date that are intended to reduce Project Operating Expenses or are reasonably necessary for the health and safety of the occupants of the Project or are required under any governmental law or regulation, which capital costs, or an allocable portion thereof, shall be amortized over the anticipated useful life of the applicable improvement or asset as reasonably determined by Landlord, together with interest on the unamortized balance at the rate as may have been paid by Landlord on funds borrowed for the purpose of constructing or acquiring such capital improvements or assets; (e) Real Property Taxes; and (f) any other costs incurred by Landlord related to the Project as a whole and not related solely to the Tenant or the Building. Project Operating Expenses shall not include (i) costs of abatement or remediation of Hazardous Materials (as defined in Section 12.1 below) brought upon, stored, used or disposed of in or about the Project by Landlord; (ii) debt service payments related to any indebtedness encumbering the Project; (iii) costs of services furnished to some tenants of the Project which are not furnished to Tenant; (iv) legal fees, brokerage commissions or advertising costs associated with leasing the Project; (v) legal fees associated with disputes with other tenants in the Project; (vi) Landlord's general overhead expenses not related to the Project; or (vii) costs of capital improvements or capital assets except as expressly set forth in Section 6.2.2(d) above. In no event will Landlord or its property manager be required to keep separate accounting records for the components of the Operating Expenses or to create any ledgers or schedules not already in existence. 7. ESTIMATED EXPENSES. 7.1 Payment. "Estimated Expenses" for any particular year shall mean Landlord's estimate of Operating Expenses and Real Property Taxes for a calendar year. Tenant shall pay Tenant's Share of the Estimated Expenses with installments of Base Rent in monthly installments of one-twelfth (1/12th) thereof on the first day of each calendar month during such year. If at any time Landlord determines that Operating Expenses and Real Property Taxes are projected to vary from the then Estimated Expenses, Landlord may, by notice to Tenant, revise such Estimated Expenses, and Tenant's monthly installments for the remainder of such year shall be adjusted so that by the end of such calendar year Tenant has paid to Landlord Tenant's Share of the revised Estimated Expenses for such year. -7- 7.2 Adjustment. "Operating Expenses and Real Property Taxes Adjustment" (or "Adjustment") shall mean the difference between Tenant's Share of Estimated Expenses and Tenant's Share of Operating Expenses and Real Property Taxes for any calendar year. After the end of each calendar year, Landlord shall deliver to Tenant a statement of Tenant's Share of Operating Expenses and Real Property Taxes for such calendar year, itemized by major category of Operating Expenses and accompanied by a computation of the Adjustment. If Tenant's payments are less than Tenant's Share, then Tenant shall pay the difference within twenty (20) days after receipt of such statement. Tenant's obligation to pay such amount shall survive the termination of this Lease. If Tenant's payments exceed Tenant's Share, then (provided that Tenant is not in default), Landlord shall credit such excess amount to future installments of Tenant's Share for the next calendar year. If Tenant is in default, Landlord may, but shall not be required to, credit such amount to Rent arrearages. 7.3 Tenant's Audit Rights. Tenant's rights to audit Landlord's books and records to verify Operating Expenses are set forth as follows: 7.3.1 Audit Rights. In the event of any dispute as to the amount of Tenant's Share of Operating Expenses (whether such dispute concerns payment of Building Operating Expenses or Project Operating Expenses), Tenant or a qualified representative of Tenant will have the right, by prior written notice ("Audit Notice") given within ninety (90) days ("Audit Period") following receipt of Landlord's annual reconciliation of Operating Expenses and at reasonable times during normal business hours, to receive a copy of Landlord's reasonable "backup" for Operating Expenses and photocopy Landlord's backup with respect to Operating Expenses relative to the preceding year for the Common Area and the Building at the offices of Landlord's property manager ("Audit"). In no event will Landlord or its property manager be required to (i) photocopy any accounting records or other items or contracts, (ii) create any ledgers or schedules not already in existence, (iii) incur any costs or expenses relative to such inspection, or (iv) perform any other tasks other than making available such accounting and other financial records as are described in this paragraph or as are reasonably necessary to substantiate Tenant's Share of Operating Expenses. Landlord agrees to cooperate with such Audit. Tenant must pay Tenant's Share of Building Operating Expenses and Project Operating Expenses when due pursuant to the terms of this Lease and may not withhold payment of Operating Expenses or any other rent pending results of the audit or during a dispute regarding Operating Expenses. The audit must be completed within thirty (30) days of the date of Tenant's Audit Notice and the results of such audit shall be delivered to Landlord within one hundred twenty (120) days after the date of Tenant's Audit Notice. If Tenant does not deliver its Audit Notice within the Audit Period, then such annual reconciliation will be conclusively binding on Tenant in the absence of fraud. 7.3.2 Audit Results. If such audit or review correctly reveals that Landlord has overcharged Tenant, and Tenant has overpaid Landlord, then within thirty (30) days after the results of such audit are made available to Landlord, Landlord agrees to reimburse Tenant the amount of such -8- overcharge or overpayment plus interest at the Applicable Interest Rate. If the audit reveals that Tenant was undercharged, then within thirty (30) days after the results of the audit are made available to Tenant, Tenant agrees to reimburse Landlord the amount of such undercharge. Tenant agrees to pay the cost of such audit. Tenant agrees to keep the results of the audit confidential and will cause its agents, employees and contractors to keep such results confidential, except as required by law. 8. INSURANCE. 8.1 Landlord. Landlord shall maintain insurance through individual or blanket policies insuring the Building against fire and extended coverage (including, if Landlord elects, "all risk" coverage, earthquake/volcanic action, flood and/or surface water insurance) for the full replacement cost of the Building, with deductibles and the form and endorsements of such coverage as selected by Landlord, together with rental abatement insurance against loss of Rent in an amount equal to the amount of Rent for a period of at least twelve (12) months commencing on the date of loss. Landlord may also carry such other insurance as Landlord may deem prudent or advisable, including, without limitation, liability insurance in such amounts and on such terms as Landlord shall determine. Tenant shall pay to Landlord, as a portion of the Operating Expenses, the costs of the insurance coverages described herein, including, without limitation, Landlord's cost of any self-insurance deductible or retention. 8.2 Tenant. Tenant shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 8.2.1 Commercial General Liability Insurance (Occurrence Form). A policy of commercial general liability insurance (occurrence form) having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence and Two Million Dollars ($2,000,000) aggregate per location if Tenant has multiple locations, providing coverage for, among other things, blanket contractual liability, premises, products/completed operations, with an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion endorsement" for damage caused by heat, smoke or fumes from a hostile fire, personal and advertising injury coverage, with deletion of (a) the exclusion for operations within fifty (50) feet of a railroad track (railroad protective liability), if applicable, and (b) the exclusion for explosion, collapse or underground hazard, if applicable, and, if necessary, Tenant shall provide for restoration of the aggregate limit and provided that the policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Tenant's indemnity obligations under this Lease; 8.2.2 [Intentionally Omitted.] 8.2.3 Workers' Compensation and Employer's Liability Insurance. Workers' compensation insurance having limits not less than those required by state statute and federal statute, if applicable, and covering all persons employed by Tenant in the conduct of its operations on the Premises (including the all states endorsement and, if applicable, the volunteers endorsement), together with employer's liability insurance coverage in the amount of at least One Million Dollars ($1,000,000); and -9- 8.2.4 Property Insurance. "All risk" property insurance including boiler and machinery comprehensive form, if applicable, covering damage to or loss of any of Tenant's personal property, fixtures, equipment and alterations, including electronic data processing equipment (collectively "Tenant's Property") (and coverage for the full replacement cost thereof including business interruption of Tenant), together with, if the property of Tenant's invitees is to be kept in the Premises, warehouser's legal liability or bailee customers insurance for the full replacement cost of the property belonging to invitees and located in the Premises. 8.2.5 Business Interruption. Tenant shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Tenant or attributable to prevention of access to the Premises as a result of such perils. 8.3 General. 8.3.1 Insurance Companies. Insurance required to be maintained by Tenant shall be written by companies licensed to do business in the state in which the Premises are located and having a "General Policyholders Rating" of at least "A - VIII" (or such higher rating as may be required by a lender having a lien on the Premises) as set forth in the most current issue of "Best's Insurance Guide." 8.3.2 Certificates of Insurance. Tenant shall deliver to Landlord certificates of insurance for all insurance required to be maintained by Tenant in the form of Exhibit D, attached hereto (or in a form acceptable to Landlord in its sole discretion), no later than seven (7) days prior to the date of possession of the Premises. Tenant shall, at least ten (10) days prior to expiration of the policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to modification except after sixty (60) days prior written notice to the parties named as additional insureds in this Lease (except in the case of cancellation for nonpayment of premium in which case cancellation shall not take effect until at least ten (10) days' notice has been given to Landlord). If Tenant fails to maintain any insurance required to be maintained by Tenant in this Lease, Tenant shall be liable for all losses and cost resulting from said failure. 8.3.3 Additional Insureds. Landlord, Landlord's lender, if any, and any property management company of Landlord for the Premises shall be named as additional insureds on a form approved by Landlord under all of the policies required by Section 8.2.1. The policies required under Section 8.2.1 shall provide for severability of interest. 8.3.4 Primary Coverage. All insurance to be maintained by Tenant shall, except for workers' compensation and employer's liability insurance, be primary, without right of contribution from insurance of Landlord. Any umbrella liability policy or excess liability policy (which shall be in "following form") shall provide that if the underlying aggregate is exhausted, the excess coverage will drop down as primary insurance. The limits of insurance maintained by Tenant shall not limit Tenant's liability under this Lease. -10- 8.3.5 Waiver of Subrogation. The parties each waive any right to recover against the other party for claims for property damages whether or not such claims are covered by the insurance required to be carried under Section 8.1 or 8.2.4 above. This provision is intended to waive fully, and for the benefit of the non-waiving party, any rights and/or claims which might give rise to a right of subrogation in favor of any insurance carrier. The coverage obtained by each party under the property insurance requirements of Section 8.1 or 8.2.4 shall include, without limitation, a waiver of subrogation endorsement attached to the certificate of insurance for the property of the waiving party. 8.3.6 Notification of Incidents. Tenant shall notify Landlord as soon as reasonably practicable, but in any event within forty-eight (48) hours after Tenant's knowledge of the occurrence of any accidents or incidents in the Premises, the Building, Common Areas or the Project which could give rise to a claim under any of the insurance policies required under this Section 8. 8.4 Indemnity. Tenant shall indemnify, protect, defend (by counsel reasonably acceptable to Landlord) and hold harmless Landlord and its partners, directors, officers, employees, shareholders, lenders, agents, contractors and each of their successors and assigns from and against any and all claims, judgments, causes of action, damages, penalties, costs, liabilities, and expenses, including all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon (collectively, "Liabilities"), arising at any time during or after the Term to the extent caused by or resulting from (i) any default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or (ii) Tenant's use of the Premises, the conduct of Tenant's business or any activity, work or things done, permitted or suffered by Tenant in or about the Premises, the Building, the Common Area or other portions of the Project, except for claims caused solely by Landlord's gross negligence or willful misconduct (including, without limitation, Landlord's breach of this Lease); provided, however, Tenant's obligation to indemnify Landlord hereunder for Liabilities resulting from and to the extent of Landlord's negligence shall be limited to the amount covered under any insurance policy required to be maintained by Tenant under this Lease (or the amount that would have been covered under such insurance policy if Tenant had maintained the policies of insurance required to be maintained by Tenant under this Lease). The obligations of Tenant under this Section 8.4 shall survive the termination of this Lease with respect to any claims or liability arising prior to such termination. 8.5 Exemption of Landlord from Liability. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property including, but not limited to, Tenant's fixtures, equipment, furniture and alterations or injury to persons in, upon or about the Premises, the Building, the Common Area or other portions of the Project arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except to the extent such claims are caused by Landlord's gross negligence or willful misconduct (including, without limitation, Landlord's willful breach of this Lease). Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the property of Tenant, or injury to or death of Tenant, Tenant's employees, invitees, customers, agents or contractors or any other person in or about the Premises, the Building, the -11- Common Area or the Project, whether such damage or injury is caused by fire, steam, electricity, gas, water or rain, or from the breakage, leakage or other defects of sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises, upon other portions of the Building or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant, except to the extent caused by Landlord's gross negligence or willful misconduct (including, without limitation, Landlord's willful breach of this Lease). Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Building or the Project or Landlord's failure to enforce the terms of any agreements with parties other than Tenant. It is expressly understood and agreed that Tenant's waivers under this section shall apply to all costs, liabilities, damages, deaths and injuries caused by Landlord's negligence (other than its gross negligence). 9. REPAIRS AND MAINTENANCE. 9.1 Tenant. Except to the extent of Landlord's obligations pursuant to the provisions of Section 9.2 below, Tenant, at Tenant's sole cost and expense, shall keep and maintain the Premises (interior and exterior), including loading docks, doors and ramps, floors, subfloors and floor coverings, walls and wall coverings, doors, windows, glass, plate glass, ceilings, skylights, lighting systems, interior plumbing, electrical and mechanical systems and wiring, appliances and devices using or containing refrigerants, fixtures and equipment in good repair and in a clean and safe condition, and repair and/or replace any and all of the foregoing in a clean and safe condition, in good order, condition and repair; provided, however, to the extent the necessity for such repair or replacement is caused by the gross negligence or willful misconduct of Landlord, its agents, employees or contractors, Landlord shall be responsible for the actual, reasonable costs of such repair or replacement to the extent such costs are not covered by the proceeds of insurance required to be maintained by Tenant under this Lease (or such proceeds as Tenant would have received had Tenant maintained the insurance required to be maintained by Tenant under this Lease). Without limiting the foregoing, Tenant shall, at Tenant's sole expense, (a) immediately replace all broken glass in the Premises with glass equal to or in excess of the specification and quality of the original glass; and (b) repair any area damaged by Tenant, Tenant's agents, employees, invitees and visitors, including any damage caused by any roof penetration, whether or not such roof penetration was approved by Landlord. In the event Tenant fails, in the reasonable judgment of Landlord, to maintain the Premises in accordance with the obligations under the Lease, which failure continues at the end of ten (10) days following Tenant's receipt of written notice from Landlord stating with particularity the nature of the failure, Landlord shall have the right to enter the Premises and perform such maintenance, repairs or refurbishing at Tenant's sole cost and expense (including a sum for overhead to Landlord). Tenant shall maintain written records of maintenance and repairs, as required by any applicable law, ordinance or regulation, and shall use certified technicians to perform such maintenance and repairs, as so required. Tenant shall deliver full and complete copies of all service or maintenance contracts entered into by Tenant for the Premises to Landlord within sixty (60) days after the Commencement Date. -12- 9.2 Landlord. Landlord shall, subject to the following limitations, repair damage to and maintain in good repair the structural portions of the roof and the roof membrane, the foundation, the load-bearing walls and exterior portions of exterior walls (excluding wall coverings, painting, glass and doors), and other structural portions of the Building and the Common Area; provided, if such damage is caused by an act or omission of Tenant, Tenant's employees, agents, invitees, subtenants, or contractors, then such repairs shall be at Tenant's sole expense. Landlord shall not be required to make any repair resulting from (i) any alteration or modification to the Building or to mechanical equipment within the Building performed by, for or because of Tenant or to special equipment or systems installed by, for or because of Tenant, (ii) the installation, use or operation of Tenant's property, fixtures and equipment, (iii) the moving of Tenant's property in or out of the Building or in and about the Premises, (iv) Tenant's use or occupancy of the Premises in violation of Section 11 of this Lease or in the manner not contemplated by the parties at the time of the execution of this Lease, (v) the acts or omissions of Tenant and Tenant's employees, agents, invitees, subtenants, licensees or contractors, (vi) fire and other casualty, except as provided by Section 13 of this Lease or (vii) condemnation, except as provided in Section 14 of this Lease. Landlord shall have no obligation to make repairs under this Section 9.2 until a reasonable time after receipt of written notice from Tenant of the need for such repairs. There shall be no abatement of Rent during the performance of such work. Landlord shall not be liable to Tenant for injury or damage that may result from any defect in the construction or condition of the Premises, nor for any damage that may result from interruption of Tenant's use of the Premises during any repairs by Landlord. Tenant waives any right to repair the Premises, the Building and/or the Common Area at the expense of Landlord under any applicable governmental laws, ordinances, statutes, orders or regulations now or hereafter in effect which might otherwise apply. 10. ALTERATIONS. 10.1 Trade Fixtures; Alterations. Tenant may install necessary trade fixtures, equipment and furniture in the Premises, provided that such items are installed and are removable without structural or material damage to the Premises, the Building, the Common Area or the Project. Tenant shall not construct, nor allow to be constructed, any alterations or physical additions in, about or to the Premises without obtaining the prior written consent of Landlord, which consent shall be conditioned upon Tenant's compliance with Landlord's reasonable requirements regarding construction of improvements and alterations; provided, however, Tenant shall have the right, without Landlord's consent but with written notice to Landlord, to undertake interior, nonstructural alterations to the Premises that do not affect any Building systems and the cost of which does not exceed, in any one instance, $7,500.00. Tenant shall submit plans and specifications to Landlord with Tenant's request for approval (or with Tenant's notice to Landlord if no approval is required hereunder) and shall reimburse Landlord for all costs which Landlord may incur in connection with granting approval to Tenant for any such alterations and additions requiring Landlord's approval hereunder, including any costs or expenses which Landlord may incur in electing to have outside architects and engineers review said matters. If Landlord does not respond to a written request from Tenant within ten (10) business days, then Landlord shall be deemed to disapprove such request. In the event Tenant makes any alterations to the Premises that trigger or give rise to a requirement that the Building -13- or the Premises come into compliance with any governmental laws, ordinances, statutes, orders and/or regulations (such as ADA requirements), Tenant shall be fully responsible for complying, at its sole cost and expense, with same. Tenant shall file a notice of completion after completion of such work and provide Landlord with a copy thereof. Tenant shall provide Landlord with a set of "as-built" drawings for any such work. 10.2 Damage; Removal. Tenant shall repair all damage to the Premises and/or the Building caused by the installation or removal of Tenant's fixtures, equipment, furniture and alterations. Upon the termination of this Lease, Tenant shall remove any or all alterations, additions, improvements and partitions made or installed by Tenant and restore the Premises to its condition existing prior to the construction of any such items (provided that Landlord shall identify during its approval of any alterations, additions or improvements to be made to or installed in the Premises by Tenant those items which Landlord reserves the right to require Tenant to remove); provided, however, Landlord may permit, upon written notice to Tenant, any such items designated by Landlord to remain on the Premises, in which event they shall be and become the property of Landlord upon the termination of this Lease. All such removals and restoration shall be accomplished in a good and workmanlike manner and so as not to cause any damage to the Premises, the Building, the Common Area or the Project whatsoever. 10.3 Liens. Tenant shall promptly pay and discharge all claims for labor performed, supplies furnished and services rendered at the request of Tenant and shall keep the Premises free of all mechanics' and materialmen's liens in connection therewith. Tenant shall provide at least ten (10) days prior written notice to Landlord before any labor is performed, supplies furnished or services rendered on or at the Premises and Landlord shall have the right to post on the Premises notices of non-responsibility. If any lien is filed, Tenant shall cause such lien to be released and removed within ten (10) days after the date of filing, and if Tenant fails to do so, Landlord may take such action as may be necessary to remove such lien and Tenant shall pay Landlord such amounts expended by Landlord together with interest thereon at the Applicable Interest Rate from the date of expenditure. 10.4 Standard of Work. All work to be performed by or for Tenant pursuant hereto shall be performed diligently and in a first class, workmanlike manner, and in compliance with all applicable laws, ordinances, regulations and rules of any public authority having jurisdiction over the Premises and/or Tenant and Landlord's insurance carriers. Landlord shall have the right, but not the obligation, to inspect periodically the work on the Premises and Landlord may require changes in the method or quality of the work if Tenant's work is not in compliance with the provisions of this Section 10. 11. USE. The Premises shall be used only for the Permitted Uses set forth in the Basic Lease Information and for no other uses. Tenant's use of the Premises shall be in compliance with and subject to all applicable governmental laws, ordinances, statutes, orders and regulations and any CC&Rs (including payments thereunder, if any) or any supplement thereto recorded in any official or public records with respect to the Project or any portion thereof. In the event Landlord desires to record CC&Rs against the Project after the date of full execution of this Lease, Landlord shall, at its option, either (a) obtain Tenant's consent thereto, which consent shall not be -14- unreasonably withheld (provided Tenant's material rights and obligations under the Lease are not impaired but provided that any provisions of such CC&Rs which require Tenant to pay reasonable assessments such as for common area maintenance and landscaping shall not be deemed to impair Tenant's material rights and obligations under this Lease), conditioned or delayed or (b) elect not to obtain Tenant's consent thereto, in which event the provisions of this Lease shall prevail over any conflicting provisions of the CC&Rs. In no event shall the Premises be used for any of the Prohibited Uses set forth on Exhibit E attached hereto. Tenant, at Tenant's sole cost and expense, shall comply with the rules and regulations attached hereto as Exhibit F, together with such additional rules and regulations as Landlord may from time to time prescribe, provided such additional rules do not materially adversely affect Tenant's rights under this Lease. Tenant shall not commit waste, overload the floors or structure of the Building, subject the Premises, the Building, the Common Area or the Project to any use which would damage the same or increase the risk of loss or violate any insurance coverage, permit any unreasonable odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises, take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants, take any action which would abrogate any warranties, or use or allow the Premises to be used for any unlawful purpose. Tenant agrees that Landlord shall not be responsible for non-compliance by any other tenant or occupant of the Project with, or Landlord's failure to enforce, any of the rules or regulations or CC&Rs or any other terms or provisions of such tenant's or occupant's lease. Tenant shall promptly comply with the reasonable requirements of any board of fire insurance underwriters or other similar body now or hereafter constituted. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Premises, the Building or the Project. 12. ENVIRONMENTAL MATTERS. 12.1 Hazardous Materials. Tenant shall not cause nor permit, nor allow any of Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees or subtenants (collectively, "Tenant's Parties") to cause or permit, any Hazardous Materials to be brought upon, stored, manufactured, generated, blended, handled, recycled, treated, disposed or used on, under or about the Premises, the Building, the Common Area or the Project, except for routine office and janitorial supplies in usual and customary quantities stored, used and disposed of in accordance with all applicable Environmental Laws. As used herein, "Hazardous Materials" means any chemical, substance, material, controlled substance, object, condition, waste, living organism or combination thereof which is or may be hazardous to human health or safety or to the environment due to its radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity, carcinogenicity, mutagenicity, phytotoxicity, infectiousness or other harmful or potentially harmful properties or effects, including, without limitation, petroleum and petroleum products, asbestos, radon, polychlorinated biphenyls (PCBs), refrigerants (including those substances defined in the Environmental Protection Agency's "Refrigerant Recycling Rule," as amended from time to time) and all of those chemicals, substances, materials, controlled substances, objects, conditions, wastes, living organisms or combinations thereof which are now or become in the future listed, defined or regulated in any manner by any Environmental Law based upon, directly or indirectly, such properties or effects. As used herein, "Environmental Laws" means any and all federal, state or local environmental, health and/or safety-related laws, regulations, -15- standards, decisions of courts, ordinances, rules, codes, orders, decrees, directives, guidelines, permits or permit conditions, currently existing and as amended, enacted, issued or adopted in the future which are or become applicable to Tenant, the Premises, the Building, the Common Area or the Project. Tenant and Tenant's Parties shall comply with all Environmental Laws and promptly notify Landlord of the violation of any Environmental Law or presence of any Hazardous Materials, other than office and janitorial supplies as permitted above, on the Premises. If Landlord has a good faith belief or a reasonable suspicion that Tenant may have violated its obligations under this Section 12.1 or that Hazardous Materials may exist in, on, under, or about the Premises, Landlord shall have the right (upon twenty-four (24) hours notice to Tenant, except that in an emergency situation no such notice shall be required) to enter upon and inspect the Premises and to conduct tests, monitoring and investigations. Landlord shall use commercially reasonable efforts to cause such tests, monitoring and investigations to be conducted without unreasonable interference with the business of Tenant. If such tests indicate the presence of any environmental condition which occurred during the Term of this Lease and which Tenant or Tenant's Parties caused, aggravated, permitted or contributed to, Tenant shall reimburse Landlord for the cost of conducting such tests. The phrase "environmental condition" shall mean any release, storage, manufacture, generation, blending, handling, recycling, treatment, disposal or use of Hazardous Materials not authorized under this Lease or any violation of Environmental Laws arising in, on, under, or about the Premises during the Term. To the extent any such environmental condition is caused, aggravated, knowingly permitted or contributed to by Tenant or Tenant's Parties, Tenant shall promptly take any and all steps necessary to rectify the same to comply with Environmental Laws and the reasonable requirements of any lender having a secured interest in all or any portion of the Project, and to the satisfaction of all environmental agencies having jurisdiction over such environmental condition, or shall, at Landlord's election, reimburse Landlord, upon demand, for the cost to Landlord of performing rectifying work. The reimbursement shall be paid to Landlord in advance of Landlord's performing such work, based upon Landlord's reasonable estimate of the cost thereof; and upon completion of such work by Landlord, Tenant shall pay to Landlord any shortfall within thirty (30) days after Landlord bills Tenant therefor or Landlord shall within thirty (30) days refund to Tenant any excess deposit, as the case may be. 12.2 Indemnification. Tenant shall indemnify, protect, defend (by counsel acceptable to Landlord) and hold harmless Landlord and its partners, directors, officers, employees, shareholders, lenders, agents, contractors and each of their respective successors and assigns (individually and collectively, "Indemnitees") from and against any and all claims, judgments, causes of action, damages, penalties, fines, taxes, costs, liabilities, losses and expenses arising at any time during or after the Term as a result (directly or indirectly) of or in connection with (a) Tenant and/or Tenant's Parties' breach of any prohibition or provision of the preceding section, or (b) the presence of Hazardous Materials on, under or about the Premises or other property as a result (directly or indirectly) of Tenant's and/or Tenant's Parties' activities, or failure to act, in connection with the Premises. This indemnity shall include the cost of any required or necessary repair, cleanup or detoxification, and the preparation and implementation of any closure, monitoring or other required plans, whether such action is required or necessary prior to or following the termination of this Lease. Neither the written consent by Landlord to the presence of Hazardous Materials on, under or about the Premises, nor the strict compliance by -16- Tenant with all Environmental Laws, shall excuse Tenant from Tenant's obligation of indemnification pursuant hereto. Tenant's obligations pursuant to the foregoing indemnity shall survive the termination of this Lease. 13. DAMAGE AND DESTRUCTION. 13.1 Casualty. If the Premises or Building should be damaged or destroyed by fire or other casualty, Tenant shall give immediate written notice to Landlord. Within thirty (30) days after receipt from Tenant of such written notice, Landlord shall notify Tenant whether the necessary repairs can reasonably be made: (a) within one hundred eighty (180) days; (b) in more than one hundred eighty (180) days but in less than two hundred seventy (270) days; or (c) in more than two hundred seventy (270) days after the date of the casualty event. 13.1.1 Less Than 180 Days. If the Premises or Building should be damaged only to such extent that rebuilding or repairs can reasonably be completed within one hundred eighty (180) days after the date of the casualty event, this Lease shall not terminate and, provided that -17- insurance proceeds are available to fully repair the damage, Landlord shall repair the Premises (including the Tenant Improvements, to the extent of available insurance proceeds), except that Landlord shall not be required to rebuild, repair or replace Tenant's Property which may have been placed in, on or about the Premises by or for the benefit of Tenant. If Tenant is required to vacate all or a portion of the Premises during Landlord's repair thereof, the Base Rent payable hereunder shall be abated proportionately on the basis of the size of the area of the Premises that is required to be and is actually vacated by Tenant (e.g., the number of square feet of floor area of the Premises that is required to be and is actually vacated by Tenant compared to the total square footage of the floor area of the Premises) from the date Tenant vacates all or a portion of the Premises that was damaged only during the period the Premises are unfit for occupancy. 13.1.2 Greater Than 180 Days. If the Premises or Building should be damaged only to such extent that rebuilding or repairs can reasonably be completed in more than one hundred eighty (180) days but in less than two hundred seventy (270) days after the date of the casualty event, then Landlord shall have the option of: (a) terminating the Lease effective upon the occurrence of such damage, in which event the Rent shall be abated from the date Tenant vacates the Premises; or (b) electing to repair the Premises (including the Tenant Improvements), provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace Tenant's Property which may have been placed in, on or about the Premises by or for the benefit of Tenant). If Tenant is required to vacate all or a portion of the Premises during Landlord's repair thereof, the Base Rent payable hereunder shall be abated proportionately on the basis of the size of the area of the Premises that is required to be vacated and is actually vacated by Tenant (e.g., the number of square feet of floor area of the Premises that is required to be vacated and is actually vacated by Tenant compared to the total square footage of the floor area of the Premises) from the date Tenant vacates all or a portion of the Premises that was damaged only during the period the Premises are unfit for occupancy. In the event that Landlord should fail to substantially complete such repairs within two hundred seventy (270) days after the date of the casualty event (such period to be extended for delays caused by Tenant or because of any items of Force Majeure, as hereinafter defined) and Tenant has not re-occupied the Premises, Tenant shall have the right, as Tenant's exclusive remedy, within ten (10) days after the expiration of such two hundred seventy (270) day period, to terminate this Lease by delivering written notice to Landlord as Tenant's exclusive remedy, whereupon all rights hereunder shall cease and terminate thirty (30) days after Landlord's receipt of such notice. 13.1.3 Greater Than 270 Days. If the Premises or Building should be so damaged that rebuilding or repairs cannot be completed within two hundred seventy (270) days after the date of the casualty event, either Landlord or Tenant may terminate this Lease by giving written notice within ten (10) days after notice from Landlord specifying such time period of repair; and this Lease shall terminate and the Rent shall be abated from the date Tenant vacates the Premises. In the event that neither party elects to terminate this Lease, Landlord shall promptly commence and diligently prosecute to completion the repairs to the Building or Premises (including the Tenant Improvements), provided insurance proceeds are available to repair the damage (except that Landlord shall not be required to rebuild, repair or replace Tenant's Property which may have been placed in, on or about the Premises by or for the benefit -18- of Tenant). If Tenant is required to vacate all or a portion of the Premises during Landlord's repair thereof, the Base Rent payable hereunder shall be abated proportionately on the basis of the size of the area of the Premises that is required to be vacated and is actually vacated by Tenant (e.g., the number of square feet of floor area of the Premises that is required to be vacated and is actually vacated by Tenant compared to the total square footage of the floor area of the Premises), from the date Tenant vacates all or a portion of the Premises that was damaged only during the period that the Premises are unfit for occupancy. 13.2 Tenant's Fault. If the Premises or any portion of the Building is damaged resulting from the negligence or breach of this Lease by Tenant or any of Tenant's Parties, Rent shall not be reduced during the repair of such damage except to the extent rental abatement insurance proceeds are received by Landlord, or would have been received had Landlord maintained the rental abatement insurance required pursuant to Section 8.1 of this Lease, and Tenant shall be liable to Landlord for the cost of the repair caused thereby to the extent such cost is not covered by insurance proceeds from policies of insurance actually maintained or required to be maintained pursuant to the provisions of this Lease. 13.3 Uninsured Casualty. Tenant shall be responsible for and shall pay to Landlord any deductible amount payable under the property insurance for the Building (provided that, with respect to earthquake insurance, Tenant's responsibility to pay the deductible amount shall not exceed $10,000 with respect to any one insured event). In the event that the Premises or any portion of the Building is damaged to the extent Tenant is unable to use the Premises and such damage is not covered by insurance proceeds received by Landlord or in the event that the holder of any indebtedness secured by the Premises requires that the insurance proceeds be applied to such indebtedness, then Landlord shall have the right at Landlord's option either (i) to repair such damage as soon as reasonably possible at Landlord's expense, or (ii) to give written notice to Tenant within thirty (30) days after the date of the occurrence of such damage of Landlord's intention to terminate this Lease as of the date of the occurrence of such damage. In the event Landlord elects to terminate this Lease, Tenant shall have the right within ten (10) days after receipt of such notice to give written notice to Landlord of Tenant's intention to pay the cost of repair of such damage (to the extent not covered by insurance proceeds received by Landlord, including noncoverage as a result of any requirement that such insurance proceeds be applied to any indebtedness secured by the Premises), in which event, following the securitization of Tenant's funding commitment in a form acceptable to Landlord, this Lease shall continue in full force and effect, Landlord shall make such repairs as soon as reasonably possible and Tenant shall reimburse Landlord for such repairs (to the extent not covered by insurance proceeds received by Landlord, including noncoverage as a result of any requirement that such insurance proceeds be applied to any indebtedness secured by the Premises) within fifteen (15) days after receipt of an invoice from Landlord. If Tenant does not give such notice within the ten (10) day period, this Lease shall terminate automatically as of the date of the occurrence of the damage. 13.4 Waiver. With respect to any damage or destruction which Landlord is obligated to repair or may elect to repair, Tenant waives all rights to terminate this Lease pursuant to rights otherwise presently or hereafter accorded by law. -19- 13.5 Force Majeure. "Force Majeure," as used in this Section 13 only and shall not apply elsewhere unless otherwise specified, means delays resulting from causes beyond the reasonable control of Landlord, including, without limitation, any delay caused by any action, inaction, order, ruling, moratorium, regulation, statute, condition or other decision of any private party or governmental agency having jurisdiction over any portion of the Project, over the construction anticipated to occur thereon or over any uses thereof, or by delays in inspections or in issuing approvals by private parties or permits by governmental agencies, or by fire, flood, inclement weather, strikes, lockouts or other labor or industrial disturbance (whether or not on the part of agents or employees of Landlord engaged in the construction of the Premises), civil disturbance, order of any government, court or regulatory body claiming jurisdiction or otherwise, act of public enemy, war, riot, sabotage, blockage, embargo, failure or inability to secure materials, supplies or labor through ordinary sources by reason of shortages or priority, discovery of hazardous or toxic materials, earthquake, or other natural disaster, delays caused by any dispute resolution process, or any cause whatsoever beyond the reasonable control (excluding financial inability) of the party whose performance is required, or any of its contractors or other representatives, whether or not similar to any of the causes hereinabove stated. 14. EMINENT DOMAIN. 14.1 Total Condemnation. If all of the Premises is condemned by eminent domain, inversely condemned or sold under threat of condemnation for any public or quasi-public use or purpose ("Condemned"), this Lease shall terminate as of the earlier of the date the condemning authority takes title to or possession of the Premises, and Rent shall be adjusted to the date of termination. 14.2 Partial Condemnation. If any portion of the Premises or the Building is Condemned and such partial condemnation materially impairs Tenant's ability to use the Premises for Tenant's business as mutually determined by Landlord and Tenant, Tenant shall have the option of terminating this Lease as of the earlier of the date title vests in the condemning authority or as of the date an order of immediate possession is issued and Rent shall be adjusted to the date of termination; provided, however, if Landlord shall offer at its expense to relocate Tenant to comparable space elsewhere, which space is satisfactory to Tenant in Tenant's sole and absolute discretion, this Lease shall not terminate but shall continue in full force and effect, except that this Lease shall be modified, as necessary, to reflect the changes incident to such relocation. If such partial condemnation does not materially impair Tenant's ability to use the Premises for the business of Tenant, Landlord shall promptly restore the Premises to the extent of any condemnation proceeds recovered by Landlord, excluding the portion thereof lost in such condemnation, and this Lease shall continue in full force and effect except that after the date of such title vesting Rent shall be adjusted as reasonably determined by Landlord. 14.3 Award. If the Premises are wholly or partially Condemned, Landlord shall be entitled to the entire award paid for such condemnation, and Tenant waives any claim to any part of the award from Landlord or the condemning authority; provided, however, Tenant shall have the right to recover from the condemning authority such compensation as may be separately -20- awarded to Tenant in connection with costs in removing Tenant's merchandise, furniture, fixtures, leasehold improvements and equipment to a new location. No condemnation of any kind shall be construed to constitute an actual or constructive eviction of Tenant or a breach of any express or implied covenant of quiet enjoyment. 14.4 Temporary Condemnation. In the event of a temporary condemnation not extending beyond the Term, this Lease shall remain in effect, Tenant shall continue to pay Rent and Tenant shall receive any award made for such condemnation except damages to any of Landlord's property. If a temporary condemnation is for a period which extends beyond the Term, this Lease shall terminate as of the date of initial occupancy by the condemning authority and any such award shall be distributed in accordance with the preceding section. If a temporary condemnation remains in effect at the expiration or earlier termination of this Lease, Tenant shall pay Landlord the reasonable cost of performing any obligations required of Tenant with respect to the surrender of the Premises. 15. DEFAULT. 15.1 Events of Defaults. The occurrence of any of the following events shall, at Landlord's option, constitute an "Event of Default": 15.1.1 Vacation or abandonment of the Premises for a period of thirty (30) consecutive days; provided, however, vacation of the Premises shall not constitute a default provided that Tenant at all times is otherwise in compliance with the terms of this Lease and maintains sufficient security personnel on site to protect the Premises from vandalism or other damage; 15.1.2 Failure to pay Rent on the date when due and the failure continuing for a period of five (5) days after written notice that such payment is due (which notice shall be in lieu of notice required under the California Code of Civil Procedure Section 1161 or any similar or successor law) or, notwithstanding the foregoing, any failure by Tenant to pay Rent on the date when due and the failure continuing for a period of five (5) days after such payment is due in any calendar year during the Term in which Landlord has delivered two (2) or more written notices, as described above, to Tenant; 15.1.3 Failure to perform Tenant's covenants and obligations hereunder (except default in the payment of Rent) where such failure continues for a period of thirty (30) days after written notice from Landlord; provided, however, if the nature of the default is such that more than thirty (30) days are reasonably required for its cure, Tenant shall not be deemed to be in default if Tenant commences the cure within the thirty (30) day period and diligently and continuously prosecutes such cure to completion; 15.1.4 The making of a general assignment by Tenant for the benefit of creditors; the filing of a voluntary petition by Tenant or the filing of an involuntary petition by any of Tenant's creditors seeking the rehabilitation, liquidation or reorganization of Tenant under any law relating to bankruptcy, insolvency or other relief of debtors and, in the case of an involuntary action, the failure to remove or discharge the same within sixty (60) days of such filing; the -21- appointment of a receiver or other custodian to take possession of substantially all of Tenant's assets or this leasehold; Tenant's insolvency or inability to pay Tenant's debts or failure generally to pay Tenant's debts when due; any court entering a decree or order directing the winding up or liquidation of Tenant or of substantially all of Tenant's assets; Tenant taking any action toward the dissolution or winding up of Tenant's affairs; the cessation or suspension of Tenant's use of the Premises; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets or this leasehold; 15.1.5 The making of any material misrepresentation or omission by Tenant or any successor in interest of Tenant in any materials delivered by or on behalf of Tenant to Landlord or Landlord's lender pursuant to this Lease; or 15.1.6 The occurrence of an Event of Default as otherwise designated as an Event of Default in the Lease. 15.2 Remedies. 15.2.1 Termination. In the event of the occurrence of any Event of Default, Landlord shall have the right to give a written termination notice to Tenant (which notice may be the notice given under Section 15.1 above, if applicable, and which notice shall be in lieu of any notice required by California Code of Civil Procedure Section 1161, et seq.) and, on the date specified in such notice, this Lease shall terminate unless on or before such date all arrears of Rent and all other sums payable by Tenant under this Lease and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other Events of Default at the time existing shall have been fully remedied to the satisfaction of Landlord. 15.2.1.1 Repossession. Following termination, without prejudice to other remedies Landlord may have, Landlord may (i) peaceably re-enter the Premises upon voluntary surrender by Tenant or remove Tenant therefrom and any other persons occupying the Premises, using such legal proceedings as may be available; (ii) repossess the Premises or relet the Premises or any part thereof for such term (which may be for a term extending beyond the Term), at such rental and upon such other terms and conditions as Landlord in Landlord's sole discretion shall determine, with the right to make reasonable alterations and repairs to the Premises; and (iii) remove all personal property therefrom. 15.2.1.2 Unpaid Rent. Landlord shall have all the rights and remedies of a landlord provided by applicable law, including the right to recover from Tenant: (a) the worth, at the time of award, of the unpaid Rent that had been earned at the time of termination, (b) the worth, at the time of award, of the amount by which the unpaid Rent that would have been earned after the date of termination until the time of award exceeds the amount of loss of rent that Tenant proves could have been reasonably avoided, (c) the worth, at the time of award, of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided, and (d) any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. The phrase "worth, at the time of award," as used in (a) and (b) above, shall be computed at the Applicable Interest Rate, and as used in (c) above, shall -22- be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 15.2.2 Continuation. Even though an Event of Default may have occurred, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession; and Landlord may enforce all of Landlord's rights and remedies under this Lease, including the remedy described in California Civil Code Section 1951.4 ("lessor" may continue Lease in effect after "lessee's" breach and abandonment and recover Rent as it becomes due, if "lessee" has the right to sublet or assign, subject only to reasonable limitations) to recover Rent as it becomes due. Landlord, without terminating this Lease, may, during the period Tenant is in default, enter the Premises and relet the same, or any portion thereof, to third parties for Tenant's account and Tenant shall be liable to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises and like costs. Reletting may be for a period shorter or longer than the remaining Term. Tenant shall continue to pay the Rent on the date the same is due. No act by Landlord hereunder, including acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interest under this Lease, shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. In the event that Landlord elects to relet the Premises, the rent that Landlord receives from reletting shall be applied to the payment of, first, any indebtedness from Tenant to Landlord other than Base Rent and Tenant's Share of Operating Expenses and Real Property Taxes; second, all costs, including maintenance, incurred by Landlord in reletting; and, third, Base Rent and Tenant's Share of Operating Expenses and Real Property Taxes under this Lease. After deducting the payments referred to above, any sum remaining from the rental Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. In no event, and notwithstanding anything in Section 16 to the contrary, shall Tenant be entitled to any excess rent received by Landlord. If, on the date Rent is due under this Lease, the rent received from the reletting is less than the Rent due on that date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all costs, including maintenance, which Landlord incurred in reletting the Premises that remain after applying the rent received from reletting as provided hereinabove. So long as this Lease is not terminated, Landlord shall have the right to remedy any default of Tenant, to maintain or improve the Premises, to cause a receiver to be appointed to administer the Premises and new or existing subleases and to add to the Rent payable hereunder all of Landlord's reasonable costs in so doing, with interest at the Applicable Interest Rate from the date of such expenditure. 15.3 Cumulative. Each right and remedy of Landlord provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and shall not preclude Landlord from exercising any other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity, by statute or otherwise. No payment by Tenant of a lesser amount than the Rent nor any endorsement on any check or letter accompanying any check or payment as Rent shall be deemed an accord and satisfaction of full payment of Rent; and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies. -23- 15.4 Landlord's Default. In the event Landlord should default in its repair or maintenance obligations hereunder, Tenant shall simultaneously give Landlord and Landlord's mortgagee (provided Tenant has been provided written notice of the address of such mortgagee) written notice specifying such default and Landlord shall thereupon have thirty (30) days in which to cure any such default, provided that if the default is not reasonably capable of being cured in thirty (30) days, Landlord shall be deemed to be in compliance with this Lease if Landlord commences to cure the default within such thirty (30) day period and diligently and continuously prosecutes such cure to completion. In addition, Landlord's mortgagee shall have the right (but not the obligation) to cure or remedy such default during the period that is permitted to Landlord hereunder, and Tenant will accept such curative or remedial action taken by Landlord's mortgagee with the same effect as if such action had been taken by Landlord; provided, however, if Landlord's default is of a nature which, if not cured immediately, poses an imminent risk of harm to persons or property and/or will have an immediate, material, adverse effect on the conduct of Tenant's business operations at the Premises, Tenant shall have the right to cure such default immediately, with only such prior notice (if any) to Landlord and Landlord's mortgagee as is reasonable under the circumstances. Upon the failure of Landlord or Landlord's mortgagee to cure such default in accordance with the provisions of this Section 15.4, and following an additional written notice to Landlord which contains the following phrase on page 1 of the notice in all capital letters and boldface type (or it shall not be deemed validly delivered to Landlord) "YOUR FAILURE TO COMMENCE THE CURE OF THE DEFAULT SET FORTH IN THIS NOTICE WITHIN TEN (10) DAYS SHALL ENTITLE THE UNDERSIGNED TO CURE SUCH DEFAULT AT LANDLORD'S EXPENSE WITHOUT FURTHER NOTICE" and an additional ten (10) day period to commence such cure (the "Second Default Notice") and the failure of Landlord to undertake such cure, Tenant shall be authorized and empowered to cure any such default for and on behalf of Landlord, and the cost of any item paid by Tenant in curing such default for and on behalf of Landlord, shall be payable on demand by Landlord to Tenant. If Landlord fails to pay to Tenant the cost of such cure within twenty (20) days following Landlord's receipt of Tenant's demand therefor, then Tenant may provide to Landlord a second written demand therefor ("Second Demand") which contains the following phrase on page 1 of the notice in all capital letters and boldface type (or it shall not be deemed validly delivered to Landlord) "YOUR FAILURE TO REIMBURSE TENANT AS REQUIRED HEREIN WITHIN THIRTY (30) DAYS SHALL ENTITLE THE UNDERSIGNED TO EXERCISE CERTAIN OFFSET RIGHTS AS SET FORTH IN THE LEASE WITHOUT FURTHER NOTICE." If Landlord fails to pay to Tenant the amount due to Tenant within thirty (30) days following Landlord's receipt of the Second Demand, then Tenant may offset from the next installments of rent and other charges coming due under this Lease the amount owed by Landlord to Tenant (together with all accrued interest at the Applicable Rate), provided, however, that (i) the amount of offset during any month shall not exceed the greater of (A) fifteen percent (15%) of the total Base Rent payable by Tenant to Landlord for such month or (B) the amount necessary to fully amortize Tenant's cost of cure from the date of completion of such cure to the expiration date of the Lease Term (without regard to any unexercised renewal options), but in no event greater than thirty percent (30%) of the total monthly Base Rent for any one month; and (ii) Landlord is not then contesting such right of offset or the amount thereof by court action or by mediation or arbitration proceeding mutually approved by Landlord and Tenant (or having contested same, a -24- judgment, decision or ruling in such action, mediation or arbitration has been rendered in favor of Tenant). 16. ASSIGNMENT AND SUBLETTING. 16.1 Tenant shall not assign, sublet or otherwise transfer, whether voluntarily or involuntarily or by operation of law, the Premises or any part thereof without Landlord's prior written approval, which shall not be unreasonably withheld; provided, however, Tenant agrees it shall be reasonable for Landlord to disapprove of a requested sublease or assignment, if the sublessee or assignee does not have a tangible net worth (as determined in accordance with generally accepted accounting principles consistently applied) equal to or greater than that of Tenant as of the date of the Lease as shown in the financial information provided to Landlord. The merger of Tenant with any other entity or the transfer of any controlling or managing ownership or beneficial interest in Tenant, or the assignment of a substantial portion of the assets of Tenant, whether or not located at the Premises, shall constitute an assignment hereunder. If Tenant desires to assign this Lease or sublet any or all of the Premises, Tenant shall give Landlord written notice thereof, which notice shall include a description of the portion of the Premises to be transferred (the "Subject Space"), with copies of all related documents and agreements associated with the assignment or sublease, including without limitation, the financial statements of any proposed assignee or subtenant (collectively, the "Transfer Notice"), thirty-five (35) days prior to the anticipated effective date of the assignment or sublease. Tenant shall pay Landlord's reasonable attorneys' fees incurred in the review of such documentation plus an administrative fee of Five Hundred Dollars ($500.00) for each proposed transfer. Landlord shall have a period of thirty (30) days following receipt of such notice and all related documents and agreements to notify Tenant in writing of Landlord's approval or disapproval of the proposed assignment or sublease. If Landlord fails to notify Tenant in writing of such election, Landlord shall be deemed to have disapproved such assignment or subletting. This Lease may not be assigned by operation of law. Any purported assignment or subletting contrary to the provisions hereof shall be void and shall constitute an Event of Default hereunder. If Tenant receives rent or other consideration for any such transfer in excess of the Rent, or in case of the sublease of a portion of the Premises, in excess of such Rent that is fairly allocable to such portion, after appropriate adjustments to assure that all other payments required hereunder are appropriately taken into account, Tenant shall pay Landlord fifty percent (50%) of the difference between each such payment of rent or other consideration received by Tenant and the Rent required hereunder, after first deducting brokerage commissions, reasonable attorneys' fees, and costs of improvements installed at Tenant's cost, which costs are incurred by Tenant in connection with any such transfer, if reasonably acceptable evidence of such costs is delivered to Landlord. Landlord may, without waiving any rights or remedies, collect rent from the assignee, subtenant or occupant and apply the net amount collected to the Rent herein reserved and apportion any excess rent so collected in accordance with the terms of the preceding sentence. Such acceptance of Rent shall in no event be deemed to imply that Landlord is approving a subtenant or assignee which Landlord has not approved in writing pursuant to the requirements of this Section 16. Tenant shall continue to be liable as a principal and not as a guarantor or surety to the same extent as though no assignment or subletting had been made. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to the Lease -25- by assignees of Tenant without notifying Tenant or any successor of Tenant and without obtaining their consent. No permitted transfer shall be effective until there has been delivered to Landlord a counterpart of the transfer instrument in which the transferee agrees to be and remain jointly and severally liable with Tenant for the payment of Rent pertaining to the Premises and for the performance of all the terms and provisions of this Lease relating thereto arising on or after the date of the transfer. Notwithstanding anything to the contrary contained in this Section 16, Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after receipt of any Transfer Notice, to recapture the Subject Space (provided that, with respect to a sublease, Landlord shall have no recapture right unless the Subject Space constitutes more than twenty percent (20%) of the rentable square footage of the Premises, and provided further that the term of such sublease is for substantially the balance of the Term of this Lease). Such recapture notice shall cancel and terminate this Lease with respect to the Subject Space as of the date stated in the Transfer Notice as the effective date of the proposed assignment or sublease until the last day of the proposed term of the assignment or sublease as set forth in the Transfer Notice. If this Lease shall be canceled with respect to less than the entire Premises, (a) Landlord shall be responsible, at Landlord's cost, to construct a demising wall separating the Subject Space from the remainder of the Premises and to separately meter the utilities for the Subject Space, (b) the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, and (c) this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of the same. If Landlord declines, or fails to elect in a timely manner to recapture the Subject Space under this Section 16, then, provided Landlord has consented to the proposed assignment or sublease, Tenant shall be entitled to proceed to transfer the Subject Space to the proposed assignee or sublessee named in the Transfer Notice upon all of the terms set forth in the Transfer Notice. 16.2 Tenant may, without the consent of, but with written notice to, Landlord, and without invoking Landlord's recapture rights, assign the Lease, or any part thereof or sublease the Premises, in whole or in part, to any of the following (collectively, "intracorporate transfers"): (i) any corporation, person or entity which has the power to direct Tenant's management and operation, or any corporation whose management and operation is controlled by Tenant, or (ii) any corporation, a majority of whose voting stock is owned by Tenant; or (iii) any corporation in which or with which Tenant, its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions for merger or consolidation of corporations; or (iv) any corporation, person or entity acquiring this Lease and all or substantially all (which for purposes hereof shall mean not less than 75% of such assets) of Tenant's assets; or (v) any corporation, person or entity acquiring all or substantially all (which for purposes hereof shall mean not less than 75% of such outstanding shares of stock) of the outstanding shares of stock of Tenant or of Tenant's parent corporations, so long as (A) the obligations of Tenant under this Lease are assumed by the surviving corporation, person or entity or the corporation or entity created by such merger or consolidation; and (B) the tangible net worth of the surviving corporation, person or entity or the entity created by such merger or consolidation is no less than that of Tenant as of the date hereof determined in accordance with "Generally Accepted Accounting Principles" consistently applied, or, if the foregoing net worth test is not satisfied, -26- the tangible net worth of the surviving corporation, person or entity, or the entity created by such merger or consolidation shall, in Landlord's sole and absolute discretion, be sufficient to meet the obligations of Tenant under this Lease. Tenant shall notify Landlord in writing and the assignment or subletting shall not become effective until Tenant has provided Landlord with such corporate resolutions and corporate documentation evidencing the existence of, the authority of and the assumption of lease obligations by such assignee or subtenant and financial statements verifying the continued net worth of the surviving Tenant. In addition, the selling or trading of the shares of Tenant on any national securities exchange (as defined in the Securities Exchange Act of 1934, as amended) shall not be deemed an assignment or subletting under this Lease. 17. ESTOPPEL, ATTORNMENT AND SUBORDINATION. 17.1 Estoppel. Within ten (10) days after written request by Landlord, Tenant shall deliver an estoppel certificate duly executed (and acknowledged if required by any lender), in the form attached hereto as Exhibit G, or in such other form as may be acceptable to the lender and reasonably acceptable to Tenant, which form may include some or all of the provisions contained in Exhibit G, to any proposed mortgagee, purchaser or Landlord. Tenant's failure to deliver said statement in such time period shall be an Event of Default hereunder and shall be conclusive upon Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's performance and Tenant has no right of offset, counterclaim or deduction against Rent hereunder; and (c) no more than one month's Base Rent has been paid in advance. If any financier should require that this Lease be amended (except for changes which would (i) materially and adversely affect the rights of Tenant, including, without limitation, any changes to the Premises, the Term, the Permitted Use or the Rent, or (ii) increase the monetary obligations of Tenant under this Lease), Landlord shall give written notice thereof to Tenant, which notice shall be accompanied by a Lease supplement embodying such amendments. Tenant shall, within ten (10) days after the receipt of Landlord's notice, execute and deliver to Landlord the tendered Lease supplement. 17.2 Subordination. Subject to Tenant's receipt of an agreement from the holder of a deed of trust or mortgage or from a ground lessor or master lessor not to disturb Tenant's rights to possession of the Premises so long as Tenant is not in breach of this Lease and so long as Tenant attorns to the record owner of the Premises, this Lease shall be subject and subordinate to all ground leases, master leases and the lien of all mortgages and deeds of trust which affect the Premises or the Project or Landlord's interest therein, and all amendments thereto. If requested, Tenant shall execute and deliver to Landlord within ten (10) days after Landlord's request a Subordination, Nondisturbance and Attornment Agreement in the form attached hereto as Exhibit H, or in such other form as may be acceptable to the ground lessor, master lessor or lender and reasonably acceptable to Tenant, which form may include some or all of the provisions contained in Exhibit H. 17.3 Attornment. In the event of a foreclosure proceeding, the exercise of the power of sale under any mortgage or deed of trust or the termination of a ground lease, Tenant shall, if requested, attorn to the purchaser thereupon and recognize such purchaser as Landlord under this -27- Lease; provided, however, Tenant's obligation to attorn to such purchaser shall be conditioned upon Tenant's receipt of a non-disturbance agreement. 18. MISCELLANEOUS. 18.1 General. 18.1.1 Entire Agreement. This Lease sets forth all the agreements between Landlord and Tenant concerning the Premises; and there are no agreements either oral or written other than as set forth herein. 18.1.2 Time of Essence. Time is of the essence of this Lease. 18.1.3 Attorneys' Fees. In any action or proceeding which either party brings against the other to enforce its rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party, including reasonable attorneys' fees, which amounts shall be a part of the judgment in said action or proceeding. 18.1.4 Severability. If any provision of this Lease or the application of any such provision shall be held by a court of competent jurisdiction to be invalid, void or unenforceable to any extent, the remaining provisions of this Lease and the application thereof shall remain in full force and effect and shall not be affected, impaired or invalidated. 18.1.5 Law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. 18.1.6 No Option. Submission of this Lease to Tenant for examination or negotiation does not constitute an option to lease, offer to lease or a reservation of, or option for, the Premises; and this document shall become effective and binding only upon the execution and delivery hereof by Landlord and Tenant. 18.1.7 Successors and Assigns. This Lease shall be binding upon and inure to the benefit of the successors and assigns of Landlord and, subject to compliance with the terms of Section 16, Tenant. 18.1.8 Third Party Beneficiaries. Nothing herein is intended to create any third party benefit. 18.1.9 Memorandum of Lease. Tenant shall not record this Lease or a short form memorandum hereof without Landlord's prior written consent which Landlord can withhold in its sole discretion. 18.1.10 Agency, Partnership or Joint Venture. Nothing contained herein nor any acts of the parties hereto shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture by the parties hereto or any relationship other than the relationship of landlord and tenant. -28- 18.1.11 Merger. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation thereof or a termination by Landlord shall not work a merger and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 18.1.12 Headings. Section headings have been inserted solely as a matter of convenience and are not intended to define or limit the scope of any of the provisions contained therein. 18.1.13 Auctions. Tenant shall not conduct, nor permit to be conducted, any auction upon the Premises without Landlord's prior written consent. Landlord shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 18.1.14 Consents. Except as otherwise provided elsewhere in this Lease, Landlord's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Tenant for any Landlord consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Tenant upon receipt of an invoice and supporting documentation therefor. Landlord's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Event of Default or breach by Tenant of this Lease exists, nor shall such consent be deemed a waiver of any then existing Event of Default or breach, except as may be otherwise specifically stated in writing by Landlord at the time of such consent. Except as otherwise set forth herein, the failure to specify herein any particular condition to Landlord's consent shall not preclude the imposition by Landlord at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 18.1.15 Security Measures. Tenant hereby acknowledges that Landlord shall have no obligation to provide a guard service or other security measures whatsoever. Tenant assumes all responsibility for the protection of the Premises, Tenant, its agents and invitees and their property from the acts of third parties. 18.2 Signs. All signs and graphics of every kind visible in or from public view or corridors, the Common Areas or the exterior of the Premises shall be subject to Landlord's prior written approval and shall be subject to any applicable governmental laws, ordinances, and regulations and in compliance with Landlord's signage program. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises; and Tenant shall repair any injury or defacement, including without limitation, discoloration caused by such installation or removal. Subject to Tenant's receipt of all applicable governmental approvals therefor (including, without limitation, the approval of the City of Fremont), signage permitted under this Section 18.2 may be, at Tenant's election, lighted signage. 18.3 Waiver. No waiver of any default or breach hereunder shall be implied from any omission to take action on account thereof, notwithstanding any custom and practice or course of dealing. No waiver by either party of any provision under this Lease shall be effective unless in -29- writing and signed by such party. No waiver shall affect any default other than the default specified in the waiver and then such waiver shall be operative only for the time and to the extent therein stated. Waivers of any covenant shall not be construed as a waiver of any subsequent breach of the same. 18.4 Financial Statements. Tenant shall provide to any lender, purchaser or Landlord, within ten (10) days after request, a current, accurate, certified financial statement for Tenant and Tenant's business and financial statements for Tenant and Tenant's business for each of the three (3) years prior to the current financial statement year prepared under generally accepted accounting principles consistently applied; provided, however, that to the extent Tenant is prohibited by law from disclosing non-public financial information, Tenant shall only be required to disclose such financial information that is deemed to be public information. Tenant shall also provide within said 10-day period, subject to the foregoing limitation on non-public financial information, such other certified financial information or tax returns as may be reasonably required by Landlord, purchaser or any lender of either. 18.5 Limitation of Liability. The obligations of Landlord under this Lease are not personal obligations of the individual partners, directors, officers, shareholders, agents or employees of Landlord; and Tenant shall look solely to the Building (which shall be deemed to include the net proceeds of any sale thereof by Landlord), for satisfaction of any liability of Landlord and shall not look to other assets of Landlord nor seek recourse against the assets of the individual partners, directors, officers, shareholders, agents or employees of Landlord. Whenever Landlord transfers its interest, Landlord shall be automatically released from further performance under this Lease and from all further liabilities and expenses hereunder and the transferee of Landlord's interest shall assume all liabilities and obligations of Landlord hereunder from the date of such transfer (including, without limitation, the obligation to return the Security Deposit in accordance with Section 3.3 above). 18.6 Notices. All notices to be given hereunder shall be in writing and mailed postage prepaid by certified or registered mail, return receipt requested, or delivered by personal or courier delivery, or sent by facsimile (immediately followed by one of the preceding methods), to Landlord's Address and Tenant's Address, or to such other place as Landlord or Tenant may designate in a written notice given to the other party. Notices shall be deemed served upon the earlier of receipt or refusal of delivery. 18.7 Brokerage Commission. Landlord shall pay a brokerage commission to Landlord's Broker specified in the Basic Lease Information in accordance with a separate agreement between Landlord and Landlord's Broker. Landlord shall have no further or separate obligation for payment of any commissions or fees to any other broker or finder. Tenant warrants to Landlord that Tenant's sole contact with Landlord or with the Premises in connection with this transaction has been directly with Landlord, Landlord's Broker and Tenant's Broker specified in the Basic Lease Information, and that no other broker or finder can properly claim a right to a commission or a finder's fee based upon contacts between the claimant and Tenant. Any commissions or fees payable to Tenant's Broker with respect to this transaction shall be paid by Landlord's Broker, and neither Landlord nor Tenant shall have any obligation with respect -30- thereto. Subject to the foregoing, Tenant agrees to indemnify and hold Landlord harmless from any claims or liability, including reasonable attorneys' fees, in connection with a claim by any person for a real estate broker's commission, finder's fee or other compensation based upon any statement, representation or agreement of Tenant, and Landlord agrees to indemnify and hold Tenant harmless from any such claims or liability, including reasonable attorneys' fees, based upon any statement, representation or agreement of Landlord. 18.8 Authorization. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant and that such execution is binding upon Tenant. 18.9 Holding Over; Surrender. 18.9.1 Holding Over. If Tenant holds over the Premises or any part thereof after expiration of the Term, such holding over shall, at Landlord's option, constitute a month-to-month tenancy, at a rent equal to one hundred fifty percent (150%) of the Base Rent in effect immediately prior to such holding over for the first three (3) months of such holding over, and at a rent equal to two hundred percent (200%) of the Base Rent in effect immediately prior to such holding over thereafter, and shall otherwise be on all the other terms and conditions of this Lease. This paragraph shall not be construed as Landlord's permission for Tenant to hold over. Acceptance of Rent by Landlord following expiration or termination shall not constitute a renewal of this Lease or extension of the Term except as specifically set forth above. If Tenant fails to surrender the Premises upon expiration or earlier termination of this Lease, Tenant shall indemnify and hold Landlord harmless from and against all loss or liability resulting from or arising out of Tenant's failure to surrender the Premises, including, but not limited to, any amounts required to be paid to any tenant or prospective tenant who was to have occupied the Premises after the expiration or earlier termination of this Lease and any related attorneys' fees and brokerage commissions. 18.9.2 Surrender. Upon the termination of this Lease or Tenant's right to possession of the Premises, Tenant will surrender the Premises broom clean, together with all keys, in good condition and repair, reasonable wear and tear excepted. Tenant shall patch and fill all holes within the Premises and all penetrations of the roof shall be resealed to a watertight condition. In no event may Tenant remove from the Premises any mechanical or electrical systems or any wiring or any other aspect of any systems within the Premises. Conditions existing because of Tenant's failure to perform maintenance, repairs or replacements shall not be deemed "reasonable wear and tear." 18.10 Joint and Several. If Tenant consists of more than one person, the obligation of all such persons shall be joint and several. 18.11 Covenants and Conditions. Each provision to be performed by Tenant hereunder shall be deemed to be both a covenant and a condition. 18.12 Addenda. The Addenda attached hereto, if any, and identified with this Lease are incorporated herein by this reference as if fully set forth herein. -31- 18.13 Parking. Tenant shall have the right, at no cost or expense to Tenant, to use one hundred sixty-eight (168) unreserved parking spaces (2.8 unreserved parking spaces per each one thousand (1,000) rentable square feet of the Premises), as shown on Exhibit A attached hereto, throughout the term of this Lease. Tenant's continued right to use the parking spaces is conditioned upon Tenant abiding by all rules and regulations which are prescribed from time to time for the orderly operation and use of the parking facility and upon Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in the use of parking facilities. Tenant further agrees that Landlord shall not be responsible for enforcing any parking rights in the Project. Landlord specifically reserves the right to change the size, configuration, design, layout, location and all other aspects of the Project's parking facility and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, close-off or restrict access to the Project's parking facility or relocate Tenant's parking passes to other parking structures and/or surface parking areas within a reasonable walking distance of the Building. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord. IN WITNESS WHEREOF, the parties have executed this Lease as of the date set forth above. "Landlord" "Tenant" CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation FIBERSTARS, INC., a California corporation By: /s/ Don Little By: /s/ Robert A. Connors ------------------------------- -------------------------------------- Name: Don Little Name: Robert A. Connors ------------------------ -------------------------------- Its: Vice President Its: CFO ------------------------ -------------------------------- Date: 12/1/98 Date: 11/23/98 ---------------------------- -------------------------------- By: /s/ Fred N. Martin ---------------------------------- Name: Fred N. Martin ---------------------------- Its: COO ---------------------------- Date: 11/23/98 ---------------------------- -32- ADDENDUM TO LEASE THIS ADDENDUM TO LEASE ("Addendum") is attached to and constitutes an integral part of the Lease between CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation, as Landlord, and FIBERSTARS, INC., a California corporation, as Tenant. The terms of this Addendum shall be incorporated in the Lease for all purposes. In the event of a conflict between the provisions of the Lease and the provisions of this Addendum, this Addendum shall control. 1. Notwithstanding anything to the contrary contained in the Lease, during the first twenty-four (24) months of the Term of the Lease only, Tenant shall pay to Landlord a fixed monthly amount of Operating Expenses (and the provisions of Sections 6.1 and 7 of the Lease shall be inapplicable thereto) as follows:
Monthly Operating ----------------- Monthly Expenses/Rentable Monthly Base Rent ------- ----------------- and Operating Months of Term Operating Expenses Square Foot Expenses -------------- ------------------ ----------- 1-12 $10,200.00 $0.17 $60,000.00 13-24 $10,800.00 $0.18 $61,800.00
2. The following new Section is hereby added to the Lease which states in its entirety as follows: 19. Option to Extend. 19.1 Terms of Option. Provided (i) Tenant is not in default under the terms of this Lease beyond any applicable cure period at the time this renewal option is exercised or at the commencement of the Extension Term (as hereinafter defined), (ii) Tenant is occupying the entire Premises, and (iii) Landlord has not given more than two (2) notices of default in any twelve (12) month period for nonpayment of monetary obligations, Tenant shall have one (1) option to renew this Lease for an additional period of sixty (60) months ("Extension Term"). The lease of the Premises by Tenant during the Extension Term shall be on all the terms and conditions of this Lease, except that Landlord shall have no additional obligation for free rent, leasing commissions, leasehold improvements or for any other tenant inducements for the Extension Term. Base Rent shall be increased (but not decreased) to the fair market rental rate ("Market Rent") as set forth below. There shall be no additional extension terms beyond the Extension Term set forth herein. Tenant must exercise its option to extend this Lease by giving Landlord written notice of its election to do so no later than two hundred ten (210) nor earlier than two hundred seventy (270) days prior to the expiration of the initial Term. Any notice not ADDENDUM TO LEASE given in a timely manner shall be void, and Tenant shall be deemed to have waived its extension rights. The extension option set forth herein is personal to Tenant and shall not be included in any assignment of this Lease. 19.2 Determination of Base Rent During Extension Term. 19.2.1 Agreement on Base Rent. Landlord and Tenant shall have thirty (30) days after Landlord receives the exercise notice in which to negotiate in good faith and attempt to agree on the Base Rent during the Extension Term. Notwithstanding anything in this Section 19 to the contrary, in no event shall the Base Rent for the Extension Term be less than the Base Rent in effect immediately prior to the Extension Term. 19.2.2 Appraisal. If Landlord and Tenant are unable to agree upon the fair market rental rate for Base Rent for the Extension Term within such thirty (30)-day period, despite each party's exercise of its good faith efforts, then within ten (10) days after the expiration of the thirty (30)-day period, each party, by giving notice to the other party together with their proposed fair market rental rate, shall appoint a real estate appraiser who is a current member of the American Institute of Real Estate Appraisers, with at least five (5) years of experience appraising building space comparable to the Premises in the city and county where the Premises is located to determine the Market Rent. Market Rent shall mean the monthly amount per rentable square foot in the Premises that a willing, non-equity new tenant would pay and a willing landlord would accept at arm's length for space in a comparable building or buildings (considering age, quality and condition), in a comparable location, giving appropriate consideration to the then-current monthly rental rates per rentable square foot, the presence or absence of rent escalation clauses such as operating expense and tax pass-throughs, length of lease term, size and location of premises being leased and other generally applicable terms and conditions of tenancy for a similar building or buildings. If the two (2) appraisers are unable to agree on whether to use Landlord's or Tenant's proposed fair market rental rate within fifteen (15) days, they shall select a third appraiser meeting the qualifications stated in this Section within five (5) days after the last day the two (2) appraisers are given to select the Market Rent for the Extension Term. Failure to agree upon such third appraiser shall result in such selection being made by a California Superior Court judge with jurisdiction. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within fifteen (15) days after the selection of the third appraiser, a majority of the appraisers shall select either Landlord's or Tenant's proposed fair market rental rate as the Market Rent for the Extension Term. The non-prevailing party shall be responsible for the costs, charges and fees of the prevailing party for such appraisal process. 19.2.3 Amendment of Lease. Immediately after the Base Rent is determined pursuant to this Section 19, Landlord and Tenant shall execute an amendment to this Lease stating the new Base Rent in effect. ADDENDUM TO LEASE -2- EXHIBIT A PREMISES Nobel Drive [GRAPHIC OMITTED] MAP OF BUILDING SIX PREMISES EXHIBIT B WORK LETTER THIS WORK LETTER ("Work Letter") is entered into as of this ______ day of November, 1998, by and between CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation ("Landlord"), and FIBERSTARS, INC., a California corporation ("Tenant"). R E C I T A L S : A. Landlord and Tenant have entered into that certain Multi-Tenant Industrial Triple Net Lease (the "Lease") dated as of the date hereof, covering certain premises (the "Premises") more particularly described in the Lease. This Work Letter is attached to the Lease as Exhibit B. The Lease is hereby incorporated into this Work Letter by this reference. Capitalized terms not defined in this Work Letter shall have the meanings given to such terms in the Lease. B. In consideration of the mutual covenants contained in the Lease and this Work Letter, Landlord and Tenant hereby agree as follows: A G R E E M E N T : 1. Definitions. As used in this Work Letter and in the Lease, the term "Shell" shall mean those improvements set forth on the "Final Landlord Plans" (defined in Section 5(b) of this Work Letter), which shall include a concrete, multi-tenant tilt up office and light industrial building to contain approximately 60,000 square feet of rentable area (the "Building"), which Building is currently under construction. As used in this Work Letter and in the Lease, the term "Tenant Improvements" shall mean those improvements set forth on the "Final Tenant Plans" (defined in Section 5(b) of this Work Letter). As used in this Work Letter and in the Lease, "Improvements" shall mean the Shell and the Tenant Improvements. The construction and installation of the Improvements is sometimes referred to herein as the "Work". 2. Completion of Improvements. Subject to the terms of the Lease and this Work Letter and any "Tenant Delay" or "Force Majeure Delay" as provided herein, Landlord shall use its commercially reasonable and diligent efforts to cause the "Contractor" (defined in Section 7 of this Work Letter) to complete the construction and installation of the Improvements in accordance with the terms of this Work Letter. 3. Designation of Representatives. With respect to the planning, design and construction of the Improvements, Landlord hereby designates Allen Burkes as "Landlord's Representative" and Tenant hereby designates Donna Prunetti as "Tenant's Representative." Tenant hereby confirms that Tenant's Representative has full authority to act on behalf of and to B-1 bind Tenant with respect to all matters pertaining to the planning, design and construction of the Improvements. Landlord hereby confirms that Landlord's Representative has limited authority to act on behalf of Landlord with respect to matters pertaining to the planning, design and construction of the Improvements. Either party may change its designated representative upon five (5) days prior written notice to the other party. 4. Architect. The architectural firm of Ware and Malcomb ("Architect"), which is serving as the architect for the design and construction of the Shell, shall also act as the architect with respect to the design and construction of the Tenant Improvements. Landlord has previously entered into a contract with Architect for the Shell and will enter into either a separate contract for Architect's services related to the design and construction of the Tenant Improvements (the "Tenant Improvement Services") or an amendment to the existing contract for the Tenant Improvement Services (the "Architect Contract"). The parties acknowledge and agree that the Architect Contract entered into with the Architect will obligate the Architect to issue to both Landlord and Tenant an architect's certificate ("Architect's Certificate") upon Substantial Completion (as hereinafter defined) of the Improvements certifying the Substantial Completion of the Improvements in accordance with the Final Plans (as hereinafter defined). 5. Improvement Plans. (a) Preliminary Plans. That certain space plan prepared by the Architect and dated November 4, 1998 shall for purposes hereof constitute the preliminary plans for the Tenant Improvements (the "Preliminary Plans"). (b) Final Plans. Attached hereto as Schedule 1 is a description of the final plans and specifications for the Shell (the "Final Landlord Plans"). Within one hundred twenty (120) days following the Effective Date of the Lease, the parties shall agree upon final plans and specifications for the Tenant Improvements ("Final Tenant Plans") which shall be consistent with the Preliminary Plans, except for the changes, if any, mutually agreed to be made thereto by the parties. Included in the Final Tenant Plans will be the civil, architectural and structural plans for the Tenant Improvements. When the Final Tenant Plans have been approved by Tenant and Landlord, Architect shall submit the Final Tenant Plans to the appropriate governmental agency for plan checking and the issuance of a building permit for the Tenant Improvements. Architect shall make any and all changes to the Final Tenant Plans required by any applicable governmental entity to obtain a building permit for the Tenant Improvements; provided, however, that if, in Architect's reasonable discretion, such changes will materially affect the Tenant Improvements, Tenant shall have three (3) business days to approve such changes, which approval shall not be unreasonably withheld. The Final Tenant Plans and the Final Landlord Plans are hereinafter collectively referred to as the "Final Plans." (c) Work Cost Estimate. Prior to the commencement of construction of any of the Tenant Improvements, Landlord shall submit to Tenant a written estimate of the cost to complete the Tenant Improvements, which written estimate will be based upon the Final Tenant Plans taking into account any modifications which may be required to reflect changes in the Final Tenant Plans required by the appropriate governmental authorities in connection with B-2 the issuance of a building permit (the "Work Cost Estimate"). Tenant will either approve the Work Cost Estimate, or disapprove specific items, and submit to Landlord revisions to the Final Tenant Plans in the form of a Change Order. Submission and approval of the Work Cost Estimate will proceed in accordance with the work schedule provided by Landlord. Upon Tenant's approval of the Work Cost Estimate (the "Work Cost Statement"), Landlord will have the right to purchase materials and to commence the construction of the items included in the Work Cost Statement. If the total costs reflected in the Work Cost Statement exceed the Allowance (as defined in Section 9 below), Tenant shall pay such excess to Landlord in cash or by wire transfer of funds, in three (3) equal installments as follows: (i) the first installment shall be paid within five (5) days after Tenant's approval of the Work Cost Statement; (ii) the second installment shall be paid within five (5) days after notice from Landlord to Tenant that the Tenant Improvements are fifty percent (50%) complete; and (iii) the third installment shall be paid within five (5) days following Substantial Completion of the Tenant Improvements. (d) No Representations. Notwithstanding anything to the contrary contained in the Lease or herein, Landlord's participation in the preparation of the Preliminary Plans, the Final Plans, the cost estimates for the Improvements and the construction thereof shall not constitute any representation or warranty, express or implied, that the Improvements, if built in accordance with the Preliminary Plans and/or the Final Plans, will be suitable for Tenant's intended purpose. Tenant acknowledges and agrees that the Improvements are intended for use by Tenant and the specifications and design requirements for such Improvements are not within the special knowledge or experience of Landlord. Landlord's sole obligation shall be to arrange the construction of the Improvements in accordance with the requirements of the Final Plans; and any additional costs or expense required for the modification thereof to more adequately meet Tenant's use, whether during or after Landlord's construction thereof, shall be borne entirely by Tenant except as otherwise provided in this Work Letter. Notwithstanding the foregoing, Landlord agrees to assign to Tenant the benefit of all construction warranties pertaining to the Tenant Improvements (and, on a nonexclusive basis, the Shell) to the extent that they do not relate to structural or other portions of the Improvements that Landlord is required to maintain and repair under the Lease. 6. Change Orders. (a) Processing and Cost of Change Orders. After the parties approve the Final Plans and a building permit for the Shell and/or the Tenant Improvements is issued, any further changes to the Final Plans and/or the base building specifications for the Shell shall require the prior written approval of Tenant and Landlord (not to be unreasonably withheld or delayed), provided that Landlord shall not need the consent or approval of Tenant for changes to the Final Plans that do not affect the Tenant Improvements and/or the Premises or materially alter the character of the Building. If Tenant desires any change in the Final Plans relative to the Tenant Improvements which is reasonable and practical (which shall be conclusively determined by the Architect in Architect's reasonable discretion), such changes may only be requested by the delivery to Landlord by Tenant of a proposed written "Change Order" specifically setting forth the requested change. Landlord shall have five (5) business days from the receipt of the proposed Change Order to provide Tenant with the Architect's disapproval of the proposed B-3 change stating the reason(s) for such disapproval, or if the Architect approves the proposed change, the following items: (i) a summary of any increase in the cost caused by such change (the "Change Order Cost"), (ii) a statement of the number of days of any delay caused by such proposed change (the "Change Order Delay"), and (iii) a statement of the cost of the Change Order Delay (the "Change Order Delay Expense"), which Change Order Delay Expense shall be the product of the number of days of delay multiplied by the estimated daily Base Rent rate. Tenant shall then have three (3) business days to approve the Change Order Cost, the Change Order Delay and the Change Order Delay Expense. If Tenant approves these items, Landlord shall promptly execute the Change Order and cause the appropriate changes to the Final Plans to be made. If Tenant fails to respond to Landlord within said three (3) business day period, the Change Order Cost, the Change Order Delay and the Change Order Delay Expense shall be deemed disapproved by Tenant and Landlord shall have no further obligation to perform any Work set forth in the proposed Change Order. The Change Order Cost shall include all costs associated with the Change Order, including, without limitation, architectural fees, engineering fees and construction costs, as conclusively determined by the Architect and the Contractor (defined in Section 7), respectively. The Change Order Delay shall include all delays caused by the Change Order, including, without limitation, all design and construction delays, as conclusively determined by the Architect and the Contractor (defined in Section 7), respectively. 7. Contractor. Landlord shall competitively bid the construction of the Tenant Improvements to no fewer than three (3) general contractors. Tenant shall have the right to submit to Landlord, within fifteen (15) days following the Effective Date of the Lease, the name of a general contractor which, subject to Landlord's reasonable approval, shall be included as one of the three (3) general contractors which shall bid on construction of the Tenant Improvements. After adjustments for any inconsistent assumptions among bids, Landlord shall select the lowest responsible and responsive bidder to construct the Tenant Improvements, provided that, upon mutual agreement of Landlord and Tenant, a contractor which was not the lowest price bidder may be selected to construct the Tenant Improvements. The general contractor selected pursuant to the foregoing procedure is referred to herein as the "Contractor." 8. Construction of the Improvements. Landlord will enter into a contract with the Contractor for the construction and installation of the Tenant Improvements in accordance with the Final Plans, which contract shall include a guaranteed maximum price, shall require that the major subcontracts be competitively bid to no fewer than three (3) subcontractors, and shall otherwise be on a form reasonably acceptable to Landlord and Tenant (the "Construction Contract"). 9. Payment for Cost of the Tenant Improvements. (a) Allowance. Landlord hereby grants to Tenant a tenant improvement allowance for the work described on the Final Tenant Plans of Six Hundred Sixty Thousand Dollars ($660,000.00) (based on $11.00 per rentable square foot of the Premises) (the "Allowance"). The Allowance is to be used only for the following costs approved by Landlord: B-4 (i) Payment of the cost of preparing the Preliminary Tenant Plans relative to the Tenant Improvements and the Final Tenant Plans, including mechanical, electrical, plumbing and structural drawings and of all other aspects necessary to complete the Final Tenant Plans. (ii) The payment of plan check, permit and license fees relating to construction of the Tenant Improvements. (iii) Construction of the Tenant Improvements as provided in the Final Tenant Plans, including without limitation, the following: (aa) Installation within the Premises of all partitioning, doors, demising walls, floor coverings, ceilings, wall coverings and painting and similar items; (bb) All electrical wiring, lighting fixtures, outlets and switches, and other electrical work necessary for the Premises; (cc) The furnishing and installation of all HVAC units, duct work, terminal boxes, diffusers and accessories necessary for the heating, ventilation and air conditioning systems within the office portions of the Premises; (dd) Any additional improvements to the Premises required for Tenant's use of the Premises including, but not limited to, odor control, special heating, ventilation and air conditioning, noise or vibration control or other special systems or improvements; (ee) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories, necessary for the Premises; (ff) All plumbing, fixtures, pipes and accessories necessary for the Premises; (gg) Testing and inspection costs; and (hh) Fees for the Contractor and tenant improvement coordinator including, but not limited to, fees and costs attributable to general conditions associated with the construction of the Tenant Improvements, provided Tenant has approved such fees (such approval not to be unreasonably withheld, delayed or conditioned). (iv) An administrative and coordination fee charged by Landlord against the Allowance equal to three percent (3%) of the total cost to complete the design, permit process and construction of the Tenant Improvements, including, without limitation, Change Orders. B-5 In no event will the Allowance be used to pay for Tenant's moving expenses or for furniture, artifacts, equipment, telephone systems or any other item of personal property which is not affixed to the Premises. (b) Costs in Excess of Allowance. The cost of each item referenced in Section 9(a) above shall be charged against the Allowance. If the cost of the constructing the Tenant Improvements exceeds the Allowance, such costs shall be paid for by Tenant in accordance with Paragraph 5(c) above. (c) Unused Allowance Amounts. Any unused portion of the Allowance upon completion of the Tenant Improvements will not be refunded to Tenant or monies to which Tenant is entitled, but shall be available for Change Order Costs. 10. Payment for Cost of the Shell. Landlord shall pay the cost of designing and constructing the Shell as provided in the Final Landlord Plans; provided, however, that Tenant shall pay for all costs associated with changes to the Final Landlord Plans, if any, which are necessary as a result of the construction of the Tenant Improvements. 11. Financing of Construction of Improvements. Landlord may elect to finance the construction of the Improvements with the proceeds of a loan ("Project Loan") from a third party lender ("Lender") at the then prevailing market rate and market terms for similar projects. The documents securing or given in connection with the Project Loan, if any, are herein collectively called "Loan Documents." Any Project Loan may be secured by the lien of a deed of trust encumbering the Land and Improvements. Tenant agrees to execute and/or provide all documents reasonably required by any Lender in connection with any Project Loan, including, without limitation, estoppel certificates, subordination agreements (subject to a commercially reasonable non-disturbance agreement), consents to the assignment of this Agreement, written confirmation of the satisfaction of closing conditions, and evidence of the due execution and validity of this Agreement. 12. Substantial Completion; Target Completion Date. The parties estimate that Substantial Completion (as defined in Section 2.1 of the Lease) will be achieved on or before July 1, 1999 (the "Target Completion Date"). Landlord agrees to use its commercially reasonable efforts to cause the Improvements to be Substantially Completed on or before the Target Completion Date. If there is any delay in the Substantial Completion of the Improvements beyond the Target Completion Date and such delay results from a Tenant Delay, then the Commencement Date shall be accelerated by the number of days of delay caused by the Tenant Delay(s). Notwithstanding anything set forth above, in the event that Substantial Completion is not achieved on or before the date that is nine (9) months following the Effective Date of the Lease (the "Outside Completion Date") for reasons other than Tenant Delays and Force Majeure Delays (which delays shall extend the Outside Completion Date), then Tenant, as Tenant's sole and exclusive remedy at law or in equity for such delay in Substantial Completion, shall be entitled to one (1) day of free Base Rent for each day Substantial Completion is delayed beyond the Outside Completion Date. In addition, if the parties at any time prior to Substantial Completion mutually agree that Substantial Completion will not be achieved on or before the B-6 date that is twelve (12) months following the Effective Date of the Lease for reasons other than Tenant Delays and Force Majeure Delays, then the parties may mutually agree in writing to terminate this Lease. Further, if Substantial Completion has not been achieved on or before the date that is eighteen (18) months following the Effective Date of the Lease for reasons other than Tenant Delays and Force Majeure Delays (the "Tenant's Outside Date"), Tenant shall have the right to terminate the Lease at any time after Tenant's Outside Date upon thirty (30) days prior written notice to Landlord; provided, however, if Substantial Completion is achieved at any time during such 30-day period, this Lease shall not terminate and shall remain in full force and effect. 13. Tenant Delays; Force Majeure Delays. As used herein, "Tenant Delays" means any delay in the completion of the Improvements resulting from any or all of the following: (1) Tenant's failure to timely perform any of its obligations pursuant to this Work Letter, including any failure to complete, on or before the due date therefor, any action item which is Tenant's responsibility pursuant to this Work Letter, including Tenant's failure to grant approvals within the time frames described herein; (2) Tenant's requested modifications to the Final Plans or any Tenant-initiated Change Orders; (3) Tenant's request for materials, finishes, or installations which are not readily available, (4) any delay in any way whatsoever arising from Tenant's right to conduct "Inspections" under Section 14 below, (5) Change Order Delays, or (6) any other act or failure to act by Tenant, Tenant's Representative, Tenant's employees, agents, independent contractors, consultants and/or any other person performing or required to perform services on behalf of Tenant, including interference with Landlord, or its contractors, during Tenant's early entry under Section 2.3 of the Lease. "Force Majeure Delays" as used herein means delays resulting from causes beyond the reasonable control of Landlord or the Contractor, including, without limitation, any delay caused by any action, inaction, order, ruling, moratorium, regulation, statute, condition or other decision of any private party or governmental agency having jurisdiction over any portion of the project, over the construction of the Improvements or over any uses thereof, or by delays in inspections or in issuing approvals by private parties or permits by governmental agencies, or by fire, flood, inclement weather, strikes, lockouts or other labor or industrial disturbance (whether or not on the part of agents or employees of either party hereto engaged in the construction of the Improvements), civil disturbance, order of any government, court or regulatory body claiming jurisdiction or otherwise, act of public enemy, war, riot, sabotage, blockage, embargo, failure or inability to secure materials, supplies or labor through ordinary sources by reason of shortages or priority, discovery of hazardous or toxic materials, earthquake, or other natural disaster, delays caused by any dispute resolution process, or any cause whatsoever beyond the reasonable control (excluding financial inability) of the party whose performance is required, or any of its contractors or other representatives, whether or not similar to any of the causes hereinabove stated. 14. Tenant's Inspection Rights. Landlord shall schedule and attend monthly progress meetings, walk-throughs and any other meetings with the Architect, the Contractor and Tenant to discuss the progress of the construction of the Improvements ("Meetings"). Landlord shall give Tenant at least twenty-four (24) hours prior notice (written or telephonic) of all such Meetings. Tenant shall designate in writing the person or persons appointed by Tenant to attend the Meetings and such designated party shall be entitled to be present at and to participate in the B-7 discussions during all Meetings; but Landlord may conduct the Meetings even if Tenant's appointees are not present. In addition to the foregoing and to Tenant's early entry rights as provided in Section 2.3 of the Lease, Tenant or its agents shall have the right at any and all reasonable times to conduct inspections, tests, surveys and reports of work in progress ("Inspections") for the purpose of reviewing whether the Improvements are being constructed in accordance with the Final Plans, as amended by any approved Change Orders or other agreed upon changes. Tenant agrees to protect, hold harmless and indemnify Landlord from all claims, demands, costs and liabilities (including reasonable attorneys' fees) arising from Tenant's or Tenant's agents entry onto the Land for the purpose of conducting Inspections. 15. Walk-Through and Punch List. Upon Substantial Completion of the Improvements, Tenant, Landlord and the Architect shall jointly conduct a walk-through of the Improvements and shall jointly prepare a punch list ("Punch List") of items needing additional work ("Punch List Items"); provided, however, the Punch List shall be limited to items which are required by the Construction Contract, the Final Plans, Change Orders and any other changes agreed to by the parties. Landlord shall diligently prosecute to completion all Punch List Items. 16. Miscellaneous Construction Covenants. (a) Coordination with Lease. Nothing herein contained shall be construed as (i) constituting Tenant as Landlord's agent for any purpose whatsoever, or (ii) a waiver by Landlord or Tenant of any of the terms or provisions of the Lease. Any default by either party with respect to any portion of this Work Letter, shall be deemed a breach of the Lease for which Landlord and Tenant shall have all the rights and remedies as in the case of a breach of the Lease by the other party. (b) Cooperation. Landlord and Tenant agree to cooperate with one another and to cause their respective employees, agents and contractors to cooperate with one another to coordinate any work being performed by Landlord and/or Tenant under this Work Letter, and their respective employees, agents and contractors so as to avoid unnecessary interference and delays with the completion of the Work. 17. No Representations. Landlord does not warrant that the Building or any component thereof will be free of latent defects or that it will not require maintenance and/or repair within any particular period of time, except as expressly provided herein. Tenant acknowledges and agrees that it shall rely solely on the warranty or guaranty, if any, from Landlord's Contractor, Tenant's Architect or other material and/or service providers relative to the proper design and construction of the Improvements or any component thereof and, to the extent that they do not relate to structural or other portions of the Improvements that Landlord is required to maintain and repair under the Lease, Landlord agrees to assign to Tenant, on a nonexclusive basis, the benefit of any such warranties or guaranties. 18. Tenant's Entry Into the Premises Prior to Substantial Completion. Provided that Tenant and its agents do not interfere with, or delay, Contractor's work in the Building and the Premises, Contractor shall allow Tenant access to the Premises prior to the Substantial Completion of the Premises for the purpose of Tenant installing overstandard B-8 equipment or fixtures (including Tenant's data and telephone equipment) in the Premises. Prior to Tenant's entry into the Premises as permitted by the terms of this Section 18, Tenant shall submit a schedule to Landlord and Contractor, for their approval, which schedule shall detail the timing and purpose of Tenant's entry. Tenant shall hold Landlord harmless from and indemnify, protect and defend Landlord against any loss or damage to the Building or Premises and against injury to any persons caused by Tenant's actions pursuant to this Section 18. IN WITNESS WHEREOF, this Work Letter is executed as of the date first written above. "Landlord" "Tenant" CATELLUS DEVELOPMENT CORPORATION, FIBERSTARS, INC., a California corporation a Delaware corporation By: /s/ Robert A. Connors -------------------------------------- By: /s/ Don Little ------------------------ Print Name: Robert A. Connors ----------------------------- Its: Vice President ------------------- Print Title: CFO ----------------------------- By: /s/ Fred N. Martin -------------------------------------- Print Name: Fred N. Martin ----------------------------- Print Title: COO ---------------------------- B-9 Schedule 1 ---------- Pacific Commons Building 6 Fiberstars November 19, 1998 Index of Drawings for Shell Building ARCHITECTURAL - ------------- A-0 Title Sheet A-0.1 Title 24, Fires Safety Notes, Fire Dept. Notes A-1.1 Site Plan A-1.2 Site Detailsd A-2.1 Floor Plan A-3.1 Building Elevations A-3.2 Enlarged Reveal Study A-4.1 Roof Plan A-4.2 Roof Details A-5.1 Wall Sections A-5.2 Wall Sections A-6.1 Door Schedule, Types, Details A-6.2 Details STRUCTURAL - ---------- S-1.1 Foundation Plan S-2.1 Roof Framing Plan S-3.1 Roof Nailing Diagram and Notes S-4.1 Panel Elevations S-4.2 Panel Elevations S-5.1 Wall Section SD-0 General Notes SD-1 Columns Schedule and Details SD-2 Panel at Footings Details SD-3 Panel Details SD-4 Roof Framing Details SD-5 Miscellaneous Details SD-6 Steel Stair - Loading Dock SD-7 Electric Room Details PLUMBING PLAN - ------------- P-1 Plumbing Plan ELECTRICAL - ---------- E-1 Symbols, Notes, Schedules and Details E-2 Site Electrical Plan E-3 Details LANDSCAPE - --------- L1.1 Landscape Construction Plan L2.1 Landscape Irrigation Plan L3.1 Landscape Irrigation Details L4.1 Landscape Planting Plan L5.1 Landscape Planting Details L6.1 Landscape Specifications L6.2 Landscape Specifications L6.3 Landscape Specifications EXHIBIT C --------- COMMENCEMENT DATE MEMORANDUM ---------------------------- With respect to that certain lease ("Lease") dated ___, 1998, between ______________________________, a _____________________ ("Tenant"), and Catellus Development Corporation, a Delaware corporation ("Landlord"), whereby Landlord leased to Tenant and Tenant leased from Landlord approximately __________ rentable square feet of the building located at __________________________ ("Premises"), Tenant hereby acknowledges and certifies to Landlord as follows: (1) Landlord delivered possession of the Premises to Tenant in a Substantially completed condition on _____________________ ("Possession Date"); (2) The Lease commenced on _______________________ ("Commencement Date"); (3) The Premises contain _________ square feet of space; and (4) Tenant has accepted and is currently in possession of the Premises and the Premises are acceptable for Tenant's use. IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this ___ day of ______________________. "Tenant" _________________________________, a __________________________ By: _____________________________ Its: ________________________ By: _____________________________ Its: ________________________ AGREED AND ACKNOWLEDGED: "Landlord" CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation By: _____________________________ Its: ________________________ C-1 EXHIBIT D --------- FORM OF INSURANCE CERTIFICATE ----------------------------- [See attached.] D-1 EXHIBIT E --------- PROHIBITED USES --------------- The following types of operations and activities are expressly prohibited on the Premises: 1. automobile/truck maintenance, repair or fueling; 2. battery manufacturing or reclamation; 3. ceramics and jewelry manufacturing or finishing; 4. chemical (organic or inorganic) storage, use or manufacturing; 5. drum recycling; 6. dry cleaning; 7. electronic components manufacturing; 8. electroplating and metal finishing; 9. explosives manufacturing, use or storage; 10. hazardous waste treatment, storage, or disposal; 11. leather production, tanning or finishing; 12. machinery and tool manufacturing; 13. medical equipment manufacturing and hospitals; 14. metal shredding, recycling or reclamation; 15. metal smelting and refining; 16. mining; 17. paint, pigment and coating operations; 18. petroleum refining; 19. plastic and synthetic materials manufacturing; 20. solvent reclamation; 21. tire and rubber manufacturing; E-1 22. above-and/or underground storage tanks; and 23. residential use or occupancy. E-2 EXHIBIT F --------- RULES AND REGULATIONS --------------------- 1. No automobile, recreational vehicle or any other type of vehicle or equipment shall remain upon the Common Area longer than 24 hours and no vehicle or equipment of any kind shall be dismantled or repaired or serviced on the Common Area. All vehicle parking shall be restricted to areas designated and marked for vehicle parking. The foregoing restrictions shall not be deemed to prevent temporary parking for loading or unloading of vehicles in designated areas. 2. Signs will conform to sign standards and criteria established from time to time by Landlord. No other signs, placards, pictures, advertisements, names or notices shall be inscribed, displayed or printed or affixed on or to any part of the outside or inside of the building without the written consent of Landlord and Landlord shall have the right to remove any such non-conforming signs, placards, pictures, advertisements, names or notices without notice to and at the expense of Tenant. 3. No antenna, aerial, discs, dishes or other such device shall be erected on the roof or exterior walls of the Premises, or on the grounds, without the written consent of the Landlord in each instance. Any device so installed without such written consent shall be subject to removal without notice at any time. 4. No loud speakers, televisions, phonographs, radios or other devices shall be used in a manner so as to be heard or seen outside of the Premises without the prior written consent of the Landlord. 5. The outside areas immediately adjoining the Premises shall be kept clean and free from dirt and rubbish by the Tenant to the satisfaction of Landlord and Tenant shall not place or permit any obstruction or materials in such areas or permit any work to be performed outside the Premises. 6. No open storage shall be permitted in the Project. 7. All garbage and refuse shall be placed in containers placed at the location designated for refuse collection, in the manner specified by Landlord. 8. No vending machine or machines of any description shall be installed, maintained or operated upon the Common Area. 9. Tenant shall not disturb, solicit, or canvass any occupant of the building and shall cooperate to prevent same. 10. No noxious or offensive trade or activity shall be carried on upon any units or any part of the Common Area nor shall anything be done thereon which would in any way interfere with the quiet enjoyment of each of the other tenants of the Project or which would F-1 increase the rate of insurance or overburden utility facilities from time to time existing in the Project. 11. Landlord reserves the right to make such amendments to these rules and regulations from time to time as are nondiscriminatory and not inconsistent with the Lease. F-2 EXHIBIT G --------- TENANT ESTOPPEL CERTIFICATE --------------------------- To: __________________________ ("Bank") Real Estate Industries Division No. __________________________ ______________________________________________________________ ______________________________________________________________ Attn: ________________________________________________________ Re: Lease Dated: ________________________________________ Current Landlord: ____________________________________________ Current Tenant: ______________________________________________ Square Feet: Approximately: _________________________________ Floor(s): ____________________________________________________ Located at: __________________________________________________ ("Tenant") hereby certifies that as of_________________________, 199__: 1. Tenant is the present owner and holder of the tenant's interest under the lease described above, as it may be amended to date (the "Lease") with ________________________ Landlord (who is called "Borrower" for the purposes of this Certificate). (USE THE NEXT SENTENCE IF THE LANDLORD OR TENANT NAMED IN THE LEASE IS A PREDECESSOR TO THE CURRENT LANDLORD OR TENANT.) [The original landlord under the Lease was__________________, and the original tenant under the Lease was_________________.] The Lease covers the premises commonly known as__________________ (the "Premises") in the building (the "Building") at the address set forth above. (CHOOSE ONE OF THE FOLLOWING SECTION 2(a)s BELOW) [2. (a) A true, correct and complete copy of the Lease (including all modifications, amendments, supplements, side letters, addenda and riders of and to it) is attached to this Certificate as Exhibit A.] [2 (a) The attached Exhibit A accurately identifies the Lease and all modifications, amendments, supplements, side letters, addenda and riders of and to it.] (b) (IF APPLICABLE) [The Lease provides that in addition to the Premises, Tenant has the right to use or rent ___________ assigned/unassigned] parking spaces near the Building or in the garage portion of the building during the term of the Lease.] (c) The term of the Lease commenced on _______________, 199___ and will expire on _______________, 199___ including any presently exercised option or renewal term. (CHOOSE ONE OF THE FOLLOWING TWO SENTENCES.) [Tenant has no option or right to renew, extend or cancel the Lease, or to lease additional space in the Premises or Building, or to use any parking (IF APPLICABLE) [other than that specified in Section 2(b) above].] [Except as G-1 specified in Paragraph(s) ______________ of the Lease (copy attached), Tenant has no option or right to renew, extend or cancel the Lease, or to lease additional space in the Premises or Building, or to use any parking (IF APPLICABLE) [other than that specified in Section 2(b) above].] (CHOOSE ONE OF THE FOLLOWING SECTION 2(d)s) [(d) Tenant has no option or preferential right to purchase all or any part of the Premises (or the land of which the Premises are a part). Tenant has no right or interest with respect to the Premises or the Building other than as Tenant under the Lease.] [(d) Except as specified in Paragraph(s) ______________ the Lease (copy attached), Tenant has no option or preferential right to purchase all or any part of the Premises (or the land of which the Premises are a part). Except for the foregoing, Tenant has no right or interest with respect to the Premises or the Building other than as Tenant under the Lease.] (e) The annual minimum rent currently payable under the Lease is $__________ and such rent has been paid through _______________, 199__. (IF APPLICABLE) [The annual percentage rent currently payable under the Lease is at the rate of _____________ such rent has been paid through ______________, 199__.] (f) (IF APPLICABLE) [Additional rent is payable under the Lease for (i) operating, maintenance or repair expenses, (ii) property taxes, (iii) consumer price index cost of living adjustments, or (iv) percentage of gross sales adjustments (i.e., adjustments made based on underpayments of percentage rent). Such additional rent has been paid in accordance with Borrower's rendered bills through _______________, 199__. The base year amounts for additional rental items are as follows: (1) operating, maintenance or repair expenses $___________, (2) property taxes $___________, and (3) consumer price index ________________ (please indicate base year CPI level).] (g) Tenant has made no agreement with Borrower or any agent, representative or employee of Borrower concerning free rent, partial rent, rebate of rental payments or any other similar rent concession (IF APPLICABLE) [except as expressly set forth in Paragraph(s) _____ of the Lease (copy attached)]. (h) Borrower currently holds a security deposit in the amount of $____________ which is to be applied by Borrower or returned to Tenant in accordance with Paragraph(s) ____ of the Lease. Tenant acknowledges and agrees that Bank shall have no responsibility or liability for any security deposit, except to the extent that any security deposit shall have been actually received by Bank. 3. (a) The Lease constitutes the entire agreement between Tenant and Borrower with respect to the Premises, has not been modified changed, altered or amended and is in full force and effect in the form (CHOOSE ONE) [attached as/described in] Exhibit A. There are no other agreements, written or oral, which affect Tenant's occupancy of the Premises. G-2 (b) All insurance required of Tenant under the Lease has been provided by Tenant and all premiums have been paid. (c) To the best knowledge of Tenant, no party is in default under the Lease. To the best knowledge of Tenant, no event has occurred which, with the giving of notice or passage of time, or both, would constitute such a default. (d) The interest of Tenant in the Lease has not been assigned or encumbered. Tenant is not entitled to any credit against any rent or other charge or rent concession under the Lease except as set forth in the Lease. No rental payments have been made more than one month in advance. 4. All contributions required to be paid by Borrower to date for improvements to the Premises have been paid in full and all of Borrower's obligations with respect to tenant improvements have been fully performed. Tenant has accepted the Premises, subject to no conditions other than those set forth in the Lease. 5. Neither Tenant nor any guarantor of Tenant's obligations under the Lease is the subject of any bankruptcy or other voluntary or involuntary proceeding, in or out of court, for the adjustment of debtor-creditor relationships. 6. (a) As used here, "Hazardous Substance" means any substance, material or waste (including petroleum and petroleum products) which is designated, classified or regulated as being "toxic" or "hazardous" or a "pollutant" or which is similarly designated, classified or regulated, under any federal, state or local law, regulation or ordinance. (b) Tenant represents and warrants that it has not used, generated, released, discharged, stored or disposed of any Hazardous Substances on, under, in or about the Building or the land on which the Building is located (IF APPLICABLE) [, other than Hazardous Substances used in the ordinary and commercially reasonable course of Tenant's business in compliance with all applicable laws]. (IF APPLICABLE) [Except for such commercially reasonable use by Tenant,] Tenant has no actual knowledge that any Hazardous Substance is present, or has been used, generated, released, discharged, stored or disposed of by any party, on, under, in or about such Building or land. 7. Tenant hereby acknowledges that Borrower (CHOOSE ONE) [intends to encumber/has encumbered] the property containing the Premises with a Deed of Trust in favor of Bank. Tenant acknowledges the right of Borrower, Bank and any and all of Borrower's present and future lenders to rely upon the statements and representations of Tenant contained in this Certificate and further acknowledges that any loan secured by any such Deed of Trust or further deeds of trust will be made and entered into in material reliance on this Certificate. 8. Tenant hereby agrees to furnish Bank with such other and further estoppel as Bank may reasonably request. ___________________________________ G-3 By: ______________________________________ Name: ____________________________________ Title: ___________________________________ G-4 EXHIBIT H --------- [See attached.] EXHIBIT H RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: [LENDER] Real Estate Group (AU #[AU#]) [OFFICE ADDRESS] Attention: [LOAN ADMIN'S NAME] Loan No. [LOAN #] ================================================================================ (Space Above For Recorder's Use) SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT (Lease To Deed of Trust) NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR LEASE BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF THE DEED OF TRUST (DEFINED BELOW). THIS SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT ("Agreement") is made [DATE OF DOCUMENTS] by and between [TRUSTOR] ("Owner"), [NAME OF LESSEE] ("Lessee") and [LENDER] ("Lender"). RECITALS: A. Pursuant to the terms and provisions of a lease dated [DATE OF LEASE] ("Lease"), Owner, as "Lessor", granted to Lessee a leasehold estate in and to a portion of the property described on Exhibit A attached hereto and incorporated herein by this reference (which property, together with all improvements now or hereafter located on the property, is defined as (the "Property"). B. [If applicable: The Lease contains provisions and terms granting Lessee an option to purchase the Property (the "Option To Purchase").] C. Owner has executed, or proposes to execute, a deed of trust with absolute assignment of leases and rents, security agreement and fixture filing ("Deed of Trust") securing, among other things, a promissory note ("Note") in the principal sum of [LOAN AMOUNT IN WORDS]/100THS DOLLARS ($[LOAN AMOUNT IN #'S]), dated [DATE OF DOCUMENTS], in favor of Lender, which Note is payable with interest and upon the terms and conditions described therein ("Loan"). The Deed of Trust is to be recorded concurrently herewith. D. As a condition to making the Loan secured by the Deed of Trust, Lender requires that the Deed of Trust be unconditionally and at all times remain a lien on the Property, prior and superior to all the rights of Lessee under the Lease and the Option To Purchase and that the Lessee specifically and unconditionally subordinate the Lease and the Option To Purchase to the lien of the Deed of Trust. Loan No. [LOAN #] E. Owner and Lessee have agreed to the subordination, attornment and other agreements herein in favor of Lender. NOW THEREFORE, for valuable consideration and to induce Lender to make the Loan, Owner and Lessee hereby agree for the benefit of Lender as follows: 1. SUBORDINATION. Owner and Lessee hereby agree that: 1.1 Prior Lien. The Deed of Trust securing the Note in favor of Lender, and any modifications, renewals or extensions thereof, shall unconditionally be and at all times remain a lien on the Property prior and superior to the Lease [and the Option To Purchase]; 1.2 Subordination. Lender would not make the Loan without this agreement to subordinate; and 1.3 Whole Agreement. This Agreement shall be the whole agreement and only agreement with regard to the subordination of the Lease [and the Option To Purchase] to the lien of the Deed of Trust and shall supersede and cancel, but only insofar as would affect the priority between the Deed of Trust and the Lease [and the Option To Purchase], any prior agreements as to such subordination, including, without limitation, those provisions, if any, contained in the Lease which provide for the subordination of the Lease [and the Option To Purchase] to a deed or deeds of trust or to a mortgage or mortgages. AND FURTHER, Lessee individually declares, agrees and acknowledges for the benefit of Lender, that: 1.4 Use of Proceeds. Lender, in making disbursements pursuant to the Note, the Deed of Trust or any loan agreements with respect to the Property, is under no obligation or duty to, nor has Lender represented that it will, see to the application of such proceeds by the person or persons to whom Lender disburses such proceeds, and any application or use of such proceeds for purposes other than those provided for in such agreement or agreements shall not defeat this agreement to subordinate in whole or in part; 1.5 Waiver, Relinquishment and Subordination. Lessee intentionally and unconditionally waives, relinquishes and subordinates all of Lessee's right, title and interest in and to the Property to the lien of the Deed of Trust and understands that in reliance upon, and in consideration of, this waiver, relinquishment and subordination, specific loans and advances are being and will be made by Lender and, as part and parcel thereof, specific monetary and other obligations are being and will be entered into which would not be made or entered into but for such reliance upon this waiver, relinquishment and subordination. 2. ASSIGNMENT. Lessee acknowledges and consents to the assignment of the Lease by Lessor in favor of Lender. 3. ESTOPPEL. Lessee acknowledges and represents that: 3.1 Lease Effective. The Lease has been duly executed and delivered by Lessee and, subject to the terms and conditions thereof, the Lease is in full force and effect, the obligations of Lessee thereunder are valid and binding and there have been no modifications or additions to the Lease, written or oral; -2- Loan No. [LOAN #] 3.2 No Default. To the best of Lessee's knowledge, as of the date hereof: (i) there exists no breach, default, or event or condition which, with the giving of notice or the passage of time or both, would constitute a breach or default under the Lease; and (ii) there are no existing claims, defenses or offsets against rental due or to become due under the Lease; 3.3 Entire Agreement. The Lease constitutes the entire agreement between Lessor and Lessee with respect to the Property, Lessee claims no rights with respect to the Property other than as set forth in the Lease [and Lessee acknowledges that the Lease does not contain any option to purchase the Property or any right of first refusal with respect to the Property]; and 3.4 No Prepaid Rent. No deposits or prepayments of rent have been made in connection with the Lease, except as follows: (if none, state "None") ____________________________________________________________ ____________________________________________________________________ 4. ADDITIONAL AGREEMENTS. Lessee covenants and agrees that, during all such times as Lender is the Beneficiary under the Deed of Trust: 4.1 Modification, Termination and Cancellation. Lessee will not consent to any modification, amendment, termination or cancellation of the Lease (in whole or in part) without Lender's prior written consent and will not make any payment to Lessor in consideration of any modification, termination or cancellation of the Lease (in whole or in part) without Lender's prior written consent; 4.2 Notice of Default. Lessee will notify Lender in writing concurrently with any notice given to Lessor of any default by Lessor under the Lease, and Lessee agrees that Lender has the right (but not the obligation) to cure any breach or default specified in such notice within the time periods set forth below and Lessee will not declare a default of the Lease, as to Lender, if Lender cures such default within fifteen (15) days from and after the expiration of the time period provided in the Lease for the cure thereof by Lessor; provided, however, that if such default cannot with diligence be cured by Lender within such fifteen (15) day period, the commencement of action by Lender within such fifteen (15) day period to remedy the same shall be deemed sufficient so long as Lender pursues such cure with diligence; 4.3 No Advance Rents. Lessee will make no payments or prepayments of rent more than one (1) month in advance of the time when the same become due under the Lease; and 4.4 Assignment of Rents. Upon receipt by Lessee of written notice from Lender that Lender has elected to terminate the license granted to Lessor to collect rents, as provided in the Deed of Trust, and directing the payment of rents by Lessee to Lender, Lessee shall comply with such direction to pay and shall not be required to determine whether Lessor is in default under the Loan and/or the Deed of Trust. 4.5 Insurance and Condemnation Proceeds. Lessee agrees that the provisions of the Deed of Trust shall control the disposition and application of any insurance proceeds and condemnation awards with respect to the Property. 5. ATTORNMENT. In the event of a foreclosure under the Deed of Trust, Lessee agrees for the benefit of Lender (including for this purpose any transferee of Lender or any transferee of Lessor's title in and to the Property by Lender's exercise of the remedy of sale by foreclosure under the Deed of Trust) as follows: -3- Loan No. [LOAN #] 5.1 Payment of Rent. Lessee shall pay to Lender all rental payments required to be made by Lessee pursuant to the terms of the Lease for the duration of the term of the Lease; 5.2 Continuation of Performance. Lessee shall be bound to Lender in accordance with all of the provisions of the Lease for the balance of the term thereof, and Lessee hereby attorns to Lender as its landlord, such attornment to be effective and self-operative without the execution of any further instrument immediately upon Lender succeeding to Lessor's interest in the Lease and giving written notice thereof to Lessee; 5.3 No Offset. Lender shall not be liable for, nor subject to, any offsets or defenses which Lessee may have by reason of any act or omission of Lessor under the Lease, nor for the return of any sums which Lessee may have paid to Lessor under the Lease as and for security deposits, advance rentals or otherwise, except to the extent that such sums are actually delivered by Lessor to Lender; and 5.4 Subsequent Transfer. If Lender, by succeeding to the interest of Lessor under the Lease, should become obligated to perform the covenants of Lessor thereunder, then, upon any further transfer of Lessor's interest by Lender, all of such obligations shall terminate as to Lender. 6. NON-DISTURBANCE. In the event of a foreclosure under the Deed of Trust, so long as there shall then exist no breach, default, or event of default on the part of Lessee under the Lease, Lender agrees for itself and its successors and assigns that the leasehold interest of Lessee under the Lease shall not be extinguished or terminated by reason of such foreclosure, but rather the Lease shall continue in full force and effect and Lender shall recognize and accept Lessee as tenant under the Lease- subject to the terms and provisions of the Lease except as modified by this Agreement; provided, however, that Lessee and Lender agree that the following provisions of the Lease (if any) shall not be binding on Lender: any option to purchase with respect to the Property; any right of first refusal with respect to the Property; any provision regarding the use of insurance proceeds or condemnation proceeds with respect to the Property which is inconsistent with the terms of the Deed of Trust. 7. MISCELLANEOUS. 7.1 Heirs, Successors, Assigns and Transferees. The covenants herein shall be binding upon, and inure to the benefit of, the heirs, successors and assigns of the parties hereto. 7.2 Notices. All notices or other communications required or permitted to be given pursuant to the provisions hereof shall be deemed served upon delivery or, if mailed, upon the first to occur of receipt or the expiration of three (3) days after deposit in United States Postal Service, certified mail, postage prepaid and addressed to the address of Lessee or Lender appearing below; provided, however, any party shall have the right to change its address for notice hereunder by the giving of written notice thereof to the other party in the manner set forth in this Agreement: "OWNER" "LENDER" __________________________________ [LENDER] __________________________________ Real Estate Group (AU #[AU #]) __________________________________ [OFFICE ADDRESS] Attn: [LOAN ADMIN'S NAME] Loan No. [LOAN #] -4- Loan No. [LOAN #] "LESSEE" __________________________________ __________________________________ __________________________________ 7.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute and be construed as one and the same instrument. 7.4 Remedies Cumulative. All rights of Lender herein to collect rents on behalf of Lessor under the Lease are cumulative and shall be in addition to any and all other rights and remedies provided by law and by other agreements between Lender and Lessor or others. 7.5 Paragraph Headings. Paragraph headings in this Agreement are for convenience only and are not to be construed as part of this Agreement or in any way limiting or applying the provisions hereof. 8. INCORPORATION. Exhibit A and Lease Guarantor's Consent are attached hereto and incorporated herein by this reference. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE OWNER TO OBTAIN A LOAN, THE PROCEEDS OF WHICH MAY BE EXPENDED FOR PURPOSES OTHER THAN THE IMPROVEMENT OF THE PROPERTY. IT IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS AGREEMENT, THE PARTIES CONSULT WITH THEIR ATTORNEYS WITH RESPECT HERETO. "OWNER" "LENDER" [TRUSTOR SIGNATURE BLOCK] [LENDER SIGNATURE BLOCK] ______________________________________ ___________________________________ By:___________________________________ By:________________________________ Name:____________________________ Name:_________________________ Title:___________________________ Title:________________________ "LESSEE" [LESSEE SIGNATURE BLOCK] ______________________________________ By:___________________________________ Name:____________________________ Title:___________________________ -5- Loan No. [LOAN #] (ALL SIGNATURES MUST BE ACKNOWLEDGED) -6- Loan No. [LOAN #] LEASE GUARANTOR'S CONSENT The undersigned ("Lease Guarantor") consents to the foregoing Subordination Agreement; Acknowledgment of Lease Assignment, Estoppel, Attornment and Non-Disturbance Agreement and the transactions contemplated thereby and reaffirms its obligations under the Lease Guaranty ("Lease Guaranty") dated [DATE OF LEASE GUARANTY]. Lease Guarantor further reaffirms that its obligations under the Lease Guaranty are separate and distinct from Lessee's obligations. AGREED: Dated as of: [DATE OF DOCUMENTS] "LEASE GUARANTOR" _________________________________ -7- Loan No. [LOAN #] DESCRIPTION OF PROPERTY EXHIBIT A to Subordination Agreement; Acknowledgement of Lease Assignment, Estoppel, Attornment and Non-Disturbance Agreement dated as of [DATE OF DOCUMENTS], executed by [NON-BORROWER TRUSTOR] as "Owner", [NAME OF LESSEE], as "Lessee", and [LENDER], as "Lender". All that certain real property located in the County of [PROPERTY LOCATION COUNTY], State of [STATE], described as follows: APN -8- Loan No. [LOAN #] STATE OF_______________________) ) ss. COUNTY OF______________________) On __________________________, before me, _________________________, a Notary Public in and for said state, personally appeared ________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ________________________________________ Notary Public in and for said State -9- EX-10.37 6 MULTI-TENANT INDUSTRIAL LEASE AGREEMENT MULTI-TENANT INDUSTRIAL LEASE AGREEMENT (MODIFIED GROSS) Harsch Investment Corp., as Agent for MacArthur Broadway Center, Inc. Landlord and Fiberstars, Inc., a California Corporation dba Fibre Optics International, Inc. Cloverdale Business Park Seattle, WA TABLE OF CONTENTS Page 1 Basic Lease Terms .................................... 2 2 Premises ............................................. 3 3 Lease Term ........................................... 3 4 Possession ........................................... 3 5 Rent ................................................. 4 6 Additional Rent ...................................... 4 7 Prepaid Rent ......................................... 5 8 Security Deposit ..................................... 5 9 Use of Premises and Project Facilities ............... 5 10 Surrender of Premises; Holding Over .................. 6 11 Signage .............................................. 6 12 Personal Property Taxes .............................. 6 13 Parking .............................................. 6 14 Utilities ............................................ 6 15 Maintenance .......................................... 6 16 Alterations .......................................... 7 17 Release and Indemnity ................................ 7 18 Insurance ............................................ 7 19 Destruction .......................................... 8 20 Condemnation ......................................... 8 21 Assignment or Sublease ............................... 9 22 Default .............................................. 9 23 Landlords Remedies ................................... 9 24 Default by Landlord .................................. 10 25 Entry of Premises and Performance by Tenant .......... 10 26 Subordination ........................................ 10 27 Notice ............................................... 10 28 Waiver ............................................... 11 29 Limitation of Liability .............................. 11 30 Force Majeure ........................................ 11 31 Professional Fees .................................... 11 32 Examination of Lease ................................. 12 33 Estoppel Certificate ................................. 12 34 Rules and Regulations ................................ 12 35 Liens ................................................ 12 36 Miscellaneous Provisions ............................. 12 EXHIBITS A Building Floor Plan Showing Premises ......................... A-1 B Project Site Plan and Legal Description ...................... B-1 C Work Letter Agreement - Intentionally Omitted ................ C-1 D Notice of Lease Term Dates - Intentionally Omitted ........... D-1 E Tenant Estoppel Certificate - Intentionally Omitted .......... E-1 F Rules and Regulations ........................................ F-1 G Project Signage Criteria ..................................... G-1 H Hazardous Materials Addendum - Intentionally Omitted ......... H-1 I Hazardous Materials Questionnaire - Intentionally Omitted .... I-1 Rider 1 1 LEASE AGREEMENT BASIC LEASE TERMS This Paragraph 1 represents a summary of the basic terms of this Lease. In the event of any inconsistency between the terms contained in this Paragraph 1 and any specific provision of this Lease, the terms of the more specific provision shall prevail. a. DATE OF LEASE EXECUTION: September 15,1998 b TENANT: Fiberstars, Inc., a California Corporation Trade Name: dba Fibre Optics Intenational, Inc. Address (Leased Premises): 309 South Cloverdale, Seattle WA 98108 Building/Unit D1-4, 46 c. LANDLORD: MacArthur Broadway Center, Inc. Address (FOR RENT/ NOTICES): C/O Harsch Investment Corp., 309 South Cloverdale, Suite B14, Seattle, WA 98108 Copy To: C/O Harsch Investment Corp., P.O. Box 2708, Portland OR, 97208 d. PREMISES: Those Certain Premises Defined in PARAGRAPH 2 Below e. TENANT'S PERMITTED USE OF PREMISES: Administration offices and warehouse for short run of assembly of fibre optics signage and for no other purposes whatsoever. f. PREMISES AREA: Approximately 6,000 Rentable Square Feet g. PROJECT AREA: Approximately 195,150 Rentable Square Feet h. PREMISES PERCENT OF PROJECT: 3.0746% on a Rentable Square Foot Basis i. TERM: Commencement Date: March 1, 1999 Expiration Date: February 28, 2000 Total Number of Months: 12 months j. MONTHLY BASIC RENT: Four Thousand Seven Hundred Eighty-Five Dollars ($4,785.00) March 1, 1999--February 28, 2000 k. ANNUAL BASIC RENT: Fifty Seven Thousand, Four Hundred Twenty Dollars ($57,420.00) March 1, 1999--February 28, 2000 l. RENT ADJUSTMENT: m. TENANT ANNUAL EXPENSE ALLOWANCE: None n. PREPAID RENT: (for last month of term): zero Dollars o. TOTAL SECURITY DEPOSIT: Four Thousand Seven Hundred Eighty-Five Dollars ($4,785.00) p. BROKER(S): None. q. GUARANTOR(S): r. TENANT IMPROVEMENTS: None. Space "as-is". s. TENANT IMPROVEMENT ALLOWANCE: None. t. PARKING: Not more than 5 unreserved vehicle parking spaces, which includes Tenant's prorata share of visitor parking spaces for the building u. ADDITIONAL SECTIONS: None. v. RIDERS: Riders numbered 1 through 1 are attached hereto and made a part hereof. If none, so state in the following space _____________. w. EXHIBITS: Exhibits lettered A, B, F and G are attached hereto and made a part hereof, C. D, E, H and I are intentionally omitted. 2 2. PREMISES. (a) Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the premises referenced in Paragraph 1 and outlined in Exhibit A (the "Premises"), located in the building (the "Building") which is part of the project described on Exhibit B (the "Project"). Landlord reserves the right to modify Tenant's percentage of the Project as set forth in Paragraph 1 if the Project size is increased through the development of additional property or decreased through the sale or other transfer of a portion of the Project. Subject to the provisions of Paragraph 4(c) below, if applicable, Tenant acknowledges that it has examined the Premises and accepts the Premises in their present condition. (b) The parties agree that the letting and hiring of the Premises is upon and subject to the terms, covenants and conditions herein set forth and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. (c) The term "Rentable Square Feet" as used in this Lease shall include a portion of the total square feet contained in any lobby or building common areas of the Building, such portion to approximate Tenant's Percentage (as shown in Subparagraph 1(h) of said total square feet. Such portion shall be determined by Landlord by measuring the area within the bounds of the inside surface of the glass in the outer wall of the Building and the surface facing the Premises of all partitions separating the Premises from the building core, adjoining tenant space and public corridors and other "Common Areas" as defined in this Lease. No deductions shall be made for space occupied by structural or functional columns or other projections. For purposes of establishing the initial Tenant's Percentage, Annual Expense Allowance and Annual Basic Rent as shown in Paragraph 1 of this Lease, the number of Rentable Square Feet of the Premises is deemed to be as set forth in Subparagraph 1(f) and the number of Rentable Square Feet of the Project is deemed to be set forth in Subparagraph 1(g). (d) Landlord reserves the right from time to time without unreasonable interference with Tenant's use of the Premises to do and perform such acts and make such changes in, to or with respect to the Common Areas, the Building or the Project as Landlord may, in the exercise of sound business judgment, deem to be appropriate. 3. LEASE TERM. The term of this Lease shall be for the period designated in Subparagraph 1(i) commencing on the Commencement Date, and ending on the Expiration Date as set forth in said Subparagraph 1(i), unless the term hereby demised shall be sooner terminated as herein provided ("Term"). Notwithstanding the foregoing, if the Commencement Date falls on any day other than the first day of a calendar month then the Term of this Lease shall be measured from the first day of the month following the month in which the Commencement Date occurs. 4. POSSESSION. (a) Delivery of Possession, If Landlord is required to perform any additional work or to construct any Tenant Improvements in or about the Premises, such obligations shall be set forth in the Work Letter Agreement attached hereto as Exhibit C. The Premises shall be delivered to Tenant upon substantial completion of any such additional work or Tenant Improvements, as shall be determined by Landlord's architect or space planner. The Commencement Date set forth in Subparagraph 1(i) is the contemplated date of substantial completion of any such additional work or Tenant Improvements; or, it none be required, the date delivery of the Premises to Tenant is otherwise contemplated. Notwithstanding the foregoing, Landlord shall not be obligated to deliver possession of the Premises to Tenant until Landlord has received from Tenant all of the following: (i) the Security Deposit and the first monthly installment of Annual Basic Rent; (ii) executed copies of policies of insurance or certificates thereof as required under Paragraph 18 of this Lease; (iii) copies of all governmental permits and authorizations required in connection with Tenant's operation of its business upon the Premises; and (iv) an executed original of the Hazardous Materials Questionnaire in the form attached hereto as Exhibit I. Except for any additional work or Tenant improvements set forth in Exhibit C, Tenant accepts the Premises "as is." Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building or the Project, including, without limitation, any representation or warranty with respect to the suitability of the same for the conduct of Tenant's business. (b) Late Delivery. Tenant agrees that if Landlord is unable to deliver possession of the Premises to Tenant on or prior to the Commencement Date specified in Subparagraph 1(i), this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, nor shall the Expiration Date of the Term be in any way extended, unless such late delivery shall be due solely to the gross negligence or willful misconduct of Landlord, in which event, as Tenant's sole remedy, the Commencement Date and the Expiration Date of the Term shall be extended one (1) day for each day Landlord delays in delivering possession of the Premises to Tenant due solely to Landlord's gross negligence or willful misconduct. Neither Landlord nor its agents shall be liable to Tenant for any damages caused by delay in delivery of the Premises, nor shall this Lease be void or voidable, but Tenant will not be liable for payment of Rent until such date as Landlord tenders possession of the Premises to Tenant. All other terms and conditions of this Lease shall remain in full force and effect. Notwithstanding the foregoing, in the event that the Landlord has not delivered possession of the Premises within six (6) months after the effective date hereof, this Lease shall terminate and be of no further force or effect. (c) Condition of Premises. In accordance with the Work Schedule to be prepared by Landlord and Tenant pursuant to the Work Letter Agreement attached hereto as Exhibit C, if any, and prior to the Commencement Date, Landlord and Tenant shall jointly conduct a walk-through inspection of the Premises and shall jointly prepare a Punch-List (the "Punch-List") of items needing additional work; provided, however, the Punch-List shall be limited to items required to be installed by Landlord under the Work Letter Agreement, and any such Punch-List will not include any items of damage to the Premises caused by Tenant's move-in or early entry, if permitted. Damage caused by Tenant will be connected or repaired by Landlord, at Tenant's expense. Other than the items specified in the Punch-List, by taking possession of the Premises, Tenant will be deemed to have acknowledged that Landlord has installed the Tenant Improvements as required by the Work Letter Agreement and that there are no additional items needing work or repair. Landlord shall cause all items set forth in the Punch-List to be repaired or connected within thirty (30) days following the preparation of the Punch-List or as soon as reasonably practicable after the preparation of the Punch-List. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, the Project or any portions thereof or with respect to the suitability of same for the conduct of Tenant's business. Without limiting the foregoing, if the Building is newly constructed or renovated, Tenant acknowledges and accepts the various start-up inconveniences that may be associated with the use of the Project and the Common Areas Landlord ???? Tenant ???? 3 such as certain construction obstacles including scaffolding, uneven air conditioning services and other typical conditions incident to recently constructed or renovated buildings. 5. RENT. (a) Basic Rent. Tenant agrees to pay Landlord as Annual Basic Rent for the Premises the Annual Basic Rent designated in Subparagraph 1(k) (adjusted as hereinafter provided) in twelve (12) equal monthly installments as designated in Subparagraph 1(j), each in advance on the first day of each and every calendar month during the Term, except that one month's rent shall be paid upon the execution of this Lease. If the Term of this Lease commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, then the rent for such periods shall be prorated in the proportion that the number of days this Lease is in effect during such periods bears to thirty days (30), and such rent shall be paid at the commencement of such period. The Annual Basic Rent, any additional rent payable pursuant to the provisions of this Lease, and any rental adjustments shall be paid to Landlord, without any prior demand therefor, and without any deduction or offset whatsoever in lawful money of the United States of America, which shall be legal tender at the time of payment, at the address of Landlord designated in Subparagraph 1(c) or to such other person or at such other place as Landlord may from time to time designate in writing. Further, all charges to be paid by Tenant hereunder, including, without limitation, payments for real property taxes, insurance, repairs, and parking, if any, shall be considered additional rent for the purposes of this Lease, and the word "rent" in this Lease shall include such additional rent unless the context specifically or clearly implies that only the Annual Basic Rent is referenced. Annual Basic Rent shall be adjusted as provided in Subparagraph 1(l). (b) Late Payments. Tenant acknowledges that late payment by Tenant to Landlord of any rent or other sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to ascertain. Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on Landlord by the terms of any encumbrance or note secured by the Premises. Therefore, if any rent or other sum due from Tenant is not received within five (5) business days of its due date, Tenant shall also pay to Landlord no later than ten (10) calendar days after the rental due date an additional sum equal to 10% of such overdue payment. Landlord and Tenant hereby agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any such late payment. Additionally, all such delinquent rent or other sums, plus this late charge, shall bear interest at the then maximum lawful rate permitted to be charged by Landlord. Any payments of any kind returned for insufficient funds will be subject to an additional handling charge of $50.00. 6. ADDITIONAL RENT. Landlord ???? Tenant ???? 4 7. PREPAID RENT. Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent set forth in Subparagraph 1(n), and if Tenant is not in default of any provisions of this Lease, such Prepaid Rent shall be applied toward the rent due for the last month of the Term. Landlord's obligations with respect to the Prepaid Rent are those of a debtor and not of a trustee, and Landlord can commingle the Prepaid Rent Landlord shall not be required to pay Tenant interest on the Prepaid Rent. Landlord shall be entitled to immediately endorse and cash Tenant's Prepaid Rent; however, such endorsement and cashing shall not constitute Landlord's acceptance of this Lease. In the event Landlord does not accept this Lease, Landlord shall return said Prepaid Rent, If Landlord sells the Premises and deposits with the purchaser the Prepaid Rent, Landlord shall be discharged from any further liability with respect to the Prepaid Rent. 8. SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit the Security Deposit set forth in Subparagraph 1(o) with Landlord, in part as security for the performance by Tenant of the provisions of this Lease and in part as an administrative fee. If Tenant is in default, regardless if such default is monetary or non-monetary, Landlord can use the Security Deposit or any portion of it to cure the default or to compensate Landlord for any damages sustained by Landlord resulting from Tenant's default. Upon demand, Tenant shall immediately pay to Landlord a sum equal to the portion of the Security Deposit expended or applied by Landlord to maintain the Security Deposit in the amount initially deposited with Landlord. If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return the unused portion of the Security Deposit to Tenant. Landlord's obligations with respect to the Security Deposit are those of a debtor and not of a trustee, and Landlord can commingle the Security Deposit with Landlord's general funds. Landlord shall not be required to pay Tenant interest on the Security Deposit. Landlord shall be entitled to immediately endorse and cash Tenant's Security Deposit; however, such endorsement and cashing shall not constitute Landlord's acceptance of this Lease. In the event Landlord does not accept this Lease, Landlord shall return said Security Deposit, If Landlord sells the Premises and deposits with the purchaser the then amount of the Security Deposit, Landlord shall be discharged from any further liability with respect to the Security Deposit. 9. USE OF PREMISES AND PROJECT FACILITIES. (a) Tenant's Use of the Premises. Tenant shall use the Premises for the use or uses set forth in Subparagraph 1(d) above, and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Nothing contained herein shall be deemed to give Tenant any exclusive right to such use in the Project. (b) Compliance. At Tenant's sole cost and expense, Tenant shall procure, maintain and hold available for Landlord's inspection, all governmental licenses and permits required for the proper and lawful conduct of Tenant's business from the Premises. Tenant shall maintain the Premises in compliance with all laws, statutes, zoning restrictions, ordinances or governmental laws, rules, regulations or requirements of any duly constituted public authority having jurisdiction over the Premises now or hereafter in force, the requirements of the Board of Fire Underwriters or any other similar body now or hereafter constituted, or of the Certificate of Occupancy issued for the Building. Tenant shall not use or occupy the Premises in violation of any of the foregoing Tenant shall, upon written notice from Landlord, discontinue any use of the Premises which is declared by any authority having jurisdiction over the Premises, governmental or otherwise, to be a violation of law or of said Certificate of Occupancy. Tenant shall comply with all rules, orders, regulations and requirements of any insurance authority having jurisdiction over the Project or any present or future insurer relating to the Premises or the Project. Tenant shall promptly, upon demand, reimburse Landlord for any additional premium charged for any existing insurance policy or endorsement required by reason of Tenant's failure to comply with the provisions of this Paragraph 9 Tenant shall not do or permit anything to be done in or about the Premises which will in any manner obstruct or interfere with the rights of other tenants or occupants of the Project, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant Landlord ???? Tenant ???? 5 cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall conduct no auctions, distress, or "going out of business" sales in or from the Premises. Tenant shall comply with all restrictive covenants and obligations created by private contracts which affect the use and operation of the Premises, the Common Areas or the Project including, without limitation, the Rules and Regulations referred to in Paragraph 34 and attached hereto as Exhibit F. Tenant shall not commit or suffer to be committed any waste in or upon the Premises and shall keep the Premises in first class repair and appearance. Further, Tenant's business machines and mechanical equipment which cause vibration or noise that may be transmitted to the Building structure or to any other space in the Building shall be so installed, maintained and used by Tenant as to eliminate or minimize such vibration or noise. Tenant shall be responsible for all structural engineering required to determine structural load, as well as the expense thereof. 10. SURRENDER OF PREMISES; HOLDING OVER. Upon expiration of the Term of this Lease, Tenant shall surrender to Landlord the Premises and all Tenant Improvements and alterations in good condition, except for ordinary wear and tear from reasonable and normal use and except for alterations Tenant has the right or is obligated to remove under the provisions of Paragraph 16 herein. Tenant shall remove all personal property including, without limitation, all wallpaper, paneling and other decorative improvements or fixtures and shall perform all restoration made necessary by the removal of any alterations or Tenant's personal property before the expiration of the Term, including for example, restoring all wall surfaces to their condition prior to the commencement of this Lease. Landlord can elect to retain or dispose of in any manner Tenant's personal property not removed from the Premises by Tenant prior to the expiration of the Term. Tenant waives all claims against Landlord for any damage to Tenant resulting from Landlord's retention or disposition of Tenant's personal property. Tenant shall be liable to Landlord for Landlord's costs for storage, removal or disposal of Tenant's personal property If Tenant, with Landlord's consent, remains in possession of the Premises after expiration or termination of the Term, such possession by Tenant shall be deemed to be a month-to-month tenancy terminable on written 30-day notice at any time by either party. All provisions of this Lease, except those pertaining to term and rent, shall apply to the month-to-month tenancy. Tenant shall pay monthly rent in an amount equal to 125% of the Basic Rent last in effect under the Lease, subject to increases as provided in Subparagraph 5(c), if applicable, plus 100% of the last month's estimate of Tenant's share of Expenses pursuant to Paragraph 6, subject to increase as provided therein. If Tenant, without Landlord's consent, shall fail to surrender the Premises after expiration or termination of the Term, Tenant shall pay monthly rent in an amount equal to 150% of the Monthly Basic Rent last in effect under the Lease, plus 100% of the last month's estimate of Tenant's share of Expenses pursuant to Paragraph 6, for the period Tenant remains in possession of the Premises until the date Tenant shall have surrendered the Premises to Landlord. Tenant acknowledges and agrees that said 150% increase in Basic Rent is a reasonable basic rental for the Premises where Tenant has failed to surrender the same in violation of this Lease. In addition, if Tenant fails to surrender the Premises as aforesaid, Tenant shall indemnify, defend and hold Landlord harmless from all loss or liability, including without limitation, any toss or liability resulting from any claim against Landlord made by any succeeding tenant founded on or resulting from Tenant's failure to surrender the Premises and losses to Landlord due to lost opportunities to lease any portion of the Premises to succeeding tenants, together with, in each case, actual attorneys' fees and costs, 11. SIGNAGE. Landlord shall designate the location on the Building and/or the Premises, if any, for one or more exterior Tenant identification sign(s). Tenant shall install and maintain its identification sign(s) in such designated location in accordance with this Paragraph 11 and Exhibit G. Tenant shall have no right to install or maintain Tenant identification signs in any other location in, on or about the Premises or the Project and shall not display or erect any other signs, displays or other advertising materials that are visible from the exterior of the Building. The size, design, color and other physical aspects of permitted sign(s) shall be subject to: (i) Landlord's written approval prior to installation, which approval may be withheld in Landlord's discretion, (ii) any covenants, conditions or restrictions encumbering the Premises, and (ill) any applicable municipal or governmental permits and approvals. The cost of the sign(s), including the installation, maintenance and removal thereof shall be at Tenant's sole cost and expense. If Tenant fails to install or maintain its sign(s), or if Tenant fails to remove same upon termination of this Lease and repair any damage caused by such removal including, without limitation, repainting the Building (if required by Landlord, in Landlord's sole but reasonable judgment), Landlord may do so at Tenant's expense. Tenant shall reimburse Landlord for all costs incurred by Landlord to effect such installation, maintenance or removal, which amount shall be deemed additional rent, and shall include, without limitation, all sums disbursed, incurred or deposited by Landlord including Landlord's costs, expenses and actual attorney's fees with interest thereon at the maximum interest rate permitted by law from the date of Landlord's demand until payment. Any sign rights granted to Tenant under this Lease are personal to Tenant and may not be assigned, transferred or otherwise conveyed to any assignee or subtenant of Tenant without Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. 12. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes, assessments, license fees and public charges levied, assessed or imposed upon its business operations as well as upon all trade fixtures, leasehold improvements, merchandise and other personal property in or about the Premises. 13. PARKING. Landlord grants to Tenant and Tenant's customers, suppliers, employees and invitees, a non-exclusive license to use vehicle parking spaces as set forth in Subparagraph 1(t) within the designated parking areas in the Project for the use of motor vehicles during the Term of this Lease. Landlord reserves the right at any time to grant similar non-exclusive use to other tenants, to promulgate rules and regulations relating to the use of such parking areas, including reasonable restrictions on parking by tenants and employees, to designate specific spaces for the use of any tenant, to make changes in the parking layout from time to time, and to establish reasonable time limits on parking. Overnight parking is prohibited and any vehicle violating this or any other vehicle regulation adopted by Landlord is subject to removal at the owner's expense. 14. UTILITIES, Tenant shall pay for all water, gas, heat, light, power, sewer, electricity, telephone or other service metered, chargeable or provided to the Premises. Landlord reserves the right to install separate meters for any such utility and to charge Tenant for the cost of such installation. Landlord ???? Tenant ???? 6 15. MAINTENANCE. Landlord shall maintain, in good condition, the structural parts of the Premises, which shall include only the foundations, bearing and exterior walls (excluding glass), subflooring and roof (excluding skylights), the unexposed electrical, plumbing and sewerage systems, including, without limitation, those portions of the systems lying outside the Premises, gutters and downspouts on the Building, provided, however, the cost of all such maintenance shall be considered "Expenses" for purposes of Subparagraph 6(a). Except as provided above, Tenant shall maintain and repair Premises in good condition, including, without limitation, maintaining the heating, ventilation and air conditioning system serving the Premises, maintaining the warehouse and baseboard heaters, maintaining and repairing all walls, floors, ceilings, interior and exterior doors, including roll up doors, exterior and interior windows and fixtures, as well as damage caused by Tenant, its agents, employees or invitees. Upon expiration or termination of this Lease, Tenant shall surrender the Premises to Landlord in the same condition as existed at the commencement of the Term, except for reasonable wear and tear or damage caused by fire or other casualty for which Landlord has received all funds necessary for restoration of the Premises from insurance proceeds. Except as provided in Paragraph 19, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Project or the Premises. 16. ALTERATIONS. Tenant shall not make any alterations to the Premises, or to the Project, including any changes to the existing landscaping, without Landlord's prior written consent. If Landlord gives its consent to such alterations, Landlord may post notices in accordance with the laws of the state in which the Premises are located. Any alterations made shall remain on and be surrendered with the Premises upon expiration of the Term, except that Landlord may, within 30 days before or 30 days after expiration of the Term, elect to require Tenant to remove any alterations which Tenant may have made to the Premises. If Landlord so elects, Tenant shall, at its own cost, restore the Premises to the condition designated by Landlord in its election, before the last day of the Term or within 30 days after notice of its election is given, whichever is later. Should Landlord consent in writing to Tenant's alteration of the Premises, Tenant shall contract with a contractor approved by Landlord for the construction of such alterations, shall secure all appropriate governmental approvals and permits, and shall complete such alterations with due diligence in compliance with plans and specifications approved by Landlord, and in compliance with all applicable laws, statutes and regulations. All such construction shall be performed in a manner which will not interfere with the quiet enjoyment of other tenants of the Project. Tenant shall pay all costs for such construction and shall keep the Premises and the Project free and clear of all mechanics' liens which may result from construction by Tenant. 17. RELEASE AND INDEMNITY. As material consideration to Landlord, Tenant agrees that Landlord, its agents, and its employees shall not be liable to Tenant, its agents, employees, invitees, licensees and other persons claiming under Tenant for (i) any damage to any property entrusted to employees of the Project, (ii) loss or damage to any property by theft or otherwise, (iii) consequential damages arising out of any loss of the use of the Premises or any equipment or facilities therein; or (iv) any injury or damage to person or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Project or from pipes, appliances or plumbing work therein or from the roof, street, sub-surface or from any other place or resulting from dampness or any other cause whatsoever. Landlord or its agents shall not be liable for interference with light or other incorporeal hereditaments, nor shall Landlord be liable for any latent defects in the Premises or the Project. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Project, and of defects therein or in the fixtures or equipment located therein. To the fullest extent permitted by law, Tenant agrees to indemnify, defend (with counsel satisfactory to Landlord) and hold harmless Landlord, its agents, successors in interest with respect to the Building and their directors, officers, partners, employees, shareholders, agents and representatives and the directors, officers, partners, employees, shareholders, agents and representatives of the partners of Landlord from (i) all claims, actions, liabilities, and proceedings arising from Tenant's use of the Premises or the conduct of its business or from any activity, work or thing done, permitted or suffered by Tenant, its agents, contractors, employees or invitees, in or about the Premises, the Building, or the Project and any breach or default in the performance of any obligation to be performed by Tenant under the terms of this Lease, or arising from any act, neglect, fault or omission of Tenant, or of its agents, contractors, employees or invitees, and (ii) any and all costs, attorneys' fees, expenses and liabilities incurred with respect to any such claims, actions, liabilities, or proceedings, and in the event any actions or proceedings shall be brought against Landlord by reason of any such claims, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel approved in writing by Landlord. Tenant hereby assumes all risk of damage to property or injury to person in, upon or about the Premises from any cause whatsoever except that which is caused by the failure of Landlord to observe any of the terms and conditions of this Lease where such failure has persisted for an unreasonable period of time after Landlord receives written notice of such, and Tenant hereby waives all its claims in respect thereof against Landlord. As used herein, the term "liabilities" shall include all suits, actions, claims and demands and all expenses (including attorneys' fees and costs of defense) incurred in or about any such liability and any action or proceeding brought thereon. If any claim shall be made or any action or proceeding brought against Landlord on the basis of any liability described in this Paragraph, Tenant shall, upon notice from Landlord defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. It is understood that payment shall not be a condition precedent to recovery upon the foregoing indemnity. 18. INSURANCE. Tenant, at its cost, shall pay for and keep in full force and effect throughout the Term of this Lease: (a) COMPREHENSIVE GENERAL LIABILITY OR COMMERCIAL GENERAL LIABILITY insurance with respect to the Premises and the operations of or on behalf of Tenant, in, of or about the Premises, including, but not limited to, personal injury, product liability (if applicable), blanket contractual, owner's protective, broad form property damage liability, liquor liability (if applicable) and owned and non-owned automobile liability in amounts not less than $1,000,000 per occurrence on the commencement date of this Lease. The insurance policy or policies shall contain the following provisions (1) severability of interest, (2) cross liability, (3) an endorsement naming Landlord, Landlord's Mortgagees and any other parties in interest designated by Landlord as additional insureds, (4) an endorsement stating "such insurance as is afforded by this policy for the benefit of the Landlord and any other additional insured shall be primary as respects any liability or claims arising out of the occupancy of the Premises by the Tenant, or Tenant's operations and any insurance carried by Landlord, or any other additional insured shall be non-contributory," (5) with respect to improvements or alterations permitted under this Lease, contingent liability and builder's risk insurance, (6) an Landlord ???? Tenant ???? 7 endorsement allocating to the Premises the full amount of liability limits required by this Lease, and (7) coverage must be on an "occurrence basis". "Claims-Made" forms are not acceptable. (b) WORKERS COMPENSATION COVERAGE as required by law. (c) TENANT'S PROPERTY INSURANCE: Tenant shall at all times during the Term hereof and at its cost and expense, maintain in effect policies of insurance covering (1) all Tenant Improvements on the Premises installed by Tenant, (2) all personal property of Tenant located in or at the Premises including, but not limited to, fixtures, furnishings, equipment and furniture, in an amount not less than their full replacement value, and (3) loss of income or business interruption insurance. These policies shall provide protection against any peril included within the classification "All Risk" including, but not limited to insurance against sprinkler leakage, vandalism and malicious mischief. The proceeds of such insurance shall be used to repair or replace the Tenant Improvements and personal property so insured. Tenant shall, slits cost, maintain rental abatement insurance assuring that the rental payable hereunder will be paid to Landlord for a period of not less than twelve (12) months if rent is to abate under any provision of this Lease. Such coverage shall include a sixty-day extended period of indemnity endorsement. All policies of insurance required hereunder shall include a clause or endorsement denying the insurer any rights of subrogation against the other party to the extent rights have been waived by the insured before the occurrence of injury or loss, if same are obtainable without unreasonable cost. Landlord and Tenant each hereby waive any rights of recovery against the other for injury or loss to such waiving party or to its property or the property of others under its control, arising from any other or cause insured against under any policy of insurance required to be carried by such waiving party under this Lease. The foregoing waiver shall be effective whether or not the waiving party shall actually obtain and maintain the insurance which such waiving party is obligated to obtain and maintain under this Lease. All insurance required to be provided by Tenant under this Lease: (a) shall be issued by insurance companies authorized to do business in the state in which the Premises are located and holding a General Policyholders Rating of "A" and a Financial Rating of "X" or better, as set forth in the most recent edition of Best's Insurance Reports; (b) shall contain an endorsement requiring at least 30 days prior written notice to Landlord and Landlord's lender, before cancellation or change in coverage scope or amount of any policy. Tenant shall deliver a certificate or copy of such policy together with evidence of payment of all current premiums to Landlord within 30 days of execution of this Lease and within fifteen (15) days of expiration of each policy. Tenant's failure to provide evidence of such coverage to Landlord shall constitute a default under this Lease. Landlord shall insure the Building (excluding all property which tenants of the Building are obligated to insure) against damage with "All Risk" insurance and public liability insurance, all in such amounts and with such deductibles as Landlord considers appropriate. The cost of any insurance maintained by Landlord hereunder shall be included as part of "Expenses" under Subparagraph 6(a). Notwithstanding any contribution by Tenant to the cost of insurance premiums as provided herein, Tenant acknowledges that it has no right to receive any proceeds from any insurance policies carried by Landlord. 19. DESTRUCTION. If during the Term of this Lease, any portion of the Premises, access to the Premises or any part of the Building which is essential to the use of the Premises is damaged or destroyed and such damage or destruction can, in Landlord's reasonable estimation, be repaired within 180 days following such damage or destruction, this Lease shall remain in full force and effect and Landlord shall promptly commence to repair and restore the damage or destruction to substantially the same condition as existed prior to such damage and shall complete such repair and restoration with due diligence in compliance with all then existing laws. If (1) such damage or destruction cannot, in Landlord's reasonable estimation, be repaired within 160 days following such damage or destruction; or (2) more than forty percent (40%) of the Building is damaged or destroyed (regardless of its impact on the Premises); or (3) any mortgagee of the Building will not allow the application of insurance proceeds to be applied to repair and restoration; or (4) the damage or destruction is not covered in full by Landlord's insurance required by Paragraph 18, or (5) the damage or destruction occurs within the last twelve (12) months of the Term of this Lease or any extension hereof, then Landlord may, in its sole discretion, terminate this Lease by delivery of notice to Tenant within 30 days of the date Landlord learns of the damage. In the event of repair, reconstruction and restoration by Landlord as herein provided, the rent payable under this Lease shall be abated proportionately with the degree to which Tenant's use of the Premises is impaired during the period of such repair, reconstruction or restoration; provided that there shall be no abatement of rent if such damage is the result of Tenant's negligence or intentional wrongdoing. Tenant shall not be entitled to any compensation or damages for loss of the use of the whole or any part of the Premises, damage to Tenant's Personal Property and/or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. If Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall be obligated to make repair or restoration only to those portions of the Building and the Premises which were originally provided at Landlord's expense, and the repair and restoration of items not provided at Landlord's expense shall be the obligation of Tenant. Tenant agrees to coordinate the restoration and repair of those items it is required to restore or repair with Landlord's repair and restoration work and in coordination with a work schedule prepared by Landlord, or Landlord's contractor. Further, Tenant's work shall be performed in accordance with the terms, standards and conditions contained in Paragraph 16 above, 20. CONDEMNATION. (a) Definitions. The following definitions shall apply: (1) "Condemnation" means (a) the exercise of any governmental power of eminent domain, whether by legal proceedings or otherwise by condemnor and (b) the voluntary sale or transfer by Landlord to any condemnor either under threat of condemnation or while legal proceedings for condemnation are proceeding; (2) "Date of Taking" means the date the condemnor has the right to possession of the property being condemned; (3) "Award" means all compensation, sums or anything of value awarded, paid or received on a total or partial condemnation; and (4) "Condemnor" means any public or quasi-public authority, or private corporation or individual, having a power of condemnation. (b) Obligations to be Governed by Lease. If during the Term of this Lease there is any taking of all or any part of the Premises or the Project, the rights and obligations of the parties shall be determined pursuant to this Lease. (c) Total or Partial Taking. If the Premises are totally taken by condemnation, this Lease shall terminate on the date of taking. If any portion of the Premises is taken by condemnation, this Lease shall remain in effect, except that Tenant can elect to terminate this Lease if the remaining portion of the Premises is rendered unsuitable for Tenant's continued Landlord ???? Tenant ???? 8 use of the Premises. If Tenant elects to terminate this Lease, Tenant must exercise its right to terminate by giving notice to Landlord within 30 days after the nature and extent of the taking have been finally determined. If Tenant elects to terminate this Lease, Tenant shall also notify Landlord of the date of termination, which date shall not be earlier than 30 days nor later than 90 days after Tenant has notified Landlord of its election to terminate; except that this Lease shall terminate on the date of taking if the date of taking falls on a date before the date of termination as designated by Tenant. If any portion of the Premises is taken by condemnation and this Lease remains in full force and effect, on the date of taking the rent shall be reduced by an amount in the same ratio as the total number of rentable square feet in the portion of the Premises taken bears to the total number of rentable square feet in the Premises immediately before the date of taking. In the case where a portion of the Premises is taken and the Lease remains in full force and effect Landlord shall, as its own cost and expense, make all alterations or repairs to the Premises so as to make the portion of the Premises not taken a complete architectural unit. Such work shall not, however, exceed the scope of work done by Landlord in originally constructing the Premises, If any portion of the Building other than the Premises is taken and in Landlord's reasonable opinion the Building should be restored in a manner that materially alters the Premises, or if severance damages from the condemning authority are not available to Landlord in sufficient amounts to permit such restoration, Landlord may terminate this Lease upon written notice to Tenant. Basic Monthly Rent due and payable hereunder shall be temporarily abated during such restoration period in proportion to the degree to which there is substantial interference with Tenant's use of Premises, as reasonably determined by Landlord or Landlord's architect. If the Premises are totally or partially taken by condemnation, Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking, and Landlord shall be entitled to receive the entire amount of the award without any deduction for any estate or interest of Tenant; provided, however, that Tenant shall be entitled to pursue separately any available claims against the taking authority for Tenant's moving expenses or loss of business so long as any award based thereon shall not diminish the Landlord's recovery. 21. ASSIGNMENT OR SUBLEASE. Tenant shall not assign or encumber its interest in this Lease or the Premises or sublease all or any part of the Premises or allow any other person or entity (except Tenant's authorized representatives, employees, invitees, or guests) to occupy or use all or any part of the Premises without first obtaining Landlord's consent which Landlord shall not unreasonably withhold. Landlord shall be deemed reasonable in withholding its consent if it determines in its sole discretion that: (i) the financial net worth of the proposed assignee or sublessee is not equal to or greater than Tenant's financial net worth as of the date of this Lease as increased by the increase in the Consumer Price Index, if any, between the date of this Lease and the date of the assignment or sublease; (ii) the intended use of the Premises by the proposed assignee or sublessee is inconsistent, incompatible or competes with other uses in the Project; (iii) the intended use of the Premises by the proposed assignee or sublessee will require more than insignificant alteration of the Premises; (iv) the intended use of the Premises by the proposed assignee or sublessee will constitute a violation of this Lease or any governmental law, rule, ordinance or regulation governing the Premises or would involve the storage, use or keeping of Hazardous Materials in, on or about the Premises, the Common Areas or any other portion of the Project; or if (v) the proposed rent for the proposed assignee or sublessee is less than the Rent then in effect under the Lease; or (vi) the proposed assignee or sublessee is a tenant in the Project or has negotiated to be a tenant in the Project any time in the six (6) months just preceding Tenant's request for Landlord's consent. Any assignment, encumbrance or sublease without Landlord's written consent shall be voidable and at Landlord's election, shall constitute a default. Landlord's waiver or consent to any assignment or subletting shall not relieve Tenant or any assignee or sublessee from any obligation under this Lease whether or not accrued. If Tenant is a partnership, a withdrawal or change, voluntary, involuntary or by operation of law of any partner, or the dissolution of the partnership, shall be deemed a voluntary assignment. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or sale or other transfer of a controlling percentage of the capital stock of Tenant, or the sale of at least 50% of the value of the assets of Tenant shall be deemed a voluntary assignment. The phrase "controlling percentage" means ownership of and right to vote stock possessing at least 50% of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for election of directors. The preceding two sentences of this paragraph shall not apply to corporations the stock of which is traded through a public exchange. If Landlord shall consent to any assignment or sublease of this Lease, three-quarters (3/4) of all sums and other consideration payable to or for the benefit of the Tenant from its assignees or subtenants in excess of the rent payable by Tenant to Landlord under this Lease shall be paid to Landlord, as and when such sums are due and payable. If Tenant requests Landlord to consent to a proposed assignment or subletting Tenant shall pay to Landlord, whether or not consent is ultimately given, $100 or Landlord's reasonable attorneys' fees incurred in connection with such request, whichever is greater. No interest of Tenant in this Lease shall be assignable by involuntary assignment through operation of law (including, without limitation, the transfer of this Lease by testacy or intestacy). Each of the following acts shall be considered an involuntary assignment: (a) If Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes proceedings under the Bankruptcy Act in which Tenant is the bankrupt; or if Tenant is a partnership or consists of more than one person or entity, if any partner of the partnership or other person or entity is or becomes bankrupt or insolvent, or makes an assignment for the benefit of creditors; or (b) If a writ of attachment or execution is levied on this Lease; or (c) If in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Premises. An involuntary assignment shall constitute a default by Tenant and Landlord shall have the right to elect to terminate this Lease, in which case this Lease shall not be treated as an asset of Tenant. 22. DEFAULT. The occurrence of any of the following shall constitute a default by Tenant: (a) A failure to pay rent or any other charge when due; (b) Abandonment of the Premises (failure to occupy and operate the Premises for ten consecutive days shall be deemed an abandonment); (c) The making by Tenant or any guarantor of this Lease ("Guarantor") of any general assignment for the benefit of creditors; the filing by or against Tenant or any Guarantor of a petition to have Tenant or such Guarantor adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant or a Guarantor, the same is dismissed within thirty (30) days); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, or of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, or of substantially all of Guarantor's assets, where possession is not restored to Tenant or such Guarantor, as the case may be, within thirty (30) days; the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within (30) days; or if this Lease shall, by operation of law or otherwise, pass to any person or persons other than Tenant except as provided in Paragraph 21 herein; (d) The failure of Tenant to timely comply with the provisions of Paragraph 26 or Paragraph 33 of this Lease regarding, respectively, Subordination and Estoppel Certificates; or (e) The failure to perform any other provision of this Lease. Landlord ???? Tenant ???? 9 23. LANDLORD'S REMEDIES. Landlord shall have the remedies described in this Paragraph 23 if Tenant is in default. These remedies are not exclusive; they are cumulative and in addition to any remedies now or later allowed by law. Landlord may terminate Tenant's right to possession of the Premises at any time. No act by Landlord other than giving notice to Tenant shall terminate this Lease. Acts of maintenance efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. Upon termination of Tenant's right to possession, Landlord has the right to recover from Tenant: (1) The worth at the time of award of any unpaid rent which had been earned at the time of termination of Tenant's right to possession; (2) The worth at the lime of award of the amount by which the unpaid rent which would have been earned after the date of termination of Tenant's right to possession until the lime of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (3) The worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (4) Any other amount, including court, attorney and collection costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. "The worth", as used for Items (1) and (2) in this Paragraph 23 is to be computed by allowing interest at the lesser of the maximum rate an individual is permitted to charge by law or 12%. "The worth" as used for Item (3) in this Paragraph 23 is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of termination plus one percent (1%). In the event of any default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant or disposed of in a reasonable manner by Landlord. No re-entry or taking possession of the Premises by Landlord pursuant to this Paragraph 23 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. 24. DEFAULT BY LANDLORD. Landlord shall not be in default hereunder unless Landlord fails to perform the obligations required of Landlord within a reasonable lime, but in no event later than forty-five (45) days after written notice by Tenant to Landlord, writing specifying wherein Landlord has failed to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than forty-five (45) days is required for performance, then Landlord shall not be in default if Landlord commences performance within such forty-five (45) day period and thereafter diligently prosecutes the same to completion. In no event shall Tenant have the right to terminate this Lease as a result of Landlord's default; Tenant's remedies shall be limited to any other remedy available at law or in equity. Nothing herein contained shall be interpreted to mean that Tenant is excused from paying rent due hereunder as a result of any default by Landlord. 25. ENTRY OF PREMISES AND PERFORMANCE BY TENANT. Landlord and its authorized representatives shall have the right to enter the Premises at all reasonable times for any of the following purposes: (a) To determine whether the Premises are in good condition and whether Tenant is complying with its obligations under this Lease; (b) To do any necessary maintenance and to make any restoration to the Premises or the Project that Landlord has the right or obligation to perform; (c) To post "for sale" signs at any time during the Term, to post "for rent" or "for lease" signs during the last 90 days of the Term, or during any period while Tenant is in default; (d) To show the Premises to prospective brokers, agents, buyers, tenants or persons interested in an exchange, at any time during the Term; (e) To repair, maintain or improve the Project and to erect scaffolding and protective barricades around and about the Premises but not so as to prevent entry to the Premises and to do any other act or thing necessary for the safety or preservation of the Premises or the Project, or (f) To discharge Tenant's obligations hereunder when Tenant has failed to do so in accordance with the terms of this Lease. Landlord shall not be liable in any manner for any inconvenience, disturbance, toss of business, nuisance or other damage arising out of Landlord's entry onto the Premises as provided in this Paragraph 25. Tenant shall not be entitled to an abatement or reduction of rent if Landlord exercises any rights reserved in this Paragraph 25. Landlord shall reasonably attempt to conduct his activities on the Premises as provided herein in a manner that will cause the least inconvenience, annoyance or disturbance to Tenant. For each of these purposes, Landlord shall at all times have and retain a key with which to unlock all the doors in, upon and about the Premises, excluding Tenant's vaults and safes. Tenant shall not alter any lock or install a new or additional lock or bolt on any door of the Premises without the prior written consent of Landlord. If Landlord gives its consent. Tenant shall furnish Landlord with a key for any such lock. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense without any abatement of rent. If Tenant shall fail to pay any sum of money, other than Monthly Basic Rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for ten (101 days after notice thereof by Landlord (or such other period as specifically provided herein), Landlord may, without waiving or releasing Tenant from any obligations of Tenant, but shall not be obligated to, make any such payment or perform any such other act on Tenant's part to be made or performed in this Lease; provided, however, all sums so paid by Landlord and all necessary incidental costs together with interest thereon at the lesser of 12% or the maximum rate an individual is permitted to charge by law from the date of such payment by Landlord, shall be payable to Landlord on demand. Tenant covenants to pay any such sums, and Landlord shall have (in addition to all other rights or remedies of Landlord) the same rights and remedies in the event of the nonpayment thereof by Tenant as in the case of default by Tenant in the payment of the rent. Further, following each second consecutive late payment of rent, Landlord shall have the option to require that Tenant increase the amount of the Security Deposit required under Paragraph 8 by one hundred percent (100%), which additional Security Deposit shall be retained by Landlord and may be applied by Landlord in the manner provided in Paragraph 8. 26. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and unless otherwise elected by Landlord or any mortgagee or any beneficiary of a Deed of Trust with a lien on the Project or any ground lessor with respect to the Project (or any part thereof), this Lease shall be subject and subordinate at all times to (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Project, or the land upon which the Project is situated, or both, and (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Project, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security. Notwithstanding the foregoing, Tenant acknowledges that Landlord shall have the right to subordinate or cause to be subordinated this Lease to any such ground leases or underlying leases or any such liens to this Lease. In the event Landlord ???? Tenant ???? 10 that any ground lease or underlying lease terminates for any reason or any mortgage or Deed of Trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the tenant of the successor in interest to Landlord, at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord any additional documents evidencing the priority or subordination of this Lease with respect to any such ground lease or underlying leases or the lien of any such mortgage or Deed of Trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to execute, deliver and record any such document in the name and on behalf of Tenant. 27. NOTICE. Any notice, demand, request, consent, approval or communication desired by either party or required to be given, shall be in writing and served either personally or sent by prepaid certified first class mail, return receipt requested, addressed as set forth in Subparagraph 1(b) and 1(c). Either party may change its address by notification to the other party. Notice shall be deemed to be communicated 48 hours from the time of mailing, or at the time of service as provided in this Paragraph 27. 28. WAIVER. No delay or omission in the exercise of any right or remedy by Landlord shall impair such right or remedy or be construed as a waiver. No act or conduct of Landlord, including, without limitation, acceptance of the keys to the Premises, shall constitute acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish termination of this Lease. Either party's consent to or approval of any act by the other requiring the party's consent or approval shall not be deemed to waive or render unnecessary that party's consent to or approval of any subsequent act by the other. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this Lease. 29. LIMITATION OF LIABILITY. In consideration of the benefits accruing hereunder, Tenant and all successors and assigns of Tenant covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (a) The sole and exclusive remedy against Landlord shall be against the Landlord's interest in the Building; (b) No partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership); (c) No service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (d) No partner of Landlord shall be required to answer or otherwise plead to any service of process; (e) No judgment may be taken against any partner of Landlord; (f) Any judgment taken against any partner of Landlord may be vacated and set aside at any time after the fact; (g) No writ of execution will ever be levied against the assets of any partner of Landlord; (h) The obligations under this Lease do not constitute personal obligations of the individual partners, directors, officers or shareholders of Landlord, or the partners, directors, officers or shareholders of the partners of Landlord, and Tenant shall not seek recourse against any such persons or entities of Landlord or any of their personal assets for satisfaction of any liability in respect to this Lease; and (i) These covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing provisions shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 30. FORCE MAJEURE. Landlord shall have no liability whatsoever to Tenant on account of (a) the inability or delay of Landlord in fulfilling any of Landlord's obligations under this Lease by reason of strike, other labor trouble, governmental controls in connection with a national or other public emergency, or shortages of fuel, supplies or labor resulting therefrom or any other cause, whether similar or dissimilar to the above, beyond Landlord's reasonable control; or (b) any failure or defect in the supply, quantity or character of electricity or water furnished to the Premises, by reason of any requirement, act or omission of the public utility or others furnishing the Project with electricity or water, or for any reason, whether similar or dissimilar to the above, beyond Landlord's reasonable control. If this Lease specifies a time period for performance of an obligation of Landlord, that time period shall be extended by the period of any delay in Landlord's performance caused by any of the events of force majeure described above. 31. PROFESSIONAL FEES. (a) If Landlord should engage any professional including, without limitation, attorneys, appraisers, accountants, environmental or other consultants for the purpose of bringing suit for possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provisions of this Lease, or for any other relief against Tenant hereunder, or in the event of any other litigation between the parties with respect to this Lease, then all costs and expenses including, without limitation, actual professional fees such as appraisers', accountants', attorneys' and other consultants' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. If Landlord employs a collection agency to recover delinquent charges, Tenant agrees to pay all collection agency fees charged to Landlord in addition to rent, late charges, interest and other sums payable under this Lease. Landlord ???? Tenant ???? 11 (b) If Landlord is named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit including, without limitation, its actual professional fees such as appraisers', accountants' and attorneys' fees, 32. EXAMINATION OF LEASE. Submission of this instrument for examination or signature by Tenant shall not create a binding agreement between Landlord and Tenant nor shall it constitute a reservation or option to lease on the part of Tenant and this instrument shall not be effective as a lease and shall not create any obligations on the part of Landlord or Tenant until this Lease has been validly executed by both Landlord and Tenant. 33. ESTOPPEL CERTIFICATE. (a) Within ten (10) days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord a statement. ("Estoppel Certificate") in a form substantially similar to the form of Exhibit E attached hereto or in such other form as Landlord's lender or purchaser may require, certifying: (i) the date of commencement of this Lease; (ii) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications, stating the nature and date of such modifications), (iii) the date to which the rent and other sums payable under this Lease have been paid; (iv) that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (v) such other matters requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 33 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Project or any interest therein. (b) Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, and (iii) that not more than one (1) month's rent has been paid in advance, Tenant's failure to deliver said statement to Landlord within ten (10) days of receipt shall constitute a default under this Lease and Landlord may, at Landlord's option, terminate this Lease. (c) Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-fact, which appointment is coupled with an interest, to act in Tenant's name, place and stead to execute such Estoppel Certificate on Tenant's behalf. 34. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the "Rules and Regulations", a copy of which is attached hereto and marked Exhibit F, and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord, Landlord shall not be responsible to Tenant for the violation or non-performance by any other tenant or occupant of the Project of any of said Rules and Regulations. 35. LIENS. Tenant shall, within ten (10) days after receiving notice of the filing of any mechanic's lien for material or work claimed to have been furnished to the Premises on Tenant's behalf or at Tenant's request, discharge the lien or post a bond equal to the amount of the disputed claim with a bonding company reasonably satisfactory to Landlord. If Tenant posts a bond, it shall contest the validity of the lien with all due diligence. Tenant shall indemnify, defend and hold Landlord harmless from any and all losses and costs incurred by Landlord as a result of any such liens attributable to Tenant. If Tenant does not discharge any lien or post a bond for such lien within such ten (10) day period, Landlord may discharge such lien at Tenant's expense and Tenant shall promptly reimburse Landlord for all costs incurred by Landlord in discharging such lien including, without limitation, attorney's fees and costs and interest on all sums expended at the maximum interest rate permitted by law. Tenant shall provide Landlord with not less than ten (10) days written notice of its intention to have work performed at or materials furnished to the Premises so that Landlord may post appropriate notices of non-responsibility. 36. MISCELLANEOUS PROVISIONS. (a) Time of Essence. Time is of the essence of each provision of this Lease. (b) Successor. This Lease shall be binding on and inure to the benefit of the parties and their successors, except as provided in Paragraph 21 herein. (c) Landlord's Consent. Any consent required by Landlord under this Lease must be granted in writing and may be withheld by Landlord in its sole and absolute discretion, unless otherwise expressly provided herein. (d) Commissions. Each party represents that it has not had dealings with any real estate broker, finder or other person with respect to this Lease in any manner, except for the broker identified in Subparagraph 1(p). If Tenant has dealt with any other person or real estate broker with respect to leasing or renting space in the Project, Tenant shall be solely responsible for the payment of any fees due said person or firm and Tenant shall hold Landlord free and harmless and indemnify and defend Landlord from any liabilities, damages or claims with respect thereto, including attorney's fees and costs. (e) Landlord's Successors. In the event of a sale or conveyance by Landlord of the Project, the same shall operate to release Landlord from any liability under this Lease, and in such event Landlord's successor in interest shall be solely responsible for all obligations of Landlord under this Lease. (f) Prior Agreement or Amendments. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors-in-interest. (g) Recording. Tenant shall not record this Lease nor a short form memorandum thereof without the consent of Landlord. Landlord may record a short form memorandum of this Lease and Tenant shall execute and acknowledge such form if requested to do so by Landlord. (h) Separability. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof, and all other provisions of this Lease shall remain in full force and effect. Landlord ???? Tenant ???? 12 (i) No Partnership or Joint Venture. Nothing in this Lease shall be deemed to constitute Landlord and Tenant as partners or joint venturers, It is the express intent of the parties hereto that their relationship with regard to this Lease and the Premises be and remain that of lessor and lessee. (j) Interpretation. This Lease shall be construed and interpreted in accordance with the laws of the state in which the Premises are located. This Lease constitutes the entire agreement between the parties with respect to the Premises and the Project, except for such guarantees or modifications as may be executed in writing by parties from time to time. When required by the context of this Lease, the singular shall include the plural, and the masculine shall include the feminine and/or neuter. "Party" shall mean Landlord or Tenant, If more than one person or entity constitutes Landlord or Tenant, the obligations imposed upon that party shall be joint and several as to all persons or entities constituting such party. The enforceability, invalidity or illegality of any provision shall not render the other provisions unenforceable, invalid or illegal. (k) Mortgagee Protection. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust, mortgagee, or ground lessor covering the Premises, and shall offer such beneficiary, mortgagee, or ground lessor, a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, or in the event of a ground lessor, by appropriate judicial action, if such should prove necessary to effect a cure. (l) Governing Law. This Lease shall be governed by and construed pursuant to the laws of the State of Washington. IN WITNESS WHEREOF, the parties have executed this Lease as of the date first above written. Landlord: Harach Investment Corp., as Agent for MacArthur/Broadway Center, Inc. By /s/ ????????????????????? Date 11-16-98 ----------------------------------- -------------- Its ----------------------------------- Tenant: Fiberstars, Inc., a California Corporation Dba Fibre Optics International, Inc. By /s/ Robert A. Connors Date 10/20/98 ----------------------------------- -------------- Its CFO ----------------------------------- Landlord ???? Tenant ???? 13 NOTARY STATE OF OREGON ) ) ss. COUNTY OF MULTNOMAH ) THIS IS TO CERTIFY that on this 16 day of NOV, 1998, before me, the undersigned, a notary public in and for the state of Oregon, duly commissioned and sworn, personally appeared Kathleen Schultz, to me known to be the Vice President of HARSCH INVESTMENT CORP., as agent for MacArthur/Broadway Center, Inc., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument, and that the seal affixed is the corporate seat of said corporation. WITNESS my hand and official seal the day and year in this certificate first above written. JENNIFER MC BLAINE /s/ Jennifer Mc Blaine (Notary Seal) ---------------------------------------------------- Print Name: Jennifer Mc Blaine ----------------------------------------- Notary Public, in and for the State and County above residing at: Portland, Oregon --------------------------------------- My commission expires: 1/8/02 ------------------------------ STATE OF California ) ) ss. COUNTY OF Alameda ) THIS IS TO CERTIFY that on this 20th day of October, 1998, before me, the undersigned, a notary public in and for the state of California duly commissioned and sworn, personally appeared Robert A. Connors, to me known to be the CFO of Fiberstars, Inc., a California Corporation dba Fibre Optics International, Inc., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument, and that the seal affixed is the corporate seal of said corporation. WITNESS my hand and official seal the day and year in this certificate first above written. DONNA M. PRUNETTI /s/ Donna M. Prunetti (Notary Seal) ---------------------------------------------------- Print Name Donna M. Prunetti ----------------------------------------- Notary Public, in and for the State and County above, residing at: 4120 Twin Peaks Terrace, Fremont, CA --------------------------------------- My commission expires 8/13/99 ------------------------------ Landlord ???? Tenant ???? 14 Exhibit A BUILDING FLOOR PLAN SHOWING PREMISES PREMISE FOR: Fibre Optics International, [Graphic Omitted] Inc. 309 Cloverdale, D-1, 2, 3, 4, 46 Seattle WA 98108-4500 EXISTING PLAN BUILDING D Truck Door Legend - ----------------- ^ On-Grade [ ] Dock-High A-1 Exhibit B PROJECT SITE PLAN AND LEGAL DESCRIPTION That portion of the southwest quarter of the northwest quarter of section 32. Township 24 north, range 4 east, W.M., in King County, Washington, as described as follows: Beginning at the intersection of the south margin of the south Cloverdale Street with the east line of government lot 3, said section 32; thence north 89 degrees 046'11" west along said south margin 120.00 feet; thence south 0 degrees 36'58" west a distance of 20.00 feet; thence north 89 degrees 46'11" west along the margin established by deed recorded under auditor's file No. 5647272, a distance of 177.00 feet to the true point of beginning; thence south 0 degrees 36'58" west a distance of 419.79 feet; thence north 89 degrees 23'02 " west a distance of 100.00 feet; thence south 0 degrees 36'58" west a distance of 225.97 feet to the south line of said northwest quarter; thence south 89 degrees 30'03" west along said south line a distance of 725.56 feet, more or less, to the east margin of "S" line, secondary state highway No. 1-K (Burien to Junction PSH No. 1) as established by deed recorded under auditor's file No. 5647272, and as established by superior court cause no. 66456, and a point on the arc of a curve the center of which bears north 86 degrees 05'06" east; thence northerly along said margin along the arc of a curve to the right, said curve having radius of 5655.00 feet through a central angle of 0 degrees 21'41" a distance of 35.66 feet; thence north 17 degrees 32'03" east a distance of 70.54 feet to a point on the arc of a curve the center of which bears north 87 degrees 03'15" east; thence northerly along the arc of a curve to the right, said curve having a radius of 340.80 feet through a central angle of 14 degrees 09'18" a distance 9F 81.52 feet; thence north 19 degrees 58'02" east a distance of 194.57 feet; thence north 42 degrees 55'29" east a distance of 386.99 feet to a point that bears north 89 degrees 46'11" west from the true point of beginning, said point also being the south margin of South Cloverdale Street as established by deed recorded under auditor's file No. 5647272; thence south 89 degrees 46'11" east along said margin a distance of 477.33 feet, more or less, to the true point of beginning; Excepting therefrom that portion of the southwest quarter of the northwest quarter of section 32, township 24 north, range 4 east, W.M., in King County, Washington, described as follows: Beginning at the intersection of the south margin of south Cloverdale Street with the east tine of government lot 3, said section 32; thence north 8904611" west along said south margin 120.00m feet; thence south 0degrees36 58" west a distance of 20.00 feet; thence north 09 degrees 46'10" west along the margin established by deed recorded under auditor's file No. 5647272, a distance of 177.00 feet; thence south 0 degrees 36'58" west a distance of 419.79 feet; thence north 89 degrees 23'02" west a distance of 100.00 feet; thence south 0 degrees 36'58" west 225.97 feet to the south line of said subdivision and the true point of beginning of this description; thence south 89 degrees 30'03" west along said south tine 505.00 feet; thence north 0 degrees 36'58" east 5.50 feet; thence north 89 degrees 55'00" east 264.96 feet; thence north 87 degrees 51'57" east 175.30 feet to a point 8.50 feet north of the south line of said subdivision; thence north 86 degrees 47'70 east 65.00 feet to a point distant north 0 degrees 36'58" east 11.58 feet from the true point of beginning thence south 0 degrees 36'58" west 11.58 feet to the true point of beginning; Being that certain parcel conveyed to the City of Seattle by deed recorded under auditor's file No. 8012040449. [Graphic Omitted] B-1 Exhibit F RULES AND REGULATIONS This Exhibit is hereby attached to and made a part of the Lease, by and between MacArthur/Broadway Center, Inc., as Landlord and Fiberstars, Inc. a California Corporation dba Fibre Optics International, Inc., as Tenant for the Premises known as Cloverdale Business Park, 309 South Cloverdale, Seattle, Washington 98108-4575. 1. Tenant and the operations and activities of Tenant shall not cause or permit any disturbing noises or objectionable odors to be produced upon or to emanate from the Premises. 2. Tenant shall not block or obstruct any of the entries, passages, doors, or sidewalks of the Project, or place, empty, or throw any rubbish, litter, pallets, or material of any nature into such areas, or permit such areas to be used at any time except for the ingress and egress of Tenant. Tenant shall refrain from parking its vehicles in front of other tenants' roll up doors or store fronts. 3. All trash, rubbish or litter removed from the Premises by Tenant shall be placed only in such areas and/or receptacles as may be designated or provided by Landlord. No dumpsters shall be placed outside of the Premises without the prior written consent of Landlord. 4. Tenant shall not store any materials, equipment, products, pallets. etc., outside the Premises without the prior written consent of Landlord. 5. Tenant shall have the nonexclusive use in common with Landlord, other tenants, their guests and invitees, of the automobile surface parking areas, subject to reasonable rules and regulations for the use thereof as prescribed from time to lime by Landlord. Landlord shall have the right to designate parking areas for use of the Projects tenants and their employees. 6. Tenant shall not leave vehicles parked in the Project's parking area overnight. Landlord reserves the right to tow any vehicle parked overnight, without prior approval, at the vehicle owner's expense. 7. No sign, placard, picture, advertisement, name or notice shall be displayed, painted, or affixed by Tenant in or on any part of the Building or the Premises without the prior written consent of Landlord and then only of such color, size, character, style, material, installation and in such places as shall be approved and designated by Landlord. 8. Tenant shall not use the Project or the Premises for housing, lodging, or sleeping purposes. No immoral or unlawful purpose will be allowed in or on any portion of the Project. 9. No birds, fowl, or animals shall be brought into or kept in or about the Premises without the prior written consent of Landlord. 10. Landlord shall have the right to control and operate the common areas of the Project, as well as facilities and areas furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. 11. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 12 Canvassing, soliciting, distribution of handbills or any other written material and peddling on or about Project are prohibited, and each tenant shall cooperate to prevent the same. 13. The only window treatment permitted for the windows in the Premises is that installed by or approved in writing by Landlord. If Landlord objects to any curtains, blinds, shades, screens, hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, Tenant shall immediately discontinue such use. Tenant shall install no awnings on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 14. Tenant shall not do or permit anything to be done in any Premises, or bring or keep anything therein which will in any way increase the rate of fire insurance on the Building or Project or on property kept therein or obstruct or interfere with the use of the Premises for their intended purposes or with the rights of other tenants, or in any way injure or annoy them, or conflict with the laws relating to fires, or with the regulations of the Fire Department or with any insurance policy upon the Building or Project or any part thereof, or cause a cancellation of or otherwise affect any fire or other insurance on the Building or Project or conflict with any of the rules and ordinances of the Department of Health. Unless approved by Landlord, no kerosene, gasoline, oil, acids, caustics or any other inflammable or combustible fluid, explosive or hazardous material shall be used or kept in or about any premises, nor shall any method or heating or air conditioning be used for any premises other than that approved by Landlord. In the event any use or activity shall lead to an increase in fire or other insurance premiums payable on the insurance obtained by Landlord, or insurance procured by an individual tenant, the party causing such increase shall be liable for payment of the same to Landlord or such individual tenant, as the case may be. Tenant understands and agrees that the vehicle of any tenant, or a vehicle belonging to any employee, licensee, invitee, agent, client or visitor of a tenant or occupant, obstructing any unauthorized area, particularly in areas designated by specially painted curbs such as fire lane areas, may be towed away at the Tenant's risk and expense. 15. No tenant shall install any radio or television antenna, loudspeaker or other devise on the roof or exterior walls of the Building. No television, radio or recorder shall be played in such a manner as to cause a nuisance to any other tenant. 16. Landlord will not be responsible for lost, stolen or damaged personal property, equipment, money, merchandise or any article from the Premises or common areas regardless of whether loss, theft, or damage occurs when the Premises are locked against entry or not. Landlord ???? Tenant ???? F-1 17. Any damage done to the Project or the Premises in any way by the movement of furniture, equipment, or merchandise within, into or out of the Project or the Premises by Tenant's servants, agents, employees, visitors or invitees shall be the responsibility of and paid by Tenant. 18. Landlord reserves the right to exclude or expel from the Project any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation or any of the Rules and Regulations of the Project. 19. Landlord shall have the right, exercisable without notice and without liability to any tenant, to change the name or street address of the Building or the Project. 20. These Rules and Regulations are in addition to, and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements, and conditions of any lease of premises in the Project. 21. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Project. 22. Landlord reserves the right to amend or repeal these Rules and Regulations and to make such other Rules and Regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Project and for the preservation of good order therein. 23. Tenant shall be responsible for the observance of all the foregoing rules by Tenants employees, agents, clients. customers, invitees and guests. 24. For the purposes of the foregoing Rules and Regulations, the term "Tenant" shall include Tenant's agents, employees. servants, licensees, invitees, clients and visitors. 25. Vehicle washing, steam cleaning, or repair is not permitted in the common area of the Park. Landlord ???? Tenant ???? F-2 Exhibit G PROJECT SIGNAGE CRITERIA (Cloverdale Business Park) PURPOSE The significance of this Criteria is to insure a continuity in the graphic elements throughout the Business Park. It is the intent of this Criteria to provide individual tenants maximum signing exposure, without visual clutter and in a manner that will enhance the overall image of the project. It is not the intent of this criteria to limit individual identity or corporate expression. Whether attached to the Lease Agreement as an exhibit or provided to the Tenant under separate cover letter, the tenant shall be responsible for fulfillment of all requirements of the Sign Criteria. Landlord reserves the right to amend, alter or vary from this criteria at Landlord's sole discretion. GENERAL CONDITIONS Each Tenant is responsible for providing his own sign at Tenant's expense. Each Tenant is also responsible for obtaining all required building permits and approvals for any sign proposed and copies shall be submitted to Landlord. This Criteria will be strictly enforced and any sign not conforming shall be considered in violation of the Lease Agreement and will be brought into conformance or removed at the expense of the Tenant. All signs and their installations must comply with the applicable building and safety codes. No additional advertisements or temporary banners, flags, painted window glass, or similar devices are permitted unless provided herein. DESIGNATED SIGN CONTRACTORS In order to implement all signing throughout the project, to minimize the cost to the Tenant of completing the sign, and to insure safe and quality workmanship and materials, the Landlord shall designate the contractor authorized to design and construct the signs. All signs must be prepared and installed by any such designated contractor. The contractor will be responsible to provided a written cost estimate for the Tenant's approval. The sign contractor shall promptly repair any damage to the premises caused by his/her work. APPROVALS The drawings for all Tenant signs must be submitted to the Landlord for approval prior to construction. The drawings to be submitted must clearly indicate sign size, letter size, color, construction material, location and sign message. INSURANCE The contractor or manufacturer shall carry Worker's Compensation and Public Liability Insurance against all damages suffered or done to any and all person's and/or property while engaged in the construction or installation of the signs, in the amounts of $500,000.00/$1,000,000.00. PERMISSIBLE SIGNS Major Tenant Identification Sign Each Tenant will be allowed one major tenant identification sign, the graphic panel will contain the company name and logo only. Sign is centered in the entrance opening and is mounted to the center of the underside of fads wall. Tenant Window Identification In addition to the major tenant identification sign, each tenant will be allowed to have the company name, hours of operation, and secondary information applied directly to the glass, adjacent to their entry door, Refer to the tenant Window Identification Specifications Exhibit for details. Material: Vinyl die-cut letters Color: White Letter Style: Helvetica Medium Location/Layout: 3 1/2" from opening side of door frame. All copy will align with this margin. See specifications below for details. 32 1/4" from Top of Window - -------------------------- 1" Lettering / 3/4" Spacing COMPANY NAME SECONDARY INFORMATION 1-"Spacing 3/4" Lettering / 3/8" Spacing HOURS: 8am - 12pm and lpm-5pm Monday - Friday TELEPHONE: 763-6200 Landlord ???? Tenant ???? G-1 EX-10.38 7 MEMORANDUM OF UNDERSTANDING FOR CATALYST(TM) [FIBERSTARS LETTERHEAD] December 10, 1998 PERSONAL AND CONFIDENTIAL ------------------------- Mr Barry Nelson Water Quality Management Toronto, Canada Re: Memorandum of Understanding for Catalyst(TM) product ---------------------------------------------------- Dear Barry, This memorandum is designed to capture the understanding between the parties with respect to the on-going operations of the Fiberstars Catalyst(TM) ("Catalyst") product line. The following has been agreed by Fiberstars, Inc. ("Fiberstars") and Water Quality Management ("WQM"): 1. Catalyst Operations (a) As soon as practical, Fiberstars will ship all existing inventory for the productline from its current location at Magic Plastics or Fiberstars to a facility run by WQM in Toronto, Canada. All inventory will continue to be owned by Fiberstars. Fiberstars will purchase additional inventory as requested by WQM in order to meet projected customer demand. WQM will order materials, with Fiberstars approval. PO's will have the "ship to" as WQM and will be invoiced to Fiberstars. WQM will maintain the inventory in good order so that it may be counted from time to time by Fiberstars. WQM will provide Fiberstars with a physical count of the Catalyst inventory by the 3rd working day after each calendar quarter. Inventory will be managed by WQM so as to minimize inventory levels, but still meet demand. After the transfer of inventory to WQM, Fiberstars and WQM will agree on the starting inventory balance as of January 1, 1999. From that date, WQM will take responsibility for any inventory items which are agreed by both parties to have been lost, damaged, or are otherwise unaccounted for while WQM is responsible for Catalyst operations. (b) WQM will take over the inventory control, materials orders (to be approved by Fiberstars) assembly, shipping and processing of orders for the Catalyst product by January 1, 1999. Orders will be processed in a timely fashion, consistent with good business practices. WQM will insure that product shipped is of the best quality possible and is consistent with product specifications. (c) WQM will provide customer support to Catalyst customers after January 1, 1999. Memorandum of Understanding December __, 1998 Page 2 (d) Fiberstars will record sales and invoice customers for the Catalyst product. Fiberstars will copy WQM on all customer invoices and correspondence. All returns must follow a Returns Goods Authorization (RGA) procedure. Customer returns with a value less than or equal to $3,000 will be approved by WQM support personnel. Customer returns with a value greater than $3,000 must be approved by Fiberstars. All authorized returned products will be received and inventoried by WQM. WQM will advise Fiberstars Customer Support of any product returns both upon authorization and upon receipt of returned items. (e) Fiberstars will pay WQM per month for the above services based on the Plan attached to this memo, on to following schedule: January 1998 $12,000 February 1998 13,000 March 1998 14,000 Thereafter 14,000 This includes the costs for Offsite operation and for the Labor component of Indirect costs. It is expected that all other costs itemized in the plan will be paid by Fiberstars. In the event that revenues are running significantly short of the planned amount, Fiberstars and WQM agree to take such action as necessary to reduce the costs of the productline. This will include reducing the WQM operations charge to Fiberstars, by up to $6,000 per month, so as to maintain a profitable Catalyst operation. WQM and Fiberstars agree to review the charge for services rendered periodically so as to provide the best possible cost to Fiberstars with a reasonable profit earned by WQM. A cost sheet from WQM is attached. 2. Future sale or business combination. (a) If Fiberstars decides to sell the Catalyst productline, WQM will have a first right to negotiate a reasonable buyout of this business. Fiberstars will decide either to sell or not to sell the Catalyst productline within 2 years of this agreement. If Fiberstars decides it will not sell the Calalyst productline, then Fiberstars agrees to negotiate reasonable terms with WQM to form a joint venture with or acquire WQM. Both parties recognize the synergies that exist between the Catalyst and WQM products, and will be working together to improve these synergies as of the date of this memorandum. Fiberstars recognizes that WQM will be making an investment in the success of Catalyst and the combined products of the two companies and will not unreasonably put WQM in a position of having to walk away from this investment. 3. Term. (a) The parties will review the business terms of the Catalyst Operation in Q4 of 1999, and agree any changes to the terms by December 1, 1999. This memorandum will no longer be in effect ater December 31, 2000, with the exception that item 2 above will remain in Memorandum of Understanding December ___, 1998 Page 3 effect if their are substantive discussions going on between Fiberstars and WQM on December 31, 2000. Memorandum of Understanding December ___,1998 Page 4 4. Consulting agreement (a) The consulting agreement between Fiberstars and Barry Nelson continues in effect and is outside the services and payments agreed in this memorandum. In the attached p1an, these costs are part of the Marketing expense. Very truly yours, FIBERSTARS, INC. By: /s/ David Ruckert -------------------------------------------- David Ruckert, Chief Executive Officer AGREED TO AND ACCEPTED: WATER QUALITY MANAGEMENT By: /s/ Barry Nelson -------------------------- Barry Nelson, President Dated: December __, 1998 January 22, 1999 EX-10.39 8 PROMISSORY NOTE PROMISSORY NOTE $30,000.00 June 19, 1998 FOR VALUE RECEIVED, the undersigned promises to pay Fiberstars, Inc., a California corporation (the "Company"), the principal sum of thirty thousand dollars ($30,000). 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. 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 the undersigned's personal residence located at 3411 Bernese Court, Carson City, NV 89705. 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 personal residence. 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. As used herein, the undersigned includes the successors, assigns and distributes 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 Sate of California, without regard to the conflict of law provisions thereof. /s/ Fredrick N. Martin ---------------------- Fredrick N. Martin 1401 Red Hawk Circle, N116 Fremont, CA 94538 Fiberstars, Inc., a California Corporation, hereby approves the terms of the above promissary note, effective as of October 7, 1996. Dated: June 19, 1998 FIBERSTARS, INC. ------------------ A California Corporation /s/ David N. Ruckert -------------------- David N. Ruckert President, CEO EX-10.40 9 AMENDED AND RESTATED PROMISSORY NOTED AMENDED AND RESTATED PROMISSORY NOTED $35,188.00 Fremont, California March 25, 1999 For value received, the undersigned promises to pay to FIBERSTARS, INC., a California corporation (the "Company"), to order, at its principal office the principal sum of Thirty-Five Thousand One-Hundred Eighty-Eight Dollars (%35,188.00) with interest thereon at the rate of nine percent (6%) per annum on the unpaid balance of the principal sum. Said principal and interest shall be due five (5) years from the date of this Note. This Noted amends, restates and supersedes that certain Promissory Note, dated October 7, 1996 made by the undersigned to the order of the Company. This Note shall be immediately due and payable, at the option of the Company, upon any termination of the undersigned's employment with the Company for any reason. The principal is payable in lawful money of the United States of America. THE PRIVILEGE IS RESERVED TO PREPAY THE NOTE IN WHOLE OR IN PART. All payments under this Note shall first be applied to interest due hereunder with the balance, if any, applied to reduce the unpaid principal sum. Should suit be commenced to collect this Note or any portion thereof, each sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. As security for the full and timely repayment of the principal and interest due under this Note, the undersigned hereby pledges and grants to the Company a first priority 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"). The holder of this Note shall have full recourse against the maker, and shall not be required to proceed against the collateral securing this Note in the event of default. ------------------------ J. STEVEN KEPLINGER EX-23.1 10 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Fiberstars, Inc. on Form S-8 (File No. 33-85664) of our reports dated February 4, 1999, on our audits of the consolidated financial statements and financial statement schedules of Fiberstars, Inc. as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-KSB. PricewaterhouseCoopers, LLP San Jose, California February 4, 1999 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,290 0 5,210 370 4,179 12,326 4,066 2,544 18,924 4,903 0 0 0 13,930 0 18,924 22,682 23,684 14,136 14,136 8,339 0 0 1,209 447 0 0 0 0 762 0.21 0.21
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