Management’s Discussion and Analysis of Results

0001104659-02-002575.txt : 20020515 0001104659-02-002575.hdr.sgml : 20020515 20020515163701 ACCESSION NUMBER: 0001104659-02-002575 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24230 FILM NUMBER: 02653053 BUSINESS ADDRESS: STREET 1: 44259 NOBEL DRIVE CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5104900719 MAIL ADDRESS: STREET 1: 44259 NOBEL DRIVE CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 j3622_10q.htm 10-Q Management’s Discussion and Analysis of Results

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark one)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-24564

FIBERSTARS, INC.

(Exact name of registrant as specified in its charter)

California		94-3021850
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

44259 Nobel Drive, Fremont, CA		94538
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code): (510) 490-0719

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

The number of outstanding shares of the registrants’ Common Stock, $0.0001 par value, as of March 31, 2002 was 4,655,008.

FIBERSTARS, INC.

TABLE OF CONTENTS

Part I — FINANCIAL INFORMATION

Item 1		Financial Statements:

		a.	Condensed Consolidated Balance Sheets March 31, 2002 and December 31, 2001

		b.	Condensed Consolidated Statements of Operations Three Months ended March 31, 2002 and 2001

		c.	Condensed Consolidated Statements of Comprehensive Operations Three Months ended March 31, 2002 and 2001

		d.	Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2002 and 2001

		e.	Notes to Condensed Consolidated Financial Statements

Item 2		Management’s Discussion and Analysis of Results of Operations and Financial Condition

Item 3		Quantitative and Qualitative Disclosures About Market Risk

Part II — OTHER INFORMATION

Item 6	Exhibits and Reports on Form 8-K

	Signatures

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIBERSTARS, INC.

CONDENSED

CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

	March 31, 2002			December 31, 2001
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,155		$	584
Accounts receivable trade, net	7,630			4,802
Notes and other accounts receivables	253			209
Inventories, net	5,162			5,423
Prepaids and other current assets	998			623
Deferred income taxes	1,451			1,441
Total current assets	16,649			13,082

Fixed assets, net	2,930			2,600
Goodwill and intangibles	4,483			4,537
Other assets	184			279
Deferred income taxes	703			936
Total assets	$	24,949		$	21,434

LIABILITIES
Current liabilities:
Accounts payable	$	2,571		$	2,395
Accrued liabilities	2,112			2,088
Short-term bank borrowing	2,429			101
Total current liabilities	7,112			4,584
Other long term liabilities	110			—
Long-term bank borrowings	401			419
Total liabilities	7,623			5,003

SHAREHOLDERS’ EQUITY
Common stock	1			1
Additional paid-in capital	19,583			18,563
Note receivable from shareholder	(75		)	(75		)
Accumulated other comprehensive loss	(454		)	(399		)
Accumulated deficit	(1,729		)	(1,659		)
Total shareholders’ equity	17,326			16,431
Total liabilities and shareholders’ equity	$	24,949		$	21,434

The accompanying notes are an integral part of these financial statements

FIBERSTARS, INC.

CONDENSED

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands except per share amounts)

(unaudited)

	Three Months Ended March 31,
	2002			2001

Net sales	$	7,590		$	6,876
Cost of sales	4,704			4,267
Gross profit	2,886			2,609

Operating expenses:
Research and development	444			651
Sales and marketing	1,806			2,199
General and administrative	706			890
Total operating expenses	2,956			3,740
Loss from operations	(70		)	(1,131		)

Other income (expense):
Equity in joint venture’s income	—			9
Net interest expense	(26		)	(40		)
Loss before income taxes	(96		)	(1,162		)
Benefit from income taxes	26			445
Net loss	$	(70	)	$	(717	)

Net loss per share — basic and diluted	$	(0.01	)	$	(0.15	)
Shares used in per share calculation — basic and diluted	4,780			4,687

The accompanying notes are an integral part of these financial statements

FIBERSTARS, INC.

CONDENSED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(amounts in thousands)

(unaudited)

	Three Months Ended March 31,
	2002			2001

Net loss	$	(70	)	$	(717	)

Other comprehensive loss, net of tax:
Foreign currency translation adjustments	(75		)	(169		)
Income tax benefit (expense)	20			65
Comprehensive loss	$	(125	)	$	(821	)

The accompanying notes are an integral part of these financial statements

FIBERSTARS, INC.

CONDENSED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

	Three Months Ended March 31,
	2002			2001

Cash flows from operating activities:
Net loss	$	(70	)	$	(717	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	255			373
Provision for doubtful accounts receivable	30			20
Equity in joint venture				(9		)
Deferred income taxes	68			(785		)
Changes in assets and liabilities:
Accounts receivable	(2,874		)	(1,578		)
Notes and other receivables	(44		)	14
Inventories	245			(571		)
Prepaids and other current assets	(376		)	57
Other assets	97			(54		)
Accounts payable	184			(634		)
Accrued liabilities	(141		)	(126		)
Total adjustments	(2,556		)	(3,293		)
Net cash used in operating activities	(2,626		)	(4,010		)

Cash flows from investing activities:
Repayment of loan made to officers	—			7
Acquisition of fixed assets	(111		)	(168		)
Net cash used in investing activities	(111		)	(161		)

Cash flows from financing activities:
Cash proceeds from sale of common stock	1,020			78
Proceeds from long-term bank borrowings	—			73
Proceeds from short-term bank borrowings	2,326			3,186
Net cash provided by financing activities	3,346			3,337

Effect of exchange rate changes on cash	(38		)	(36		)

Net increase (decrease) in cash and cash equivalents	571			(870		)
Cash and cash equivalents, beginning of period	584			1,230
Cash and cash equivalents, end of period	$	1,155		$	360

Non-cash investing and financing activities:
Acquire fixed assets	$	(450	)	$	—
Finance acquisition of fixed assets	$	450		$	—

The accompanying notes are an integaral part of these financial statements

FIBERSTARS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2002

(Unaudited)

1. Summary of Significant Accounting Policies

Interim Financial Statements (unaudited)

Although unaudited, the interim financial statements in this report reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of financial position, results of operations and cash flows for the interim periods covered and of the financial condition of Fiberstars, Inc. (the “Company”) at the interim balance sheet dates. The results of operations for the interim periods presented are not necessarily indicative of the results expected for the entire year.

Comparative Figures

Certain prior period amounts have been reclassified to conform with the current year’s presentation.

Year-end Balance Sheet

The year-end balance sheet information was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2001, contained in the Company’s 2001 Annual Report on Form 10-K.

Foreign Currency Translation

The Company’s international subsidiaries use their local currency as their functional currency. For those subsidiaries, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded to a separate component of shareholders’ equity.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing income available to shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental shares upon exercise of stock options and warrants.

A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts):

	Three months ended March 31,
	2002			2001
Numerator - Basic and Diluted EPS
Net loss	$	(70	)	$	(717	)
Denominator - Basic and Diluted EPS
Weighted average shares	4,780			4,687
Basic and diluted net loss per share	$	(0.01	)	$	(0.15	)

The shares outstanding used for calculating basic and diluted EPS includes 445,000 shares of Common Stock issuable for no cash consideration upon exercise of certain exchange provisions of warrants held by ADLT.

At March 31, 2002, options and warrants to purchase 1,542,254 shares of common stock were outstanding, but were not included in the year-to-date calculation of diluted EPS because their inclusion would have been antidilutive. Options to purchase 1,662,849 shares of common stock were outstanding at March 31, 2001, but were not included in the year-to-date calculation of diluted EPS for 2001 because their inclusion would have been antidilutive.

2. Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or market and consist of the following (in thousands):

	March 31, 2002		December 31, 2001
	(unaudited)

Raw materials	$	3,730	$	3,788
Finished goods	1,432		1,635
	$	5,162	$	5,423

3. Line of Credit and Long-term Debt:

The Company has a $5,000,000 Loan and Security Agreement (Accounts Receivable and Inventory) dated December 7, 2001, bearing interest equal to prime plus 0.25% per annum computed daily or a fixed rate term option of LIBOR plus 3%. Borrowings under this Loan and Security Agreement are collateralized by the Company’s assets and intellectual property. Specific borrowings are tied to accounts receivable and inventory balances, and the Company must comply with certain covenants with respect to effective net worth and financial ratios. The Company had borrowings of $2,357,000 against this facility as of March 31, 2002.

The Company also has a $356,000, in UK pounds sterling based on the exchange rate at March 31, 2002, bank overdraft agreement with Lloyds Bank Plc through its UK subsidiary. There were no borrowings against this facility as of March 31, 2002.

The Company has a $511,000 (in EUROs, based on the exchange rate at March 31, 2002) bank borrowing facility in Germany with Sparkasse Neumarkt Bank for the German office facility. At the end of the first fiscal quarter of 2002, the Company had borrowings of $401,000 against this credit facility. Additionally, there is a revolving line of credit of $178,000 (in EUROs) with Sparkasse Neumarkt Bank. As of March 31, 2002 there was a total borrowing of $72,000 against this facility.

4. Comprehensive Income (loss)

Comprehensive income (loss) is defined as net income (loss) plus sales, expenses, gains and losses that under generally accepted accounting principles, are included in comprehensive income (loss) but excluded from net income (loss). A separate statement of comprehensive income (loss) has been presented with this report.

5. Segments and Geographic Information

The Company operates in a single industry segment that manufactures, markets and sells fiber optic lighting products. The Company has two primary product lines: the pool and spa lighting product line and the commercial lighting product line, each of which 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):

	Three Months ended March 31,
	2002		2001
	(unaudited)		(unaudited)

U.S. Domestic	$	5,804	$	4,854
Other countries	1,786		2,021
	$	7,590	$	6,876

Geographic sales are categorized based on the location of the customer to whom the sales are made.

A summary of sales by product line is as follows (in thousands):

	Three months ended March 31,
	2002		2001
	(unaudited)		(unaudited)

Pool and Spa Lighting	$	4,189	$	3,033
Commercial Lighting	3,401		3,843
	$	7,590	$	6,876

A summary of geographic long lived assets (fixed assets, goodwill and intangibles) is as follows (in thousands):

	March 31, 2002		December 31, 2001
	(unaudited)

U.S. Domestic	$	6,102	$	5,791
Other Countries	1,311		1,346
	$	7,413	$	7,137

6. Goodwill and Intangibles—Adoption of SFAS 142

The Company has adopted the provisions of Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, effective January 1, 2002. The following table summarizes the impact of adopting SFAS 142 on the net loss and net loss per share for all periods reported in the accompanying Condensed Consolidated Financial Statements (in thousands, except per share amounts):

	Three months ended March 31,
	2002			2001

Reported net loss	$	(70	)	$	(717	)
Add back: goodwill amortization	—			55
Adjusted net loss	$	(70	)	$	(662	)

Basic and diluted loss per share:
Reported net loss	$	(0.01	)	$	(0.15	)
Goodwill amortization	—			0.01
Adjusted net loss	$	(0.01	)	$	(0.14	)

As part of adopting SFAS 142 the Company reclassified certain intangibles from goodwill to intangibles. These amounts were based on an analysis of the asset value of the Unison acquisition performed at the time of the Unison acquisition in January 2000. The after-tax add-back of goodwill amortization for the three months ended March 31, 2001 includes a gross amount of additional goodwill of $70,000 at historic rates partially offset by $15,000 due to a change in the life of certain Unison intangibles from 10 years to 5 years effective January, 2002.

In accordance with the provisions of SFAS 142 the Company will perform an initial test of goodwill impairment before June 30, 2002. Additionally, and in accordance with SFAS 142, goodwill will be subject to an annual impairment test. The Company does not believe goodwill is impaired as of January 1, 2002, the initial date of adopting SFAS 142, and March 31, 2002.

The changes in the carrying amount of goodwill and intangibles as of March 31, 2002 and December 31, 2001 were as follows (in thousands):

	Goodwill									Intangibles
	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Balance as of December 31, 2001	$	6,114		$	(1,577	)	$	4,537		$	—	$	—		$	—

Reclassification	(770		)	152			(618		)	770		(152		)	618

Amortization expense	—			—			—			—		(54		)	—

Balance as of March 31, 2002	$	5,344		$	(1,425	)	$	3,919		$	770	$	(206	)	$	564

Intangibles at March 31, 2002 include developed and core technology and patents with a gross carrying amount of $399,000 and $371,000, respectively, and accumulated amortization of $105,000 and $101,000, respectively.

The estimated annual amortization expense for intangibles is $157,000 for fiscal 2002, 2003 and 2004 and $50,000 for 2005, 2006 and 2007.

7. Recent pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS, No.141, “Business Combinations’’ and SFAS No.142, “Goodwill and Other Intangible Assets’’. Under SFAS No.141, all business combinations initiated after June 30, 2001 must be accounted for using the purchase method. SFAS No.142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles and the testing for impairment of existing goodwill and other intangibles. The Company has adopted the provisions of SFAS No.142 effective January 1, 2002.

In October 2001, the FASB issued SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets’’, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No.121 and the accounting and reporting provisions of Accounting Principles Board, or APB, Opinion No.30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions’’, for the disposal of a segment of a business. The Company adopted the provisions of SFAS No. 144 effective January 1, 2002. The implementation of SFAS No. 144 did not have a material effect on the Company’s financial position and results of operations.

products as a reduction of revenue. The Company adopted the provisions of EITF No. 01-09 effective January 1, 2002. The implementation of EITF No. 01-09 did not have a material effect on the Company’s financial position and results of operations.

8. Purchased In-process Research and Development

In February 2000, the Company purchased certain assets of Unison Fiber Optic Systems, Inc. (“Unison”) and accounted for the acquisition as a purchase. In the first quarter of fiscal 2000 a total of $938,000 was expensed as a write-off of in-process technology acquired. The total value of the acquisition was approximately $2,550,000.

As of the acquisition date, technological feasibility of the in-process technology had not been established and the technology had no alternative future use. Therefore, the Company expensed the in-process research and development in the first quarter of fiscal 2000. The remaining intangible assets are being amortized using the straight-line method over the estimated useful life of the assets ranging from 3 to 7 years.

The value assigned to this acquired in-process research and development was determined by identifying research projects in areas for which technological feasibility had not been established as of the acquisition date. These projects include the Compound Parabolic Collector (“CPC”) project and the extruded large core fiber project. The value was determined by estimating the revenue contribution and the percentage of completion of each of these projects. The projects were deemed to be 56% complete on the date of acquisition based on a leveraging of core technology. The net cash flows were then discounted utilizing a weighted average cost of capital of 35%, which, among other related assumptions, the Company believes to be reasonable. This discount rate takes into consideration the inherent uncertainties surrounding the successful development of the in-process research and development, the expected profitability levels of such technology, and the uncertainty of technological advances that could potentially impact the estimates described above.

To date, actual results have been materially consistent with our assumptions at the time of the acquisition. The assumptions primarily consist of a projected completion date for the products to be derived from the in-process technology acquired, the estimated cost required to bring them to completion and the pre-tax profit projected to be derived from these products. The initial illuminators using the CPC technology shipped in the fourth quarter of 2001. While this is later than planned, the profit projected to be achieved from these products was not forecast to be material prior to 2002. Initial products based on extruded solid core fiber are still under development and are not expected to begin shipping until 2003, as projected in the development plan at the time of the acquisition. Failure to achieve the expected levels of revenue and net income from these products during the complete life cycle will have a negative impact on the return on investment expected at the time that the acquisition was finalized. This could also cause a reduction in value of other assets related to these development activities.

9. Related Party Transactions

In previous years, the Company advanced amounts 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 2004. At March 31, 2002 and 2001, $83,000 and $73,000 was outstanding under the notes, respectively. At March 31, 2002, $36,000 is included in other assets and $47,000 is included in notes and other receivables. At March 31, 2001, $73,000 was included in notes and other receivables.

ADLT is a holder of 22% of the Company’s outstanding common stock. In January 2000, the Company executed the Mutual Supply Agreement with ADLT under which the Company buys certain lamps and

components for its illuminators and through which the Company sells its finished products to ADLT. The terms of this agreement provide for specified pricing on products purchased from and sold to ADLT. The Company has purchased, and continues to purchase, components from ADLT under the terms of this agreement. Also, in January 2000, the Company entered into a Development Agreement with Unison, a wholly owned subsidiary of ADLT, under which the Company provided development services for which it received $2 million in fees from October 1999 through January 2001. In exchange, the Company will pay royalties on the sales of products these technologies produce at a rate of 3% for five years, 2% for the next two years and 1% for the next three years, after which the Company assumes exclusive royalty-free rights.

The Company had sales to ADLT under the terms of the Mutual Supply Agreement and prior supply agreements of $445,000 during the first three months of fiscal 2002 and $238,000 during the first three months of fiscal 2001. Purchases were made from ADLT under these agreements with the Company along with royalties paid amounted to $86,000 during the first three months of fiscal 2002 and $110,000 during the first three months of fiscal 2001. Accounts receivable from ADLT were $141,000 and $286,000 as of March 31 of fiscal 2002 and 2001, respectively and accounts payable due ADLT were $655,000 and $115,000 for the same periods respectively.

10. Private Placement

In a private placement in March 2002, the Company sold 328,633 shares of Common Stock for net proceeds of $980,000 (net of fees and expenses). In addition, each purchaser was issued a warrant to purchase a number of shares of the Company’s Common Stock equal to 20% of the number of shares of Common Stock purchased by such purchaser in the offering. The purchase price of the Common Stock was $3.00 per share, which was based on an 8.8% discount on the 10 day average price as of March 14, 2002. The purchase price of the Common Stock for insiders who participated in the offering was $3.35, which was the higher of (1) the price on the closing date or (2) the 10 day average price as of March 14, 2002, plus a $.03 premium because of the issuances of the warrants. The warrants have an initial exercise price of $4.30 per share and a life of 5 years.

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

When used in this discussion, the words “expects,” “anticipates,” “estimates,” “believes” and similar expressions are intended to identify forward-looking statements. These statements, which include statements as to the Company’s future operating results, expected expenses and capital expenditure levels, expected cash flows, expected inventory levels, reductions in accounts receivable, expectations regarding market conditions, the adequacy of capital resources and growth in operations, our accounting policies, our strategy with regard to protecting our proprietary technology, our belief as to the adequacy of existing cash balances and credit lines and the use of proceeds are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as our ability to retain and obtain customer and distributor relationships, our ability to maintain relationships with strategic partners including Advanced Lighting Technology, Inc. (“ADLT”), our ability to manage expenses and inventory levels, our ability to reduce manufacturing overhead and general and administrative expenses as a percentage of sales, our ability to reduce doubtful accounts receivable, our ability to increase cash balances in future quarters, the cost of accessing or acquiring technologies or intellectual property, the cost of enforcing or defending intellectual property, risks relating to developing and marketing new products, the ability of our lighting products to meet customer expectations, manufacturing difficulties, possible delays in the release of products, risks associated with the evolution and growth of the fiber optic lighting market, trends in price performance and adoption rates of fiber optic lighting products in Europe and the United States, our dependence on a limited number of suppliers for components and distributors for sales, our ability to obtain high-quality components at reasonable prices, the impact of limited energy resources on our manufacturing operations and business, the impact of technological advances and competitive products, and seasonal and other fluctuations in the construction industry; and the matters discussed below in the subsection entitled “Factors That May Affect Results.” These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

RESULTS OF OPERATIONS

Net sales increased 10% to $7,590,000 for the quarter ended March 31, 2002 as compared to the same quarter a year ago. The increase was primarily the result of a significant increase in pool lighting sales, up 38% over the same quarter a year ago, due to the successful launch of the Company’s new Jazz Light™ product in the first quarter. The Jazz Light provides energy efficient lighting which also changes color. Pool lighting sales in other product lines were down slightly. Sales from commercial lighting products in the first quarter of fiscal 2002 were down 12% from the same quarter in fiscal 2001. The decrease was primarily due to a slowdown in sales through the Company’s FX division which sells lighting products to resorts and casinos. These sales have been affected by the decrease in themed entertainment lighting, particularly after the tragedy of September 11, 2001, due to a slowdown in people traveling to resorts and casinos.

Gross profit was $2,886,000 in the first quarter of fiscal 2002, an 11% increase compared to the same period in the prior year. Our gross profit margin was 38% for the first quarter of fiscal 2002, approximately equal to the gross profit margin achieved in the same period in 2001. The gross profit

margin was less than our target of 40% largely due to the higher start-up costs associated with launching the Jazz Light product. This resulted in higher direct costs of $80,000 for initial versions of the product along with increased freight costs of $50,000 for air shipping components in the first quarter. We anticipate that components will be shipped via the ocean in future quarters, at a lower cost.

Research and development expenses were $444,000 in the first quarter of fiscal 2002, a 32% decrease compared with the first quarter of fiscal 2001. The decrease is largely due to lower patent expenses of $48,000, project work costs of $26,000 and consulting fees of $53,000, along with a higher credit for work performed under an award by the National Institute of Science and Technology (“NIST”). A total of $265,000 was credited for NIST funds to be received for work performed in the first quarter of 2002 under a federal Advanced Technology Program award. A total of $143,000 was credited in the first quarter of 2001 under the same award. As a percentage of net sales, research and development expenses were 6% for the first quarter of fiscal 2002 compared to 9% in the first quarter of fiscal 2001.

Sales and marketing expenses declined 18% to $1,806,000 in the first quarter of fiscal 2002 as compared to $2,199,000 for the same period in fiscal 2001. This decrease was partially due to lower sales and marketing expenditures in the pool lighting market in the areas of travel of $32,000, free freight of $50,000 and marketing fees of $50,000. It was also a result of lower sales and marketing spending in commercial lighting of $155,000 due to the closure of two sales offices in Texas and Virginia at the end of the first quarter of fiscal 2001 and lower other marketing expenses of $106,000. Sales and marketing expenses were 24% of sales in the first quarter of fiscal 2002 compared to 32% for the same quarter in fiscal 2001. It is expected that sales and marketing expenses will increase in future quarters in fiscal 2002 as the Company initiates the marketing launch of its Fiberstars EFO™ product. This product offers more energy efficient lighting to the commercial lighting market.

Our general and administrative costs were $706,000 in the first quarter of fiscal 2002, a decrease of 21% over costs in the first quarter of fiscal 2001. This decrease was largely a result of the cessation of goodwill amortization in the first quarter of 2002 on adoption of the provisions of SFAS 142 (see Note 6 of the Notes to Condensed Consolidated Financial Statements). There was a $96,000 reduction in amortization costs for the first quarter of fiscal 2002 as compared to the first quarter of 2001 as a result of adopting these provisions. The remaining decrease in general and administrative costs resulted from restructuring expenses of $118,000 recorded in the first quarter of 2001 for which there was no similar charge in the first quarter of 2002. General and administrative costs were 9% of revenue in the first quarter of 2002 and 13% of revenue in the same period for 2001.

We recorded a net loss of $70,000 in the first quarter of fiscal 2002 as compared to a net loss of $717,000 in the first quarter of fiscal 2001. This loss was substantially lower in the first quarter of fiscal 2002 due to the increase in sales and lower expenses.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

In February 2000, the Company purchased certain assets of Unison and accounted for the acquisition as a purchase. In the first quarter of 2000 a total of $938,000 was expensed as a write-off of in-process technology acquired. The Company tracks progress against assumptions made at the time of the acquisition for the research and development projects which were included in the in-process technology acquired.

The total purchase price of approximately $2,550,000 was assigned, based on an independent appraisal, to the fair value of the assets acquired, including $625,000 to tangible assets acquired, $977,000 to identified intangible assets, $938,000 to in-process research and development, and $10,000 to goodwill. The in-process research and development was expensed at the acquisition date. The value assigned to this acquired in-process research and development was determined by identifying research projects in areas for which technological feasibility had not been established as of the acquisition date.

These projects include the Compound Parabolic Collector (“CPC”) project and the extruded large core fiber project. The value was determined by estimating the revenue contribution and the percentage of completion of each of these projects. The projects were deemed to be 56% complete on the date of acquisition, based on leveraging core technologies. The net cash flows were then discounted utilizing a weighted average cost of capital of 35%, which, among other related assumptions, the Company believes to be reasonable. This discount rate takes into consideration the inherent uncertainties surrounding the successful development of the in-process research and development, the expected profitability levels of such technology, and the uncertainty of technological advances that could potentially impact the estimates described above. If these projects are not successfully developed, the Company’s future revenues and achievement of profitability may not be realized. Additionally, the value of other intangible assets acquired may become impaired.

To date, actual results have been materially consistent with the Company’s assumptions at the time of the acquisition. The assumptions primarily consist of a projected completion date for the products to be derived from the in-process technology acquired, the estimated cost required to bring them to completion and the pre-tax profit projected to be derived from these products. The initial illuminators using the CPC technology shipped in the fourth quarter of 2001. While this is later than planned, the profit projected to be achieved from these products was not forecast to be material in fiscal 2000 or 2001. Initial products based on extruded solid core fiber are still under development and are not expected to begin shipping until 2003, as projected in the development plan at the time of the acquisition. Failure to achieve the expected levels of revenue and net income from these products during the complete life cycle will have a negative impact on the return on investment expected at the time that the acquisition was finalized. This could also cause a reduction in value of other assets related to these development activities.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002, our cash and cash equivalents were $1,155,000 as compared to $584,000 at December 31, 2001. In addition, there was a utilization of the Company’s bank loan agreement of $2,429,000 at the end of the quarter as compared to no outstanding utilization of the line of credit at the prior year end.

Cash was used during the first three months of fiscal 2002 by a net loss of $70,000 compared to a net loss of $717,000 for the same period in fiscal 2001. After adjusting for depreciation and amortization there was a contribution of $185,000 to cash in the three months ended March 31, 2002 as compared to a utilization of $344,000 for the same period in fiscal 2001. This contribution to cash in the first quarter of fiscal 2002 was offset by cash utilized to fund an increase in accounts receivable of $2,874,000 and an increase in prepaids of $376,000. A cash contribution came from the reduction of inventories and increases in accounts payables and accrued liabilities totaling $288,000. After including cash used for working capital, there was a total of $2,626,000 in cash used for operating activities in the first three months of fiscal 2002 compared to a use of $4,010,000 for operating activities in the first three months of fiscal 2001. Accounts receivable remained seasonably high as the Company carried balances for “early buy” customer purchases made in the fourth quarter of fiscal 2001 which are due to be paid in the second quarter of fiscal 2002.

There was a net utilization of cash of $111,000 in the first quarter of fiscal 2002 due to the acquisition of fixed assets. The Company acquired an additional $450,000 in fixed assets consisting of certain fiber extrusion equipment which it had agreed to purchase as part of the acquisition of certain assets of Unison from Advanced Lighting Technologies, Inc. in January 2000. This purchase did not result in a cash outflow in this quarter as the equipment will be paid for in future quarters of fiscal 2002 and in fiscal 2003. This equipment will initially be used as part of the Company’s on-going NIST research and development project.

There was a net contribution of $3,346,000 in cash in the first three months of fiscal 2002 from financing activities. This contribution came primarily from two sources: 1) from short-term bank borrowings of $2,326,000; and 2) from the selling of the Company’s Common Stock and warrants to purchase the Company’s Common Stock for net proceeds of $1,020,000, the major portion of which was for a private placement in March 2002, which netted $980,000 after legal expenses.

As a result of the cash used in operating and investing activities and the cash provided by financing activities, there was a net provision of cash in the first three months of fiscal 2002 of $571,000 that resulted in an ending cash balance of $1,155,000. This compares to a net utilization of $870,000 in cash for the same period in fiscal 2001 resulting in an ending cash balance of $360,000 for that period.

The Company has a $511,000 (in EUROs, based on the exchange rate at March 31, 2002) bank borrowing facility in Germany with Sparkasse Neumarkt Bank for the German office facility. At the end of the first quarter, the Company had borrowings of $401,000 against this credit facility. Additionally, there is a revolving line of credit of $178,000 (in EUROs) with Spartkasse Neumarkt Bank. As of March 31, 2002, there was a total borrowing of $72,000 against this facility.

Additionally, the Company has issued 100,000 warrants on a contingency basis to the former shareholders of Lightly Expressed, Inc., a company which the Company acquired in 2000. Under the terms of these warrants, if the contingencies are met, the Company may be required to pay cash in lieu of shares of the Company’s stock. The Company is not able to forecast the amount of cash which might be paid out under this arrangement, if any.

The Company believes that existing cash balances, proceeds from the private placement stock offering and funds available through the Company’s bank lines of credit along with 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. However, unforeseen adverse competitive, economic or other factors may damage the Company’s cash position, and thereby affect operations.

RECENT PRONOUNCEMENTS

In November 2001, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” EITF No. 01-09 requires recording certain consideration paid to distributors of the Company’s products as a reduction of revenue. The Company adopted the provisions of EITF No. 01-09 effective January 1, 2002. The implementation of EITF No. 01-09 did not have a material effect on the Company’s financial position and results of operations.

FACTORS THAT MAY AFFECT RESULTS

Our quarterly operating results are subject to fluctuations caused by many factors which could result in decreased revenues and a drop in the price of our common stock.

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. Our product development and marketing expenditures may vary significantly from quarter to quarter and are made well in advance of potential resulting revenue. Significant portions of our expenses are relatively fixed in advance based upon our forecasts of future sales. If sales fall below our expectations in any given quarter, we will not be able to make any significant adjustment in our operating expenses, and our operating results will be adversely affected.

Our sales are dependent upon new construction levels and are subject to seasonal general economic trends.

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 of pools. Sales of commercial lighting products also depend significantly upon the level of new building construction and renovation. 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. The U.S. economy has been strengthening at the beginning of 2002, however there is no assurance this trend will continue. Additionally, some business segments, such as themed entertainment, remain weak as a result of reduced air travel following the September 11 tragedy. Themed entertainment is a key source of revenues for the Company’s commercial lighting segment and continued softness of this industry will potentially have a material negative effect on the Company’s future commercial lighting sales .

If we are not able to successfully develop, manufacture, market and sell our new products, our operating results will decline.

We expect to introduce additional new products in 2002 in the Pool and Spa Lighting and Commercial Lighting markets. 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 these new products. If any of these new products fails to meet expectations, our operating results will be adversely affected.

We operate in markets that are intensely and increasingly competitive.

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 and Osram/Siemens. 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 adversely affect our operating results if we cannot compete effectively.

We rely on intellectual property and other proprietary information that may not be protected and that may be expensive to protect.

We currently hold 29 patents. There can be no assurance, however, that our issued patents are valid or that any patents applied for will be issued. We have a policy of seeking to protect our intellectual property through, among other things, the prosecution of patents with respect to certain of our technologies. There are many issued patents and pending patent applications in the field of fiber optic technology, and certain of our competitors hold and have applied for patents related to fiber optic lighting. Although, to date, we have not been involved in litigation challenging our intellectual property rights or asserting intellectual property rights of others, we have in the past received communications from third parties asserting rights in our patents or that our technology infringes intellectual property rights held by such third parties. Based on information currently available to us, we do not believe that any such claims involving our technology or patents are meritorious. However, we may be required to engage in litigation to protect our patent rights or to defend against the claims of others. In the event of litigation to determine the validity of any third party claims or claims by us against such third party, such litigation, whether or not determined in our favor, could result in significant expense and divert the efforts of our technical and management personnel, regardless of the outcome of such litigation.

We rely on distributors for a significant portion of our sales and terms and conditions of sales are subject to change with very little notice.

Most of the Company’s products are sold through distributors and the Company does not have long-term contracts with its distributors. Some of these distributors are quite large, particularly in the pool products market. If these distributors significantly change their terms with the Company or change their historical pattern of ordering products from the Company, there could be a significant impact on the Company’s revenues and profits.

We depend on key employees in a competitive market for skilled personnel, and the loss of the services of any of our key employees could materially affect our business.

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 harm the Company’s business or results of operations.

We depend on a limited number of suppliers from whom we do not have a guarantee to adequate supplies, increasing the risk that loss of or problems with a single supplier could result in impaired margins, reduced production volumes, strained customer relations and loss of business.

Mitsubishi is the sole supplier of the Company’s fiber, other than the large core fiber the Company now manufactures following the Unison acquisition. The Company also relies on a sole source for certain lamps, reflectors, remote control devices and power supplies. The loss of one or more of the Company’s suppliers could result in delays in the shipment of products, additional expense associated with redesigning products, impaired margins, reduced production volumes, strained customer relations, loss of business or otherwise harm the results of operations.

We may experience power blackouts and higher electricity prices as a result of California’s current energy crisis, which could disrupt our operations and increase our expenses.

California has recently been experiencing an energy crisis that could disrupt our operations and increase our expenses. We rely on the major Northern California public utility, Pacific Gas & Electric Company, or PG&E, to supply electric power to our facilities in Northern California. Due to problems associated with the de-regulation of the power industry in California and shortages in wholesale electricity supplies, customers of PG&E have been faced with increased electricity prices, power shortages and, in some cases, rolling blackouts. If blackouts interrupt our power supply, we may be temporarily unable to continue operations at our facilities. Any such interruption in our ability to continue operations at our facilities could delay our ability to develop, manufacture or market our products, which could damage our reputation and result in lost revenue, either of which could substantially harm our business and results of operations.

We depend on sufficient cash liquidity from all sources of cash available to the Company to finance on-going operations and growth.

While the Company has historically been able to fund cash needs from operations, from bank lines of credit or from capital markets, due to competitive, economic or other factors there can be no assurance that the Company will continue to be able to do so. Constraints on liquidity may affect the Company’s ability to maintain good vendor and customer relationships or may constrain future growth.

OTHER FACTORS:

Our business is subject to additional risks that could materially and adversely affect our future business, including:

• 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;

• sales and distribution risks, such as risks of changes in product mix or distribution channels that result in lower margins;

• risks of the loss of a significant distributor or sales representative;

• risks of the loss of or substantial decrease in orders by a significant customer or swimming pool builder, such as South Central Pools;

• risks of the effects of volume discounts that we grant from time to time to our larger customers, including reduced profit margins;

• risks of product returns and exchanges; as we cannot be assured that we will not experience component problems in the future that could require increased warranty reserves and manufacturing costs;

• risks associated with product development and introduction problems, such as increased research, development and marketing expenses associated with new product introductions;

• dependence on collaborating with third parties, which are not subject to material contractual commitments, to augment the Company’s research and development efforts; and

• risks associated with delays in the introduction of new products and technologies, including lost sales and loss of market share.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At March 31, 2002, the Company had $398,000 in cash held in foreign currencies as translated at period end foreign currency exchange rates. The balances for cash held overseas in foreign currencies is subject to exchange rate risk. The Company has a policy of maintaining cash balances in local currencies unless an amount of cash is occasionally transferred in order to repay intercompany debts.

The Company has certain bank borrowings in foreign currencies. The Company had a total borrowing of $401,000 against a credit facility which totals $511,000 (in EUROs) held by its German subsidiary. This borrowing is largely held in order to finance the building of new offices owned by the Company in Berching, Germany. Of the amounts under this borrowing, $29,000 is due in 2003 and $372,000 is due in 2008. In addition, there is a revolving line of credit of $178,000 (in German Deutsche Mark) with Sparkasse Neumarkt Bank. As of March 31, 2002, there was $72,000 in borrowings against this facility.

PART II — OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

The sale of the above securities were considered to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder. The recipients of securities in the private placement represented their intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in the private placement. All recipients had adequate access, through their relationship with the Company, to information about the Company.

(d) Use of Proceeds from Sales of Registered Securities.

Of the $1,000,000 in aggregate proceeds raised by us in the private placement, approximately $20,000 was paid by us to cover related fees and expenses, including legal fees. We intend to use the net proceeds for general corporate purposes, including working capital.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number		Description of Exhibits

4.1		Form of Warrant for the purchase of shares of Common Stock.

10.1		Common Stock and Warrant Purchase Agreement, dated March 21, 2002, by and among the Registrant and the investors named therein.

(b) Reports on Form 8-K.

The Company did not file any reports on Form 8-K with the Securities and Exchange Commission during the quarter ended March 31, 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		FIBERSTARS, INC.

Date: May 15, 2002	By:	/s/	Robert A.Connors
			Robert A.Connors
			Chief Financial Officer

		(Principal Financial and Accounting Officer)

INDEX OF EXHIBITS

Exhibit Number		Description of Exhibits

4.1		Form of Warrant for the purchase of shares of Common Stock.

10.1		Common Stock and Warrant Purchase Agreement, dated March 21, 2002, by and among the Registrant and the investors named therein.

EX-4.1 3 j3622_ex4d1.htm EX-4.1 THE WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITI

Exhibit 4.1

THE WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL OR UPON EVIDENCE REASONABLY SATISFACTORY TO FIBERSTARS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT OR ANOTHER APPLICABLE EXEMPTION.

FIBERSTARS, INC.

Warrant for the purchase of [ ] shares of Common Stock

No. ____

March 29, 2002

THIS CERTIFIES that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, [ ] or registered assigns (the “Holder”), is the registered holder of this warrant (the “Warrant”), entitling the Holder to subscribe for and purchase from FIBERSTARS, INC., a California corporation (the “Company”), upon the terms and conditions set forth herein, at any time or from time to time, during the period commencing with the date hereof and ending on 5:00 p.m. (Pacific time) on the date of the fifth anniversary of the date hereof (the “Exercise Period”), up to an aggregate of [ ] fully paid and non-assessable shares (the “Warrant Shares”) of the Company’s Common Stock (“the Common Stock”), at an initial exercise price (subject to adjustment as set forth herein, the “Exercise Price”) per share equal to $4.30 per share, upon surrender of this Warrant and payment of the Exercise Price as provided in Section 2. As used herein, the term “this Warrant” shall mean and include this Warrant and any Warrant or Warrants hereafter issued as a consequence of the exercise or transfer of this Warrant in whole or in part.

1. Warrant. This Warrant is issued pursuant to, and in accordance with, the Common Stock and Warrant Purchase Agreement between the Company and Holder, dated the date hereof (the “Purchase Agreement”).

2. Exercise of Warrant. This Warrant may be exercised, in whole at any time or in part from time to time, during the Exercise Period by the surrender of this Warrant (with the Election to Exercise attached hereto), to the Company at its main office, or such other place which the Company may designate in writing, together with proper payment of an amount equal to the product of the Exercise Price and the number of Warrant Shares being exercised (the “Aggregate Warrant Price”). Payment of the Aggregate Warrant Price shall be made by certified or official bank check payable to the order of the Company or by wire transfer of immediately available funds to an account designated by the Company. If this Warrant is exercised in part, this Warrant must be exercised for a number of whole shares of the Common Stock, and the Holder shall be entitled to receive a new Warrant covering the Warrant Shares which have not been exercised and setting forth the proportionate part of the Aggregate Warrant Price applicable to

such Warrant Shares. Upon surrender of this Warrant, the Company will (a) issue a certificate or certificates in the name of the Holder for the largest number of whole shares of Common Stock to which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional share of the Common Stock to which the Holder shall be entitled, pay to the Holder cash in an amount equal to the fair market value of such fractional share (determined in such reasonable manner as the Board of Directors of the Company shall determine), and (b) deliver the other securities and properties receivable upon the exercise of this Warrant, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of this Warrant.

(a) Cashless Exercise. Notwithstanding anything contained herein to the contrary, the holder of this Warrant may, in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Warrant Price, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (a “Cashless Exercise”):

Net Number =	(A x B) - (A x C)
	B

For purposes of the foregoing formula:

A = the total number of shares with respect to which this Warrant is then being exercised.

B = the closing sale price of the Common Stock (as reported by the Wall Street Journal) on the date immediately preceding the date of the Exercise Notice.

C = the Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

3. Registration, Registration Rights, and Transfers.

(a) Any Warrants issued upon the transfer or exercise in part of this Warrant shall be numbered and shall be registered in a warrant register (the “Warrant Register”) maintained by the Company or its transfer agent as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and shall not be liable for any registration of transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made in accordance with the terms hereof.

(b) This Warrant, and the shares of Common Stock issuable upon its exercise, are subject to the restrictions upon transferability and registration rights as set forth in the Fiberstars, Inc. Common Stock and Warrant Purchase Agreement of even date pursuant to which this Warrant issues, and no others.

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(c) This Warrant may be exchanged, at the option of the Holder hereof, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent.

4. Adjustment of Exercise Price and Number of Shares.

(a) Subdivision and Combination. In case the Company shall at any time subdivide (by stock split, stock dividend or otherwise) or combine the outstanding Common Stock, the Exercise Price shall be decreased, in the case of subdivision, or increased, in the case of combination, in the same proportion as the Common Stock is subdivided or combined, in each case effective automatically upon, and simultaneously with, the effectiveness of the subdivision or combination which gives rise to the adjustment.

(b) Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 4, the number of Warrant Shares issuable upon the exercise of this Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price.

(c) Merger or Consolidation. In case the Company after the date hereof (i) shall consolidate with or merge into any other person and shall not be the continuing or surviving corporation of such consolidation or merger, or (ii) shall permit any other person to consolidate with or merge into the Company and the Company shall be the continuing or surviving person but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property, or (iii) shall transfer all or substantially all of its properties or assets to any other person, or (iv) shall effect a capital reorganization or reclassification of the Common Stock (other than a capital reorganization or reclassification resulting in the issue of additional Common Stock for which adjustment in the Exercise Price is provided in this Section 8), then, and in the case of each such transaction, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder of this Warrant, upon the exercise thereof at any time after the consummation of such transaction, shall be entitled to receive (at the aggregate Exercise Price in effect at the time of such consummation for all Warrant Shares issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock or other securities issuable upon such exercise prior to such consummation, the highest amount of securities, cash or other property to which the Holder would actually have been entitled as shareholder upon such consummation if the Holder had exercised the rights represented by this Warrant immediately prior thereto, subject to adjustments (subsequent to such consummation) as nearly equivalent as possible to the adjustments provided for in this Section 4.

(d) Assumption of Obligations. Notwithstanding anything contained in this Warrant to the contrary, the Company will not effect any of the transactions described in clauses (i) through (iv) of Section 4(c) unless, prior to the consummation thereof, each person (other than the Company) which may be required to deliver any stock, securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and

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reasonably satisfactory to, the Holder of this Warrant, (a) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company under this Warrant) and (b) the obligation to deliver to the Holder such shares of stock, securities, cash or property as, in accordance with the foregoing provisions of this Section 4, the Holder may be entitled to receive.

(e) Notice of Adjustment Events. Whenever the Company contemplates the occurrence of an event which would give rise to adjustments under this Section 4, the Company shall use its reasonable best efforts to notify the Holder of this Warrant, at least thirty (30) days prior to the record date with respect to such event or, if no record date shall be established, at least thirty (30) days prior to such event, a notice specifying (i) the nature of the contemplated event, (ii) the date of which any such record is to be taken for the purpose of such event, (iii) the date on which such event is expected to become effective and (iv) the time, if any is to be fixed, when the holders of record of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable in connection with such event.

(f) Notice of Adjustments. Whenever the Exercise Price or the kind of securities or property issuable upon exercise of this Warrant, or both, shall be adjusted pursuant to this Section 4, the Company shall make a certificate signed by an executive officer of the Company, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method of which such adjustment was calculated (including a description of the basis on which the Company made any determination hereunder), and the Exercise Price and the kind of securities or property issuable upon exercise of this Warrant after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to the Holder promptly after each adjustment.

5. Reservation of Shares; Fully Paid Stock.

(a) The Company shall at all times reserve and keep available, free from pre-emptive rights, out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the rights to purchase all Warrant Shares granted pursuant to this Warrant, such number of shares of Common Stock as shall, from time to time, be sufficient therefor.

(b) The Company covenants that all shares of Common Stock issuable upon exercise of this Warrant, upon receipt by the Company of the full Exercise Price therefor, shall be duly and validly issued, fully paid, non-assessable, and the Holder shall receive good and valid title to such shares free and clear from any adverse claim (as defined in the applicable Uniform Commercial Code), except such as have been created by the Holder.

6. Taxes. The issuance of any shares or other securities upon the exercise of this Warrant, and the delivery of certificates or other instruments representing such shares or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance, other than applicable transfer taxes. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue

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thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

7. Legend. Unless subject to an effective registration statement filed with the United States Securities and Exchange Commission, the Warrant Shares issued upon exercise of this Warrant shall be subject to a stop transfer order and the certificate or certificates evidencing such Warrant Shares shall bear the following legend:

(a) The following legend under the Act:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL OR UPON EVIDENCE REASONABLY SATISFACTORY TO FIBERSTARS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT OR ANOTHER APPLICABLE EXEMPTION.”

(b) Such other legends as may be required under state securities laws.

8. Replacement Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant (and upon surrender of any Warrant at the principal office of the Company if mutilated), and upon reimbursement of the Company’s reasonable incidental expenses and, if reasonably requested, an indemnity reasonably acceptable to the Company, the Company shall execute and deliver to the holder thereof a new Warrant of like date, tenor, and denomination.

9. Notices.

(a) Unless otherwise provided, any notice, request, demand or other communication required or permitted under this Warrant shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified, or when sent by facsimile (with receipt confirmed and promptly confirmed by personal delivery, U.S. first class mail, or courier), or overnight courier service, or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed as follows (or at such other address as a party may designate by notice to the other):

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If to the Company:

Fiberstars, Inc.

44259 Nobel Drive

Fremont California 94538

Attention: David N. Ruckert, CEO

Facsimile: (510) 490-0947

Telephone: (650) 490-0719

with a copy to:

Pillsbury Winthrop LLP

2550 Hanover Street

Palo Alto, California 94304

Attention: Richard Bebb

Facsimile: (650) 233-4545

Telephone: (650) 233-4500

If to Holder:

See the address provided by the Holder on its counter-part signature page to the Purchase Agreement.

10. Warrant Holder Not Shareholder. The Holder of any Warrant shall not have, solely on account of such status, any rights of a shareholder of the Company, either at law or in equity, or to any notice of meetings of shareholders or of any other proceedings of the Company, except as provided in this Warrant.

11. Remedies. The Company agrees that the remedies at law of the Holder, in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms hereof, may not be adequate and such terms may, in addition to and not in lieu of any other remedy, be specifically enforced by a decree of specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.

12. Headings. The headings contained in this Warrant are for convenience of reference only and are not part of this Warrant.

13. Applicable Law. This Warrant shall be construed in accordance with the laws of the State of California applicable to contracts made and performed within such State, without regard to principles of conflicts of law.

B-6

IN WITNESS WHEREOF, the Company has executed and delivered this Warrant as of the date set forth above.

	FIBERSTARS, INC.,

	a California corporation


	By:

	Name:

	Title:

B-7

To:	Fiberstars, Inc.

ELECTION TO EXERCISE

The undersigned hereby exercises his or its rights to purchase Warrant Shares covered by the within Warrant and tenders payment herewith in accordance with the terms thereof, certifies that he owns this Warrant free and clear of any and all claims, liens and/or encumbrances and requests that certificates for such securities be issued in the name of, and delivered to:




	(Print Name, Address and Social Security
	or Tax Identification Number)

The undersigned hereby elects to pay the Exercise Price (select one option):

o By payment of cash, check or wire transfer; or

o By Cashless Exercise (as calculated pursuant to Section 2(a) of the Warrant).

If the number of Warrant Shares purchased upon such exercise or surrendered in lieu of payment of the Exercise Price shall not be all the Warrant Shares covered by the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below.

All terms used and not defined herein shall have their respective meanings as set forth under the Warrant.

Dated:	Name:
		(Print)

Address:


			(Signature)

B-8

EX-10.1 4 j3622_ex10d1.htm EX-10.1 FIBERSTARS, INC

Exhibit 10.1

FIBERSTARS, INC.

COMMON STOCK AND WARRANT

PURCHASE AGREEMENT

THIS COMMON STOCK AND WARRANT PURCHASE AGREEMENT (this “Agreement”), dated March 29, 2002, is entered into by and among FIBERSTARS, INC., a California corporation (the “Company”), and each Investor identified at Schedule 1 hereto (each an “Investor,” and collectively, the “Investors”).

WHEREAS, the Company, upon the terms and conditions set forth in this Agreement, proposes to issue and sell to each Investor (i) such number of shares of Company common stock, no par value (the “Common Stock”), set forth opposite the name of such Investor on the attached Schedule 1, for the aggregate purchase price set forth opposite the name of the Investor on Schedule 1, and (ii) a warrant to purchase, subject to the terms and conditions herein, up to the aggregate number of shares Common Stock set forth opposite such Investor’s name on the attached Schedule 2 at the per share exercise price set forth opposite the name of each Investor on Schedule 2.

NOW, THEREFORE, in consideration of the mutual covenants and agreements as set forth herein and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

1. Definitions. For purposes of this Agreement, capitalized terms not otherwise defined in this Agreement shall have the following meanings:

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time.

“Lien” means, with respect to any asset, any mortgage, pledge, security interest, encumbrance, lien or charge of any kind in respect of such asset.

“Material Adverse Effect” means any change, violation, inaccuracy, circumstance or effect that is materially adverse to the business, properties, assets (including intangible assets), liabilities, capitalization or financial condition of the Company and its Subsidiaries, taken as a whole; provided, however that the following shall not be taken into account in determining whether has been a Material Adverse Effect: (i) any occurrences relating to the economy of the United States in general and (ii) changes in trading prices for the Company’s securities or for securities in general.

“Person” means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof.

“Securities Act” means the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time.

“Subsidiary” means a Person, whether incorporated or unincorporated, of which (i) more than fifty percent (50%) of the securities or other ownership interests or (ii) securities or other interests having by their terms ordinary voting power to elect more than fifty percent (50%) of the board of directors or others performing similar functions with respect to such corporation or other organization, is directly owned or controlled by such Person or by any one or more of its Subsidiaries.

“Related Agreements” means the Warrant in the form attached at Exhibit B and Amendment No. 1 to the Rights Agreement attached at Exhibit D.

2. Purchase and Sale of Common Stock.

2.1 Sale and Issuance of Common Stock. Subject to the terms and conditions set forth in this Agreement, the Company agrees to sell and issue to each Investor at the Closing (as defined below) and each Investor, severally and not jointly, agrees to purchase at the Closing, such aggregate number of shares of Common Stock (the “Shares”) as set forth opposite such Investor’s name on Schedule 1. As to each Investor, the Shares shall equal the quotient obtained by dividing (x) the aggregate purchase price (the “Aggregate Purchase Price”) set forth opposite that Investor’s name on Schedule 1, by (y) the Per Share Purchase Price (as defined below), rounded to the nearest whole share.

2.2 Per Share Purchase Price. The purchase price for each share of Common Stock shall be, as to all Investors except John B. Stuppin, three dollars ($3.00) per share; and, as to Investor John B. Stuppin, only, the Per Share Purchase Price shall be the greater of (x) $3.03 and (y) the sum of the closing price of one share of Company Common Stock on the NASDAQ National Market on the Closing Date, plus three cents ($0.03).

2.3 Closing. The completion of the purchase and sale of the Shares (the “Closing”) shall take place at the offices of Pillsbury Winthrop LLP, 2550 Hanover Street, Palo Alto, California at 3:30 p.m., local California time, on March 29, 2002, or at such other time and place as the Company and the Investors mutually agree in writing. The date on which the Closing takes place is referred to as the “Closing Date.” At the Closing, after receipt of payment therefore, the Company shall deliver to each Investor a duly executed and irrevocable letter of instruction addressed to the Company’s transfer agent, pursuant to which such transfer agent is instructed to deliver the Shares to such Investor in certificated form, each such certificate to be registered in the name of the Investor or if so indicated on the Stock Certificate Questionnaire attached hereto as Exhibit A, in the name of a nominee designated by the Investor.

3. Issuance of Warrants to Purchase Common Stock.

3.1 Issuance of Warrants. Subject to the terms and conditions of this Agreement, the Company agrees to issue to each Investor a Warrant (the “Warrant”) to purchase shares of Common Stock in such number and at such exercise price as set forth opposite the name of such

Investor at Schedule 2 hereto, which number of shares and exercise price shall be determined consistent with Sections 3.2 and 3.3 hereof.

3.2 Number. The Company shall issue a Warrant to each Investor to purchase such number of shares (such number being subject to appropriate adjustment for stock splits, reverse stock dividends and the like after the date hereof) of Common Stock as set forth opposite that Investor’s name on Schedule 2, hereto, which number shall equal the product of (x) the number of Shares being purchased by such Investor as set forth opposite that Investor’s name on Schedule 1 hereto, multiplied by (y) twenty one-hundredths (0.20), rounded to the nearest whole share (such product being such Investor’s “Warrant Shares.”) All Warrants shall be governed by the terms and conditions of a Warrant Agreement in the form attached hereto at Exhibit B, and the Company’s issuance of a Warrant to each Investor shall be contingent upon execution by such Investor of the Warrant Agreement for the applicable Warrant Shares.

3.3 Warrant Exercise Price. The exercise price for each share of Common Stock issuable upon exercise of the Warrant (the “Warrant Share Exercise Price”) shall be four dollars and thirty cents ($4.30).

3.4 Closing. Completion of the purchase and sale of the Warrants shall be concurrent with the Closing under Section 2.2, above. At the Closing, and subject to each Investor’s purchase of his designated Shares, the Company shall deliver to the Investor a Warrant for the purchase of such number of Warrant Shares at the Warrant Exercise Price set forth opposite such Investor’s name on Schedule 2.

4. Representations, Warranties and Agreements of the Company. The Company hereby represents and warrants to, and agrees with, each Investor that, except as otherwise disclosed in the Company’s periodic reports on Form 10–Q for the quarters ended March 31, 2001, June 30, 2001 and September 30, 2001, the Company’s Annual Report on Form 10–K405A for the year ended December 31, 2000, the Company’s proxy statement for its 2001 annual meeting, the Company’s current reports on Form 8–K filed on February 12, 2001 and September 21, 2001, the Company’s registration of rights filed on Form 8–A on September 27, 2001, and the Company’s registration statement filed on Form S–8 filed on August 31, 2001 (collectively the “SEC Documents”), in its Press Release of February 28, 2002, or in the Schedule of Exceptions attached at Exhibit E all of which qualify the following representations and warranties in their entirety:

4.1 Organization and Qualification. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California. The Company has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as currently conducted. The Company is qualified as a foreign corporation and is in good standing in all states where the conduct of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect on the Company.

4.2 Authorization. All corporate action on the part of the Company necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and thereunder, and the authorization, issuance and delivery of the Shares

and Warrants has been taken or will be taken on or prior to the Closing. This Agreement constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors’ rights generally, (b) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (c) to the extent the indemnification provisions contained in this Agreement may be limited by applicable federal or state securities laws.

4.3 Valid Issuance. The Shares, the Warrants and the shares of Common Stock issuable upon exercise of the Warrants have been duly authorized and, when issued, sold and delivered to the Investors after payment therefore in accordance with the terms hereof, will be validly issued, fully paid and nonassessable, and, assuming the accuracy of the representations and warranties of the Investors set forth at Section 5.4 of this Agreement, will be issued in compliance with all applicable federal and state securities laws and will be free of all Liens or other encumbrances other than as set forth in the legends contained in Section 5.5 of this Agreement.

4.4 Non-Contravention. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby do not and will not (a) contravene or conflict with the articles of incorporation or by-laws of the Company, (b) to the Company’s knowledge, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to the Company or any of its Subsidiaries, (c) constitute a default under or give rise to a right of termination, cancellation or acceleration of any right or obligation of the Company or any of its Subsidiaries or to a loss of any benefit to which the Company or any of its Subsidiaries is entitled under any provision of any agreement, contract or other instrument binding upon the Company or any of its Subsidiaries or any license, franchise, permit or other similar authorization held by the Company or any of its Subsidiaries, or (d) result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries, except for such contraventions, conflicts or violations referred to in clause (b) or defaults, rights of termination, cancellation or acceleration, or losses or Liens referred to in clause (c) or (d) that would, individually or in the aggregate, have a Material Adverse Effect on the Company.

4.5 Governmental Consents. No consent, approval, qualification, order or authorization of, or filing with, any local, state or federal governmental authority is required on the part of the Company in connection with the Company’s valid execution, delivery or performance of this Agreement or the offer, sale or issuance of the Shares or Warrants except any notices of sale required to be filed with the Securities and Exchange Commission (“SEC”) under Regulation D of the Securities Act, or such post-Closing filings as may be required under applicable state securities laws, which will be timely filed within the applicable periods therefor.

4.6 Litigation. Except as disclosed in the SEC Documents, there is no action, suit or proceeding before or by any court or government agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened against or adversely affecting the Company that would result in any material adverse change in the business, properties, results of

operations or financial condition of the Company, or materially and adversely affect the consummation of the transactions contemplated by this Agreement.

4.7 SEC Filings and Financial Statements. The financial statements included in the SEC Documents are hereafter collectively referred to as the “Financial Statements.” The balance sheet contained in the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2001 shall be referred herein as the “Company Balance Sheet” and the date of such balance sheet shall be referred to herein as the “Company Balance Sheet Date.” Each of the balance sheets included in the Financial Statements (including any related notes and schedules) presents fairly the financial position of the Company as of its date, and the other financial statements included in the Financial Statements (including any related notes and schedules) present fairly the results of operations or other information included therein of the Company for the periods or as of the dates therein set forth (subject, in the case of interim financial statements, to normal year-end adjustments), and each of the Financial Statements was prepared in accordance with generally accepted accounting principles consistently applied during the periods involved (except as otherwise stated therein and except that interim financial statements may not contain all footnotes required by generally accepted accounting principles). The Company has filed all reports required to be filed by it since the Company Balance Sheet Date pursuant to the reporting requirements of the Exchange Act. None of the documents filed with the SEC and referred to in this Section 4.7 contained, as of its date, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

4.8 No Material Adverse Change. Since the Company Balance Sheet Date, except as set forth in the Company’s SEC Documents (a) there has been no material adverse change in the business, properties, results of operations or financial condition of the Company, whether or not arising in the ordinary course of business, and (b) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. Since the Company Balance Sheet Date until the date of this Agreement, except as set forth in the Company’s SEC Documents filed with the SEC on or prior to the date of this Agreement, there have been no material transactions entered into by the Company that have not arisen in the ordinary course of business.

4.9 Access to Information. Prior to the Closing, the Company will provide to the Investor, its officers, employees and professional representatives such information as such persons from time to time may reasonably request with respect to the Company and the transactions contemplated by this Agreement, and prior to the Closing shall permit the Investor, its officers, employees and professional representatives reasonable access, during regular business hours and upon reasonable notice, to the properties, books and records of the Company as the Investor from time to time may reasonably request.

4.10 Registration Rights. In addition to Section 6.1 of this Agreement, the Company has granted registration rights, including demand and piggyback registration rights, to the holders of approximately 1,489,000 shares of Company Common Stock.

4.11 Capitalization. The authorized capital stock of consists of 30,000,000 shares of Common Stock and 2,000,000 of shares of preferred stock (the “Preferred Stock”), of which 100,000 have been designated as Series A Participating Preferred Stock. As of September 30, 2001 (i) 4,321,326 shares of Company Common Stock were issued and outstanding, and (ii) no shares of Preferred Stock were issued and outstanding. As of December 31, 2001, the Company had outstanding warrants to purchase up to approximately 1,100,000 shares of Company Common Stock. The Company has reserved approximately 1,995,750 shares of Company Common Stock for issuance under its employee equity incentive plans, of which approximately 1,632,000 were outstanding as of December 31, 2001. Since September 30, 2001, until the date of this Agreement, the Company has not issued any shares of its capital stock or any voting securities (including options, debt or similar rights and obligations convertible or exchangeable for capital stock or voting securities of the Company) other than pursuant to Company’s equity incentive plans, all of which has been filed on or prior to the date of this Agreement with the SEC and are identified in the SEC Documents. All of the outstanding shares of the Company’s capital stock are, and all shares of the Company Common Stock that may be issued pursuant to the exercise of outstanding employee stock options and convertible securities will be, when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and non-assessable. There are not as of the date hereof any stockholder agreements, voting trusts or other agreements or understandings to which the Company or any of its Subsidiaries is a party or by which it is bound relating to the voting of any shares of the capital stock of the Company or any agreements, arrangements, or other understandings to which the Company or any of its Subsidiaries is a party or by which it is bound that will limit the issuance of the Shares, the Warrant, or the Warrant Shares issuable upon exercise of the Warrant.

4.12 Offering. Neither the Company nor any Person acting on its behalf authorized by the Company to act on its behalf has engaged in a general solicitation of investors (including without limitation by way of advertisement) with respect to the Shares or the Warrants.

5. Representations and Warranties of the Investor. Each Investor except as to Section 0 below, hereby represents and warrants to the Company and as to Section 5.9 Investor Trigran, Investments L.P. (“Trigran”) further warrants that:

5.1 Authorization. The Investor has all requisite power and authority to enter into the transactions contemplated by this Agreement and that this Agreement constitutes a valid and legally binding obligation of the Investor except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors’ rights generally, (b) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (c)to the extent the indemnification provisions contained in this Agreement may be limited by applicable federal or state securities laws.

5.2 Purchase Entirely for Own Account. The Shares, Warrant and Common Stock issuable upon exercise of the Warrant to be purchased by the Investor will be acquired for investment for the Investor’s own account, and not as a nominee or agent, and not with a view to the resale or distribution of any part thereof; provided, however, that by making the representations herein, the Investor does not agree to hold such securities for any minimum or other specific term and reserves the right to dispose of any of such securities at any time in

accordance with or pursuant to a registration statement or an exemption under the Securities Act. The Investor is not a party to any contract, undertaking, agreement or arrangement with any person to sell, transfer or otherwise dispose of any of the Shares purchased by it.

5.3 Reliance Upon Investor’s Representations. The Investor understands that the issuance and sale of the Shares, Warrant, and Common Stock issuable upon exercise of the Warrant will not be registered under the Securities Act on the ground that such issuance and sale will be exempt from registration under the Securities Act pursuant to Rule 506 of Regulation D and/or section 4(2) thereof, and that the Company’s reliance on such exemption is based on each Investor’s representations set forth herein.

5.4 Receipt of Information. The Investor has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance and sale of the Shares, Warrant, and Common Stock issuable upon exercise of the Warrant and the business, properties, prospects and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 4 of this Agreement or the right of the Investor to rely thereon. No person other that the Company has been authorized to give any information or to give any representation not contained in this Agreement in connection with the Offering and, if given or made, such information or representation must not be relied upon as having been authorized by the Company.

5.5 Investment Experience. The Investor is experienced in evaluating and investing in securities of companies and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Shares.

5.6 Accredited Investor. The Investor is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act.

5.7 Restricted Securities. The Investor understands that the Shares may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Shares or an available exemption from registration under the Securities Act, the Shares must be held indefinitely. In particular, the Investor is aware that the Shares may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company.

5.8 Legends. Each certificate or other document evidencing any of the Shares, Warrants, and Common Shares issuable upon execution of the Warrant shall be endorsed with the legends set forth below, and the Investor covenants that, except to the extent such restrictions are waived by the Company, the Investor shall not transfer the shares represented by any such

certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate:

(i) The following legend under the Act:

(ii) Such other legends as may be required under state securities laws.

5.9 Beneficial Ownership. Immediately prior to the Closing, the number of shares of Company Common Stock beneficially owned by Trigran does not exceed 431,182.

6. Registration Rights.

6.1 Certain Definitions. As used in this Section 6, the following terms shall have the meanings set forth below:

(a) “Commission” shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

(b) “Holder” shall mean any Investor who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 6.11 hereof.

(d) “Other Stockholders” shall mean persons other than Holders who, by virtue of agreements with the Company, are entitled to include their securities in certain registrations hereunder.

(e) “Registrable Securities” shall mean (i) Shares issued pursuant to this Agreement, (ii) shares of Common Stock issued or issuable upon exercise of Warrants acquired pursuant to this Agreement, and (iii) any Common Stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in (i) and (ii) above; provided, however, that Registrable Securities shall not include any shares of Common Stock which have previously been registered or which have been sold to the public. Notwithstanding the foregoing, Registrable Securities shall not include shares held by any holder

of less than one percent (1%) of the outstanding Common Stock of the Company if such shares are available for sale pursuant to Rule 144.

(f) The terms “register,” “registered” and “registration” shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement.

(g) “Registration Expenses” shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification, and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses.

(h) “Rule 144” shall mean Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission.

(i) “Rule 145” shall mean Rule 145 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission.

(j) “Selling Expenses” shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and fees and disbursements of counsel for any selling Holder.

6.2 Company Registration.

(a) If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising demand registration rights, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Rule 145 transaction, or a registration on any registration form that does not permit secondary sales, the Company will:

(i) promptly give to each Holder written notice thereof; and

(ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 6.2(b) hereof, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder and received by the Company within twenty (20) days after the written notice from the Company described in clause (i) above is mailed or delivered by the Company. Such written request may specify all or a part of a Holder’s Registrable Securities.

(b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 6.2(a)(i) hereof. In such event, the right of any Holder to registration pursuant to this Section 6.2(a)(i) shall be conditioned upon such Holder’s

participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the Other Stockholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company.

Notwithstanding any other provision of this Section 6.2, if the representative of the underwriters advises the Company in writing, and the Company’s Board of Directors determines, that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) limit or exclude the number of Registrable Securities to be included in the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account and thereafter as set forth in Section 6.9. If any person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration.

If shares are so withdrawn from the registration and if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 6.9 hereof.

6.3 Expenses of Registration. All Registration Expenses incurred in connection with any registration pursuant to Section 6.2 hereof, shall be borne by the Company.

6.4 Registration Procedures. In the case of each registration effected by the Company pursuant to Section 6, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to:

(a) Keep such registration effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that such one hundred twenty (120) day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company.

(b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement;

(c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder or Underwriter from time to time may reasonably request in order to facilitate the public offering of such securities;

(d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing;

(e) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed;

(f) Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and

(g) Enter into an underwriting agreement reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains customary underwriting provisions and provided further that if the underwriter so requests the underwriting agreement will contain customary contribution provisions.

6.5 Indemnification.

(a) To the extent permitted by law, the Company will indemnify each Holder, each of its officers, directors, members and partners, legal counsel, and accountants and each person controlling such Holder within the meaning of section 15 of the Securities Act, on behalf of which registration, qualification, or compliance has been effected pursuant to this Section 6, and each underwriter, if any, and each person who controls within the meaning of section 15 of the Securities Act any underwriter, against all expenses, claims, losses, damages, and liabilities (or actions, proceedings, or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular, or other document (including any related registration statement, notification, or the like) incident to any such registration, qualification, or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act, the Exchange Act, any state securities laws or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification, or compliance, and will reimburse each such Holder, each of

its officers, directors, members, partners, legal counsel, and accountants and each person controlling such Holder, each such underwriter, and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability, or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability, or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein or the failure by such Holder to deliver a prospectus to the buyer. It is agreed that the indemnity agreement contained in this Section 6.5 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld).

(b) To the extent permitted by law, each Holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify the Company, each of its directors, officers, partners, legal counsel, and accountants and each underwriter, if any, of the Company’s securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of section 15 of the Securities Act, each other such Holder and Other Stockholder, and each of their officers, directors, and partners, and each person controlling such Holder or Other Stockholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular, or other document, any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or the failure to deliver a prospectus to the buyer, and will reimburse the Company and such Holders, Other Stockholders, directors, officers, partners, legal counsel, and accountants, persons, underwriters, or control persons for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein provided, however, that the obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld); provided further that in no event shall any indemnity under this subsection (b) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder.

(c) Each party entitled to indemnification under this Section 6.5 (the “Indemnified Party”) shall give notice to the party required to provide indemnification (the “Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably

be withheld), and the Indemnified Party may participate in such defense at such party’s expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 6, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom.

(d) If the indemnification provided for in this Section 6.5 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

6.6 Information by Holder. Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification, or compliance referred to in this Section 6.

6.7 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to:

(a) Make and keep public information regarding the Company available as those terms are understood and defined in Rule 144 under the Securities Act, at all times it remains subject to the reporting requirements of the Securities Act;

(b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time it remains subject to such reporting requirements;

(c) So long as a Holder owns any Registrable Securities, furnish to the Holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration.

6.8 Transfer or Assignment of Registration Rights. The rights to register securities granted to a Holder by the Company under this Section 6 may be transferred or assigned by a Holder provided that the Company is given written notice at the time of or within a reasonable time after such transfer or assignment, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and, provided further, that (i) the transferee or assignee of such rights assumes the obligations of such Holder under this Agreement in a writing delivered to the Company and (ii) the transferor assignment is made consistent with Section 8.2, hereof.

6.9 Allocation of Registration Opportunities. In any circumstance in which all of the Registrable Securities and other shares of Common Stock of the Company (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred Stock of the Company) with registration rights (the “Other Shares”) requested to be included in a registration on behalf of the Holders or other stockholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares that may be so included, the number of shares of Registrable Securities and Other Shares that may be so included shall be allocated, subject to such superior registration rights, if any, granted prior to the date hereof, among the Holders of Registrable Securites and stockholders of Other Shares requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares requested to be included. The Company shall not limit the number of Registrable Securities to be included in a registration pursuant to this Agreement in order to include shares held by stockholders with no registration rights. To facilitate the allocation of shares in accordance with the above provisions, the Company or the Underwriters may round the number of Shares allocated to any Holder to the nearest 100 shares.

6.10 Delay of Registration. No Holder shall have any right to take any action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 6.

6.11 Termination of Registration Rights. The right of any Holder to request registration or inclusion in any registration pursuant to this Section 6 hereof shall terminate at such time that all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any ninety (90) day period. Notwithstanding the foregoing, if not already expired, all rights under this Section 6 shall expire on the earlier of (i) the fifth anniversary of the Closing and (ii) the closing of an acquisition of the Registrable Securities in exchange for publicly traded stock (i.e., stock that has been registered under the Securities Act for issuance to such Holder and is listed on a national securities exchange or Nasdaq) of another entity.

7. Restrictions on Transferability.

7.1 General Restrictions.

(a) The Shares, Registrable Securities and any other securities issued in respect of the Registrable Securities upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act; provided, however, that, notwithstanding anything to the contrary herein, a Holder may at any time and from time to time transfer the Shares or its Registrable Securities in whole or in part to its partners, members, affiliates, or a trust, partnership, limited liability company or other entity controlled by (or for the benefit of) such Holder or his or her spouse, parents, sibling, parents, former spouse, and/or children. The Holders will cause any proposed purchaser, assignee, transferee, or pledgee of any such shares held by the Holders (the “Transferee”) that is not a party to this Agreement to execute and deliver to the Secretary of the Company a written agreement, pursuant to which such Transferee shall agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement.

(b) Each certificate representing the Shares, Registrable Securities and any other securities issued in respect of the Shares or Registrable Securities upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of clause (c) below) be stamped or otherwise imprinted with appropriate restrictive legends as set forth in Section 5.8 hereof. Each Holder consents to the Company making a notation on its records and giving instructions or stop transfer or other appropriate orders to any transfer agent of the Preferred Stock or the Common Stock in order to implement the restrictions on transfer established in this Agreement.

(c) The Holder of each certificate representing Registrable Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 7.1. Prior to any proposed sale, assignment, transfer or pledge (each, a “Transfer”) of any such Shares and/or Registrable Securities (other than (i) a transfer not involving a change in beneficial ownership, (ii) in transactions involving the distribution without consideration of Registrable Securities by an Investor to any of its direct or indirect members, partners, retired members or retired partners, or to the estate of any of its direct or indirect members, partners, retired members or retired partners, (iii) in transactions involving the transfer without consideration of Registrable Securities by the Investor during his lifetime by way of gift or on death by will or intestacy or for tax or estate planning purposes, (iv) in transactions involving the transfer or distribution of Registrable Securities by a corporation or limited liability company to any subsidiary, parent or affiliated corporation or limited liability company of such corporation or limited liability company, or (v) in transactions in compliance with Rule 144(k)), unless there is in effect a registration statement under the Securities Act covering the proposed Transfer, the Holder shall give written notice to the Company of such Holder’s intention to effect such Transfer. Each such notice shall describe the manner and circumstances of the proposed Transfer in sufficient detail, and shall be accompanied, at such Holder’s expense, by either (A) an unqualified written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company addressed to the Company, or other evidence

reasonably satisfactory to the Company, to the effect that the proposed Transfer of the Registrable Securities may be effected without registration under the Securities Act, or (B) a “no action” letter from the Commission to the effect that the Transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the Holder shall be entitled to transfer such Registrable Securities in accordance with the terms of the notice delivered by the Holder to the Company.

(d) Not later than fifteen (15) business days following the date of any Transfer as to which prior notice is not required pursuant to this Section 7.1, the transferor of the Registrable Securities shall deliver to the Secretary of the Company written notification of such Transfer setting forth the name of the transferor, name and address of the Transferee and the number of Registrable Securities which have been so transferred. Additionally, the transferor shall deliver an Assignment and Assumption Agreement duly executed by the Transferor with such notice. Each certificate evidencing the Registrable Securities transferred as above provided shall bear, except if such Transfer is made pursuant to Rule 144, the appropriate restrictive legends, except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such Holder and the Company, such legends are not required in order to establish compliance with any provision of the Securities Act.

8. Conditions to Closing.

8.1 Mutual Conditions. The obligations of the Company and of the Investor under Sections 2.1 and 3.1 of this Agreement are each subject to the fulfillment on or before the Closing of each of the following conditions, any of which may, to the extent legally permissible, be waived in writing in whole or in part by each party:

(a) Litigation. No order enjoining or restraining the transactions contemplated by this Agreement shall be in effect and no action or proceeding before any federal or state court or governmental agency or other regulatory or administrative agency or instrumentality shall have been instituted or pending that challenges the acquisition of the Shares, Warrant, or Warrant Shares by the Investor or otherwise seeks to restrain or prohibit consummation of the transactions contemplated by this Agreement or seeking to impose any material limitations on any provisions of this Agreement.

(b) Governmental Approvals. The Company and Investor shall have received any necessary approvals, authorizations, permits or consents under applicable laws and regulations (foreign or domestic) to consummate and make effective the transactions contemplated by this Agreement.

(c) Waiver of Participation of ADLT. The Company shall have obtained from Advanced Lighting Technologies, Inc. (“ADLT”) waiver of its right to acquire Shares or Warrants under this Agreement, and such waiver shall not have been revoked as of Closing.

8.2 Conditions of the Investor’s Obligations at the Closing. The obligations of the Investor under Sections 2.1 and 3.1 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, any of which may be waived in writing in whole or in part by the Investor:

(a) Representations and Warranties. The representations and warranties of the Company contained in Section 4 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing Date (provided that any such representation and warranty made as of a specific date shall be true and correct as of such specific date).

(b) Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing.

(c) Compliance Certificate. The Chief Executive Officer, President, Chief Financial Officer or Treasurer of the Company shall deliver to the Investor at the Closing a certificate certifying that the conditions specified in Sections 8.2(a), (b) and (d) have been fulfilled.

(d) No Material Adverse Effect. No Material Adverse Effect shall have occurred with respect to the Company.

(e) Stock Certificates. The Company shall have delivered to the Investor a duly executed and irrevocable letter of instruction addressed to the Company’s transfer agent, pursuant to which such transfer agent is instructed to deliver the Shares to the Investor in certificated form.

(f) Opinion of Counsel. Each Investor shall have received the opinion of Pillsbury Winthrop LLP, counsel to the Company, substantially in the form of Exhibit C subject to such exceptions and qualifications reasonably acceptable to such Investor.

8.3 Conditions of the Company’s Obligations at the Closing. The obligations of the Company to the Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by the Investor, any of which may be waived in writing in whole or in part by the Company:

(a) Related Agreements. The Investor shall have delivered to the Company signature pages to this Agreement and the Related Agreements (except Amendment No. 1 to the Rights Agreement) duly executed by the Investor at the Closing.

(b) Representations and Warranties. The representations and warranties of the Investor contained in Section 5 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing.

(c) Compliance Certificate. The Investor, or Managing Partner, Chief Executive Officer, President or Chief Financial Officer of the Investor, as applicable, shall have delivered to the Company at the Closing a certificate certifying that the conditions specified in Sections 8.3(a) and (b) have been fulfilled.

9. Miscellaneous.

9.1 Reasonable Efforts; Other Actions. Subject to the terms and conditions herein provided and applicable law, the Company and Investor shall use all commercially reasonable efforts promptly to take, or cause to be taken, all other actions and do, or cause to be done, all other things necessary, proper or appropriate under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement.

9.2 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. Neither the Company nor the Investor shall assign this Agreement or any rights hereunder or delegate any duties hereunder without the prior written consent of the other (which consent may not be unreasonably withheld from whom consent is sought) except as otherwise provided herein.

9.3 Notices. Unless otherwise provided, any notice, request, demand or other communication required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified, or when sent by Facsimile (with receipt confirmed and promptly confirmed by personal delivery, U.S. first class mail, or courier), or overnight courier service, or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed as follows (or at such other address as a party may designate by notice to the other):

If to the Company:

Fiberstars, Inc.

44259 Nobel Drive

Fremont California 94538

Attention: David N. Ruckert, CEO

Facsimile: (510) 490-0947

Telephone: (650) 490-0719

with a copy to:

Pillsbury Winthrop LLP

2550 Hanover Street

Palo Alto, California 94304

Attention: Richard Bebb

Facsimile: (650) 233-4545

Telephone: (650) 233-4500

If to the Investor:

See the address provided by the Investor on its counter-part signature page.

9.4 Survival. All representations and warranties contained or provided for herein shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the party benefiting from any such representation or warranty, and shall survive the Closing to the extent of applicable statutes of limitations; provided, however, that the representations and warranties in Sections 4 and 5 of this Agreement shall not be construed so as to constitute representations and warranties concerning circumstances existing after any date specifically referred to therein, or the Closing Date, as the case may be.

9.5 Finders or Brokers. Each Investor represents that it has not engaged any investment banker, finder or broker, and neither is nor will be obligated for any finder’s fee or commission, in connection with the transactions contemplated hereby. The Company represents that it has not engaged any investment banker, finder or broker, and neither is nor will be obligated for any finder’s fee or commission, in connection with the transactions contemplated hereby. Each party agrees to indemnify and hold harmless the other from the liability for any fees, commissions and other payments (and the costs and expenses of defending against such liability or asserted liability) that may be owing as a result of such party’s breach of its representation made in this Section 9.5.

9.6 Specific Performance. Each of the parties hereto recognizes and acknowledges that a breach by it of any covenants or agreements contained in this Agreement will cause the other party to sustain damages for which it would not have an adequate remedy at law for money, damages. Therefore, in the event of any such breach, the aggrieved party shall be entitled to the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief (without posting bond) in addition to any other remedy to which it may be entitled, at law or in equity.

9.7 Expenses. Each party hereto shall pay all of its own costs and expenses incurred in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the transactions contemplated herein, whether or not such transactions are consummated.

9.8 Amendments and Waivers. This Agreement may be amended or modified only by a written instrument signed by the Company and the Investors hereunder. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the party against whom such waiver is sought to be enforced. No waiver by either party of any default with respect to any provision, condition or requirement hereof shall be deemed to be a continuing waiver in the future thereof or a waiver of any other provision, condition or requirement hereof; nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter.

9.9 Severability. If one or more provisions of this Agreement are held to be unenforceable, invalid or void by a court of competent jurisdiction, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

9.10 Entire Agreement. This Agreement and the documents referred to herein contain the entire understanding of the parties with respect to the matters covered herein and supersedes all prior agreements and understandings, written or oral, between the parties relating to the subject matter hereof.

9.11 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California (irrespective of its choice of law principles); provided, however, that neither this Agreement nor any provision hereof shall be construed for or against any party on the basis that such party drafted this Agreement or any provision hereof.

9.12 Counterparts. This Agreement may be executed by facsimile copies and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

9.13 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. Any reference in this Agreement to a statutory provision or rule or regulation promulgated thereunder shall be deemed to include any similar successor statutory provision or rule or regulation promulgated thereunder.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

	COMPANY

	FIBERSTARS, INC.


	By	/s/ David N. Ruckert

	Name	David N. Ruckert

	Title	President, CEO

	INVESTORS

	[Investor signatures follow on attached counter-parts]

SIGNATURE PAGE TO

STOCK AND WARRANT PURCHASE AGREEMENT

DATED AS OF MARCH 2002

BY AND AMONG

FIBERSTARS, INC.

AND EACH INVESTOR NAMED THEREIN

The undersigned hereby executes and delivers the Fiberstars, Inc. Stock and Warrant Purchase Agreement (the “Agreement”) to which this Signature Page is attached effective as of the date of the Agreement, which Agreement and Signature Page, together with all counterparts of such Agreement and signature pages of the other Investors named in such Agreement, shall constitute one and the same document in accordance with the terms of such Agreement.

Number of Shares:		200,000

Number of Warrant Shares:			40,000


Trigran Investments L.P.
Print Name of Investor

By	/s/ Lawrence A. Oberman
	Signature


[If Investor is an entity]


Vice President of General Partner
Title of Signatory with Investor

Investor’s Address:



Facsimile:

Telephone:

SIGNATURE PAGE TO

STOCK AND WARRANT PURCHASE AGREEMENT

DATED AS OF MARCH 2002

BY AND AMONG

FIBERSTARS, INC.

AND EACH INVESTOR NAMED THEREIN

Number of Shares:		40,299

Number of Warrant Shares:			8,060


John B. Stuppin & Jane K. Stuppin Trustees UTD 3/11/91
Print Name of Investor

By	/s/ John B. Stuppin
	Signature


[If Investor is an entity]


Trustee
Title of Signatory with Investor

Investor’s Address:



Facsimile:

Telephone:

SIGNATURE PAGE TO

STOCK AND WARRANT PURCHASE AGREEMENT

DATED AS OF MARCH 2002

BY AND AMONG

FIBERSTARS, INC.

AND EACH INVESTOR NAMED THEREIN

Number of Shares:

33,333

Number of Warrant Shares:

6,667

F. Van Kasper

Print Name of Investor

/s/ F. Van Kasper

Signature

[If Investor is an entity]

Title of Signatory with Investor

Investor’s Address:

Facsimile:

Telephone:

SIGNATURE PAGE TO

STOCK AND WARRANT PURCHASE AGREEMENT

DATED AS OF MARCH 2002

BY AND AMONG

FIBERSTARS, INC.

AND EACH INVESTOR NAMED THEREIN

Number of Shares:		16,667

Number of Warrant Shares:			3,333


Dan Smith
Print Name of Investor

By	/s/ Dan Smith
	Signature

[If Investor is an entity]


Title of Signatory with Investor

Investor’s Address:



Facsimile:

Telephone:

SIGNATURE PAGE TO

STOCK AND WARRANT PURCHASE AGREEMENT

DATED AS OF MARCH 2002

BY AND AMONG

FIBERSTARS, INC.

AND EACH INVESTOR NAMED THEREIN

Number of Shares:

16,667

Number of Warrant Shares:

3,333

Robert R. Tufts and Joyce A. Tufts, Trustees U/A,
Dated September 18, 1987

Print Name of Investor

/s/ Robert R. Tufts

Signature

[If Investor is an entity]

Title of Signatory with Investor

Investor’s Address:

Facsimile:

Telephone:

SIGNATURE PAGE TO

STOCK AND WARRANT PURCHASE AGREEMENT

DATED AS OF MARCH 2002

BY AND AMONG

FIBERSTARS, INC.

AND EACH INVESTOR NAMED THEREIN

Number of Shares:

Number of Warrant Shares:

William E. Mercer

Print Name of Investor

/s/ William E. Mercer

Signature

[If Investor is an entity]

Title of Signatory with Investor

Investor’s Address:

Facsimile:

Telephone:

SIGNATURE PAGE TO

STOCK AND WARRANT PURCHASE AGREEMENT

DATED AS OF MARCH 2002

BY AND AMONG

FIBERSTARS, INC.

AND EACH INVESTOR NAMED THEREIN

Number of Shares:		6,667

Number of Warrant Shares:			1,333


Walter L. Skaggs and Diane K. Skaggs
Print Name of Investor

	/s/ Walter L. Skaggs
By	/s/ Diane K. Skaggs
	Signature

[If Investor is an entity]


Title of Signatory with Investor


Investor’s Address:



Facsimile:

Telephone:

SCHEDULE 1

SCHEDULE OF INVESTORS AND SHARES

Investor	Aggregate Purchase Price		Per Share Purchase Price		Common Shares Purchased

Trigran Investments L.P.	$	600,000.00	$	3.00	200,000

John B. Stuppin & Jane K. Stuppin, Trustees under the John B. and Jane K. Stuppin Revocable Living Trust dated March 11, 1991	$	135,000.00	$	3.35	40,299

Van Kasper	$	100,000.00	$	3.00	33,333

Dan Smith	$	50,000.00	$	3.00	16,667

Robert R. Tufts	$	50,000.00	$	3.00	16,667

William E. Mercer, Jr.	$	45,000.00	$	3.00	15,000

Diane Skaggs	$	20,000.00	$	3.00	6,667

S-1-1

SCHEDULE 2

SCHEDULE OF WARRANTS

Investor	Warrant Shares	Warrant Exercise Price

Trigran Investments L.P.	40,000	4.30

John B. Stuppin and Jane K. Stuppin, Trustees under the John B. and Jane K. Stuppin Revocable Living Trust dated March 11, 1991	8,060	4.30

Van Kasper	6,667	4.30

Dan Smith	3,333	4.30

Robert R. Tufts	3,333	4.30

William E. Mercer, Jr.	3,000	4.30

Diane Skaggs	1,333	4.30

S-2-1