ENERGY FOCUS, INC/DE - Annual Report: 2006 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
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For
the fiscal year ended DECEMBER 31, 2006
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period
from to
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Commission
file number 0-24230
FIBERSTARS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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94-3021850
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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32000
Aurora Road, Solon, OH 44139
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (440) 715-1300
Securities
registered under section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
Title
of
Each Class
Common
Stock, $0.0001 par value
Series A
Participating
Preferred
Stock
Purchase
Rights
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer. o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act) Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $84,971,000 as of
June 30, 2006 (based upon the last trading price of the Common Stock of
registrant on the Nasdaq National Market as of that date). Shares of common
stock held as of June 30, 2006 by each director and executive officer of
the registrant, as well as shares held by each holder of more than 10% of the
common stock known to the registrant, have been excluded for purposes of the
foregoing calculation. This calculation does not reflect a determination that
any person is an affiliate of the registrant for any other purpose.
As
of
March 1, 2007, there were 11,404,856 shares of the registrant’s Common
Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Items
10
(as to directors and Section 16 (a) Beneficial Ownership Reporting
Compliance), 11, 12 (as to Beneficial Ownership), 13 and 14 of Part III of
this Report on Form 10-K incorporates information by reference from
registrant’s definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for
registrant’s 2007 Annual Meeting of Shareholders to be held June 14,
2007.
FORWARD-LOOKING
STATEMENTS
When
used in this Report, the words “expects,” “anticipates,” “estimates,” “plans,”
“intends” and similar expressions are intended to identify forward-looking
statements. These statements include, but are not limited to, statements as
to
our competitive position, future operating results, net sales growth, expected
operating expenses and capital expenditures, gross product margin improvement,
sources of revenues, anticipated credits from government contracts, product
development and enhancements, liquidity and cash reserves, our reliance upon
a
limited number of customers, our accounting policies, the effect of recent
accounting announcements, the development and marketing of new products,
relationships with customers and distributors, relationships with, dependence
upon and the ability to obtain components from suppliers, as well as our remarks
concerning our ability to compete in the fiber optic lighting market, the
evolution and future size of the fiber optic lighting market, seasonal
fluctuations, plans for and expected benefits of outsourcing and offshore
manufacturing, trends in the price and performance of fiber optic lighting
products, the benefits and performance of our lighting products, the adequacy
of
our current facilities, our strategy with regard to protecting our proprietary
technology, our ability to retain qualified employees; and the risks set forth
below under Item 1A, “Risk Factors.” These forward-looking statements speak only
as of the date hereof. We expressly disclaim any obligation or undertaking
to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
Fiberstars®,
BritePak®, OptiCore™, Lightly Expressed®, Jazz Light™, FX Light™, FX Spa Light™,
EFO ICE™, EnergyFocus™, and Fiberstars EFO® are our registered trademarks.
We also refer to trademarks of other corporations and organizations in this
document.
All
references to “Fiberstars,” “we,” “us,” “our” or “the Company” means
Fiberstars, Inc. and its subsidiaries, except where it is made clear that
the term means only the parent company.
Fiberstars
designs, develops, manufactures and markets fiber optic lighting systems for
wide-ranging uses in both the general commercial and the pool and spa lighting
markets. Our EFO lighting system, first introduced in 2004, offers greater
energy savings, heat dissipation, and maintenance cost benefits over
conventional lighting for multiple applications. Accordingly, we believe our
EFO
lighting system will become a leading technology in accent lighting and numerous
niche lighting markets.
We
currently operate in two principal markets, Commercial Lighting and Pool and
Spa
Lighting, with several product lines:
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Commercial
Lighting. Within
this market we sell both EFO lighting systems and traditional fiber
optic
lighting systems used in commercial
applications.
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Energy
Efficient Accent Lighting. We
market our EFO lighting systems primarily as an energy efficient
alternative to MR-16 halogen lamps used for accent lighting in retail
and
commercial building settings. We also target niche lighting markets
such
as general illumination on naval ships, adjustable spot lights used
on
loading docks and display and freezer case
lighting.
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Specialty
Decorative and Special Effects Lighting. We
market our traditional small diameter fiber optic systems in specialty
and
special effects lighting applications including case lighting, decorative
and neon alternative applications and
signage.
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LED
Lighting Systems. We
market a line of LED lighting products for the decorative and general
lighting markets.
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Pool
and Spa Lighting. We
market both our traditional fiber optic lighting products, developed
prior
to the introduction of EFO fiber optic systems, and other energy
efficient
non-fiber optic systems for underwater lighting applications. Our
underwater lighting systems are installed in pools and spas built
by pool
builders throughout the United States and Canada. We also market
pool EFO
LED feature lighting systems and a line of pool control systems.
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Our
fiber
optic lighting systems combine three components—an illuminator, fiber and
fixtures—that are used in configurations designed for specific applications. The
electrically powered illuminator encases the lamp and serves to generate and
efficiently focus light to the fiber. Currently our illuminators use HID or
halogen lamps. In 2006 we adapted the technology to work with LEDs, introducing
a line of EFO water feature product and a berth light for US Navy ships. Our
proprietary large diameter fiber cables used in our EFO fiber optic systems
connect to the illuminator and are designed to emit light either at the end
of
the fiber as a point of light, or along the length of the fiber, similar in
effect to neon lighting. We currently market our EFO fiber optic systems with
two, six or eight fiber cables connected to the illuminator.
Our
EFO
fiber optic lighting system consists of a central source of illumination
connected to multiple end-points via fiber cables. The electrically powered
illuminator lamp encases our patented collectors that have our proprietary
nanotechnology coating layers enabling the efficient capture of over 90% of
the
light from the lamp. Our large diameter fiber cables, manufactured through
a
proprietary continuous extrusion process, connect to the illuminator and
efficiently deliver 95% of the light from the illuminator to the fiber while
virtually eliminating infrared and ultraviolet light that negatively affect
perishable goods and works of art. Our proprietary couplers attach the
end-points of our fiber cables to the fixtures, enhancing compatibility with
new
fixtures. The efficiency benefits provided by these components coupled with
our
proprietary fiber optic extrusion manufacturing process distinguish our EFO
fiber optic systems from other fiber optic lighting systems and traditional
lighting technologies for numerous lighting applications. As a result of these
developments, we believe we are the first to market energy efficient fiber
optic
lighting systems for specific applications such as accent lighting used in
retail and commercial settings.
1
The
increasingly stringent regulatory environment, high energy prices, retail and
commercial demand for accent lighting and recent innovations in our fiber optic
technology for lighting systems position our products to address a meaningful
segment of the general lighting market.
The
worldwide market for electric lamps, lighting fixtures and ballasts was
approximately $79 billion in 2001 and expected to grow to $100 billion by 2006,
representing 5% annual growth, according to a 2003 report by The Freedonia
Group, Inc., a market research firm. We estimate that our current
addressable market for EFO technology is currently greater than $5 billion.
This
addressable market includes halogen accent lighting, freezer case lighting
in
supermarkets, dock lighting and display case lighting. The limitations of the
lighting products commonly used for these applications, combined with rising
energy costs and increasingly stringent energy regulations, present a compelling
opportunity for alternative lighting solutions in these niche
markets.
Impact
of Energy Regulation in the Lighting Industry
In
the
United States, electricity consumption is projected to increase from 3.5 billion
kilowatt hours in 2003 to 5.2 billion kilowatt hours in 2025, according to
the
United States Department of Energy’s International Energy Outlook. According to
the report, electricity consumption in the commercial sector is the fastest
growing segment at 2.5% annually through 2025. The Department of Energy in
a
2005 report estimated that lighting in the United States accounts for
approximately 27% of total electricity consumed by commercial end-users. The
electric power industry faces the challenge of satisfying increasing demand
while being constrained by the limited supply of fossil fuels as well as
infrastructure limitations affecting generation, transmission and distribution,
all of which may result in higher electricity prices.
These
challenges have resulted in a variety of new government regulations and
initiatives intended to curtail energy consumption. This growing global concern
with energy utilization together with energy conservation regulation has
encouraged the development and implementation of more energy efficient lighting
solutions. Some of the key regulations and initiatives affecting the lighting
industry include:
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ASHRAE-IESNA
Standard 90.1. In
July 2004, the Department of Energy adopted the 1999 version of
ASHRAE-IESNA Standard 90.1, requiring all commercial and government
buildings to reduce lighting power density as measured by watts
per square
foot. For example, this standard generally mandated a reduction
in power
density to 1.9 watts per square foot for both new construction
and
renovations requiring building permits for retail buildings in
the United
States. This standard was lowered for retail buildings to 1.9 watts
per
square foot from the approximately 3.3 watts per square foot under
the
1989 version adopted for retail buildings in some
states.
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·
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The
Energy Policy Act of 2005. This
recently enacted federal legislation provides tax incentives to
commercial
and residential electricity consumers for making energy efficiency
improvements well beyond present standards in their buildings and
homes.
The incentives are in place for a two year period beginning
January 1, 2006.
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State
Legislation. Certain
states, such as California, have adopted standards that exceed
the
ASHRAE-IESNA 90.1 minimum requirements. California’s updated Title 24,
which took effect in October 2005, requires residential and
non-residential buildings to use energy efficient lighting that
meets
minimum lumens per watt.
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LEED—U.S.
Green Building Council’s Leadership in Energy & Environmental
Design. LEED
is a self-assessing system designed for energy efficiency rating
of new
and existing commercial, institutional and high-rise residential
buildings. LEED evaluates the environmental performance of the
entire
building over its life cycle, providing a definitive standard for
what
constitutes a “green” building. To receive LEED certification, the
building must meet, among other things, ASHRAE- IESNA Standard
90.1
lighting requirements. For each reduction of 10% beyond the 90.1
requirements, the project receives an additional point toward achieving
LEED certification. In certain localities, a building must receive
a LEED
certificate in order to receive a building
permit.
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Recent
legislation has limited energy consumption available for lighting, which
conflicts with the desire of the user to maintain or even increase
effective lighting.
For example, retailers value effective accent lighting as a critical element
in
showcasing merchandise and promoting sales, but are constrained by
the current
regulatory environment. Accent lighting is also essential in commercial and
other buildings, including office buildings, schools, hospitals and
casinos, which
use
lighting as a design element in hallways, entryways, conference rooms and to
display artwork. To maintain or obtain effective, high quality
lighting,
these
retailers and other commercial users need a lighting solution that meets
increasingly stringent regulatory requirements.
2
Overview
of Lighting Technologies
Multiple
lighting technologies have evolved to address a variety of lighting
requirements. Each of these technologies has characteristics and limitations
that affect its utility in a given application.
Incandescent.
Due
to
its simplicity of use and low initial cost, the incandescent bulb is the
dominant light source used in residential lighting in the United States. The
basic technology for incandescent bulbs was created in the 19th century and
further developed in the mid 20th century with the introduction of the Tungsten
filament and gas fill. The MR-16 halogen lamp, one type of an incandescent
lamp,
has commonly been used in accent lighting. Incandescent bulbs including MR-16s
have the following general characteristics:
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Produce
a high quality bright, white light;
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Emit
significant heat, infrared and ultraviolet radiation that can damage
perishable goods and increases room temperature adding to
cooling
costs; and
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Require
significant electricity and frequent replacement due to short
life.
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Fluorescent.
The
fluorescent lamp is an energy efficient alternative to incandescent lamps
commonly used in general illumination. The fluorescent lamp was initially
developed in the 1930s using mercury atoms in a low pressure discharge. The
compact fluorescent lamp, developed in the 1980s, produces notably higher
lumens
per watt than an incandescent lamp. Fluorescent lamps have the following
general
characteristics:
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Offer
high energy efficiency with modern fluorescent lamps reaching efficiencies
of about 80 lumens per watt;
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Produce
a non-directional beam of light not ideal for accent
lighting;
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Emit
light with unfavorable color
characteristics;
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Contain
mercury, which leads to disposal issues;
and
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Exhibit
lower light output and a shorter life in a cold
environment.
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Solid
State Lighting. Invented
in 1962, LEDs are only now beginning to show promise as a light source. For
example, LEDs are increasingly replacing incandescent lamps in traffic signals
and as brake and high mount stop lights for new cars. As the technology develops
further, some industry professionals predict that performance
characteristics of LEDs will equal or potentially exceed those of
fluorescent lamps. Current LEDs have the following general
characteristics:
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Offer
energy efficiency comparable to halogen
sources;
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Demonstrate
long life cycles; and
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Emit
low luminosity.
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High-Intensity
Discharge.
The
newest white light source, the metal halide HID lamp, was invented in 1966
and
is used extensively in outdoor applications, automotive headlamps and general
lighting sources in large indoor buildings such as warehouses. Metal halide
HID
lamps with efficiencies exceeding incandescent and fluorescent lamps in lumens
per watt are available commercially. Newer versions of HID lamps are being
used
as interior spotlights for commercial applications. Metal halide HID lamps
have
the following general characteristics:
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Emit
high quality white light;
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Offer
energy efficiency;
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Provide
cost effectiveness in larger light packages, but are too expensive
when
packaged in a smaller light source partly due to their
expensive ballasts; and
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Radiate
significant heat.
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Emergence
of Fiber Optic Lighting
In
the
past several years, a number of patented technological advancements in our
fiber
optic lighting systems have resulted in markedly better performance
characteristics enabling potential for broader use in a number of additional
lighting applications. We believe our EFO fiber optic lighting systems are
economically and aesthetically appealing and well-suited for accent and other
niche lighting applications.
3
Our
EFO
fiber optic system offers energy efficiency, lower life cycle costs and
addresses the limitations of traditional lighting systems in specific
applications. Building upon significant recent breakthroughs in fiber optic
lighting technology, the first commercial deployment of our EFO system to a
major customer was in the first quarter of 2004. Our patented EFO technology
addresses the limitations of current fiber optic lighting technology and meets
government regulations for energy efficiency through a series of technological
advances over the last 18 months, including:
·
Improved
light output equivalent to MR-16s while being up to 80% more energy
efficient;
·
Introduced
a full spectrum lamp that closely simulates daylight color;
·
Improved our patented large core fiber extrusion process enabling high volume
production and reducing manufacturing costs; and
·
Developed application-specific fixtures to meet a broad variety of customers’
needs, including light bars which replicate fluorescent tubes.
We
believe the intensity and efficiency of our EFO system improves upon the
lighting advantages of traditional fiber optic lighting by enhancing customers’
lighting capabilities. EFO’s accent lighting capabilities allow a retailer to
focus the attention of shoppers to the areas and products that they want to
highlight. Physically separating the heat source from the fixture provides
a
non-heat radiating lighting solution that lowers cooling costs associated with
lighting and reduces food spoilage and melting. The benefits of our EFO system
have attracted new customers and have led to test application of our product
at
select locations.
Key
Features of Our EFO FiberOptic System
Illuminator.
Most
of
our commercial illuminators today deploy our specially designed metal halide
HID
lamps due to the capacity of these lamps to provide long life and maximum
brightness. Our EFO technology can efficiently distribute the light from higher
wattage metal halide lamps to lower light levels. We may, however, in the future
use other efficient lighting sources as they become commercially
viable.
Fiber
Cables. Our
patented large core fiber has outstanding clarity and consistency with low
attenuation for fiber optic lighting applications. By combining our compound
parabolic collector, or CPC, technology and our large core fiber, our system
delivers light ranging from 30 to 60 lumens per watt, compared to approximately
eight to 15 lumens per watt for a system using traditional MR-16 halogen
lamps.
Fixtures.
We
produce a broad assortment of adjustable fixtures that allow the customer to
easily adjust the direction and beam spread of the light for optimal light
concentration.
Key
Benefits of Our EFO System
Energy
Efficiency. Our
EFO
system can provide our customers with accent lighting that also satisfies
government and other regulatory regulations for energy efficient lighting.
EFO
technology enables customers to comply with ASHRAE-IESNA Standard 90.1 and
Title
24, qualify for the tax incentives available under the Energy Policy Act of
2005
and secure LEED certification without sacrificing intensity and light quality.
The following table highlights the electrical savings of one 70 watt EFO accent
light compared to competing lighting technologies:
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Light Source
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Number
equivalent
in 70 Watt
EFO
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Total Watts
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Estimated Energy
Savings
%
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70W
EFO accent light
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1
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70W
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—
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26W
Compact fluorescent down light
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4
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104W
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33
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%
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50W
MR-16 halogen accent light
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8
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400W
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83
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%
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60W
Incandescent down light
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7
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420W
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83
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%
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3W
Luxeon3 LED accent light
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60
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180W
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61
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%
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25W
Ceramic metal halide accent light
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5
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125W
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44
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%
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4
The
EFO
technology delivers up to 80% energy savings over halogen or other incandescent
lighting systems commonly used in similar applications. For example, Cinemark
reduced its energy consumption from 5,140 watts to 1,120 watts by installing
our
EFO system.
Color.
Today
our
EFO system is available in warm white and daylight colors. The warm white lamps
have a color temperature that is suitable for interior spaces. The daylight
color temperature matches the color temperature of the light entering spaces
through windows. Because we control the design of the lamp, reflector and output
fixture we can tune the system to deliver a balanced, full spectrum white
light.
Elimination
of Virtually all Heat Radiation. Our
EFO
system is designed to prevent the infrared and ultraviolet radiation emitted
from the lamp from being funneled through the fiber. As a result, the light
output emits virtually no infrared or ultraviolet light, which produce heat
when
absorbed by the target, and the only heat generated is from light output itself,
which is negligible. In contrast, halogen lamps produce approximately nine
watts
of heat energy for every one watt of light.
Cost
Savings. Our
EFO
system is able to significantly reduce maintenance and replacement costs that
are normally attributed to traditional lighting systems. Our EFO systems contain
lamps with a long life cycle and need fewer lamps to light a given area. For
example, a customer would have to replace 20-40 MR-16 halogen lamps for every
one EFO lamp annually based on average retail usage. In addition, because the
EFO lamp is physically separated from the light fixture, when used in
applications such as freezer cases, the quality of light and life of the EFO
lamp is not affected by the freezing temperature. The EFO lamp does not radiate
heat in the freezer and the freezer does not need to be emptied to change the
lamp as is the case with fluorescent lamps.
Traditional
Fiber Optic Lighting
We
also
sell a line of traditional fiber optic products that do not use our EFO
technology. These products use an illuminator with HID or halogen light sources
and a traditional imaging optical method that focuses the light from the source
into bundles of stranded fiber. The system is used largely in decorative and
display case lighting applications, where color changing and small points of
light are key features.
In
addition, we sell a line of fiber optic pool lighting products designed to
add
color and decorative lighting to water features for residential pools. We
also sell
a
variety of feature lighting systems that change color and includes an option
to
synchronize the color changes of multiple water features. The water
feature
lights
are sold in kits that may be used to light waterfalls, one or more linear water
streams, deck lights and landscape lights.
Our
objective is to become the leading provider of energy efficient lighting
systems. To achieve this objective, we intend to pursue the following
strategies:
·
Capitalize
on the growing need for low cost, energy efficient lighting systems.
We
intend
to devote significant resources to our product development efforts to maximize
the energy efficiency and quality of our lighting systems while reducing costs
and enabling our customers to meet more stringent government regulations. In
addition, we plan to continue to hire personnel with technological expertise
in
the lighting industry, develop new proprietary technologies and integrate new
and potentially more efficient lighting sources into our lighting
systems.
·
Focus
on market niches where the benefits of our technology are most
compelling. We
intend
to establish showcase installations to demonstrate the benefits of our EFO
technology and build broader awareness among our target customer base. For
example, we believe the benefits of our EFO technology will appeal to retailers
and supermarket operators, who share similar needs for highly efficient,
flexible accent lighting solutions. To reach our target markets, we also intend
to continue to build a direct sales force of experienced lighting
salespeople.
·
Develop
and expand strategic relationships. To
build
awareness of our EFO technology, we intend to market our systems to leading
architects, lighting designers, contractors and other entities that recommend
or
install lighting systems, as well as to fixture manufacturers and other
participants in the general lighting market. For example, we have an agreement
with Gensler Architecture, Design & Planning LLC or Gensler, a leading
architecture, design and planning firm, under which Gensler provides consulting
services and helps enhance our visibility and image within the design and
construction communities. In addition, we plan to construct a Fiberstars
Lighting Academy in Solon, Ohio, where lighting specialists, designers and
installers will attend courses on EFO lighting technology and installation.
We
believe these marketing efforts will help further adoption of our technology
in
the general lighting market.
·
Further
develop and enhance pool lighting products. We
intend
to develop new products that are complementary to traditional pool lights
currently sold by pool equipment suppliers. To maximize the sales of these
new
products, we plan to leverage our well-established presence in the pool and
spa
lighting market.
We
market
a wide variety of fiber optic lighting systems in two general markets:
(1) commercial lighting and (2) pool and spa lighting. Within the
commercial lighting market we sell EFO systems in energy efficient accent
lighting and specialty decorative and special effects lighting. All of our
fiber
optic lighting systems are comprised of illuminators, fiber cables and fixtures.
Other customized components for non-EFO systems include under water lenses,
color changing electric pool lights, landscape lighting fixtures and a line
of
lighted water features including waterfalls and laminar flow water
fountains.
5
EFO
Fiber Optic System
Our
EFO
fiber optic system is a new technology capable of replacing halogen and compact
fluorescent lamps in retail and commercial lighting settings while using only
a
fraction of the energy. This lighting system effectively distributes energy
efficient light in a user-friendly manner. The EFO system is based upon a
lighting system made up of several components: a highly efficient light source,
proprietary CPC optics, proprietary FiberJacks coupling technology and our
large
core fiber.
The
primary light source for our EFO system is a unique metal halide HID lamp
specifically developed in cooperation with, and is produced on our equipment
exclusively for us by, Advanced Lighting Technologies, Inc. and its
subsidiaries (“ADLT”) to maximize efficiency, output and life span. This source
produces light with an efficiency of up to 90 lumens per watt, five times the
efficiency of the light source used in MR-16 halogen lamps. We believe our
metal
halide HID lamp is the most energy efficient source of high quality light
currently available and more closely matches the daylight color spectrum than
any other lamp available for fiber optic applications. Furthermore, our standard
metal halide HID lamp has a current life span of up to 14,000 hours, which
is up
to five times the typical life of MR-16 halogen lamps. We also use alternative
light sources such as LEDs in certain applications, and in the future we
anticipate utilizing these light sources in more of our products as they become
more energy efficient.
We
surround our light source with a CPC and employ additional coupling optics.
We
hold ten United States patents and one corresponding patent in Australia, and
two pending patent applications in the United States and 9 pending corresponding
foreign patent applications, for the CPC and those coupling optics. These
collectors capture more than 90% of the light generated by our light source.
Traditional imaging collectors are only about one half as efficient at
delivering light to their outputs. Our collectors have multiple coating layers
each smaller than 100 nanometers, which acting together form a reflective
surface. These nanotechnology coatings were designed to act in conjunction
with
the other components in our EFO system. The coatings are applied using a unique
low-pressure chemical vapor deposition process. Together with the patented
shape
of our collector, this non-imaging optical system delivers 93% reflectivity
in
the visible region. Furthermore, this optical system does not reflect infrared
and ultraviolet radiation, minimizing the amount of infrared and ultraviolet
light that leaves the collector.
Glass
rods collect the light output from our collector, piping it outside the housing.
These rods act as thermal barriers and when coated, also become filters. These
filters block virtually all remaining infrared and ultraviolet radiation that
comes from the light source directly or which is reflected by the collectors.
The purity of the glass rods and the filters’ anti-reflective coatings allow for
a transmission of up to 95% of the light output from the collector. These rods
are the point of connection to the fiber optic cable. We house the lamp, solid
state power supply, collector and rods in a single package referred to as the
illuminator.
Unlike
most fiber optic lighting systems, which use bundles of thin strands of fiber,
our fiber is produced as a flexible large core polymer light pipe of varying
diameters from three millimeters to 20 millimeters, depending on the customer’s
application requirements. Our large core fiber is manufactured using a new
acrylic plastic composition and proprietary processing method that produces
a
fiber that can withstand the heat and light conditions associated with EFO
applications. This manufacturing process enables us to significantly reduce
the
cost of producing a continuous extruded large core fiber. We believe our large
core fiber is approximately twice as efficient as a comparable stranded fiber
cable.
Our
EFO
system consists of an illuminator, pre-cut lengths of our large core fiber
with
the FiberJacks couplers at either end, and application-specific fixtures. The
FiberJacks couplers allow one end of the fiber to snap into the illuminator,
similar to the way a telephone line connects to a phone jack, and the other
end
into the application-specific fixtures. FiberJacks, a proprietary plug-and-play
coupling system, has significantly changed the installation of fiber optic
lighting systems by eliminating the need for on-site fiber preparation, often
an
extremely precise process requiring highly skilled technicians. On-site
preparation could result in errors in the alignment of the fibers, which in
turn
result in loss of light and variability of illumination at the fixture. With
FiberJacks, all centering and alignment happens automatically, eliminating
these
types of losses and variability, and because all of our large core fibers are
cut and finished with the FiberJacks couplers at the factory, the on-site
installer need only unpack the fiber and snap it into the illuminator and the
fixture.
Application
Specific Fixtures
Our
EFO
system can be adapted to any number of lighting applications, including those
currently using traditional lighting systems. The primary concerns to commercial
end-users include quality of light, such as color, luminosity and directional
lighting, and compliance with energy regulation. Our EFO system allows these
customers greater flexibility in meeting their lighting needs within these
regulatory constraints while maintaining the desired effect. The key variable
in
each of these applications is the fixture. We have developed FiberJacks
compatible application-specific fixtures that allow the EFO system to be used,
for example, in supermarkets, commercial retail space, freezer cases, in-case
lighting, casinos and commercial accent lighting where traditional lighting
technology was not, or is no longer, capable of meeting the customer’s needs. In
addition, our EFO system can provide greater energy efficiency than traditional
lighting systems with the advantages of directional lighting and focusable
beams
that traditional lighting systems typically sacrifice to comply with energy
regulation. Many of our output fixtures include optics that allow consistent
repetitive beam adjustment in both angle and beam spread. In addition, most
of
our fixtures are clean, simple and small in appearance, and include a wide
range
of trim and finishes.
6
These
fixtures leverage the strengths of fiber optics to deliver well-defined beams,
in an attractive package, at a low cost.
Commercial
Lighting
The
primary illuminator in this product line is currently the 405 illuminator
series, which uses a metal halide HID light source. Other Fiberstars
illuminators use a halogen lamp. This light source may be sold with
a
color wheel that causes the light output to rotate through a variety of colors
for decorative applications, or as a white light system for down lighting or
star
ceiling
applications. When used in down lighting or star ceiling applications, the
illuminator is coupled with a variety of bundled fiber diameters and lengths
that are encased in a plastic cladding. We sell a variety of down light and
accent light fixtures for this product line. When used in neon-like decorative
applications, the illuminator is coupled with a variety of diameters and lengths
of BritePak®, a woven stranded fiber cable encased in a clear plastic
cladding.
Pool
and Spa Lighting Products
Our
pool
lighting products are designed to add color and decorative lighting to water
features for residential pools at night. The 6000 series illuminator is
the
primary
fiber optic product line sold into the swimming pool market and also uses an
HID-based illuminator with a traditional imaging optical system. The illuminator
is used with bundles of stranded fiber that transfer the light from the
illuminator under the pool decking and into the pool where the end points are
encased in a lens fixture. The illuminator is equipped with a color wheel that
changes the color of the light output.
We
sell a
variety of feature lighting systems that also change color. These are sold
with
the 2000 illuminator series, which includes an option for synchronizing the
color changes of multiple water features and with outdoor spas. The water
feature lights are sold in kits that may be used to light waterfalls, one or
more linear water streams, deck lights and landscape lights.
In
addition, we sell the Jazz Light, a pool light that changes color. This light
fits into the wall of the pool and uses an HID lamp with a color wheel
to
provide
pool color changes. We also sell portable spa lights that add decorative color
to portable spas.
Other
Products
In
our
European operations we have developed a line of LED products for the decorative
and accent lighting market. We plan to introduce these into the retail and
specification markets in the U.S. in 2007. We also sell in Europe a small line
of incandescent light sources. These products are sold into the decorative
lighting market.
7
Addressable
Markets and Applications
The
following table identifies our current addressable markets and potential
applications that have deployed or beta tested our products:
|
Market
for EFO
|
|
Potential
Applications
|
|
|
Supermarkets
|
|
Accent
lighting for specialty product display sections such as seafood,
meat,
wine, freezer cases, and any other specialty accent
lighting
|
|
|
Specialty
Retail
|
|
Down
lighting and accent lighting applied to display items such as clothing
racks and display windows
|
|
|
Ships
|
|
Replacement
of fluorescent bulbs for general illumination and specialty lighting
applications
|
|
|
Commercial
Buildings
|
|
Accent
and down lighting used in entry ways, conference rooms, foyers,
and art
displays
|
|
|
Dock
Lighting
|
|
Replacement
of existing hazardous and breakable dock lights used on loading
docks
|
|
|
Restaurants
|
|
Down
lighting and accent lighting
|
|
|
Hospitals
|
|
Down
lighting for lobby, waiting room, gift shop and floral
cases
|
|
|
Signs
|
|
Direct
view end-point stranded fiber
|
|
|
Museum
Lighting
|
|
Used
for high quality white light without damaging infrared or ultraviolet
radiation
|
|
|
Pools
|
High
efficiency water feature and other specialty pool
applications
|
8
|
Market
for Specialty
Decorative
and Special
Effect
|
|
Potential
Applications
|
|
|
Retail
Case Lighting
|
|
Used
in glass display cases for a low-heat emission and high quality
bright
white light
|
|
|
Museum
Lighting
|
|
Used
for high quality white light without damaging infrared or ultraviolet
radiation
|
|
|
Decorative
|
|
Kiosk
accent lighting, wall wash accent, color light for added attention,
direct
view side-emitting stripes, cove lighting, star fields, glass edge
lighting
|
|
|
Neon
Replacement
|
|
Stripes
of light going around the façade, Interior decorative
lighting
|
|
|
Signage
|
|
Back
light and halo letters, side emitting outline or enhancing graphics.
Direct view end point with special effects color changing or
animation
|
|
|
Furniture
|
|
Encased
in furniture such as cabinets
|
|
|
Casinos
|
|
Special
effect single color or white light only, accent down lighting on
game
tables, conference rooms, same as commercial buildings.
|
|
|
Hotels
|
|
Hall
way lighting, hotel spas, saunas, workout rooms, conference rooms,
display
cases
|
|
|
Pool
and Spa
|
|
Safe
and efficient lighting solution that enables users to change color
options
in pools and spas.
|
|
Sales,
Marketing and Distribution
Our
products are sold through a combination of a direct sales force paid on base
plus commission, independent sales representatives and distributors into
geographic markets throughout the world. We also are building an internal
sales
force for the sale of our EFO systems. We have been successful in hiring
experienced salespeople from industry leading firms such as General Electric
in
order to facilitate our sales efforts. As of December 31, 2006, we had 50
sales and sales support people throughout the United States and Europe. We
believe the presence of salespeople with experience at industry-leading firms
provides additional credibility to our marketing of our products, particularly
our EFO systems, into markets historically dominated by a few large companies.
In order to maximize our sales opportunities, we have developed different
sales
and marketing strategies to address various target markets of our
products.
Commercial
Lighting
EFO
Sales and Marketing
Our
strategy is to sell our EFO system to several large accounts. We then plan
to
leverage these successes into additional installations with these and new
customers. We identify key accounts through marketing efforts combining
advertising, articles in trade publication and presentations at industry
conferences and trade shows. The salespeople first facilitate the testing
of the
EFO system with a customer and then work with the customer for initial and
follow-on sales. The typical test sequence is as follows: demonstrations
to key
executives within the store chain; small tests of prototype installations
in one
store department; larger tests in multiple departments; and finally, sales
to
store locations within chain regions. For example, a grocery store installation
can include a variety of departments including seafood, deli, bakery, meat,
wine
and produce. These departments often display their higher margin products
around
the store’s perimeter. In many cases the store chain derives most of its profit
from these sections of the store and is willing to spend more on highlighting
their merchandise. Early multi-store sales have come from national supermarket
chains and other retailers. We have installed products in over 60 stores
at
several grocery store chains. Our sales successes have come as a result of
our ability to demonstrate a reduction in energy costs, help the chain meet
energy regulations and provide attractive lighting of the chain’s
merchandise.
9
To
increase adoption of our EFO technology, we also intend to market our systems
to
leading architects, lighting designers, contractors and other entities that
recommend or install lighting systems. For example, we have agreements with
Gensler, a leading architecture, design and planning firm, under which they
assist in designing our EFO system in the markets in which they do business.
Gensler also provides strategic advice to help us enhance our visibility and
image within the design and construction community as a manufacturer of
preferred technology.
In
addition, some utility companies have embraced our technology as an energy
efficient alternative to traditional lighting systems and have begun to promote
EFO to their customers.
We
also
sell our EFO systems through lighting representatives who target specific
lighting projects in local markets. These representatives will specify EFO
systems as the lighting for projects where EFO’s efficiency and lighting
intensity are important. The sales representative firms are used in the United
States, Canada, Europe and other international markets. We have more than
62
independent lighting representative organizations throughout the United States
for our commercial lighting products, including EFO and traditional lighting
products. These organizations are paid on a commission basis. Approximately
13
of these representatives account for a large majority of our commercial lighting
product sales. We sell our products in Europe through two subsidiaries, Crescent
Lighting Ltd. in the United Kingdom and Lichtberatung Mann (LBM) in Germany.
These two companies manage our sales operations in Europe, Russia and the
Middle
East, which, as in the United States, include sales through sub-distributors
and
sales representatives. In other international markets we sell through regional
lighting representatives.
We
regularly attend industry conferences at which we give presentations on our
products. These conferences include Lightfair, Food Marketing Institute and
other United States trade shows targeted at our customers, as well as lighting
industry trade shows in Europe, Australia, Japan, India and China. We have
had
articles on our products written in LD+A, Architectural Lighting, Architectural
Record, Display and Design Ideas and Visual Merchandising and Store Design.
We
participate in studies conducted by independent third parties, including
universities and other educational institutions, designed to evaluate the
benefits of our lighting systems. We also regularly give presentations to
lighting designers on the benefits of EFO systems. In addition to selling
into
national grocery store and retail chains directly, our sales strategy for
EFO is
to convince lighting designers of EFO’s energy saving and accent lighting
benefits. Lighting designers work with architects on larger building projects
to
ensure that attractive and up-to-date lighting products are used.
Traditional
Commercial Lighting Products
Similar
to our sales efforts for EFO systems, we sell our traditional fiber optic
commercial lighting products through independent sales representatives. In
addition, as with our EFO systems, we sell our traditional commercial lighting
products in Europe, Russia and the Middle East through our subsidiaries.
We also
sell our traditional commercial lighting products internationally in most
industrialized countries through distributors, including ADLT in Australia,
Magic Lite in Canada, Verslite Hitech Lighting in India, Lighting Limited
in
China and Mitsubishi and Koto in Japan.
Government
Sales
U.S.
Navy
In
March
2006 we entered into an agreement with U.S. Defense Department’s Defense
Advanced Research Projects Administration or DARPA, to install our lighting
systems on several U.S. Navy ships as part of a sea test. The test is designed
to determine if these products can be used in future Navy installations.
The
test installations are scheduled to be completed in the first half of 2007,
with
the sea tests running for approximately 9 months thereafter. A total of
$1,979,000 in revenue was recognized under this program in 2006. There was
no
such revenue recognized in prior years.
Pool
and Spa Products
Our
sales
and marketing strategy for our pool and spa lighting products differs from
our
strategy for our commercial lighting products. Specifically, although the
end-user for our pool and spa products is primarily the residential market,
we
primarily focus on sales to pool builders and pool product distributors by
utilizing regional sales representative organizations that specialize in
such
sales. Accordingly, our marketing efforts for swimming pool products depend
in
large part upon swimming pool builders recommending our products to their
customers and adapting their swimming pool designs to include our lighting
systems. Each representative organization typically has the exclusive right
to
sell our products within its territory, receiving commissions on territory
sales. In addition to using regional sales representatives, we also market
our
products to regional and national distributors in the swimming pool market.
These distributors stock our products to fill orders received from swimming
pool
builders. Some of these distributors also engage in limited marketing activities
in support of our products. We also market to certain large national pool
builders under which they may purchase systems directly from us and offer
our
products with their swimming pools. To a lesser extent, we enter into incentive
arrangements to encourage pool builders to purchase our products. We provide
pool builders and independent sales representatives with marketing tools,
including promotional videos, showroom displays and demonstration systems.
We
also use trade advertising and direct mail in addition to an ongoing program
of
sales presentations to pool builders and distributors.
10
SCP
Pool
Corporation, or SCP, the largest pool distributor in the United States and
our
largest pool customer, accounted for approximately 10%, 11% and 11% of our
net
sales in 2004, 2005 and 2006, respectively. We expect to maintain our business
relationship with SCP; however, a cessation or substantial decrease in the
volume of purchases by this customer could reduce availability of our products
to end users and have a material adverse effect on our net sales and results
of
operations. At December 31, 2006, SCP accounted for 6% of accounts
receivable and at December 31, 2005, they accounted for 8% of accounts
receivable.
Sales
of
our swimming pool products follow a seasonal pattern. This typically results
in
higher sales in the second and fourth quarters as pool distributors stock
shelves for the spring and summer seasons. First quarter pool sales tend
to be
the lowest for a given year. Consistent with industry practice, we provide
extended terms to distributors for shipments in the fourth quarter of a given
year whereby they receive products in November and December for which
they pay in equal installments from March through June of the
following year. We sell the majority of our swimming pool lighting systems
within the United States, Canada and Australia. Our pool lighting sales in
Europe were not material in 2004, 2005 and 2006.
Backlog
We
typically ship standard products within a few days after receipt of an order
and
custom products within 30 to 60 days of order receipt. Generally, there is
not a significant backlog of orders, except at year-end. Our backlog at the
end
of 2006 was $1,143,000 compared to $1,144,000 at the end of 2005. We anticipate
that all of our backlog as of December 31, 2006 will be filled in
2007.
Competition
Our
products compete with conventional electric lighting systems and with a variety
of lighting products, including conventional light sources such as incandescent
light bulbs as well as metal halide lamps, LEDs, compact fluorescent lamps
and
decorative neon lighting. Our EFO systems compete with conventional electrical
lighting systems, other fiber optic lighting systems, and alternative energy
efficient lighting products such as compact fluorescent lighting. Our
traditional commercial lighting products compete with other lighting products
primarily in the areas of down lighting, accent lighting and signage lighting.
Our pool and spa lighting products compete with other sources of pool and
spa
lighting in the areas of in-pool lighting, including colored and color changing
underwater lighting, and pool and spa accent lighting. Principal competitive
factors include price, performance, ease of installation and maintenance
requirements.
Our
EFO
systems compete with conventional electrical lighting technologies and with
other sources of accent and down lighting such as ceramic metal halide, halogen
and incandescent bulbs. Our EFO systems compete with traditional electrical
lighting systems and other fiber optics systems in markets where energy
efficiency, ease of installation and lower maintenance costs are principal
competitive factors. Our EFO systems also compete with manufacturers of lamps
and fixtures who may sell their products to end-users as a system or as
individual components.
We
expect
that our ability to compete effectively with conventional lighting technologies,
other fiber optic lighting products and new lighting technologies that may
emerge will depend substantially upon achieving greater performance and reducing
the cost of our EFO systems. Principal competitors in the EFO market include
large lamp manufacturers and lighting fixture companies whose financial
resources substantially exceed ours. These conventional lighting companies
may
introduce new or improved products that may reduce or eliminate some of the
competitive advantages of our products. We anticipate the primary competition
to
our EFO systems will come from new technologies which offer increased energy
efficiency, lower maintenance costs and/or lower heat radiation. In certain
applications we compete with LED systems produced by large lighting companies,
such as Phillips and General Electric.
In
traditional commercial lighting, we compete primarily with local and regional
neon lighting manufacturers that, in many cases, are more established in
their
local markets than we are. In traditional commercial lighting, fiber optic
lighting products are offered by a number of smaller companies, some of which
compete aggressively on price. Some of these competitors offer products with
performance characteristics similar to our products. Additionally, some
conventional lighting companies now manufacture or license fiber optic lighting
systems that compete with our products. Schott, a German glass fiber company,
markets fiber optic systems in the United States. Many companies compete
with us
in Asia, including Philips, Mitsubishi, Bridgestone and Toray. Mitsubishi
also
sells our BritePak fiber cables in Japan. In addition, we compete with Toray
in
the stranded small diameter optical fiber in the special effects lighting
market.
In
the
pool and spa market, we face competition from suppliers and distributors
who
bundle lighting and non-lighting products and sell these packages to pool
builders and installers. In addition, we face competition directly from
manufacturers who produce their own lighting systems and components. For
example, in the pool market, competitive products are offered by Pentair’s
American Products Division, a major manufacturer of pool equipment and supplies,
as well as Super Vision International. In the spa business, spa manufacturers
install LED lighting systems during the manufacturing process. We intend
to
develop new fiber optic lighting products that are complementary to traditional
pool lights currently sold by pool equipment suppliers. To maximize the sales
of
these new products, we plan to leverage our well-established presence in
the
pool and spa lighting market.
11
While
we
cannot predict the impact of competition on our business, we believe that
an
increase in the rate of our market expansion may be accompanied by increased
competition. Increased competition could result in price reductions, reduced
profit margins and loss of market share, developments which could adversely
affect our operating results. There can be no assurance that we will be able
to
continue to compete successfully against current and future
competitors.
Manufacturing
and Suppliers
We
produce our lighting systems through a combination of internal and outsourced
manufacturing and assembly. Our internal lighting system manufacturing consists
primarily of fiber processing, final assembly, testing and quality control.
We
use independent contractors to manufacture some components and sub-assemblies
and have worked with a number of our vendors to design custom components
to meet
our specific needs. We manage inventories of domestically produced component
parts on a just-in-time basis when practicable. Our quality assurance program
provides for testing of all sub-assemblies at key stages in the assembly
process
as well as testing of finished products.
In
2004,
we initiated a program to manufacture more of our products offshore, primarily
in India and Mexico. As this process continues, we expect that more high
volume
products will be sourced offshore where labor and component cost savings
may be
achieved. Under a Production Share Agreement initiated in 2003 and renewed
in
August 2006, we conduct contract assembly in Mexico through North American
Production Sharing Inc. and Industrias Unidas de BC, SA de CV, or North
American. Under this agreement North American provides administrative and
manufacturing services, including labor services and the use of manufacturing
facilities in Mexico for the manufacture and assembly of certain of our fiber
optic systems and related equipment and components. Also in 2004, we began
obtaining assembled products from ECDS, located in Cochain, India. These
products are received on a purchase order basis, primarily by ocean shipment
and
in some cases by air freight.
We
manufacture our large core fiber products in our Solon, Ohio
facility,
using
either an extrusion process or a cast process.
Under
a
supply agreement, which was last renewed in January 2000, Mitsubishi is the
sole supplier of our small diameter stranded fiber. In sales volume, our
products that incorporate small diameter stranded fiber have historically
been
the single largest fiber product that we sell and represent significant sales
volume. We expect to maintain our relationship with Mitsubishi for the supply
of
small diameter fiber.
ADLT
and
Fiberstars have had a strategic relationship since 1997 when ADLT acquired
a
substantial equity interest in Fiberstars, which was sold in 2004. Over the
years ADLT and Fiberstars have maintained a collaborative relationship based
on
ADLT’s position as a leading supplier of metal halide light sources and
Fiberstars need for “state of the art” light source technology. As a result, we
rely on ADLT for our metal halide lamps, reflectors and power supplies. To
further this relationship, in September 2005 and April 2006 we entered into
several new agreements with ADLT regarding mutual development collaboration
for
the continued improvement in our lamp technology and for support of our coating
technologies. These agreements also provide for the purchase of certain coating
equipment, the provision to us of certain other services, the continued supply
to us of products manufactured by ADLT, and a cross-license of certain
intellectual property.
We
also
rely on other sole source suppliers for other lamps, reflectors, remote control
devices and power supplies. Although we cannot predict the effect that the
loss
of one or more of such suppliers would have on our results of operations,
such
loss could result in delays in the shipment of products and additional expenses
associated with redesigning products and could have a material adverse effect
on
our operating results.
Research
and Development
We
believe that growth in fiber optic lighting will be driven by improvements
in
technology to provide increased light output at lower costs. Accordingly,
we
commit much of our research and development resources to those challenges.
We
have a research and development team located in Ohio primarily focused on
developing or improving new and current EFO systems. In addition, we currently
have engineers based in California and in India focused on further developing
our pool and spa products.
We
purchased the base technology underlying our EFO system in 2000 with the
acquisition of Unison Fiber Optic Lighting Systems LLC. Subsequent to this
acquisition, we have been aided in our development of this technology, as
well
as the development of our traditional fiber optics products, by government
awards and contracts. We have commercial rights to all of the technology
we
develop as part of these various government research and development contracts.
A summary of work under these contracts is as follows:
·
In
2003,
we successfully completed a three-year $2.0 million research and development
project to develop a continuous extrusion process for large core plastic
optical
fiber funded under a grant from the National Institute of Standards and
Technology, or NIST, of the United States Department of Commerce.
·
In
February 2003 DARPA, through the Army Aviation and Missile Command, or
AMCOM, awarded to us and our partners a research and development contract
for
the development of next-generation light sources, optics, luminaire and
integrated illuminated technologies for its high efficiency distributed
lighting, or HEDLight, project. This contract provided for total payments
of up
to $7.8 million, including payments for subcontractors, over three years
based
on the achievement of milestones in the development of fiber optic illuminators
and fixtures for installation on ships and aircraft. We received total gross
funding of $7.8 million under this contract through December 31, 2005.
12
·
In April 2003, we announced, together with APL Engineered Materials, a
subsidiary of ADLT, the award of a $2.7 million research and development
contract from DARPA for the development of a new arc discharge light source,
a
project to be led by APL Engineered Materials. Of this amount, we received
from
ADLT in 2006, $300,000 based on our achievement of certain milestones related
to
our contribution to this project. We anticipate that this new light source
will
exceed the performance of our existing EFO light source in efficiency,
brightness and color rendering.
·
In
June 2004, we announced an additional $1.0 million in funding from DARPA,
dependent on the achievement of certain milestones, to
develop
an LED version of the HEDLight system. We achieved these milestones and earned
the full $1.0 million by the end of 2005.
·
Also in
June 2004, we announced two Small Business Innovative Research, or SBIR,
awards from the Department of Energy. One is to work on an instant-on version
of
EFO, and the other is to develop a fast cure for the fiber production process,
which would lower cost and improve throughput on the fiber production line.
These awards were for an initial $100,000 for the first feasibility phase,
and
in September 2005 we received approval for an additional funding of
$750,000 over two years for each project for the completion phase.
· In
addition, in October 2005, further SBIR awards from the Department of
Defense under DARPA totaling $200,000 were obtained to further explore
improvements to lamp coatings and design and to further research materials
and
processing techniques for the Company’s Continuously Extruded Large Core Fiber
processing method. In December 2006 we received approval for an additional
funding of $750,000 over two years for each project for the completion
phase.
·
Net of
payments to subcontractors, we received from DARPA and DoE aggregate cash
payments of $2.5 million, in 2006, $2.3 million in 2005 and $2.5 million
in 2004
for R&D work.
On
September 19, 2005, we entered into agreements with ADLT regarding
development assistance to be provided to us by ADLT and by us to ADLT. Under
these agreements, ADLT will provide us with consulting, research and development
services, including the development of lamps to be used in our current and
future EFO systems for projects. So far, this assistance has only been required
in the first quarter of 2006. In addition to our agreement with ADLT, we
further
augmented our internal research and development efforts by collaborating
with
other component suppliers, independent consultants and third parties. We
depend
substantially on these parties to undertake research and development efforts
necessary to achieve improvements that would not otherwise be possible given
the
multiple and diverse technologies that must be integrated into our products
and
our limited engineering, personnel and financial resources. These third parties
have no material contractual commitments to participate in these efforts,
and
there can be no assurance that they will continue to do so.
Research
and development expense for the years ended December 31, 2006, 2005 and
2004 were $2.3 million, $2.2 million and $1.2 million, respectively, net
of
credits for research and development from the government.
In
March
2006 we entered into a DARPA agreement with the Navy in which we will supply
our
lighting on three Navy ships for a sea test. Milestone deliveries under this
agreement have been booked as revenue as the milestones have been delivered.
In
2006 we recognized $1,979,000 in revenue for deliveries made. Following
successful completion of the sea test currently anticipated in late 2007
or
early 2008, the Navy would have the ability to purchase more products from
us.
Intellectual
Property
We
believe that the success of our business depends primarily on our technical
innovations, marketing abilities and responsiveness to customer requirements,
rather than on patents, trade secrets, trademarks, copyrights and other
intellectual property rights. Nevertheless, we have a policy of seeking to
protect our intellectual property through patents, license agreements, trademark
registrations, confidential disclosure agreements and trade secrets. As of
March
6, 2007, our intellectual property portfolio consisted of 49 issued United
States and foreign patents, various pending United States patent
applications and various pending Patent Cooperation Treaty, or PCT, patent
applications filed with the World Intellectual Property Organization that
serve
as the basis of national patent filings in countries of interest. A total
of 43
applications are pending. Our issued patents expire at various times between
August 2008 and April 2023. Generally, the term of patent protection
is 20 years from the earliest effective filing date of the patent
application. There can be no assurance, however, that our issued patents
are
valid or that any patents applied for will be issued. There can be no assurance
that our competitors or customers will not copy aspects of our fiber optic
lighting systems or obtain information that we regard as proprietary. There
also
can be no assurance that others will not independently develop products similar
to ours. The laws of some foreign countries in which we sell or may sell
our
products do not protect proprietary rights to products to the same extent
as do
the laws of the United States.
13
We
are
aware that a large number of patents and pending patent applications exist
in
the field of fiber optic technology. We are also aware that 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, we have in the past received communications
from
third parties asserting rights in our patents or that our technology infringes
intellectual property 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. There
can be no assurance that third parties will not assert claims that our products
infringe third party patents or other intellectual property rights or that,
in
case of a dispute, licenses to such technology will be available, if at all,
on
reasonable terms. In addition, we may need to take legal action to enforce
our
intellectual property rights in the future. In the event of litigation to
determine the validity of any third-party claims or claims by us against
third-parties, such litigation, whether or not determined in our favor, could
result in significant expense to us and divert the efforts of our technical
and
management personnel from productive tasks. Also, in the event of an adverse
ruling in such litigation, we might be required to expend significant resources
to develop non-infringing technology or to obtain licenses to the infringing
technology, which licenses may not be available on acceptable terms. In the
event of a successful claim against us and our failure to develop or license
a
substitute technology, our operating results could be adversely
affected.
Employees
As
of
December 31, 2006, we had 125 full time employees, of whom 50 were involved
in sales, marketing and customer service, 19 in research and product
development, 40 in assembly and quality assurance, and 16 in finance and
administration. From time to time, we employ part-time personnel in various
capacities, primarily assembly and clerical support. In addition, we have
35
contract employees in Mexico. We have never experienced a work stoppage.
No
employees are subject to any collective bargaining agreement, and we believe
our
employee relations to be good.
We
believe that our future success will depend to a large extent on the continued
contributions of certain employees, many of whom would be difficult to replace,
and on our 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 our operations or otherwise harm our business or results
of
operations.
Available
Information
Our
Web
site is http://www.fiberstars.com.
We make
available free of charge, on or through our Web site, our annual, quarterly
and
current reports, and any amendments to those reports, as soon as reasonably
practicable after electronically filing such reports with the SEC. Information
contained on our Web site is not part of this Report.
Item
1A. Risk Factors
We
have recently changed the focus of our business and may be unsuccessful or
experience difficulties in implementing this change. If this occurs, we may
not
be able to achieve operating profitability.
In
connection with the reorganization and restructuring of Fiberstars, we intend
to
shift the primary focus of our business from our pool and spa products to
products using our EFO technology. While we intend to continue designing
and
manufacturing pool and spa products, we plan to allocate significant resources
to the development, marketing and distribution of our EFO system in the accent
lighting market. We have a limited operating history in this market, and
our
shift in focus may affect our ability to accurately forecast sales, establish
adequate reserves, estimate amounts of warranty and returns and other similar
expenses. Our ability to achieve and maintain profitability depends on our
ability to successfully implement our new business strategy.
Our
operating results are subject to fluctuations caused by many factors that
could
result in decreased revenue and a decline in the price of our common
stock.
Our
quarterly operating results can vary significantly depending upon a number
of
factors including:
·
the
lighting market’s acceptance of, and demand for, our products;
·
the
level and seasonality of orders and the delivery of new products;
·
the
continued availability of our current manufacturing channels and raw material
suppliers;
·
the
continued availability of our distributors or the availability of replacement
distribution channels;
·
fluctuations in our sales volumes and mix of low and high margin
products;
·
product
development and marketing expenditures, which are made well in advance of
potential resulting revenue;
·
increased expenses in research and development if we are not able to meet
certain milestones in our Defense Advanced Research Project Agency, or DARPA,
contracts;
·
the
seasonality of the construction industry, which results in a substantial
portion
of our historical quarterly sales in the last month of each of the second
and
fourth quarters of the year;
14
·
a
significant portion of our expenses are relatively fixed, and if sales fall
below our expectations, we will not be able to make any significant adjustment
in our operating expenses; and
·
the
impact of natural disasters, terrorist acts and other unforeseeable catastrophic
events.
Although
we attempt to control our expense levels, these levels are based, in part,
on
anticipated revenue. Therefore, we may not be able to control spending in
a
timely manner to compensate for any unexpected revenue shortfall.
You
should not rely on period-to-period comparisons of our operating results
as an
indication of future performance. The
results
may be below the expectations of market analysts or investors, which would
likely cause our share price to decline.
Our
future success is highly dependent on the successful adoption of EFO systems
by
the lighting market, which is traditionally slow in adopting new
technologies.
EFO
is a
relatively new and unproven type of lighting that may not achieve acceptance
by
lighting designers or other consumers of lighting products. Our potential
retail
customers are widespread and independent, and their decisions are influenced
by
a variety of factors which are often unique to each customer. These customers
have multiple choices in lighting designs and products, including incandescent
and fluorescent technologies, and may be averse to adopting new technology
or
incurring the costs of utilizing new technologies. In addition, these
alternative lighting products are manufactured by large, established companies
with significantly greater resources than us for developing energy efficient
lighting. As a result, even if potential customers choose to adopt new lighting
technologies, our products still may not be utilized. Even if some customers
utilize our products on a limited basis, there is no guarantee that they
will
expand their use of or continue to utilize our products.
One
of
our significant markets is large-scale new construction, including retail
and
grocery stores. Effective lighting by these customers is a critical element
in
showcasing merchandise and promoting sales. As a result, these customers
are
reluctant to change current lighting products for fear of losing sales. In
order
to penetrate these markets, we must persuade this customer base that the
adoption of our EFO systems will not negatively impact their business. This
process is slow, time-consuming and expensive. If our EFO system is not adopted
by this customer base, we may not generate sufficient revenue to offset the
cost
of bringing our EFO technology into these target markets.
Finally,
successful penetration in certain markets or geographic regions does not
guarantee that we will be able to achieve successful penetration into the
accent
lighting market or that our acceptance will be geographically
widespread.
Our
color spectrum lamp is untested by the retail market and may not be accepted
without technological changes, if at all.
Our
EFO
system offers a new full spectrum lamp for use in retail stores. If
our
new full color spectrum lamp is not as effective as we anticipate or does
not
meet
the
specific needs of this target customer base, we may need to expend additional
resources to make technological changes to the spectrum. If our new full
color
spectrum is not accepted or if we are unable to make the changes necessary
for
customer acceptance, this could negatively impact sales of our EFO
system.
We
plan on allocating a significant amount of resources to the research and
development of our EFO lighting technology. If our EFO lighting system is
not
accepted in our target market, we may not recoup these
expenses.
We
plan
on devoting a substantial portion of our research and development resources
to
developing new products using our EFO lighting technology and marketing it
in
our target markets. Because our EFO lighting system is a relatively new product,
we do not know if we will be successful in penetrating our target markets.
As a
result, we may not generate a sufficient amount of revenue from the sales
of our
EFO lighting systems to offset the costs necessary to bring our EFO lighting
systems to market. Our gross margins and operating results will suffer if
our
EFO lighting systems are not accepted in our target markets.
Our
large core fiber manufacturing is centralized in a single facility, which
may
affect our ability to sufficiently meet product demand in a cost effective
or
timely manner.
We
manufacture our large core fiber through a unique proprietary process and
currently have one machine that manufactures this fiber, located at the facility
we lease in Solon, Ohio. This large core fiber is used in a majority of our
EFO
systems. As a result, we are subject to manufacturing delays due to facility
shutdown, power loss or labor difficulties. If our facility were to experience
temporary shutdown, or be unable to function at predicted capacity, we may
be
unable to meet our demand in a cost efficient manner, if at all. Furthermore,
our ability to modify our production output for custom orders is limited
by our
having one machine at a single facility. In addition, our alternative method
is
not cost effective. In 2005 and 2006 we entered into agreements with ADLT
to
purchase two coating machines and the supply of certain coatings which will
be
operated and maintained by a third party. If this machine is not operated
or
maintained properly we may experience delays in our manufacturing
process.
15
Two
Fiberstars coating machines are operated by a third party. If the third party
does not operate and/or maintain the machines properly, we may experience
manufacturing delays.
In
2005
and 2006 we entered into agreements with ADLT to purchase two coating machines
and the supply of certain coatings which will be operated and maintained
by a
third party. If this machine is not operated or maintained properly we may
experience delays in our manufacturing process.
If
electricity costs decline or regulatory requirements for energy efficient
lighting are repealed, demand for our products may
decline.
The
principal advantage of our EFO technology over competing lighting technologies
is energy efficiency. Factors compelling our target customers to utilize
more
energy efficient lighting technologies include increasing energy costs and
federal and state
government regulations requiring lower wattage per square foot such as
ASHRAE-IESNA Standard 90.1, which limits electricity
consumption for lighting per square foot to 1.9 watts for both new construction
and renovations requiring building permits for retail buildings in the United
States. If the need for increasingly energy efficient lighting technologies
by
our target customer base declines, the attractiveness of our technology would
also decline.
We
depend on a limited number of suppliers from whom we do not have guarantees
of
adequate supplies, thus 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 our small diameter stranded fiber, which is used
extensively in our fiber pool and spa lighting products, and to a lesser
extent,
in our EFO systems. We also rely on a third party to operate and maintain
Fiberstars arctube machines to produce EFO lamps. The loss of Mitsubishi
as a
supplier or ADLT as a third party operator could result in delays in the
shipment of products, additional expense associated with redesigning
products,
impaired margins, reduced production volumes, strained customer relations
and
loss of business or could otherwise harm our
results
of operations.
We
depend on ADLT for a number of components used in our products as well as
future
development of new components and also rely on ADLT to operate and maintain
our
coating machine and provide certain related services.
ADLT
supplies us with certain components used in our products. While ADLT has
been
financially viable, there can be no assurances that this will continue. In
addition, ADLT can terminate for convenience its obligations to supply us
with
components and related services for the coating machine purchased from them
upon
nine months notice to us. As a result, we have identified alternative suppliers
for these components, but there could be an interruption of supply and increased
costs if a transition to a new supplier were required. We could lose current
or
prospective customers as a result of supply interruptions. Increased costs
and
delays would negatively impact our gross margins and results of
operations.
We
have experienced negative cash flow from operations and may continue to do
so in
the future. We may need to raise additional capital in the future, but our
ability to do so may be limited.
While
we
have historically been able to fund cash needs from operations, bank lines
of
credit or from capital markets transactions, due to competitive, economic
or
other factors there can be no assurance that we will continue to be able
to do
so. If our capital resources are insufficient to satisfy our liquidity
requirements and overall business objectives we may seek to sell additional
equity
securities or obtain debt financing. Adverse business conditions due to a
weak
economic environment or a weak market for our
products
have led to and may lead to continued negative cash flow from operations,
which
may require us to raise additional financing, including equity financing.
Any
equity financing may be dilutive to shareholders, and debt financing, if
available, will increase expenses and may involve restrictive covenants.
We may
be required to raise additional capital at times and in amounts which
are
uncertain, especially under the current capital market conditions. Under
these
circumstances, if we are unable to acquire additional
capital
or are required to raise it on terms that are less satisfactory than desired,
it
may harm our financial condition, which could require us to curtail our
operations significantly, sell significant assets, seek arrangements with
strategic partners or other parties that may require us to relinquish
significant rights to products, technologies or markets, or explore other
strategic alternatives including a merger or sale of our company.
We
sell products into a marketplace where our competitors often have lower initial
product pricing. If we are unable to provide
customers with long term cost savings, we may not be able to successfully
penetrate our target markets, which could harm
our revenue and gross profits.
Customers
in our target markets currently use conventional lighting technologies,
including incandescent, halogen and fluorescent lighting. The initial cost
of
using these traditional lighting technologies is relatively low. Historically,
we have not been able to price our EFO lighting system to compete with these
traditional lighting products. As a result, in order to gain market share,
our
EFO lighting system must provide our target customers with longer life cycles.
This is achieved through reduced maintenance costs,
reduced energy costs and providing customers with the desired lighting effect
without resulting in damage to or loss of goods. If we
are
not able to persuade potential customers of the long-term cost savings in
using
our EFO lighting system, we may not be able to
successfully compete in our target markets. Our financial results will suffer
if
we are not able to penetrate these target markets and gain
market share. Additionally, MR-16 halogen lamp pricing is declining, and
in
order to remain competitive and broaden our market
targets
to include compact fluorescent lamps and other lamp types, we believe we
must
continue to reduce EFO costs and pricing.
16
We
operate in markets that are intensely and increasingly competitive. To be
successful, we must provide energy saving solutions that offer compelling
competitive advantages over conventional lighting
technologies.
Competition
is increasing in the commercial decorative and accent lighting and pool lighting
markets, as well as in the energy efficient lighting markets. A number of
companies
offer directly competitive products, including color halogen lighting for
swimming pools and incandescent and fluorescent
lighting
for commercial decorative and accent lighting. For example, General Electric
recently announced it has developed a more energy-efficient incandescent
lamp.
We also compete with LED products in water lighting and in neon and other
lighted signs. In addition, many of our competitors in the pool and spa market
bundle their lighting products with other pool and spa related products,
which
many customers find to be an attractive alternative. Our competitors include
large and well-established companies such as General Electric, Sylvania,
Philips, Schott, 3M, Bridgestone, Pentair, Mitsubishi and
OSRAM/Siemens.
Many
of
our competitors have substantially greater financial, technical and marketing
resources than we do. We may not be able to adequately respond to technological
developments or fluctuations in competitive pricing. 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. To stay competitive we must continue to allocate
our resources to research and development, which could negatively impact
our
gross margins. If we are unable to provide more efficient lighting technology
than our competitors, our operating results will be adversely
affected.
We
rely on intellectual property and other proprietary information that may
not be
protected and that may be expensive to protect.
We
currently hold 49 patents in the United States, and three corresponding patents
in Japan and one corresponding patent in Australia. We also have 43 patents
pending in the United States. 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 key 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 some of our competitors hold and
have
applied for patents related to fiber optic and non-fiber optic lighting.
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. For example, in 2005 we were involved in patent litigation
with Pentair with respect to our FX Pool Light product, which was subsequently
settled. Litigation to determine the validity of any third-party claims or
claims by us against such third party, 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. In addition,
we do not know whether our competitors will in the future apply for and obtain
patents that will prevent, limit or interfere with our ability to make, use,
sell or import our products. Although we may seek to resolve any potential
future claims or actions, we may not be able to do so on reasonable terms,
or at
all. If, following a successful third-party action for infringement, we cannot
obtain a license or redesign our products, we may have to stop manufacturing
and
marketing our products and our business would suffer as a result.
Sales
of our EFO systems depend on acceptance by multiple decision makers, resulting
in lengthy sales cycles. As a result, the flow of EFO revenue is not
predictable.
One
of
our significant markets is large-scale new construction and the length of
our
sales cycle in this market can be anywhere from nine months to as long as
three
years. Decisions about lighting products utilized in large-scale new
construction are made
at
multiple levels by our current and potential customers, including merchandising
and purchasing personnel, the chief financial officer
and the chief executive officer. These decisions are influenced by a number
of
factors including cost, reliability of the product
and
reliability of its source. In addition, some of these customers function
autonomously and decisions with respect to construction, including lighting,
are
made by each store, even if part of a large chain. As a result, with respect
to
such customers, we often must meet with all the decision makers at each store
where we want to install our EFO systems. Furthermore, such decisions are
made
significantly
in advance of the utilization of the actual product. As a result, if we are
unable to access the multiple decision makers or
convince
them to adopt our products and utilize them on a widespread basis, we may
be
unable to successfully penetrate these markets. We may also be required to
invest significant time and resources into marketing to these customers before
we are able to determine if we will be able to sell such customers our
products.
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.
Our
future success will depend to a large extent on the continued contributions
of
certain employees, such as our current chief executive officer, chief financial
officer and chief technical officer. These and other key employees would
be
difficult to replace. Our future success will also depend on our ability
to
attract and retain qualified technical, sales, marketing and management
personnel, for whom competition is intense. The loss of or failure to attract,
hire and retain any such persons could delay product development cycles,
disrupt
our operations or otherwise harm our business or results of operations. In
addition, we plan to build a new internal sales force, which may not generate
the anticipated net sales and may incur unanticipated expenses.
17
We
are becoming increasingly dependent on foreign sources of supply for many
of our
components and in some cases complete assemblies, which due to distance or
political events, may result in untimely deliveries.
In
order
to control costs, we are continually seeking offshore supply of components
and
assemblies. We currently import supplies from, or have products assembled
in,
Mexico, India, China, Taiwan, Japan and some European countries. This results
in
longer lead times for deliveries, which can mean less responsiveness to sudden
changes in market demand for the products involved. Some of the countries
where
components are sourced may be less stable politically than the United States
or
may be subject to natural disasters or diseases, and this could lead to an
interruption in the delivery of key components. Delays in the delivery of
key
components
could result in delays in product shipments, additional expenses associated
with
locating alternative component sources or redesigning
products, impaired margins, reduced production volumes, strained customer
relations and loss of customers, any of which
could
harm our results of operations. Furthermore, we bear the risk of theft or
damage
to our products with certain of our offshore partners, particularly with
regard
to our assembly facilities in Mexico.
If
we fail to maintain an effective system of internal controls, we may not
be able
to accurately report our financial results or prevent fraud. As a result,
current and potential shareholders could lose confidence in our financial
reporting, which could harm our business and the trading price of our common
stock.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. We have in the past discovered, and may in the
future
discover, areas of our internal controls that need improvement. Section 404
of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our
internal controls over financial reporting and have our independent registered
public accounting firm annually attest to our evaluation, as well as issue
their
own opinion on our internal control over financial reporting, which is required
by us for the first time in connection with this Annual Report on
Form 10-K. We have prepared for compliance with Section 404 by
strengthening, assessing and testing our system of internal controls to provide
the basis for our report. However, the continuous process of strengthening
our
internal controls and complying with Section 404 is expensive and time
consuming, and requires significant management attention. We cannot be certain
that these measures will ensure that we will maintain adequate control over
our
financial processes and reporting. If we or our independent registered public
accounting firm discover a material weakness, the disclosure of that fact,
even
if quickly remedied, could reduce the market’s confidence in our financial
statements and harm our stock price. In addition, future non-compliance with
Section 404 could subject us to a variety of administrative sanctions,
including the suspension or delisting of our common stock from The NASDAQ
National Market and the inability of registered broker-dealers to make a
market
in our common stock, which would further reduce our stock price. Estimates
of
our annual costs, independent of additional audit fees, required to comply
with
Section 404 after 2006 on an on-going basis are $300,000 or higher. While
we expect these costs to increase our operating expenses significantly, we
cannot predict or estimate the amount of future additional costs we may incur
or
the timing of such costs.
Our
components are difficult to manufacture and procure in large quantities and
supply may be limited in the short term.
EFO
system includes components that are difficult to manufacture and procure
in
large quantities in the short term. These
components include lamps and optical and electronic components. Furthermore,
if
these components are in limited supply, our suppliers may allocate their
supply
to larger customers. If an increase in demand outpaces the projected expansion
of our manufacturing capabilities, or if larger quantities are needed in
a
shorter time frame than anticipated, we may not be able to meet customers’
requirements and our ability to market our EFO system may be adversely affected.
Our inability to meet customers’ requirements may also negatively affect our
ability to gain market share and acceptance among lighting designers and
other
repeat customers of lighting products.
We
have historically relied on government funding for our research and
development.
Historically,
approximately 54% of our EFO research and development efforts have been
supported directly by government funding. In 2006, approximately 35% of our
EFO
research and development funding came from government sources and is contracted
for short periods, usually one to two years. If government funding were to
continue to be reduced or eliminated, there is no guarantee we would be able
to
continue to fund our research and development efforts in EFO technology and
products at their current levels, if at all. If we are unable to support
our EFO
research and development efforts, there is no guarantee we would be able
to
develop enhancements to our current products or develop new
products.
Changes
to financial accounting standards may affect our results of operations and
cause
us to change our business practices.
We
prepare our financial statements to conform with generally accepted accounting
principles, or GAAP, in the United States. These accounting principles are
subject to interpretation by the American Institute of Certified Public
Accountants, the Securities and Exchange Commission and various bodies formed
to
interpret and create appropriate accounting policies. A change in those policies
can have a significant effect on our reported results and may affect our
reporting of transactions completed before a change
is
announced. Changes to those rules or the questioning of current practices
may adversely affect our reported financial results
or the
way we conduct our business. For example, accounting policies affecting many
aspects of our business, including rules relating to
employee stock option grants, have recently been revised or are under review.
The Financial Accounting Standards Board and other
agencies
have finalized changes to GAAP required us, starting in our first quarter
of
2006, to record a charge to earnings for employee stock option grants and
other
equity incentives. We may have significant and ongoing accounting charges
resulting from option grant and other equity incentive expensing that could
reduce our overall net income. In addition, because we historically have
used
equity-related compensation as a component of our total employee compensation
program, the accounting change could make the
use of
equity-related compensation less attractive to us and therefore make it more
difficult to attract and retain employees.
18
We
currently rely on lighting representatives for a significant portion of our
decorative and special effects lighting systems sales and terms and conditions
of sales are subject to change with very little notice.
Most
of
our decorative and special effects lighting systems are sold through lighting
representatives, and we do not have long-term contracts with our distributors.
If these distributors significantly change their terms with us or change
their
historical pattern of ordering products from us, there could be a significant
adverse impact on our net sales and operating results.
Our
sales are dependent upon new construction levels and are subject to seasonal
and
general economic trends.
Construction
levels are affected by general economic conditions, real estate market, interest
rates and the weather. Sales of
commercial lighting products depend significantly upon the level of new building
construction and renovation. 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. 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 and the third quarters 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.
If
we are not able to timely and successfully develop, manufacture, market and
sell
our new products, our operating results will decline.
We
expect
to introduce new products each year in the pool and spa lighting market and
the
commercial lighting market. We depend on various components and raw materials
for use in the manufacturing of our products from sole and foreign suppliers.
We
may not be able to successfully manage price fluctuations due to market demand
or shortages. Significant increases in the costs or sustained
interruptions in our receipt of adequate amounts, of necessary components
and
raw materials could harm our margins, result
in
manufacturing halts, harm our reputation and relationship with our customers
and
negatively impact our results of operations. In addition, we could have
difficulties manufacturing these new products as a result of our inexperience
with them or the costs could be higher
than expected and delivery of these products may cause us to incur additional
unexpected research and development expenses.
Furthermore, in order to competitively price our products and achieve broader
market acceptance, we may need to redesign our manufacturing
process to produce our products in higher volume and at a reduced cost.
Furthermore, any delays in the introduction of
these
new products could result in lost sales, loss of customer confidence and
loss of
market share. 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
rely on the largest pool distributor in the United States for a significant
portion of our pool and spa lighting products sales.
We
sell a
significant portion of our pool and spa lighting products through SCP. SCP
accounted for approximately 10%, 11% and 11% of our net sales in 2004, 2005
and
2006, respectively. If SCP ceases to purchase or substantially decreases
its
volume of purchases, this could significantly reduce the availability of
our
products to end users, which could negatively impact our net sales and operating
results. Furthermore, because SCP is the largest distributor in the United
States, we may not be able to increase sales to our other distributors
sufficiently to offset the loss resulting from SCP’s reduction or cessation in
sales.
The
loss of a key sales representative could have a negative impact on our net
sales
and operating results.
We
rely
on key sales representatives and outside sales agents for a significant portion
of our sales. These sales representatives and outside sales agents have unique
relationships with our customers and would be difficult to replace. The loss
of
a key sales representative or outside sales agent could interfere with our
ability to maintain customer relationships and result in declines in our
net
sales and operating results. In addition, these sales representatives and
sales
agents carry multiple products lines, including those of our competitors.
Generally, a sales representative or sales agent will primarily sell products
from one well-established company and supplement these sales with products
from
smaller companies, such as Fiberstars. As a result, if we lost a key sales
representative or sales agent, we may have difficulty replacing the sales
representative or sales agent, if at all, which could negatively impact our
net
sales.
19
We
use plants in Mexico and India to manufacture and assemble many of our pool
and
spa products. The supply of these finished
goods may be impacted by local political or social conditions as well as
the
financial strength of the companies with which
we do business.
As
we
attempt to reduce manufacturing expenses, we are becoming increasingly dependent
upon offshore companies for the manufacturing and final assembly of many
of our
pool and spa products. To do so, we must advance certain raw materials,
inventory and production costs to these off-shore manufacturers. The supply
of
finished goods from these companies, and the raw materials, inventory and
funds
that we advance to them may be at risk depending upon the varying degrees
of
stability of the local political, economic and social environments in which
they
operate, and the financial strength of the manufacturing companies
themselves.
Because
we depend on a limited number of significant customers for our net sales,
the
loss of a significant customer, reduction in order size or the effects of
volume
discounts granted to significant customers from time to time could harm our
operating results.
Our
business is currently dependent on a limited number of significant customers,
and we anticipate that we will continue to rely on a limited number of
customers. For example, in 2006, SCP, our largest pool and spa customer,
accounted for approximately 11%
of
our net sales. We expect these customers to continue to represent a significant
portion of our net sales in the future. The loss of any
of
these significant customers would harm our net sales and operating results.
Customer purchase deferrals, cancellations, reduced
order
volumes or non-renewals from any particular customer could cause our quarterly
operating results to fluctuate or decline and harm our business. In addition,
volume discounts granted to significant customers from time to time could
lead
to reduced profit margins, and negatively impact our operating
results.
Our
components and products could have defects or design or compatibility issues,
any of which could be costly to correct and could
result in the rejection of our products and damage to our reputation, as
well as
lost sales, diverted development resources and increased warranty reserves
and
manufacturing costs.
In
the
past, we have experienced design defects and product failure. For example,
in
our EFO systems, we experienced defects related to the power supply in the
illuminator. In our pool and spa products, we experienced defects with our
circuit sequencing
color wheel. We cannot guarantee that we will not experience defects or
compatibility issues in components or products in
the
future. Errors or defects in our products may arise in the future, and, if
significant or perceived to be significant, could result in rejection of
our
products, product returns or recalls, damage to our reputation, lost revenue,
diverted development resources and increased customer service and support
costs
and warranty claims. Errors or defects in our products could also result
in
product liability claims. We estimate warranty and other returns and accrue
reserves for such costs at the time of sale. Any estimates, reserves or accruals
may be insufficient to cover sharp increases in product returns, and such
returns may harm our operating results. In addition,
customers may require design changes in our products in order to suit their
needs. Losses, delays or damage to our reputation
due to
design or defect issues would likely harm our business, financial condition
and
results of operations.
If
we are unable to predict market demand for our products and focus our
inventories and development efforts to meet market demand, we could lose
sales
opportunities and experience a decline in sales.
In
order
to arrange for the manufacture of sufficient quantities of products and avoid
excess inventory we need to accurately predict market demand for each of
our
products. Significant unanticipated fluctuations in demand could cause problems
in our operations. We may not be able to accurately predict market demand
in
order to properly allocate our manufacturing and distribution resources among
our products, especially with respect to the manufacturing of our large core
fiber, as we use one machine to manufacture this fiber. As a result, we may
experience declines in sales and lose, or fail to gain, market share.
Conversely, if we overbuild inventories we run the risk of having inventory
write-offs due to obsolescence.
We
depend on collaboration with third parties, who are not subject to material
contractual commitments, to augment our research and development
efforts.
Our
research and development efforts include collaboration with third parties.
Many
of these third parties are not bound by
any
material contractual commitment leaving them free to end their collaborative
efforts at will. Loss of these collaborative efforts could adversely affect
our
research and development efforts and could have a negative effect on our
competitive position in the market. In addition, arrangements for joint
development efforts may require us to make royalty payments on sales of
resultant products
or enter into licensing agreements for the technology developed, which could
increase our costs and negatively impact our
results
of operations.
20
The
demand for new construction is affected by general economic
conditions.
The
United States and international economies are cyclical and therefore difficult
to predict. A sustained economic recovery is uncertain. In particular, recent
increases in the cost of oil, increases in energy costs, terrorist acts and
similar events, continued turmoil
in the Middle East or war in general could contribute to a slowdown of the
market demand for products that require significant
initial
capital expenditures, including new residential and commercial buildings.
In
addition, increases in interest rates may increase financing costs to customers,
which in turn may decrease building rates and associated demand for our
products. If the economic recovery slows down as a result of the recent
economic, political and social turmoil, or if there are further terrorist
attacks in the United States or elsewhere, we may experience decreases in
the
demand for our products, which may harm our operating results.
We
are subject to global economic or political conditions, which may disrupt
the
general economy, reducing demand for our products.
We
have
significant international activities and customers, and plan to continue
these
efforts, which subject us to additional business risks, including logistical
complexity, political instability and the general economic conditions in
those
markets. Sales outside the United States accounted for approximately 33%
of our
net sales in 2004, 33% of our net sales in 2005 and 29% of our net sales
in
2006. Because the market for our products tends to be highly dependent upon
general economic conditions, a decline in general economic conditions would
likely harm our operating results.
Risks
we
face in conducting business internationally include:
·
multiple, conflicting and changing laws and regulations, export and import
restrictions, employment laws, regulatory requirements and other government
approvals, permits and licenses;
·
difficulties and costs in staffing and managing foreign operations such as
our
offices in Germany and the United Kingdom;
·
difficulties and costs in recruiting and retaining individuals skilled in
international business operations;
·
increased costs associated with maintaining international marketing
efforts;
·
potentially adverse tax consequences;
political and economic instability, including wars, acts of terrorism, political
unrest, boycotts, curtailments of trade and other business restrictions;
and
·
currency
fluctuations.
In
addition, in the Asia/Pacific region generally, we face risks associated
with a
recurrence of SARS, spreading of Asian bird flu, tensions between countries
in that region, such as political tensions between China and Taiwan, the
ongoing
discussions with North Korea regarding its
nuclear
weapons program, potentially reduced protection for intellectual property
rights, government-fixed foreign exchange rates, relatively
uncertain legal products and developing telecommunications infrastructures.
In
addition, some countries in this region, such
as
China, have adopted laws, regulations and policies which impose additional
restrictions on the ability of foreign companies to conduct business in that
country or otherwise place them at a competitive disadvantage in relation
to
domestic companies.
Item
2. Property
Our
principal executive offices and commercial lighting manufacturing and assembly
facilities are located in a 79,000 square foot facility in Solon, Ohio, under
a
lease agreement expiring in 2011. 10,000 square feet of this space is subleased
to another tenant through June 2008. We have other local sales offices in
the
United States in Pleasanton, California and New York and in Europe sales
and
operations offices in the United Kingdom in Thatcham, under lease. We also
own a
local office in Berching, Germany. We also have a contract manufacturing
facility near Tijuana, Mexico. We believe that our current facilities are
adequate to support our current and anticipated near-term operations and
that we
can obtain additional space we may need in the future at commercially reasonable
terms.
Item
3. Legal Proceedings
On
March
6, 2006, Ohms Electric, Inc. filed a complaint against Fiberstars, Inc. with
the
30th Judicial Circuit Court in the State of Michigan. The complaint requests
unspecified damages as a result of the Company’s product not working properly at
Neighborhood Cinema in Lansing, Michigan. The suit was resolved in December
2006.
We
may
also from time to time become involved in legal proceedings in the ordinary
course of business.
There
were no matters submitted to a vote of security holders during the quarter
ended
December 31, 2006.
Executive
Officers of the Registrant
Our
executive officers and their ages as of December 31, 2006, are as
follows:
21
|
Name
|
|
|
|
|
Age
|
|
|
Position
|
|
|
||
|
John
Davenport
|
|
|
61
|
|
|
Chief
Executive Officer and Director
|
||||||
|
Roger
Buelow
|
|
|
34
|
|
|
Vice
President, Engineering and Chief Technology Officer
|
||||||
|
Robert
A. Connors
|
|
|
58
|
|
|
Vice
President, Finance and Chief Financial Officer
|
||||||
|
Ted
des Enfants.
|
|
|
35
|
|
|
Vice
President and General Manager, Fiberstars EFO
|
||||||
|
Barry
R. Greenwald
|
|
|
60
|
|
|
President
and General Manager, Pool Division
|
||||||
|
Eric
Hilliard
|
39
|
Chief
Operational Officer
|
||||||||||
Mr. Davenport
was
appointed our Chief Executive Officer and a director in July 2005.
Mr. Davenport joined us in November 1999 as Vice President, Chief
Technology Officer and was appointed Chief Operating Officer in July 2003.
Prior to joining Fiberstars, Mr. Davenport served as President of Unison
Fiber Optic Lighting Systems, LLC, or Unison, from 1998 to 1999.
Mr. Davenport began his career at GE Lighting in 1972 as a research
physicist and thereafter served 25 years in various capacities including
GE
Lighting’s research and development manager and as development manager for high
performance LED projects. He is a recognized expert in light sources, lighting
systems and lighting applications, with special emphasis in low wattage
discharge lamps, electronic ballast technology and distributed lighting systems
using fiber optics.
Mr. Buelow was
appointed our Chief Technology Officer in July 2005. Mr. Buelow has
also served as our Vice President, Engineering since February 2003. Prior
to joining Fiberstars in 1999, he served as Director of Engineering for Unison
from 1998 to 1999. Prior to that he served four years as an engineer at GE
Lighting working on several fiber optic lighting projects. Mr. Buelow is a
Certified Quality Engineer with ten patents.
Mr. Connors
joined
the Company in July 1998 as Vice President, Finance, and Chief Financial
Officer. From 1984 to 1998, Mr. Connors held a variety of positions for
Micro Focus Group Plc, a software company with 1997 revenues of
$165 million, including Chief Financial Officer and Chief Operating
Officer. Prior to working for Micro Focus Group Plc, he held senior finance
positions with Eagle Computer and W. R. Grace.
Mr. des
Enfants joined
the Company in January 2005 as Vice President and General Manager,
Fiberstars EFO. From 1994 to 2003, Mr. des Enfants held a variety of
positions with the GE Lighting, most recently as District Sales Manager in
the
eastern region. From 1998 to 2001, he was National Account Manager with GE
Lighting and from 1994 to 1998 held various Sales and Sales Manager positions
at
GE Lighting.
Mr. Greenwald
joined
the Company in October 1989 as General Manager, Pool Division. He became
Vice President in September 1993, Senior Vice President in
February 1997 and President of the Pool Division in July 2005.
Prior to joining the Company, Mr. Greenwald served as National Sales
Manager at Aquamatic, a swimming pool accessory company, from August 1987
to October 1989. From May 1982 to August 1987, Mr. Greenwald
served as National Sales Manager at Jandy Inc., a swimming pool equipment
company.
Mr.
Hilliard joined
the Company in November 2006 as Chief Operational Officer. He
is an
operations and management professional with more that 12 years of experience
in
manufacturing operations. Prior to joining the Company, Mr. Hilliard was
a
Business Manager of Saint Gobain, flight structures business from 2002 to
2006.
Additionally he served 7 years with the Goodrich Aerospace Company in operations
as well as internationally with HJ Heinz Company.
22
PART II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Our
common stock trades on the Nasdaq National Market under the symbol FBST.
The
following table sets forth the high and low sales prices for our common stock,
from its consolidated transaction reporting system.
|
|
|
High
|
|
Low
|
|
|
First
quarter 2005
|
|
10.12
|
|
7.28
|
|
|
Second
quarter 2005
|
|
12.50
|
|
8.28
|
|
|
Third
quarter 2005
|
|
15.50
|
|
9.75
|
|
|
Fourth
quarter 2005
|
|
10.80
|
|
8.00
|
|
|
First
quarter 2006
|
|
9.33
|
|
7.61
|
|
|
Second
quarter 2006
|
|
9.09
|
|
6.91
|
|
|
Third
quarter 2006
|
|
8.85
|
|
6.75
|
|
|
Fourth
quarter 2006
|
|
7.95
|
5.42
|
|
There
were approximately 300 holders of record of our common stock as of
March 14, 2007, and we estimate that at that date there were approximately
800 additional beneficial owners.
We
have
not declared or paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth certain information regarding our equity compensation
plans as of December 31, 2006:
|
Plan category
|
|
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
|
|
|||||||
|
Equity
compensation plans approved by security holders
|
|
|
1,293,000
|
|
|
|
$
|
7.00
|
|
|
|
245,000
|
(1)(2)
|
|
||
|
Equity
compensation plans not approved by security holders
|
|
|
8,000
|
|
|
|
$
|
4.50
|
|
|
|
—
|
|
|
||
|
Total
|
|
|
1,301,000
|
(3)
|
|
|
$
|
6.98
|
|
|
|
245,000
|
|
|
||
______________
(1)
Includes the number of shares reserved for issuance under our 2004 Stock
Incentive Plan.
(2)
Includes 55,000 shares available for sale pursuant to our 1994 Employee Stock
Purchase Plan. Shares of common stock will be purchased at a price equal
to 85%
of the fair market value per share of common stock on either the first day
preceding the offering period or the last date of the offering period, whichever
is less.
(3)
Includes 8,000 warrants held by employees or directors.
Item
6. Selected Financial Data
The
Selected Operations and Balance Sheet Data set forth below have been derived
from our Consolidated Financial Statements. It should be read in conjunction
with the information appearing under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included in
Item 7 of this Report and the Consolidated Financial Statements and related
notes found in Item 15 of this Report.
23
SELECTED
CONSOLIDATED FINANCIAL DATA
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
|
YEARSENDEDDECEMBER31,
|
2006
|
|
2005
|
|
2004
|
|
2003
|
2002
|
||||||||
|
OPERATING
SUMMARY
|
||||||||||||||||
|
Net
sales
|
$
|
27,036
|
$
|
28,337
|
$
|
29,731
|
$
|
27,238
|
$
|
30,960
|
||||||
|
Gross
profit
|
7,785
|
10,626
|
11,511
|
10,341
|
11,474
|
|||||||||||
|
As
a percent of net sales
|
28.8
|
%
|
37.5
|
%
|
38.7
|
%
|
38.0
|
%
|
37.1
|
%
|
||||||
|
Research
and development expenses
|
2,341
|
2,190
|
1,188
|
1,279
|
2,290
|
|||||||||||
|
As
a percent of net sales
|
8.7
|
%
|
7.7
|
%
|
4.0
|
%
|
4.7
|
%
|
7.4
|
%
|
||||||
|
Sales
and marketing expenses
|
9,774
|
9,595
|
8,595
|
7,188
|
7,907
|
|||||||||||
|
As
a percent of net sales
|
36.2
|
%
|
33.9
|
%
|
28.9
|
%
|
26.4
|
%
|
25.5
|
%
|
||||||
|
General
and administrative expenses
|
4,956
|
3,135
|
2,459
|
2,435
|
2,709
|
|||||||||||
|
As
a percent of net sales
|
18.3
|
%
|
11.1
|
%
|
8.3
|
%
|
8.9
|
%
|
8.8
|
%
|
||||||
|
Restructure
expense
|
734
|
3,120
|
—
|
—
|
—
|
|||||||||||
|
As
a percent of net sales
|
2.7
|
%
|
11.0
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
||||||
|
Loss
before tax
|
(9,537
|
)
|
(7,314
|
)
|
(762
|
)
|
(594
|
)
|
(1,441
|
)
|
||||||
|
As
a percent of net sales
|
(35.3
|
)%
|
(25.8
|
)%
|
(2.6
|
)%
|
(2.2
|
)%
|
(4.7
|
)%
|
||||||
|
Net
loss
|
(9,650
|
)
|
(7,423
|
)
|
(704
|
)
|
(608
|
)
|
(3,519
|
)
|
||||||
|
As
a percent of net sales
|
(35.7
|
)%
|
(26.2
|
)%
|
(2.4
|
)%
|
(2.2
|
)%
|
(11.4
|
)%
|
||||||
|
Net
loss per share
|
||||||||||||||||
|
Basic
|
$
|
(0.85
|
)
|
$
|
(0.90
|
)
|
$
|
(0.10
|
)
|
$
|
(0.10
|
)
|
$
|
(0.70
|
)
|
|
|
Diluted
|
$
|
(0.85
|
)
|
$
|
(0.90
|
)
|
$
|
(0.10
|
)
|
$
|
(0.10
|
)
|
$
|
(0.70
|
)
|
|
|
Shares
used in per share calculation:
|
||||||||||||||||
|
Basic
|
11,385
|
8,223
|
7,269
|
5,993
|
5,028
|
|||||||||||
|
Diluted
|
11,385
|
8,223
|
7,269
|
5,993
|
5,028
|
|||||||||||
|
FINANCIAL
POSITION SUMMARY
|
||||||||||||||||
|
Total
assets
|
$
|
40,592
|
$
|
46,209
|
$
|
27,018
|
$
|
24,119
|
$
|
20,101
|
||||||
|
Cash,
cash equivalents and short-term investments
|
15,968
|
23,578
|
3,609
|
4,254
|
231
|
|||||||||||
|
Working
capital
|
22,410
|
31,530
|
14,541
|
12,449
|
7,417
|
|||||||||||
|
Credit
line borrowings
|
1,124
|
47
|
----
|
-----
|
-----
|
|||||||||||
|
Current
portion of long-term borrowings
|
778
|
342
|
38
|
30
|
593
|
|||||||||||
|
Long-term
borrowings
|
1,862
|
1,089
|
484
|
521
|
449
|
|||||||||||
|
Shareholders’
equity
|
30,880
|
38,184
|
21,202
|
18,950
|
14,240
|
|||||||||||
|
Common
shares outstanding
|
11,394
|
11,270
|
7,351
|
6,317
|
4,667
|
|||||||||||
24
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion of our financial condition and results of operations
should
be read together with the consolidated financial statements and the related
notes incorporated by reference in this Annual Report on Form 10-K or
referred to herein. This discussion contains, in addition to historical
information, forward- looking statements that involve risks and uncertainties.
Our actual results could differ materially from the results discussed in
the
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below as well
as
those discussed under “Risk Factors,” “Special Note Regarding Forward-Looking
Statements” and elsewhere in this Report. We disclaim any obligation to update
information contained in any forward-looking statement.
Overview
Fiberstars
designs, develops, manufactures and markets fiber optic lighting systems
for
wide-ranging uses in both the general commercial and the pool and spa lighting
markets. Our EFO system introduced in 2004, offers greater energy savings,
heat
dissipation and maintenance cost benefits over conventional lighting for
multiple applications. Accordingly, we believe our EFO system will become
a
leading technology in accent lighting and numerous niche lighting
markets.
Net
Sales
In
2006,
2005 and 2004, products generated net sales of $27.0 million, $28.3 million,
and
$29.7 million. Of these net sales, in 2006, 2005 and 2004, sales of our EFO
systems generated net sales of $4.0 million, $1.5 million and $0.6 million,
respectively, and sales of our traditional commercial lighting systems generated
net sales of $9.6 million, $12.0 million and $12.2 million, respectively.
In
addition, in 2006, 2005 and 2004, we generated net sales of $13.4 million,
$14.8
million and $16.9 million from sales of our pool and spa lighting
products.
We
sell
our general commercial lighting systems through direct sales personnel and
independent lighting representatives. Specifically, we target large accounts
and
regional lighting representatives who in turn target specific lighting projects
in local markets. We also intend to work with architects, lighting designers,
contractors, utilities and other entities that recommend or install lighting
systems to build awareness for our EFO systems. For example, we have an
agreement with Gensler, an architecture, design and planning firm, under
which
Gensler assists us in designing our EFO systems in the markets in which they
do
business. We sell our traditional commercial lighting products through our
national account sales personnel as well as independent lighting
representatives. We also sell both our EFO and traditional commercial lighting
products in Europe, Russia and the Middle East through our two subsidiaries
who
manage our sales operations in those regions. For our pool and spa lighting
products, we utilize regional sales representatives that specialize in selling
swimming pool systems to pool builders and pool product
distributors.
Our
target markets and end customers for our commercial lighting products include
national supermarket chains, specialty retail stores, restaurants and hotels
and
other commercial entities seeking down lighting and accent lighting solutions.
The target customers for our pool and spa lighting markets are pool builders
and
pool product distributors who in turn sell our products into the residential
market.
We
sell
the majority of our commercial lighting systems and pool lighting products
in
the United States, Canada and Australia. Sales in the United States accounted
for approximately 69% of our net sales in 2006, 67% in 2005 and 67% in
2004.
Cost
of Sales
Cost
of
sales consists primarily of costs associated with the manufacture of our
products, including personnel and occupancy costs associated with manufacturing
support and quality assurance.
Research
and Development
Research
and development expense consists primarily of salaries, bonuses and benefits
for
engineering personnel, depreciation of equipment, costs of third party
subcontractors and consultants and costs associated with various projects,
including testing, developing prototypes and URL related expenses. Funds
received under government contracts are recorded as a credit to research
and
development expense.
Sales
and Marketing
Sales
and
marketing expense consists primarily of salaries, bonuses, benefits and related
costs for sales and marketing personnel, sales commissions, and costs associated
with trade shows, literature and participation at industry
conferences.
General
and Administrative
General
and administrative expense consists primarily of salaries, bonuses, insurance,
bank charges, benefits and related costs for finance and administrative
personnel and for outside service expenses, including legal, accounting and
investor relations. In 2006, general and administrative expenses included
costs
of compliance with Section 404 of the Sarbanes Oxley Act of 2002 relating
to
evaluation of, and reporting of, internal financial controls. These expenses
were approximately $0.5 million for 2006 in external consulting.
25
Restructuring
In
June 2005 we announced a restructuring which called for moving our
headquarters and base of operations from Fremont, California to Solon, Ohio.
We
indicated at that time that the cost of the restructure would be approximately
$3,500,000 and would result in approximately $2,000,000 in savings. A
liability of $1,220,000 was accrued at December 31, 2005. In 2006, we paid
$1,954,000 and expensed an additional $734,000. There is no accrued
liability for restructuring at December 31, 2006.
Seasonality
Sales
of
our products follow a seasonal pattern which typically results in higher
sales
in the second and fourth quarters as pool distributors stock shelves for
the
spring and summer seasons. First quarter sales for our products tend be lower
in
any given year. Consistent with industry practice, we provide extended terms
to
distributors for shipments in the fourth quarter of a given year whereby
they
receive products in November and December for which they pay in equal
installments from April through June of the following
year.
Critical
Accounting Policies and Estimates
The
preparation of financial statements requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingencies and the reported amounts of revenue and expenses
in
the financial statements. Material differences may result in the amount and
timing of revenue and expenses if different judgments or different estimates
were utilized. Critical accounting policies, judgments and estimates which
we
believe have the most significant impact on our financial statements are
set
forth below:
·
Revenue
recognition;
·
Allowances for doubtful accounts, returns and discounts;
·
Valuation of inventories; and
·
Accounting for income taxes.
·
Stock-Based
Compensation
Revenue
Recognition
The
Company recognizes revenue when all of the following occur: (1) we have
received a purchase order from the customer or completed of a sales agreement
with the customer; (2) shipment of the product has occurred or services
have been provided; and (3) the sales price is fixed or determinable and
collectibility is reasonably assured. Revenue from product sales is generally
recognized upon shipment, and allowances are provided for estimated returns,
discounts and warranties. Such allowances are adjusted periodically to reflect
actual and anticipated returns, discounts and warranty expenses. Revenue
from
product sales that include an installation or other service obligation on
the
part of the Company are recognized upon the shipment of the product and
completion of the Company’s installation or service obligation. Revenue on sales
that include services such as design, integration and installation is generally
recognized using the percentage-of-completion method. Under the
percentage-of-completion method, revenue recognized reflects the portion
of the
anticipated contract revenue that has been earned, equal to the ratio of
labor
costs expended to date to anticipated final labor costs, based on current
estimates of labor costs to complete the project. Our products are generally
subject to warranties, and we provide for the estimated future costs of repair,
replacement or customer accommodation in costs of sales. Fees for research
and
development services are determined on a cost-plus basis and are recognized
as
revenue when ownership of the completed work-product passes to the
customer.
We
recognize shipments to pool lighting distributors as revenue upon shipment.
Estimated sales returns are recorded upon recognition of revenues from
distributors having rights of return, including exchange rights for unsold
products. Historically, returns have been minimal. Shipments made to commercial
lighting representatives and distributors are also recognized as revenue
upon
shipment because in these instances the representative or distributor is
acting
as a pass-through agent to a specific lighting project for which we have
an
existing contract or purchase order.
Revenue
recognition in each period is dependent on our application of these accounting
policies. Our application of percentage-of-completion accounting is subject
to
our estimates of labor costs to complete each project. In the event that
actual
results differ from these estimates or we adjust these estimates in future
periods, our operating results for a particular period could be materially
affected.
Allowances
for Doubtful Accounts, Returns and Discounts
We
establish allowances for doubtful accounts, returns and discounts for
specifically identified doubtful accounts, returns and discounts based on
credit
profiles of our customers, current economic trends, contractual terms and
conditions and historical payment, return and discount experience. For each
year
ended December 31, the allowance for doubtful accounts, returns and
discounts was $0.9 million for 2006, $1.4 million for 2005 and $1.2 million
for
2004. The amount charged to allowances for doubtful accounts and discounts
was
$0.8 million in 2006, $1.2 in 2005 and $0.9 million in 2004. The amount charged
to expenses for doubtful accounts was $151,000 in 2006, $76,000 in 2005 and
$47,000 in 2004. In the event that actual returns, discounts and bad debts
differ from these estimates or we adjust these estimates in future periods,
our
operating results and financial position could be materially
affected.
26
Valuation
of Inventories
We
state
inventories at the lower of standard cost (which approximates actual cost
determined using the first-in-first-out method) or market. We establish
provisions for excess and obsolete inventories after evaluation of historical
sales, current economic trends, forecasted sales, product lifecycles and
current
inventory levels. During 2006, 2005 and 2004 we charged $868,000, $196,000
and
$116,000 to cost of sales for excess and obsolete inventories. Adjustments
to
our estimates, such as forecasted sales and expected product lifecycles,
could
harm our operating results and financial position.
Accounting
for Income Taxes
As
part
of the process of preparing our consolidated financial statements, we are
required to estimate our income tax liability in each of the jurisdictions
in
which we do business. This process involves estimating our actual current
tax
expense together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenues, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in our consolidated balance sheet. We must then assess the likelihood
that these deferred tax assets will be recovered from future taxable income
and,
to the extent we believe that recovery is not more likely than not or is
unknown, we must establish a valuation allowance.
Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our deferred tax assets. At December 31, 2006, we have recorded a
full valuation allowance against our deferred tax assets in the United States
and Germany, due to uncertainties related to our ability to utilize our deferred
tax assets, primarily consisting of certain net operating losses carried
forward. The valuation allowance is based on our estimates of taxable income
by
jurisdiction and the period over which our deferred tax assets will be
recoverable.
Stock-Based
Compensation
We
measure all employee stock-based awards as an expense based on the grant-date
fair value of these awards. Effective January 1, 2006, we began to recognize
expense for all stock-based awards granted on or after that date and for
all
previous unvested awards using the modified prospective method. The fair
value
of options is estimated using the Black-Scholes option pricing model. Weighted
average assumption used in the model include the expected life of the options,
volatility, and risk-free interest rates.
Results
of Operations
Net
Sales
Our
net
sales decreased 5% to $27,036,000 in 2006 compared to $28,337,000 in 2005
and
$29,731,000 in 2004. The 2006 decrease was a result of lower sales of pool
products of 9% or $1,390,000 and traditional lighting products of 20% or
$2,386,000 which was partially offset by increased sales of EFO products
of 162%
or $2,473,000. This decrease in pool lighting sales was primarily due to
a
$2,868,000 decrease in sales from our in-ground and Jazz lighting products
partially offset by sales of $1,478,000 of new control and LED products.
The
decrease in traditional commercial lighting sales was due to lower sales
in the
U.S. and Germany. We expect net sales to increase in 2007 due to an anticipated
increase in demand for Fiberstars EFO systems in commercial lighting markets
and
partially offset by an expected continued decline in demand of our traditional
fiber optic products and pool products. The market for our products is highly
dependent upon general economic conditions.
Our
net
sales decreased 5% to $28,337,000 in 2005 compared to $29,731,000 in 2004.
The
2005 decrease was a result of lower sales of pool products of 13% or $2,134,000
which was partially offset by increased sales of commercial lighting products
of
5% or $698,000. This decrease in pool lighting sales was primarily due to
a
$2,414,000 decrease in sales from our spa lighting products. The increase
in
commercial lighting sales was due to $945,000 in increased sales of EFO products
partially offset by a decline in traditional fiber optic sales from our core
legacy commercial lighting products of $247,000.
International
sales accounted for approximately 31% of net sales in 2006 as compared to
33% of
net sales in 2005 and 2004.
Gross
Profit
We
had
gross profit of $7,785,000 in 2006, a decrease of 27% compared to $10,626,000
in
2005. Gross profit as a percent of sales decreased to 29% in 2006 compared
to
38% in 2005. This decrease was primarily due to lower gross profit margins
from
commercial lighting sales (16 percentage points) combined with a smaller
decrease in pool lighting margins (2 percentage points). Commercial lighting
gross profit margins declined due to increased sales from EFO products which
are
selling at a lower margin than traditional fiber optic products. We expect
gross
profit margins to improve due to improved gross profit margins on EFO sales
in
2007. Gross profit margins are also dependent upon general economic
conditions.
Gross
profit of $10,626,000 in 2005 decreased 8% compared to $11,511,000 in 2004.
Gross profit as a percent of sales decreased to 38% in 2005 compared to 39%
in
2004. This decrease was primarily due to lower gross profit margins from
commercial lighting sales (5 percentage points) combined with a smaller decrease
in pool lighting margins (2 percentage points). Commercial lighting gross
profit
margins declined due to increased sales from EFO products which are selling
at a
lower margin than traditional fiber optic products.
27
Operating
Expenses
Research
and development expenses were $2,341,000, a 7% increase from research and
development expenses of $2,190,000 in 2005. Although we increased spending
in
research and development expense on personnel and project costs related to
government contract work and on improvements for existing products, this
spending continued to be offset by expense credits for funds received in
2006
under certain Department of Energy, or DOE, contracts and under Defense Advanced
Research Projects Agency, or DARPA, research and development contracts awarded
in February and April of 2004, and SBIR awards. The gross research and
development spending along with credits from government contracts is shown
in
the following table:
|
|
|
Year ended December 31,
|
|
|||||||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
(in thousands)
|
|
|||||||
|
Gross
expenses for research and development
|
|
$
|
3,556
|
|
$
|
4,485
|
|
$
|
3,670
|
|
|
Deduct:
credits from DARPA & DOE contracts
|
|
(1,215
|
)
|
(2,295
|
)
|
(2,482
|
)
|
|||
|
Net
research and development expense
|
|
$
|
2,341
|
|
$
|
2,190
|
|
$
|
1,188
|
|
Funds
received from DOE and DARPA for milestones achieved during the fiscal year
are
recorded as a credit to research and development expense. Net of payments
to
subcontractors, this amounted to $1,215,000 in 2006 compared to $2,295,000
in
2005. This decrease in DOE and DARPA credits was a result of lower DARPA
credits
in the year as a result the completion of the AMCOM contract and associated
credits in 2005. These lower credits were partially offset by an increase
in
credits from DOE. Gross expenses for research and development decreased by
$929,000, due to the re-allocation of some R&D staff to building milestone
deliverables under the Navy ship install contract and their associated costs
being included in cost of sales in 2006 whereas there were no such re-classed
expenses in 2005. Research and development expenses were 8.7% of sales in
2006
compared to 7.7% of sales in 2005. We expect research and development expenses
to remain approximately flat in 2007 due to a comparable level of anticipated
DARPA and DOE credits as those incurred in 2006.
Research
and development expenses were $2,190,000 in 2005, an 84% increase from research
and development expenses of $1,188,000 in 2004. Although we increased spending
in research and development expense on personnel and project costs related
to
government contract work and on improvements for existing products, this
spending was offset by the increase in expense credits for funds received
in
2004 under certain DOE contracts and under DARPA research and development
contracts awarded in February and April of 2003. Funds received from
DOE and DARPA for milestones achieved during the fiscal year are recorded
as a
credit to research and development expense. Net of payments to subcontractors,
this amounted to $2,482,000 in 2004. Research and development expenses were
8.0%
of sales in 2005 compared to 4.0% of sales in 2004.
Sales
and
marketing expenses were $9,774,000 in 2006, a 2% increase compared to the
$9,595,000 in sales and marketing expenses for 2005. This increase was due
in
part to an increase of $734,000 in EFO sales and marketing offset by lower
commissions ($443,000) and lower Pool sales and marketing ($120,000) in
2006. Sales and marketing expenses were 36% of sales in 2006 and 34% of
sales in 2005. The Company expects sales and marketing expenses to increase
in
absolute dollars in 2007 compared to 2006.
Sales
and
marketing expenses were $9,595,000 in 2005, a 12% increase compared to the
$8,595,000 in sales and marketing expenses for 2004. This
increase was due in part to an increase of $730,000 in 2005 largely from
higher
pool and spa sales and marketing as a result of settling the Pentair lawsuit
and
additional selling costs with SCP. The balance of the increase is due to
higher
spending on EFO sales and marketing in the United States and Europe.
Sales
and marketing expenses were 34% of sales in 2004 and 29% of sales in
2004.
General
and administrative expenses were $4,956,000 in 2006, a $1,821,000 increase
as
compared to $3,135,000 in 2005. General and administrative expenses were
18% of
sales in 2006 and 11% of sales in 2005 and 8% of sales in 2004. The
increase was primarily due to higher costs associated with complying with
the
Sarbanes Oxley Act of 2002, option expenses associated with implementing
FAS
123r, accounting fees, investor relations costs and legal fees. We became
an
accelerated filer with the SEC due to our market capitalization as of
June 30, 2006. As a result we were required to comply with Section 404
of the Sarbanes-Oxley Act of 2002 beginning with our fiscal year ending
December 31, 2006. Our outside costs to comply with Section 404 were
approximately $500,000, independent of additional audit fees. The Company
expects general and administrative expenses to decrease in 2007 due to lower
Section 404 costs.
General
and administrative expenses were $3,135,000 in 2005, a $676,000 increase
as
compared to $2,459,000 in 2004. General and administrative expenses were
11% of
sales in 2005 and 8% of sales in 2004.
In
June 2005 we announced a restructuring which called for moving our
headquarters and base of operations from Fremont, California to Solon, Ohio.
We
indicated at that time that the cost of the restructure would be approximately
$3,500,000 and would result in approximately $2,000,000 in savings. In 2005
we
spent approximately $3,100,000 on restructuring expenses. Additional
restructuring costs were necessary in 2006 beyond what was originally estimated
in order to further consolidate distribution operations into our Mexican
production site. In 2006 we spent approximately $700,000 on restructuring
expenses. Restructuring was nearly complete as of year end 2006 and we continue
to expect to realize between $1,500,000 and $2,000,000 in cost savings on
an
annual basis. These savings are being offset by expense increases as a result
of
building capacity and increasing expenses for development, sales and marketing
of new products, primarily EFO, and also new lighting products.
28
Other
Income and Expenses
We
had
interest income of $760,000 and interest expense of $277,000 in 2006. Interest
income consists of interest earned on deposits and marketable securities
in
2006, most of which was earned after receiving funds from the follow-on stock
offering closed in November 2005. Interest expense is for bank interest on
equipment loans and on a building loan in Germany for our corporate offices
there. Our interest expense, was $39,000 in 2005 as compared to $17,000 in
2004.
We
have
certain long-term leases. Payments due under these leases are disclosed below
in
Item 7 and in the Consolidated Financial Statements and related Notes included
elsewhere in this Report.
Income
Taxes
We
have a
full valuation allowance against our deferred tax assets in the United States
and Germany. There was no operating statement tax expense or benefit for
our
German operations in 2006 as any expected benefit was offset by an increase
in
our valuation allowance. We had a tax expense of $75,000 in the U.S. resulting
from a tax liability associated with the tax treatment for goodwill. In addition
we had a $38,000 tax expense shown for 2006 is a result of tax expense for
our
United Kingdom operations which experienced a profit in 2006.
Net
Income (Loss)
Due
to
the decrease in sales in 2006 combined with a decrease in gross profit as
a
result of the lower sales and gross profit margins, the amount of loss before
income taxes was $9,537,000, an increase from the loss before taxes of
$7,314,000 in 2005. After including taxes from international operations and
the United States tax expense relating to goodwill, the loss was $9,650,000,
an
increase in the loss over the $7,423,000 loss in 2005. This compares to a
2004
loss of $704,000.
Liquidity
and Capital Resources
Cash
and Cash Equivalents
At
December 31, 2006, our cash and cash equivalents were $3,705,000 as
compared to $5,554,000 at December 31, 2005. We had $1,862,000 in long-term
borrowings and $1,902,000 in short-term borrowings as of December 31, 2006
and $1,089,000 in long-term borrowings and $389,000 in short-term borrowings as
of December 31, 2005. We also had $12,263,000 in short-term securities at
December 31, 2006 and $18,024,000 in short-term securities at
December 31, 2005.
Operating
Activities
Net
cash
used by operating activities primarily consists of net loss adjusted by non-cash
items, including depreciation, amortization, stock-based compensation, and
the
effect of changes in working capital. Cash decreased during 2006 by a net
loss
of $9,650,000 compared to net losses of $7,423,000 and $704,000
for
2005 and
2004, respectively. After adjustments for depreciation and amortization and
non-cash stock-based compensation charge, net cash used by operating activities
was $7,335,000 in 2006 as compared to net cash used by operating activities
of
$5,933,000 for 2005.
There
were several changes in working capital in 2006. Cash decreased by $2,457,000
due to a reduction in accruals largely due to paying off restructuring expenses
accrued in 2005 and increased by $1,510,000 and $558,000 due to increases
in
accounts payables and a reduction in prepaids, respectively.
After
adjustments for all non-cash items, including cash used for working capital,
net
cash used in operating activities was $7,184,000 in 2006 compared to $3,472,000
used in operating activities in 2005 and $2,469,000 used in operating activities
in 2004.
Cash
Provided by Investing Activities
There
was
a net contribution of cash of $2,058,000 in investing activities largely
from
the sales of short-term investments $5,761,000 partially offset by the
acquisition of fixed assets $3,703,000. This compares to a net utilization
of
cash of $19,921,000 in investing activities in 2005 primarily due to the
investments made in short-term securities and the acquisition of fixed assets.
This compares to $724,000 spent on fixed asset acquisitions in 2004.
Cash
Provided by Financing Activities
There
was
a net contribution to cash from financing activities of $2,908,000 in 2006
compared to net contributions of $25,749,000 and $2,511,000 in 2005 and 2004,
respectively. This net contribution was primarily due to our receipt of
$2,686,000 in proceeds from bank borrowings net of repayments of $491,000,
of
which $1,609,000 of the proceeds was used was to finance the purchase of
manufacturing equipment.
29
As
a
result of the cash used in operating activities and the cash provided by
financing and investing activities, there was a net decrease in cash in 2006
of
$1,849,000 that resulted in an ending cash balance of $3,705,000. This compares
to a net increase in cash of $1,945,000 in 2005 resulting in an ending cash
balance of $5,554,000 for 2005.
We
have a
bank line of credit agreement with Silicon Valley Bank effective August 15,
2005. It was further amended September 25, 2006 and extended through August
15,
2007. This credit facility is for $5,000,000 and is secured by our assets
and
intellectual property. At December 31, 2006 the interest rate was 8.75%.
The
interest rate was 7.75% at December 31, 2005. The rate is the same for both
the term-loan and line of credit in both years. It has a minimum tangible
net worth covenant which we must meet going forward. On December 31, 2005
this agreement was amended and restated to include an additional $3,000,000
term-loan line of credit for equipment purchases. This agreement calls for
repayment of principle in equal amounts over 4 years from the date of purchase
of the equipment and has an interest rate of prime plus 0.5% if the quick
ratio
is greater than 1.5, and prime plus 1.5% if the quick ratio is at or below
1.5.
Borrowings under the Silicon Valley Agreement are collateralized by our assets
and intellectual property. Specific borrowings under the revolver are tied
to
accounts receivable and inventory balances, and we are required to comply
with
certain covenants with respect to effective net worth and financial ratios,
which we met as of December 31, 2006. The Company had borrowings of $1.0
million under the revolving line of credit at December 31, 2006, and no
borrowings at December 31, 2005. We had total borrowings of $2,261,000 under
the
term-loan portion of the agreement as of December 31, 2006, and had
$1,092,000 in borrowings under this portion as of December 31, 2005. We pay
an unused line fee of 0.25% against any unused daily balance during the
year.
Through
our U.K. subsidiary, we maintain a bank overdraft facility of $490,000 (in
UK
pounds sterling, based on the exchange rate at December 31, 2006) under an
agreement with Lloyds Bank Plc. There were no borrowings against this facility
as of December 31, 2006 and 2005, respectively. The facility is renewed
annually on January 1. The interest rate was 7.25% at December 31,
2006 and 6.75% at December 31, 2005.
Through
our German subsidiary, we maintain a credit facility under an agreement with
Sparkasse Neumarkt Bank. This credit facility is in place to finance our
building of new offices in Berching, Germany which is owned and occupied
by our
German subsidiary. As of December 31, 2006, we had borrowings of $379,000
(in Euros, based on the exchange rate at December 31, 2006) against this
credit facility, all of which comes due between 2007 and 2008. At December
31, 2005, the Company had borrowings of $331,000 (in Euros based on
the exchange rate at December 31, 2005). The interest rate was 5.35% at
December 31, 2006 and 2005. In addition, our German subsidiary has a
revolving line of credit for $198,000 (in Euros, based on the exchange rate
at
December 31, 2006) with Sparkasse Neumarkt Bank. As of December 31,
2006, there were borrowings of $124,000 against this facility and borrowings
of
$47,000 against this facility at December 31, 2005. The revolving facility
is renewed annually on January 1. Interest rates on this line of credit
were 9.75% at December 31, 2006 and 8.75% at December 31, 2005.
On
November 8, 2005 the Company closed a follow-on offering, selling 2,500,000
new shares of Common Stock at a price of $8.25. The purchase price of the
Common
Stock was set at $8.25 per share on November 2, 2005, which was
approximately a 5% discount on the closing price on that day. On
November 11, 2005 the Company announced that the underwriters had exercised
their option to sell an additional 452,497 shares of Common Stock for $8.25
as
part of the offering. The gross amount raised was $24.4 million from the
selling
of 2,952,497 new shares, before costs and expenses. The net amount received
by
the company after deducting 6% in underwriter’s fees and legal, accounting and
other costs was $22.2 million.
We
believe that our existing cash balances, funds received from the financing
described above and funds available to us through our bank lines of credit
together with funds that we anticipate generating from our operations, will
be
sufficient to finance our currently anticipated working capital requirements
and
capital expenditure requirements for at least the next 12 to 18 months. However,
a sudden increase in product demand requiring a significant increase in
manufacturing capability, or unforeseen adverse competitive, economic or
other
factors may impact our cash position, and thereby affect operations. From
time
to time we may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. There can be no
assurance that such funding, if needed, will be available on terms acceptable
to
us, or at all. Furthermore, any additional equity financing may be dilutive
to
shareholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds,
may
require that we relinquish rights to certain of our technologies or products.
Failure to generate sufficient revenues or to raise capital when needed could
have an adverse impact on our business, operating results and financial
condition, as well as our ability to achieve intended business
objectives.
30
Contractual
Obligations
The
following summarizes our contractual obligations as of December 31, 2006,
consisting of current and future payments for borrowings by our German
subsidiary, borrowings under an equipment term loan in the United States
and
minimum lease payments under operating leases and the effect these obligations
are expected to have on our liquidity and cash flow in future
periods.
|
|
|
Borrowings
By German
Subsidiary
|
|
Borrowings
Under
Equipment
Term Loan
|
|
Non-
Cancelable
Operating
Leases
|
|
|||||||||
|
2007
|
|
|
$
|
47
|
|
|
|
$
|
731
|
|
|
|
$
|
980
|
|
|
|
2008
|
|
|
332
|
|
|
|
676
|
|
|
|
788
|
|
|
|||
|
2009
|
|
|
|
|
|
676
|
|
|
|
772
|
|
|
||||
|
2010
|
|
|
—
|
|
|
|
178
|
|
|
|
730
|
|
|
|||
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
222
|
|
|
|||
|
|
|
|
$
|
379
|
|
|
|
$
|
2,261
|
|
|
|
$
|
3,492
|
|
|
The
Company also has $1,000,000 for credit line borrowings in the United States
and $124,000 for Germany recorded as a current liability at December 31,
2006.
Off-Balance
Sheet Arrangements
We
had no
off-balance sheet arrangements as of December 31, 2006 or
2005.
Recently
Issued Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (revised 2004) or SFAS
123R, “Share-Based Payments.” SFAS 123R requires all
entities
to recognize compensation expense in an amount equal to the fair value of
share-based payments, such as stock options granted
to employees. The Company has applied SFAS 123R using the modified prospective
method. Under this method, the Company
is
required to record compensation expense (as previous awards continue to vest)
for the unvested portion of previously granted awards that remain outstanding
at
the date of adoption. The Company could have elected to adopt SFAS 123R by
restating previously issued financial statements, basing the amounts on the
expense previously calculated and reported in the pro forma disclosures that
had
been required by SFAS 123. SFAS 123R was first effective for the Company
for its
year ending December 31, 2006. In March 2005, the SEC released Staff
Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which
provides interpretive guidance related to the interaction between SFAS
123(R) and certain SEC rules and regulations. It also provides the SEC
staff’s views regarding valuation of share based payment arrangements. The
application of SFAS 123R with SAB 107 had the effect of increasing stock-based
compensation expense and reducing earnings by $1,118,000 in 2006 or 10 cents
per
share. The fair value of compensation expense has been calculated using the
Black-Scholes pricing model. The amount of total unearned compensation at
December 31, 2006 is $1,959,000. The remaining weighted average life is
approximately 2 years.
In
July,
2006, the FASB issued FASB interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN48”), an interpretation of FASB statement No. 109,
“Accounting for Income Taxes”, regarding accounting for income tax uncertainties
effective for fiscal years beginning after December 15, 2006. FIN 48 will
apply
to all tax positions related to income taxes subject to SFAS 109 on Accounting
for Income Taxes. The adoption of the provisions of FIN 48 did not
have a material impact on our financial position.
In
September 2006, the Securities and Exchange Commission published Staff
Accounting Bulletin (“SAB”) No. 108 (Topic 1N), Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 requires registrants to quantify misstatements using
both the balance sheet and income statement approaches, with adjustment required
if either method results in a material error. The provisions of SAB No. 108
are
effective for annual financial statements for the fiscal year ending after
November 15, 2006. We have incorporated SAB No. 108 in our financial statements
as included in this Annual Report on Form 10-K, and it has had no material
effect upon initial adoption.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair
value,
and expands disclosures about fair value measurements. This statement applies
under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements.
We
will adopt this standard January 1, 2008. We do not expect it to have a material
impact on our financial position or results of operations.
31
Item
7A. Qualitative and Quantitative Disclosures About Market
Risk
At
December 31, 2006, we had $1,045,000 in cash held in foreign currencies
based on the exchange rates at December 31, 2006. It is our practice to
maintain cash balances in local currencies subject to periodic conversions
prior
to transfer to repay inter-company debts.
Through
our German subsidiary, we maintain a credit facility under an agreement with
Sparkasse Neumarkt Bank. At December 31, 2006, we had total borrowings of
$379,000 against this facility which comes due between 2007 and 2008 and
is
secured by real property owned by our German subsidiary. In addition, our
German
subsidiary has a revolving line of credit for $198,000 (in Euros, based on
the
exchange rate at December 31, 2006) with Sparkasse Neumarkt Bank. There
were $124,000 and $47,000 in borrowings against this facility at
December 31, 2006 and 2005, respectively. If funds from the credit facility
are used to repay inter-company debts there is an exchange rate conversion
risk.
Item
8. Consolidated Financial Statements and Supplementary
Data.
Our
consolidated financial statements and related notes required by this item
are
listed and set forth in this report at Item 15 beginning at page F-1. The
accompanying notes are an integral part of our consolidated financial
statements.
Supplementary
Financial Information
The
following table sets forth our selected unaudited financial information for
the
eight quarters in the period ended December 31, 2006. This information has
been prepared on the same basis as the audited financial statements and,
in the
opinion of management, contains all adjustments necessary for a fair
presentation thereof.
QUARTERLY
FINANCIAL DATA
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
|
2006 QUARTERS ENDED
|
|
|
|
DEC. 31
|
|
SEP. 30
|
|
|
JUN. 30
|
|
|
|
MAR. 31
|
|
|||||
|
Net
sales
|
|
$
|
7,191
|
6,808
|
$
|
7,709
|
5,327
|
||||||||||||
|
Gross
profit
|
|
1,819
|
2,036
|
2,328
|
1,602
|
||||||||||||||
|
As
a percent of net sales
|
|
25.3
|
%
|
29.9
|
%
|
30.2
|
%
|
30.0
|
%
|
||||||||||
|
Net
income (loss)
|
|
(2
,784
|
)
|
(2,125
|
)
|
(2,299)
|
(2,441
|
)
|
|||||||||||
|
As
a percent of net sales
|
|
(38.7
|
)%
|
(31.2
|
)%
|
(29.8
|
)%
|
(45.8
|
)%
|
||||||||||
|
Net
income (loss) per share:
|
|
||||||||||||||||||
|
Basic
|
|
$
|
(0.24
|
)
|
(0.19
|
)
|
(0.20
|
)
|
(0.22
|
)
|
|||||||||
|
Diluted
|
|
$
|
(0.24
|
)
|
(0.19
|
)
|
(0.20
|
)
|
(0.22
|
)
|
|||||||||
|
2005 QUARTERS ENDED
|
|
|
|
DEC. 31
|
|
|
SEP. 30
|
|
JUN. 30
|
|
|
MAR. 31
|
|
|
||||||||
|
Net
sales
|
|
|
$
|
6,234
|
|
|
$
|
7,638
|
|
|
$
|
7,645
|
|
|
|
$
|
6,820
|
|
|
|||
|
Gross
profit
|
|
|
2,203
|
|
|
2,958
|
|
|
2,922
|
|
|
|
2,543
|
|
|
|||||||
|
As
a percent of net sales
|
|
|
35.3
|
%
|
|
38.7
|
%
|
|
38.2
|
%
|
|
|
37.3
|
%
|
|
|||||||
|
Net
income (loss)
|
|
|
(3,535
|
)
|
|
(2,074
|
)
|
|
(763)
|
|
|
|
(1,051
|
)
|
|
|||||||
|
As
a percent of net sales
|
|
|
(56.7
|
)%
|
|
(27.2
|
)%
|
|
(10.0)
|
%
|
|
|
(15.4
|
)%
|
|
|||||||
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Basic
|
|
|
$
|
(0.37
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.10
|
)
|
|
|
$
|
(0.14
|
)
|
|
|||
|
Diluted
|
|
|
$
|
(0.37
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.10
|
)
|
|
|
$
|
(0.14
|
)
|
|
|||
Item
9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
Evaluation
of disclosure controls and procedures
We
maintain “disclosure controls and procedures,” as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”), that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act
is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to our management, including
our
principal executive officer and principal financial officer,
as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Our disclosure
controls and procedures have been designed to meet, and management believes
that
they meet, reasonable assurance standards, subject to the deficiencies and
weaknesses identified and discussed under the sub-heading “Changes in Internal
Controls” below. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment
in
evaluating the cost-benefit relationship of possible disclosure controls
and
procedures. The design of any disclosure controls and procedures also is
based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
32
Based
on
their evaluation as of the end of the period covered by this Annual Report
on
Form 10-K, our principal
executive officer and principal financial officer
have
concluded that, subject to the limitations noted above our disclosure controls
and procedures were effective to ensure that material information relating
to
us, including our consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period in which this Annual
Report on Form 10-K was being prepared.
Management’s
Report on Internal Controls Over Financial Reporting
The
management of Fiberstars, Inc., is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined
in
Exchange Act Rules 13a-15(f). Under the supervision and with the participation
of management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of internal control
over financial reporting based upon criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control -
Integrated Framework (COSO framework).
An
effective internal control system, no matter how well designed, has inherent
limitations, including the possibility of human error and circumvention or
overriding of controls and therefore can provide only reasonable assurance
with
respect to reliable financial reporting. Furthermore, effectiveness of an
internal control system in future periods can not be guaranteed because the
design of any system of internal controls is based in part upon assumptions
about the likelihood of future events. There can be no assurance that any
control design will succeed in achieving its stated goals under all potential
future conditions. Over time certain controls may become inadequate because
of
changes in business conditions, or the degree of compliance with policies
and
procedures may deteriorate. As such, misstatements due to error or fraud
may
occur and not be detected.
Based
on
our evaluation under the COSO framework, management concluded that internal
control over financial reporting was effective as of December 31, 2006.
Management’s assessment of the effectiveness of internal control over financial
reporting as of December 31, 2006 has been audited by Grant Thornton LLP,
an independent registered public accounting firm, as stated in their report
which is included herein.
Changes
in internal controls.
There
was
no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
33
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Shareholders
Fiberstars,
Inc.
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Fiberstars, Inc.
(a
Delaware Corporation) and subsidiaries ("the Company") maintained effective
internal control over financial reporting as of December 31, 2006, based
on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Fiberstars, Inc. maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also
in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based
on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
and its subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2006 and our report dated March 15, 2007 expressed an
unqualified opinion on those financial statements.
/s/
GRANT THORNTON LLP
Cleveland,
Ohio
March
15,
2007
34
Item
9B. Other Information
Not
applicable.
35
PART III
Item
10. Directors and Executive Officers of the Registrant
The
information required by this Item regarding directors and nominees is
incorporated herein by reference to the information under the caption “PROPOSAL
NO. 1: ELECTION OF DIRECTORS” in our definitive Proxy Statement to be filed with
the SEC in connection with the solicitation of proxies for our 2007 Annual
Meeting of Shareholders to be held on June 14, 2007 (the “Proxy
Statement”). Information on our executive officers may be found in
Part I.
Item 405
of Regulation S-K calls for disclosure of any known late filings or failure
by an insider to file a report required by Section 16 of the
Securities Exchange Act of 1934, as amended. This disclosure is contained
in the
section entitled “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE” in the Proxy Statement and is incorporated herein by
reference.
We
have a
separately designated standing Audit Committee established in accordance
with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended. The members of the Audit Committee are Ronald Casentini (Chairperson),
Michael Kasper and John B. Stuppin. All of such members meet the independence
standards established by The NASDAQ Stock Market for serving on an audit
committee. SEC regulations require that we disclose whether a director
qualifying as an “audit committee financial expert” serves on our Audit
Committee. Our Board of Directors has determined that both Mr. Casentini
and Mr. Stuppin qualify as an “audit committee financial expert” within the
meaning of such regulations.
Our
Board
of Directors adopted a Code of Ethics and Business Conduct for all of its
directors, officers and employees on February 25, 2004. To request a copy
of the Code of Ethics and Business Conduct, please send a written request
to our
Secretary at Fiberstars Inc., 32000 Aurora Road, Solon, OH 44139. It is also
available from our corporate website http://www.fiberstars.com.
Item
11. Executive Compensation
The
information regarding executive compensation required by Item 11 is incorporated
herein by reference from the information in the Proxy Statement under the
captions “EXECUTIVE COMPENSATION AND OTHER MATTERS,” “PROPOSAL NO. 1:
ELECTION OF DIRECTORS—Director Compensation” and “PROPOSAL NO. 1: ELECTION
OF DIRECTORS—Compensation Committee Interlocks and Insider
Participation.”
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information regarding security ownership of certain beneficial owners and
management required by Item 12 is incorporated herein by reference from the
information in the Proxy Statement under the caption “SECURITY OWNERSHIP OF
PRINCIPAL SHAREHOLDERS AND MANAGEMENT.”
The
information regarding Securities to be issued under our Compensation Plans
can
be found under Item 5 of this Report on Form 10-K.
Item
13. Certain Relationships and Related Transactions and Director
Independence
The
information regarding certain relationships and related transactions required
by
Item 13 is incorporated herein by reference to the information in the Proxy
Statement under the caption “CERTAIN TRANSACTIONS” and “DIRECTOR
INDEPENDENCE.”
Item
14. Principal Accountant Fees and Services
The
information regarding principal accountant fees and services and the
pre-approval policies and procedures required by Item 14 is incorporated
by
reference from the information contained in the Proxy Statement under the
caption “RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTANTS—Principal Accountant Fees and Services” and “RATIFICATION OF
APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS—Pre-Approval Policies
and Procedures.”
36
PART IV
Item
15. Exhibits and Financial Statement Schedule
(a)
(1) Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of
Fiberstars, Inc.
We
have
audited the accompanying consolidated balance sheets of Fiberstars, Inc.
(a
Delaware corporation) and subsidiaries (the Company) as of December 31, 2006
and
2005, and the related consolidated statements of operations, comprehensive
income (loss), shareholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2006. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Fiberstars, Inc. and
subsidiaries as of December 31, 2006 and 2005 and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.
Our
audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in Item 15(a)(2) of this Form 10-K is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” as
revised.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Fiberstars, Inc.’s
internal control over financial reporting as of December 31, 2006, based
on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our
report dated March 15, 2007 expressed an unqualified opinion
thereon.
/s/
GRANT THORNTON LLP
Cleveland,
Ohio
March 15,
2007
F-1
FIBERSTARS, INC.
CONSOLIDATED
BALANCE SHEETS, December 31,
(amounts
in thousands except share and per share amounts)
|
|
2006
|
2005
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|
|
|||||
|
Cash
and cash equivalents
|
$
|
3,705
|
$
|
5,554
|
|||
|
Short-term
investments
|
12,263
|
18,024
|
|||||
|
Accounts
receivable, net of allowances for doubtful accounts of $355 in
2006 and
$260 in 2005
|
6,185
|
6,287
|
|||||
|
Inventories,
net
|
7,708
|
7,722
|
|||||
|
Prepaids
and other current assets
|
324
|
879
|
|||||
|
Total
current assets
|
30,185
|
38,466
|
|||||
|
Fixed
assets, net
|
5,978
|
3,422
|
|||||
|
Goodwill,
net
|
4,247
|
4,135
|
|||||
|
Other
assets
|
182
|
186
|
|||||
|
Total
assets
|
$
|
40,592
|
$
|
46,209
|
|||
|
LIABILITIES
|
|||||||
|
Current
liabilities:
|
|
||||||
|
Accounts
payable
|
$
|
4,202
|
$
|
2,623
|
|||
|
Accruals
and other current liabilities
|
1,671
|
3,924
|
|||||
|
Credit
line borrowings
|
1,124
|
47
|
|||||
|
Current
portion of long-term bank borrowings
|
778
|
342
|
|||||
|
Total
current liabilities
|
7,775
|
6,936
|
|||||
|
Deferred
tax liabilities
|
75
|
-----
|
|||||
|
Long-term
bank borrowings
|
1,862
|
1,089
|
|||||
|
Total
liabilities
|
9,712
|
8,025
|
|||||
|
Commitments
and contingencies (Note 8).
|
|
|
|||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Preferred
stock, par value $0.0001 per share:
|
|
|
|||||
|
Authorized:
2,000,000 shares in 2006 and 2005
|
|
|
|||||
|
Issued
and outstanding: no shares in 2006 and 2005
|
|
|
|||||
|
Common
stock, par value $0.0001 per share:
|
|
|
|||||
|
Authorized:
30,000,000 shares in 2006 and 2005
|
|
|
|||||
|
Issued
and outstanding: 11,394,400 shares in 2006 and 11,270,000 shares
in
2005
|
1
|
1
|
|||||
|
Additional
paid-in capital
|
53,841
|
52,452
|
|||||
|
Unearned
stock-based compensation
|
-----
|
(397
|
)
|
||||
|
Accumulated
other comprehensive income
|
601
|
41
|
|||||
|
Accumulated
deficit
|
(23,563
|
)
|
(13,913
|
)
|
|||
|
Total
shareholders’ equity
|
30,880
|
38,184
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
40,592
|
$
|
46,209
|
|||
F-2
FIBERSTARS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the years ended December 31,
(amounts
in thousands except per share amounts)
|
2006
|
2005
|
2004
|
||||||||
|
Net
sales
|
$
|
27,036
|
$
|
28,337
|
$
|
29,731
|
||||
|
Cost
of sales
|
19,251
|
17,711
|
18,220
|
|||||||
|
Gross
profit
|
7,785
|
10,626
|
11,511
|
|||||||
|
Operating
expenses:
|
|
|
||||||||
|
Gross
research and development
|
3,556
|
4,485
|
3,670
|
|||||||
|
Deduct
credits from government contracts
|
(1,215
|
)
|
(2,295
|
)
|
(2,482
|
)
|
||||
|
Net
research and development expense
|
2,341
|
2,190
|
1,188
|
|||||||
|
Sales
and marketing
|
9,774
|
9,595
|
8,595
|
|||||||
|
General
and administrative
|
4,956
|
3,135
|
2,459
|
|||||||
|
Restructuring
expenses.
|
734
|
3,120
|
—
|
|||||||
|
Total
operating expenses
|
17,805
|
18,040
|
12,242
|
|||||||
|
Loss
from operations
|
(10,020
|
)
|
(7,414
|
)
|
(731
|
)
|
||||
|
Other
income (expense):
|
|
|||||||||
|
Other
income (expense)
|
-----
|
1
|
(14
|
)
|
||||||
|
Interest
Income
|
760
|
138
|
-----
|
|
Interest
expense
|
(277
|
)
|
(39
|
)
|
(17
|
)
|
|
Net
loss before income taxes
|
(9,537
|
)
|
(7,314
|
)
|
(762
|
)
|
||||
|
Income
tax benefit (provision)
|
(113
|
)
|
(109
|
)
|
58
|
|||||
|
Net
loss
|
$
|
(9,650
|
)
|
$
|
(7,423
|
)
|
$
|
(704
|
)
|
|
|
Net
loss per share—basic and diluted
|
$
|
(0.85
|
)
|
$
|
(0.90
|
)
|
$
|
(0.10
|
)
|
|
|
Shares
used in per share calculation—basic and diluted
|
11,385
|
8,223
|
7,269
|
The
accompanying notes are an integral part of these financial
statements.
F-3
FIBERSTARS, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For
the years ended December 31,
(amounts
in thousands)
|
2006
|
2005
|
2004
|
||||||||
|
Net
loss
|
$
|
(9,650
|
)
|
$
|
(7,423
|
)
|
$
|
(704
|
)
|
|
|
Other
comprehensive income:
|
|
|
||||||||
|
Foreign
currency translation adjustments
|
507
|
(636
|
)
|
233
|
||||||
|
Net
unrealized gain on securities
|
53
|
16
|
—
|
|||||||
|
Comprehensive
loss
|
$
|
(9,090
|
)
|
$
|
(8,043
|
)
|
$
|
(471
|
)
|
The
accompanying notes are an integral part of these financial
statements.
F-4
FIBERSTARS, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
For
the years ended December 31, 2006, 2005 and 2004
(amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
Notes
|
|
Accumulated
|
|
Retained
|
|
|
|
|||||||||
|
|
|
|
|
|
|
Additional
|
|
Unearned
|
|
Receivable
|
|
Other
|
|
Earnings
|
|
|
|
||||||||
|
|
|
CommonStock
|
|
Paid-In
|
|
Stock-Based
|
|
From
|
|
Comprehensive
|
|
(Accumulated
|
|
|
|
||||||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Shareholder
|
|
Income
|
|
Deficit)
|
|
Total
|
|||||||||
|
Balances,
December 31, 2003
|
6,317
|
$
|
1
|
$
|
24,531
|
$
|
—
|
$
|
(224
|
)
|
$
|
428
|
$
|
(5,786
|
)
|
$
|
18,950
|
||||||||
|
Exercise
of common stock warrants
|
553
|
121
|
|
|
|
121
|
|||||||||||||||||||
|
Issuance
of common stock
under
employee stock purchase plan
|
4
|
31
|
|
|
|
31
|
|||||||||||||||||||
|
Exercise
of common stock options
|
477
|
2,201
|
|
|
|
2,201
|
|||||||||||||||||||
|
Non-employee
stock-based compensation
|
|
|
123
|
|
|
|
|
123
|
|||||||||||||||||
|
Unearned
stock-based compensation
|
|
|
513
|
(513
|
)
|
|
|
|
-----
|
||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
|
|
|
23
|
|
|
|
23
|
|||||||||||||||||
|
Note
receivable from shareholder
|
|
|
|
|
224
|
|
|
224
|
|||||||||||||||||
|
Foreign
currency translation adjustment
|
|
|
|
|
|
233
|
|
233
|
|||||||||||||||||
|
Net
loss
|
|
|
|
|
|
|
(704
|
)
|
(704
|
)
|
|||||||||||||||
|
Balances,
December 31, 2004
|
7,351
|
$
|
1
|
$
|
27,520
|
$
|
(490
|
)
|
$
|
—
|
$
|
661
|
$
|
(6,490
|
)
|
$
|
21,202
|
||||||||
|
Issuance
of common stock S-3 Filing
|
2,952
|
22,174
|
|
|
|
22,174
|
|||||||||||||||||||
|
Exercise
of common stock warrants
|
587
|
408
|
(62
|
)
|
|
346
|
|||||||||||||||||||
|
Issuance
of common stock
under
employee stock purchase plan
|
4
|
31
|
|
|
|
31
|
|||||||||||||||||||
|
Exercise
of common stock options
|
376
|
2,131
|
|
|
|
2,131
|
|||||||||||||||||||
|
Unearned
stock-based compensation
|
|
53
|
(53
|
)
|
|
|
—
|
||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
|
197
|
146
|
|
|
343
|
|||||||||||||||||||
|
Net
unrealized gain on securities
|
|
|
|
|
16
|
|
16
|
||||||||||||||||||
|
Foreign
currency translation adjustment
|
|
|
|
|
(636
|
)
|
|
(636
|
)
|
||||||||||||||||
|
Net
loss
|
|
|
|
|
|
(7,423
|
)
|
(7,423
|
)
|
||||||||||||||||
|
Balances,
December 31, 2005
|
11,270
|
$
|
1
|
$
|
52,514
|
$
|
(397
|
)
|
$
|
(62
|
)
|
$
|
41
|
$
|
(13,913
|
)
|
$
|
38,184
|
|||||||
|
Reclassification
of unearned stock-based
compensation
upon FAS 123R adoption
|
|
|
(397
|
)
|
397
|
|
|
|
-----
|
||||||||||||||||
|
Additional
Costs from 2005 S-3 Filing
|
|
|
(45
|
)
|
|
|
|
|
(45
|
)
|
|||||||||||||||
|
Exercise
of common stock warrants
|
14
|
|
62
|
|
|
|
|
62
|
|||||||||||||||||
|
Exercise
of common stock options
|
106
|
|
563
|
|
|
|
|
563
|
|||||||||||||||||
|
Issuance
of common stock
under
employee stock purchase plan
|
4
|
|
26
|
|
|
|
|
26
|
|||||||||||||||||
|
Note
Receivable from shareholder
|
|
|
|
|
62
|
|
|
62
|
|||||||||||||||||
|
Stock-based
compensation for options vested
|
|
|
1,118
|
|
|
|
|
1,118
|
|||||||||||||||||
|
Net
unrealized gain on securities
|
|
|
|
|
|
53
|
|
53
|
|||||||||||||||||
|
Foreign
currency translation adjustment
|
|
|
|
|
|
507
|
|
507
|
|||||||||||||||||
|
Net
loss
|
(9,650
|
)
|
(9,650
|
)
|
|||||||||||||||||||||
|
Balances,
December 31, 2006
|
11,394
|
$
|
1
|
$
|
53,841
|
$
|
-----
|
$
|
-----
|
$
|
601
|
$
|
(23,563
|
)
|
$
|
30,880
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
F-5
FIBERSTARS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended December 31,
(amounts
in thousands)
|
|
2006
|
2005
|
2004
|
|||||||
|
Cash
flows from operating activities:
|
|
|
|
|||||||
|
Net
loss
|
$
|
(9,650
|
)
|
$
|
(7,423
|
)
|
$
|
(704
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
||||||||
|
Depreciation
and amortization
|
1,197
|
1,145
|
989
|
|||||||
|
Provision
for doubtful accounts receivable
|
151
|
76
|
(84
|
)
|
||||||
|
Stock-based
compensation
|
1,118
|
345
|
146
|
|||||||
|
Unrealized
income from marketable securities
|
(53
|
)
|
(16
|
)
|
—
|
|||||
|
Deferred
Taxes
|
63 |
—
|
—
|
|||||||
|
Changes
in assets and liabilities:
|
|
|
||||||||
|
Accounts
receivable, trade
|
127
|
722
|
(1,448
|
)
|
||||||
|
Inventories
|
351
|
363
|
(1,673
|
)
|
||||||
|
Prepaid
and other current assets
|
558
|
(313
|
)
|
(208
|
)
|
|||||
|
Other
assets
|
(99
|
)
|
56
|
70
|
||||||
|
Accounts
payable
|
1,510
|
(257
|
)
|
694
|
||||||
|
Accruals
and other current liabilities
|
(2,457
|
)
|
1,830
|
(251
|
)
|
|||||
|
Total
adjustments
|
2,466
|
3,951
|
(1,765
|
)
|
||||||
|
Net
cash provided by (used in) operating activities
|
(7,184
|
)
|
(3,472
|
)
|
(2,469
|
)
|
||||
|
Cash
flows from investing activities:
|
|
|
|
|||||||
|
Purchase
of short-term investments
|
(108,834
|
)
|
(45,768
|
)
|
—
|
|||||
|
Sale
of short-term investments
|
114,595
|
27,767
|
—
|
|||||||
|
Acquisition
of fixed assets
|
(3,703
|
)
|
(1,920
|
)
|
(724
|
)
|
||||
|
Net
cash provided (used in) investing activities
|
2,058
|
(19,921
|
)
|
(724
|
)
|
|||||
|
Cash
flows from financing activities:
|
|
|
|
|||||||
|
Proceeds
from issuances of common stock
|
651
|
24,680
|
2,354
|
|||||||
|
Repayment
of loan made to shareholder
|
62
|
—
|
224
|
|||||||
|
Proceeds
from credit line borrowings
|
1,077
|
-----
|
-----
|
|||||||
|
Proceeds
from long-term borrowings
|
1,609
|
1,069
|
-----
|
|||||||
|
Payments
of long-term borrowings
|
(491
|
)
|
-----
|
(67
|
)
|
|
Net
cash provided by financing activities
|
2,908
|
25,749
|
2,511
|
|
Effect
of exchange rate changes on cash
|
369
|
(411
|
)
|
37
|
||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(1,849
|
)
|
1,945
|
(645
|
)
|
|||||
|
Cash
and cash equivalents, beginning of year
|
5,554
|
3,609
|
4,254
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
3,705
|
$
|
5,554
|
$
|
3,609
|
||||
|
Supplemental
information:
|
|
|
||||||||
|
Interest
paid
|
$
|
248
|
$
|
39
|
$
|
17
|
||||
|
Non-cash
investing activities
|
|
Fully
depreciated assets disposed of
|
$
|
79
|
$
|
1,083
|
$
|
—
|
The
accompanying notes are an integral part of these financial
statements
F-6
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2006 and 2005
1.
Nature of Operations:
Fiberstars, Inc.
(the “Company”) develops and assembles lighting products using fiber optic
technology for commercial lighting and swimming pool and spa lighting
applications. The Company markets its products for worldwide distribution
primarily through independent sales representatives, distributors and swimming
pool builders.
2.
Summary of Significant Accounting Policies:
Basis
of Presentation:
The
consolidated financial statements include the accounts of Fiberstars, Inc.
and its subsidiaries. All significant inter-company balances and transactions
have been eliminated.
Use
of Estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Estimates include, but are not limited to, the
establishment of reserves for accounts receivable, sales returns, inventory
obsolescence and warranty claims; the useful lives for property, equipment,
and
intangible assets, and stock-based compensation. Actual results could differ
from those estimates.
Cash
Equivalents:
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Short-Term
Investments:
The
Company’s short-term investments are classified as available-for-sale, which are
stated at estimated fair value. The Company has determined its short-term
investments are available to support current operations and, accordingly,
has
classified such short-term investments as current assets without regard for
contractual maturities. These short-term investments are invested through
a
major financial institution. The unrealized gains or losses on these short-term
investments are included in accumulated other comprehensive income as a separate
component of shareholders’ equity until realized.
Short-term
investments at December 31, 2006 were as follows (in
thousands):
|
|
|
Cost
|
|
Net
unrealized gain
|
|
Estimated
Fair Value
|
|
|||||||
|
Money
Market Fund
|
|
$
|
18
|
|
|
$
|
—
|
|
|
|
$
|
18
|
|
|
|
Agency
Securities
|
|
3,642
|
|
|
46
|
|
|
|
3,688
|
|
|
|||
|
Agency
Discount Notes
|
|
6,468
|
|
|
23
|
|
|
|
6,491
|
|
|
|||
|
Munincipal
Bonds Taxable (Variable)
|
|
2,066
|
|
|
--
|
|
|
|
2,066
|
|
|
|||
|
Total
|
|
$
|
12,194
|
|
|
$
|
69
|
|
|
|
$
|
12,263
|
|
|
The
short-term investments maturing in 2007 total $10.1 million. The remaining
short-term investments have scheduled maturity dates from July 2024 through
December 2036.
The
change in net unrealized holding gains on securities available for sale in
the
amount of $53,000 has been charged to other comprehensive income for the
year
ended December 31, 2006. The cost of securities sold is based on the
specific identification method.
Proceeds
from the sale of available securities during 2006 were $108.8 million. Gross
gains of $562,000 were realized on the sales of available for sale securities
during 2006.
F-7
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
Fair
Value of Financial Instruments:
Carrying
amounts of certain of the Company’s financial instruments including cash and
cash equivalents, short-term investments, accounts receivable and accounts
payable approximate fair value due to their short maturities. Based on borrowing
rates currently available to the Company for loans with similar terms, the
carrying value of long-term debt obligations also approximates fair
value.
Revenue
Recognition:
The
Company recognizes revenue when all of the following occur: (1) receipt of
a purchase order from the customer or completion of a sales agreement with
the
customer; (2) shipment of the product has occurred or services have been
provided; and (3) the sales price is fixed or determinable and
collectibility is reasonably assured. Revenue from product sales is generally
recognized upon shipment, and allowances are provided for estimated returns,
discounts and warranties. Such allowances are adjusted periodically to reflect
actual and anticipated returns, discounts and warranty expenses. Revenue
from
product sales that include an installation or other service obligation on
the
part of the Company are recognized upon the shipment of the product and the
completion of the Companys’ installation or service obligation. Revenue on sales
that include services such as design, integration and installation is generally
recognized using the percentage-of-completion method. Under the
percentage-of-completion method, revenue recognized reflects the portion
of the
anticipated contract revenue that has been earned, equal to the ratio of
labor
costs expended to date to anticipated final labor costs, based on current
estimates of labor costs to complete the project. The Company’s products are
generally subject to warranties, and the Company provides for the estimated
future costs of repair, replacement or customer accommodation in costs of
sales.
Fees for research and development services are determined on a cost-plus
basis
and are recognized as revenue when performed.
The
Company recognizes shipments to pool lighting distributors as revenue upon
shipment. Estimated sales returns are recorded upon recognition of revenues
from
distributors having rights of return, including exchange rights for unsold
products. Shipments made to commercial lighting representatives and distributors
are also recognized as revenue upon shipment because in these instances the
representative or distributor is acting as a pass-through agent to a specific
lighting project for which the Company has an existing contract or purchase
order.
Inventories:
The
Company states inventories at the lower of standard cost (which approximates
actual cost determined using the first-in-first-out method) or market. The
Company establishes provisions for excess and obsolete inventories after
evaluation of historical sales, current economic trends, forecasted sales,
product lifecycles and current inventory levels. Charges to cost of sales
for
excess and obsolete inventories amounted to $868,000, $196,000 and $116,000
in
2006, 2005 and 2004, respectively.
Accounts
Receivable:
The
Company’s customers are currently concentrated in the United States and Europe.
In the normal course of business, the Company extends unsecured credit to
its
customers related to the sale of its products. Typical credit terms require
payment within 30 days from the date of delivery or service. The Company
evaluates and monitors the creditworthiness of each customer on a case-by-case
basis. The Company provides allowances for sales returns and doubtful accounts
based on its continuing evaluation of its customers’ ongoing requirements and
credit risk. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. The Company does not require
collateral from its customers.
Income
Taxes:
As
part
of the process of preparing its consolidated financial statements, the Company
estimates its income tax liability in each of the jurisdictions in which
it does
business. This process involves estimating the Company’s actual current tax
expense together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenues, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in the consolidated balance sheet. The Company then assesses the
likelihood that these deferred tax assets will be recovered from future taxable
income and, to the extent the Company believes that recovery is not more
likely
than not, or is unknown, the Company establishes a valuation
allowance.
Significant
management judgment is required in determining the provision for income taxes,
the deferred tax assets and liabilities and any valuation allowance recorded
against such deferred tax assets. At December 31, 2006, the Company’s
deferred tax assets primarily consist mainly of certain net operating losses
carried forward. The Company has recorded a valuation allowance of $9,680,000
against these deferred tax assets, due to uncertainties related to its ability
to utilize those deferred tax assets. The valuation allowance is based on
estimates of taxable income by jurisdiction and the periods over which its
deferred tax assets could be recoverable.
F-8
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
Long-lived
Assets:
Goodwill
represents the excess of acquisition cost over the fair value of tangible
and
identified intangible net assets of the businesses acquired. Goodwill is
not
amortized, but is subjected to an annual impairment test. Intangible assets
from
acquisitions are stated at cost and are amortized on a straight-line basis
over
the estimated life of the assets acquired, but in no case for a period longer
than 10 years. Fixed assets are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the related assets
(two to five years). Leasehold improvements are amortized on a straight-line
basis over their estimated useful lives or the lease term, whichever is shorter,
generally 3 to 7 years. When events or changes in circumstances indicate
that assets may be impaired, an evaluation is performed comparing the estimated
future undiscounted cash flows associated with the asset to the asset’s carrying
amount to determine if a write-down to market value or discounted cash flow
is
required.
Certain
Risks and Concentrations:
The
Company invests its excess cash in deposits and high-grade short-term securities
with a major financial institution that is insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to $100,000 and the Securities Investor
Protection Corporation (“SIPC”) up to $500,000 of primary net equity protection
including $100,000 for claims for cash. At times the cash balances exceed
the
amounts insured by the FDIC. Currently the Company has approximately $12
million
in short term securities invested with Bear Stearns Securities Corporation,
under the management of Seneca Capital. The Company has not experienced any
losses in such accounts and believes it is not exposed to significant risk
of
loss.
The
Company sells its products primarily to commercial lighting distributors
and
residential pool distributors and pool installation contractors in North
America, Europe and the Far East. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. Although
the Company maintains allowances for potential credit losses that it believes
to
be adequate, a payment default on a significant sale could materially and
adversely affect its operating results and financial condition. At
December 31, 2006 and 2005, one customer accounted for 6% and 8% of
accounts receivable, respectively. One customer accounted for 11%, 11% and
10%
of net sales in 2006, 2005 and 2004, respectively.
The
Company currently buys all of its small diameter stranded fiber, the main
component of most of its products, from one supplier. There is a limited
number
of fiber suppliers, and even if an alternative supplier were obtained, a
change
in suppliers could cause delays in manufacturing and a possible loss of sales
which would adversely affect operating results.
The
Company also relies on sole source suppliers for certain lamps, reflectors,
remote control devices and power supplies. Although the Company cannot predict
the affect that the loss of one or more of such suppliers would have on the
Company, such loss could result in delays in the shipment of products and
additional expenses associated with redesigning products and could have a
material adverse affect on the Company’s operating results.
The
Company is dependent upon offshore companies for the manufacturing and final
assembly of many of its pool and spa products. The Company advances certain
raw
materials, inventory, and production costs to these off-shore manufacturers.
The
supply of finished goods from these companies, and the raw materials, inventory
and funds that it advances to them may be at risk depending upon the varying
degrees of instability of these local political, economic, and social
environments in which they operate, and the financial strength of the companies
themselves.
Research
and Development:
In
February 2003, Defense
Advanced Research Projects Agency, or DARPA,
awarded
the Company and its partners a research and development contract for the
development of next generation light sources, optics, luminaire and integrated
illuminated technologies for its High Efficiency Distributed Lighting (HEDLight)
project. The DARPA contract calls for gross payments of $7,824,000 to the
Company over three years based on achievement of various research and
development milestones. On April 10, 2003 the Company announced that it and
APL Engineered Materials, a subsidiary of Advanced Lighting Technologies
Inc.
(ADLT), were awarded a further $2.7 million research and development contract
from DARPA to develop a new arc discharge light source. The contracts provided
the Company $1,966,000 and $2,502,000 in research and development credits
for
the fiscal years ended December 31 2005 and 2004 respectively, net of
subcontractor fees. The milestones are for work performed in developing fiber
optic illuminators and fixtures for installation on ships and aircraft. Funds
for each year are subject to annual congressional budget approval.
During
2005, the Company received a total of $1.5 million in awards from the Department
of Energy under its Small Business Innovation Research “SBIR” program to improve
its energy saving lighting technology, EFO. In addition, further SBIR awards
from the Department of Defense under DARPA totaling $200,000 were obtained
to
further explore improvements to lamp coatings and design and to further research
materials and processing techniques for the Company’s Continuously Extruded
Large Core Fiber processing method.
F-9
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
In
March
2006 the Company entered into a DARPA agreement in which the Company supplied
its’ lighting on three United States Navy ships for sea testing. Milestone
deliveries under this agreement have been booked as revenue as the milestones
have been delivered. In 2006, the Company recognized $1,979,000 in revenue
for
deliveries made.
Earnings
Per Share:
Basic
earnings (loss) per share is computed by dividing income (loss) available
to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share is computed giving effect
to
all dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of incremental shares upon exercise
of
stock options.
A
reconciliation of the numerator and denominator of basic and diluted earnings
(loss) per share is provided as follows (in
thousands, except per share amounts):
|
|
|
Years Ended December 31,
|
|
|||||||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
Numerator—Basic
and Diluted loss per share
|
|
|
|
|
|
|
|
|||
|
Net
loss
|
|
$
|
(9,650
|
)
|
$
|
(7,423
|
)
|
$
|
(704
|
)
|
|
Denominator—Basic
and Diluted loss per share
|
|
|
|
|
|
|||||
|
Weighted
average shares outstanding
|
|
11,385
|
8,223
|
|
7,269
|
|
||||
|
Basic
and diluted loss per share
|
|
$
|
(0.85
|
)
|
$
|
(0.90
|
)
|
$
|
(0.10
|
)
|
The
shares outstanding used for calculating basic and diluted earnings (loss)
per
share for a portion of the year 2005 included 156,375 shares of common stock
and
114,375 shares of common stock in 2004 issuable for no cash consideration
upon
exercise of certain exchange provisions of warrants held by ADLT and two
of its
former employees. There were no warrants outstanding for ADLT during
2006.
Options
and warrants to purchase 1,690,430 shares, 1,485,678 shares and 2,167,903
shares
of common stock were outstanding at December 31, 2006, 2005 and 2004,
respectively, but were not included in the calculations of diluted earnings
(loss) per share because the Company had a loss for these years and their
inclusion would be anti-dilutive.
Stock-Based
Compensation:
In
December 2004, the FASB issued FAS No. 123R, Share-Based Payment (“FAS No.
123R”). FAS No. 123R is a revision of FAS
No.
123, Accounting for Stock-Based Compensation (“FAS No. 123”), and supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (“APB No. 25”), and its related implementation guidance. On January 1,
2006, the Company adopted the provisions of FAS No. 123R using the modified
prospective method. FAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment
transactions. The Statement requires entities to recognize compensation expense
for awards of equity instruments to employees based on grant-date fair value
of
those awards (with limited exceptions). FAS No. 123R also requires the benefits
of tax deductions in excess of recognized compensation expense to be reported
as
a financing cash flow, rather than as an operating cash flow as prescribed
under
the prior accounting rules. This requirement reduces net operating cash flows
and increases net financing cash flows in periods after adoption. Total cash
flow remains unchanged from what would have been reported under prior accounting
rules. For the year ended December 31, 2006, the Company recorded compensation
expense of $1,118,000, or 10 cents per share. At December 31, 2005, the Company
had unamortized compensation expenses of $397,000. This amount is now part
of
our total unearned compensation of $1,959,000 remaining at December 31,
2006. The remaining weighted average life is approximately 2
years. These costs will be charged to expense, amortized on a straight line
method, in future periods in accordance with our FAS 123R
accounting.
The
expense for 2006 includes both the cost of awards granted in 2006 and those
unvested at the beginning of 2006. Both the expense and future unearned
compensation have been estimated using the Black-Scholes option pricing model.
Estimates utilized in the calculation include the expected life option,
risk-free interest rate, and volatility and are further
comparatively detailed below. The volatility estimates are calculated using
historical pricing experience.
As
of
December 31, 2006, the Company has two stock-based employee compensation
plans, which are described more fully in Note 9. Prior to December 31,
2006, the Company accounted for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related Interpretations. Under these principles, employee stock options are
valued at the excess of the fair value of the underlying common stock over
the
exercise price of the options on the grant date.
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of FAS 123R. Under these principles, the equity instruments
are valued at the fair value which is computed based on stock price on the
date
of grant or other measurement date, exercise price, estimated life, stock
volatility and the risk free rate of interest.
F-10
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
The
following table illustrates the effect on net income and earnings (loss)
per
share if the Company had prior to 2006 applied the fair value recognition
provisions of FASB Statement No. 123, Accounting
for Stock-Based Compensation,
to
stock-based employee compensation.
(in
thousands, except per share amounts):
|
|
|
|
|||||
|
|
|
2005
|
|
2004
|
|
||
|
Net
Loss—as reported
|
|
$
|
(7,423
|
)
|
$
|
(704
|
)
|
|
Add:
Stock-based employee compensation expense included in reported
net loss,
net of related tax effects
|
|
20
|
|
12
|
|
||
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
(530
|
)
|
(420
|
)
|
||
|
Net
Loss—Pro forma
|
|
$
|
(7,933
|
)
|
$
|
(1,112
|
)
|
|
Basic
and Diluted Loss Per Share—As reported
|
|
$
|
(0.90
|
)
|
$
|
(0.10
|
)
|
|
Basic
and Diluted Loss Per Share—Pro forma
|
|
$
|
(0.96
|
)
|
$
|
(0.15
|
)
|
The
fair
value of each option grant and stock purchase plan grant combined is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 2006, 2005 and
2004:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
Fair
value of options issued
|
|
$
|
3.52
|
|
$
|
5.14
|
|
$
|
3.77
|
|
|
Exercise
price
|
|
$
|
7.09
|
|
$
|
10.65
|
|
$
|
7.50
|
|
|
Expected
life of option
|
|
4.0
years
|
|
5.02
years
|
|
4.88
years
|
|
|||
|
Risk-free
interest rate
|
|
4.91
|
%
|
3.58
|
%
|
3.00
|
%
|
|||
|
Expected
volatility
|
|
59
|
%
|
49
|
%
|
48
|
%
|
|||
Foreign
Currency Translation:
The
Company’s international subsidiaries use their local currencies as their
functional currencies. 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 directly to accumulated comprehensive
income within the statement of shareholders’ equity. Foreign currency
transaction gains and losses are included as a component of interest income
and
other. Gains and losses from foreign currency translation are included as
a
separate component of comprehensive income (expense) within the consolidated
statement of comprehensive income (loss).
Advertising
Expenses:
The
Company expenses the costs of advertising, which consists of costs for the
placement of advertisements in various media as incurred. Advertising expenses
were $415,000, $192,000 and $206,000 for the years ended December 31, 2006,
2005 and 2004, respectively.
Product
warranties:
The
Company warrants finished goods against defects in material and workmanship
under normal use and service for periods of one to three years for illuminators
and fiber. Settlement costs consist of actual amounts expensed for warranty
services, which are largely a result of third party service calls, and costs
of
replacement products. A liability for the estimated future costs under product
warranties is maintained based on estimated future warranty expense for products
outstanding under warranty (in
thousands):
|
|
|
Year ended
December 31,
|
|
||||
|
|
|
2006
|
|
2005
|
|
||
|
Balance
at the beginning of the year
|
|
$
|
393
|
$
|
430
|
|
|
|
Accruals
for warranties issued
|
|
219
|
656
|
|
|||
|
Settlements
made during the year (in cash or in kind)
|
|
(382
|
) |
(693
|
)
|
||
|
Balance
at the end of the year
|
|
$
|
230
|
$
|
393
|
|
|
F-11
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
Reclassifications:
Certain
prior year information has been reclassified to conform to current year
presentation.
Recent
Pronouncements:
In
July,
2006, the FASB issued FASB interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), an interpretation of FASB statement No. 109,
“Accounting for Income Taxes”, regarding accounting for income tax uncertainties
effective for fiscal years beginning after December 15, 2006. FIN 48 will
apply
to all tax positions related to income taxes subject to SFAS 109 on Accounting
for Income Taxes. The impact of adopting the positions of the interpretation
is
not anticipated to have a material impact on our overall financial
position.
In
September 2006, the Securities and Exchange Commission published Staff
Accounting Bulletin (“SAB”) No. 108 (Topic 1N), Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 requires registrants to quantify misstatements using
both the balance sheet and income statement approaches, with adjustment required
if either method results in a material error. The provisions of SAB No. 108
are
effective for annual financial statements for the fiscal year ending after
November 15, 2006. We have incorporated SAB No. 108 in our financial statements
as included in this Annual Report on Form 10-K, and it has had no material
effect upon initial adoption.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair
value,
and expands disclosures about fair value measurements. This statement applies
under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements.
We
will adopt this standard January 1, 2008. We do not expect it to have a material
impact on our financial position or results of operations.
3.
Inventories
(in
thousands):
|
|
December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Raw
materials
|
$
|
6,354
|
$
|
6,431
|
|||
|
Inventory
reserve
|
(899
|
)
|
(859
|
)
|
|||
|
Finished
goods
|
2,253
|
2,280
|
|||||
|
|
$
|
7,708
|
$
|
7,852
|
|||
4.
Fixed Assets
(in
thousands):
|
|
December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Equipment
(useful life 5 years)
|
$
|
8,411
|
$
|
5,648
|
|||
|
Tooling
(useful life 2 - 5 years)
|
2,657
|
1,998
|
|||||
|
Furniture
and fixtures (useful life 5 years)
|
202
|
193
|
|||||
|
Computer
software (useful life 3 years)
|
395
|
368
|
|||||
|
Leasehold
improvements (the shorter of useful life or lease life)
|
1,475
|
839
|
|||||
|
|
13,140
|
9,046
|
|||||
|
Less
accumulated depreciation and amortization
|
(7,162
|
)
|
(5,624
|
)
|
|||
|
|
$
|
5,978
|
$
|
3,422
|
|||
F-12
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
Fixed
assets are stated at cost and are depreciated using the straight-line method
over the estimated useful lives of the related assets (two to five years).
Leasehold improvements are amortized on a straight-line basis over their
estimated useful lives or the lease term, whichever is shorter, generally
3 to
7 years.
5.
Goodwill and Intangibles
In
accordance with SFAS 142, goodwill is subject to an annual impairment test.
The Company performs the test in the fourth quarter of every year. The tests
showed no impairment of the Company’s goodwill asset.
The
changes in the carrying amounts of goodwill and intangibles for the years
ended
December 31, 2006 and 2005 were as follows (in
thousands):
|
Goodwill
|
Intangibles
|
||||||||||||
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||||
|
Balance
as of January 1, 2005
|
$
|
4,279
|
$
|
770
|
$
|
(620
|
)
|
$
|
150
|
||||
|
Amortization
expense
|
—
|
—
|
(150
|
)
|
(150
|
)
|
|||||||
|
Foreign
currency translation
|
(144
|
)
|
—
|
—
|
—
|
||||||||
|
Balance
as of December 31, 2005
|
4,135
|
770
|
(770
|
)
|
---
|
||||||||
|
Foreign
currency translation
|
112
|
—
|
—
|
—
|
|||||||||
|
Balance
as of December 31, 2006
|
$
|
4,247
|
$
|
770
|
$
|
(770
|
)
|
$
|
—
|
||||
Intangibles
at December 31, 2006 and 2005 include developed and core technology and
patents with a gross carrying amount of $399,000 and $371,000. These Intangibles
became fully amortized in 2005.
6.
Accruals and Other Current Liabilities (in
thousands):
|
|
December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Sales
commissions and incentives
|
$
|
445
|
$
|
1,089
|
|||
|
Accrued
warranty expense
|
230
|
393
|
|||||
|
Accrued
legal and accounting fees
|
29
|
155
|
|||||
|
Accrued
employee benefits
|
418
|
304
|
|||||
|
Accrued
payables—related parties
|
81
|
15
|
|||||
|
Accrued
rent
|
57
|
871
|
|||||
|
Accrued
DARPA payables
|
--
|
314
|
|||||
|
Accrued
Severance
|
--
|
455
|
|||||
|
Accrued
taxes
|
45
|
153
|
|||||
|
Others
|
366
|
175
|
|
|
$
|
1,671
|
$
|
3,924
|
7.
Bank Borrowings:
The
Company has a bank line of credit agreement with Silicon Valley Bank dated
August 15, 2005. It was further amended September 25, 2006 and extended
through August 15, 2007. This credit facility is for $5,000,000 and is secured
by the Companys’ assets and intellectual property. At December 31, 2006, the
interest rate was 8.75%. The interest rate was 7.75% at December 31, 2005.
The rate is the same for both the term-loan and line of credit in both
years. It has a minimum tangible net worth covenant which the Company must
meet going forward. On December 31, 2005 this agreement was amended and
restated to include an additional $3,000,000 term-loan line of credit for
equipment purchases. This agreement calls for repayment of principle in equal
amounts over 4 years from the date of purchase of the equipment and has an
interest rate of prime plus 0.5% if the quick ratio is greater than 1.5,
and
prime plus 1.5% if the quick ratio is at or below 1.5. Borrowings under the
Silicon Valley Agreement are collateralized by the Companys’ assets and
intellectual property. Specific borrowings under the revolver are tied to
accounts receivable balances, and the Company’s required to comply with certain
covenants with respect to effective net worth and financial ratios, which
the
Company met as of December 31, 2006. The Company had borrowings of
$1,000,000 under the revolving line of credit at December 31, 2006, and no
borrowings at December 31, 2005. The Company had total borrowings of $2,261,000
under the term-loan portion of the agreement as of December 31, 2006, and
had $1,092,000 in borrowings under this portion as of December 31, 2005.
The Company pays an unused line fee of 0.25% against any unused daily balance
during the year.
F-13
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
The
$1,000,000 revolving line of credit is a current liability. Future maturities
of
obligations under the term-loan portion are as follows: 2007; $731,000, 2008;
$676,000, 2009; $676,000, and 2010 $178,000.
Through
the Companiys’ U.K. subsidiary, it maintains a bank overdraft facility of
$490,000 (in UK pounds sterling, based on the exchange rate at December 31,
2006) under an agreement with Lloyds Bank Plc. There were no borrowings against
this facility as of December 31, 2006 and 2005, respectively. The facility
is renewed annually on January 1. The facility interest rate
was 7.25% at December 31, 2006 and 6.75% at December 31, 2005.
Through
the Companys’ German subsidiary, it maintains a credit facility under an
agreement with Sparkasse Neumarkt Bank. This credit facility is in place
to
finance our building of new offices in Berching, Germany which is owned and
occupied by the Companys’ German subsidiary. As of December 31, 2006, the
Company had borrowings of $379,000 (in Euros, based on the exchange rate
at
December 31, 2006) against this credit facility, all of which comes due
between 2007 and 2008. At December 31, 2005, the Company had borrowings of
$331,000 (in Euros based on the exchange rate at December 31, 2005). The
interest rate was 5.35% at December 31, 2006 and 2005. In addition, the
Companys’ German subsidiary has a revolving line of credit for $198,000 (in
Euros, based on the exchange rate at December 31, 2006) with Sparkasse
Neumarkt Bank. As of December 31, 2006, there were borrowings of $124,000
against this facility and borrowings of $47,000 against this facility at
December 31, 2005. The revolving facility is renewed annually on
January 1. Interest rates on this line of credit were 9.75% at December 31,
2006 and 8.75% at December 31, 2005. The $124,000 revolving line of credit
is a current liability. Future maturities of remaining borrowings are $47,000
in
2007 and $332,000 in 2008.
8.
Commitments and Contingencies:
The
Company occupies manufacturing and office facilities under non-cancelable
operating leases expiring through 2011 under which it is responsible for
related
maintenance, taxes, and insurance. Minimum lease commitments under the leases
are as follows (in
thousands):
|
Year ending December 31,
|
Gross
lease
commitments
|
Sublease
Payments
|
Minimum lease
commitments
|
|||||||
|
2007
|
$ |
994
|
$ |
(14
|
)
|
$
|
980
|
|
2008
|
795
|
(7
|
)
|
788
|
||||||
|
2009
|
772
|
-----
|
772
|
|||||||
|
2010
|
730
|
-----
|
730
|
|||||||
|
2011
|
222
|
-----
|
222
|
|
Total
minimum lease payments
|
$
|
3,492
|
These
leases included certain escalation clauses and thus rent expense was recorded
on
a straight-line basis. Consolidated net rent expense approximated $828,000,
$1,026,000 and $839,000 for the years ended December 31, 2006, 2005 and
2004, respectively. Beginning in 2006, a portion of our Solon facility has
been
subleased. For 2006, gross rent of $895,000 has been reduced by $67,000 of
sublease rentals.
At
December 31, 2006, a letter of credit in the amount of $290,000 was held by
the Company on behalf of Sparkasse Neumarkt Bank. The letter of credit would
be
drawn against the Company’s line of credit facility with Silicon Valley Bank in
the event of a default by the Company’s German subsidiary, LBM, on its
outstanding loan with Sparkasse Neumarkt Bank.
9.
Shareholders’ Equity:
Common
Stock:
The
Company had shareholder notes receivable of $62,000 for warrants exercised
in
2005 and paid for in 2006.
Warrants:
There
have been no warrants issued by the Company in 2006, 2005, and 2004. Warrants
were issued in 2000 as part of acquisitions, and in 2002 and 2003 as part
of
stock based financings. There have been no warrants issued to employees,
directors or consultants for compensation purposes. The activity relating
to
previously issued warrants is as follows:
F-14
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
|
Warrants
Outstanding
Shares
|
Warrants
Outstanding
Exercise Price
|
Warrants
Exercisable
|
Amount
|
||||||||||||||||||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||||||||||||||
|
Balance,
December 31, 2003
|
|
|
1,601,899
|
|
|
$
|
0.01 - $6.00
|
|
|
392,648
|
|
|
$ |
4,248
|
|
|
|||||||||||||||||
|
Warrants
vested.
|
|
|
—
|
|
|
$
|
0.01 - $5.563
|
|
|
779,251
|
|
|
—
|
|
|
||||||||||||||||||
|
Warrants
exercised
|
|
|
(553,312
|
)
|
|
$
|
0.01 - $5.563
|
|
|
(553,312
|
)
|
|
(1,532
|
)
|
|
||||||||||||||||||
|
Warrants
cancelled
|
|
|
(32,585
|
)
|
|
$5.563
|
|
|
(32,585
|
)
|
|
(181
|
)
|
|
|||||||||||||||||||
|
Balance,
December 31, 2004
|
|
|
1,016,002
|
|
|
$
|
0.01 - $5.563
|
|
|
586,002
|
|
|
$ |
2,535
|
|
|
|||||||||||||||||
|
Warrants
vested.
|
|
|
—
|
|
|
$
|
0.01 - $5.563
|
|
|
427,269
|
|
|
—
|
|
|
||||||||||||||||||
|
Warrants
exercised
|
|
|
(587,374
|
)
|
|
$
|
0.01 - $5.563
|
|
|
(587,374
|
)
|
|
(625
|
)
|
|
||||||||||||||||||
|
Warrants
cancelled
|
|
|
(17,877
|
)
|
|
$5.563
|
|
|
(15,146
|
)
|
|
(73
|
)
|
|
|||||||||||||||||||
|
Balance,
December 31, 2005
|
|
|
410,751
|
|
|
$
|
4.30 - $4.50
|
|
|
410,751
|
|
|
$
|
1,837
|
|
|
|||||||||||||||||
|
Warrants
exercised
|
(13,800
|
)
|
$
|
4.50
|
(13,800
|
)
|
(62
|
)
|
|||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
396,951
|
$ |
4.30 - $4.50
|
396,951
|
$
|
|
1,775
|
||||||||||||||||||||||||||
1988
Stock Option Plan:
Upon
adoption of the 1994 Stock Option Plan (see below), the Company’s Board of
Directors determined to make no further grants under the 1988 Stock Option
Plan
(the 1988 Plan). Upon cancellation or expiration of any options granted under
the 1988 Plan, the related reserved shares of common stock became available
instead for options granted under the 1994 Stock Option Plan, and, after
May 19, 2004, under our 2004 Stock Incentive Plan.
1994
Directors’ Stock Option Plan:
At
December 31, 2004, a total of 400,000 shares of common stock had been
reserved for issuance under the 1994 Directors’ Stock Option Plan. The plan
provided for the granting of nonstatutory stock options to non-employee
directors of the Company. This plan was terminated on May 19,
2004.
1994
Stock Option Plan:
At
December 31, 2004, an aggregate of 1,550,000 shares of the Company’s common
stock had been reserved for issuance and issued under the 1994 Stock Option
Plan
to employees, officers, and consultants at prices not lower than the fair
market
value of the common stock of the Company on the date of grant in the case
of
incentive stock options, and not lower than 85% of the fair market value
on the
date of grant in the case of non-statutory stock options. Options granted
may be
either incentive stock options or nonstatutory stock options. The plan
administrator (the Board of Directors or a committee of the Board) determines
the terms of options granted under the plan including the number of shares
subject to the option, exercise price, term and exercisability. This plan
was
terminated on May 19, 2004.
2004
Stock Incentive Plan
A
total
of 1,000,000 shares of common stock had been reserved for issuance under
the
2004 Employee Stock Purchase Plan. On May 19, 2004, the shareholders
approved the 2004 Stock Incentive Plan (the “2004 Plan”). The stated purpose of
the 2004 Plan is to promote the long-term success of the Company and the
creation of stockholder value by (a) encouraging employees, outside
directors and consultants to focus on critical long-range objectives,
(b) encouraging the attraction and retention of employees, outside
directors and consultants with exceptional qualifications and (c) linking
employees, outside directors and consultants directly to stockholder interests
through increased stock ownership. The 2004 Plan seeks to achieve this purpose
by providing for awards in the form of restricted shares, stock units, options
(which may constitute incentive stock options or nonstatutory stock options)
or
stock appreciation rights. An aggregate of 500,000 shares of the Company’s
common stock was reserved for issuance under the 2004 Plan on May 19, 2004.
On June 15, 2006, the shareholders reserved an additional 500,000 shares
of the
Company’s common stock for issuance under the 2004 Plan.
F-15
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
Option
activity under all plans comprised:
|
|
|
Options
Available
For Grant
|
|
Number of Shares
Outstanding
|
|
Weighted
Average Exercise
Price Per Share
|
|
|||||||
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
|||||||
|
Balance,
December 31, 2003
|
|
|
55
|
|
|
|
1,387
|
|
|
|
$
|
4.18
|
|
|
|
Granted
|
|
|
(273
|
)
|
|
|
273
|
|
|
|
$
|
7.20
|
|
|
|
Cancelled
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
$
|
5.11
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(477
|
)
|
|
|
$
|
4.62
|
|
|
|
Additional
shares reserved
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
311
|
|
|
|
1,154
|
|
|
|
$
|
5.56
|
|
|
|
Granted
|
|
|
(376
|
)
|
|
|
376
|
|
|
|
$
|
9.88
|
|
|
|
Cancelled
|
|
|
79
|
|
|
|
(79
|
)
|
|
|
$
|
5.50
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(376
|
)
|
|
|
$
|
8.95
|
|
|
|
Balance,
December 31, 2005
|
|
|
14
|
|
|
|
1,075
|
|
|
|
$
|
6.48
|
|
|
|
Granted
|
|
|
(330
|
)
|
|
|
330
|
|
|
|
$
|
7.12
|
|
|
|
Cancelled
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
$
|
5.52
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(106
|
)
|
|
|
$
|
5.36
|
|
|
|
Additional
shares reserved
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
190
|
|
|
|
1,293
|
|
|
|
$
|
7.00
|
|
|
At
December 31, 2006, 755,762 options to purchase shares of common
stock were exercisable at a weighted average fair value of
$3.07.
At
December 31, 2006, total outstanding
shares were 1,293,479 with a weighted average fair value of
$3.33.
|
OPTIONS OUTSTANDING
|
|
OPTIONS CURRENTLY
EXERCISABLE
|
|
|||||||||||||||||||||||
|
Range of
Exercise Prices
|
|
Number
of Shares
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
||||||||||||||
|
|
|
(in thousands)
|
|
(in years)
|
|
|
|
(in thousands)
|
|
|
|
|
||||||||||||||
|
$2.95
- $4.80
|
|
|
312
|
|
|
|
2.0
|
|
|
|
$
|
3.90
|
|
|
|
294
|
|
|
|
$
|
3.90
|
|
|
|
||
|
$5.25
- $7.19
|
|
|
295
|
|
|
|
4.8
|
|
|
|
$
|
6.53
|
|
|
|
130
|
|
|
|
$
|
6.30
|
|
|
|
||
|
$7.23
- $9.50
|
|
|
410
|
|
|
|
5.8
|
|
|
|
$
|
7.62
|
|
|
|
197
|
|
|
|
$
|
7.73
|
|
|
|
||
|
$9.60
- 12.00
|
|
|
276
|
|
|
|
4.4
|
|
|
|
$
|
10.09
|
|
|
|
135
|
|
|
|
$
|
10.47
|
|
|
|
||
|
|
|
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
||||
1994
Employee Stock Purchase Plan:
A
total
of 150,000 shares of common stock had been reserved for issuance under the
1994
Employee Stock Purchase Plan. The plan permits eligible employees to purchase
common stock through payroll deductions at a price equal to the lower of
85% of
the fair market value of the Company’s common stock at the beginning or end of
the offering period. Employees may end their participation at any time during
the offering period, and participation ends automatically on termination
of
employment with the Company. On June 15, 2006, the shareholders reserved
an
additional 50,000 shares of the Company’s common stock for issuance under the
1994 Employee Stock Purchase Plan. At December 31, 2006, 2005 and 2004,
94,614 shares, 90,306 shares and 86,382 shares had been issued under this
plan.
Stock-based compensation expense has been recorded as part of the Company’s
stock-based compensation.
Shareholder
Rights Plan
On
September 12, 2001, the Board of Directors of Fiberstars, Inc.
declared a dividend distribution of one “Right” for each outstanding share of
common stock of the Company to shareholders of record at the close of business
on September 26, 2002. One Right will also attach to each share of common
stock issued by the Company subsequent to such date and prior to the
distribution date defined below. With certain exceptions, each Right, when
exercisable, entitles the registered holder to purchase from the Company
one
one-thousandth of a share of a new series of preferred stock, designated
as
Series A Participating Preferred Stock, at a price of $30.00 per one
one-thousandth of a share, subject to adjustment. The Rights were distributed
as
a non-taxable dividend and expire ten years from the date of the Rights Plan.
In
general, the Rights will become exercisable and trade independently from
the
common stock on a distribution date that will occur on the earlier of
(i) the public announcement of the acquisition by a person or group of 15%
or more of the common stock or (ii) ten days after commencement of a tender
or exchange offer for the common stock that would result in the acquisition
of
15% or more of the common stock. Upon the occurrence of certain other events
related to changes in ownership of the common stock, each holder of a Right
would be entitled to purchase shares of common stock, or an acquiring
corporation’s common stock, having a market value of twice the exercise price.
Under certain conditions, the Rights may be redeemed at $0.001 per Right
by the
Board of Directors. On November 27, 2006 the Company reincorporated in the
State of Delaware and the Rights became Rights to purchase Series A
Participating Preferred Stock of the reincorporated Company. The description
and
terms of the Rights are set forth in a Rights Agreement dated as of October
25,
2006 between the Company and Mellon Investor Services LLC, as rights agent.
F-16
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
Follow-On
2005 Stock Offering
On
November 8, 2005 the Company closed a follow-on offering, selling 2,500,000
new shares of Common Stock at a price of $8.25. The purchase price of the
Common
Stock was set at $8.25 per share on November 2, 2005, which was
approximately a 5% discount on the closing price on that day. On
November 11, 2005 the Company announced that the underwriters had exercised
their option to sell an additional 452,497 shares of Common Stock for $8.25
as
part of the offering. The gross amount raised was $24.4 million from the
selling
of 2,952,497 new shares, before costs and expenses. The net amount received
by
the company after deducting 6% in underwriter’s fees and legal, accounting and
other costs was $22.2 million.
10.
Income Taxes:
The
components of the benefit from (provision for) income taxes are as follows
(in thousands):
|
Years
Ended December31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Foreign
|
(50
|
)
|
(107
|
)
|
58
|
|||||
|
State
|
|
|
(2
|
)
|
—
|
|||||
|
(50
|
)
|
(109
|
)
|
58
|
||||||
|
Deferred:
|
||||||||||
|
Federal
|
(74
|
) |
—
|
—
|
||||||
|
Foreign
|
12
|
—
|
—
|
|||||||
|
State
|
(1
|
) |
—
|
—
|
||||||
|
(63
|
) |
—
|
—
|
|||||||
|
Benefit
from (provision for) income taxes
|
$
|
(113
|
)
|
$
|
(109
|
)
|
$
|
58
|
||
The
following table shows the geographic components of pretax income (loss) between
United States and foreign subsidiaries (in
thousands):
|
December31,
|
||||||||||
|
|
|
2006
|
|
2005
|
|
2004
|
||||
|
United
States
|
$
|
(9,510
|
)
|
$
|
(7,714
|
)
|
$
|
(813
|
)
|
|
|
Foreign
subsidiaries
|
(27
|
)
|
400
|
51
|
||||||
|
$
|
(9,537
|
)
|
$
|
(7,314
|
)
|
$
|
(762
|
)
|
||
The
principal items accounting for the difference between income taxes computed
at
the United States statutory rate and the benefit from (provision for) income
taxes reflected in the statements of operations are as follows:
|
|
December31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
United
States statutory rate
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
||||
|
State
Taxes (net of federal tax benefit)
|
2.0
|
%
|
5.5
|
%
|
5.5
|
%
|
||||
|
Valuation
allowance
|
(39.0
|
)%
|
(46.5)%
|
(28.3)%
|
||||||
|
Other
|
1.8
|
%
|
5.5
|
%
|
(3.6)%
|
|||||
|
(1.2
|
)%
|
(1.5)%
|
7.6
|
%
|
||||||
F-17
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
The
tax
effects of temporary differences that give rise to significant portions
of the
deferred tax assets are as follows (inthousands):
|
|
December31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Allowance
for doubtful accounts
|
$
|
113
|
$
|
99
|
$
|
84
|
||||
|
Accrued
expenses and other reserves
|
1,097
|
1,681
|
1,227
|
|||||||
|
Tax
credits, Deferred R&D and other
|
154
|
352
|
339
|
|||||||
|
Net
operating loss
|
8,328
|
4,617
|
1,699
|
|||||||
|
Valuation
allowance
|
(9,680
|
)
|
(6,749
|
)
|
(3,349
|
)
|
||||
|
Net
deferred tax asset
|
$
|
12
|
$
|
—
|
$
|
—
|
||||
|
Deferred
tax liabilities associated
with
indefinite-lived
intangibles
|
(75 | ) | — | — | ||||||
|
Net
total deferred taxes
|
$ | (63 | ) |
$
|
— |
$
|
— | |||
The
Company has a full valuation allowance against its United States and German
deferred tax assets. The net deferred tax asset of $12,000 is for the Company’s
United Kingdom subsidiary which was profitable in 2006. The $58,000 tax
benefit shown for 2004 is a result of deferred tax for the German operations
which experienced a loss in 2004 after being profitable in prior years. No
tax
benefit has been recorded for the 2006 German operations loss.
The
deferred tax provision for 2006 resulted from tax
amortization of intangible assets with indefinite lives for book
purposes. During 2006, cumulative tax-amortization exceeded book
amortization that had been previously recorded resulting in the requirement
to record a deferred tax liability of $75,000 at December 31,
2006.
As
of
December 31, 2006, the Company has a net operating loss carry-forward of
approximately $22.6 million and $21.5 million for federal and state
and local income tax purposes, respectively. If not utilized, these
carry-forwards will begin to expire in 2020 for federal and 2008 for state
purposes.
11.
Segments and Geographic Information:
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):
|
|
|
Years Ended December 31,
|
|
|||||||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
United
States Domestic
|
|
$
|
18,776
|
|
$
|
19,123
|
|
$
|
19,974
|
|
|
Other
Countries
|
|
8,260
|
|
9,214
|
|
9,757
|
|
|||
|
|
|
$
|
27,036
|
|
$
|
28,337
|
|
$
|
29,731
|
|
A
summary
of geographic long-lived assets (fixed assets and goodwill) is as follows
(in thousands):
|
|
|
December 31,
|
|
||||
|
|
|
2006
|
|
2005
|
|
||
|
United
States Domestic
|
|
$
|
8,406
|
|
$
|
5,975
|
|
|
Germany
|
|
1,674
|
|
1,506
|
|
||
|
Other
Countries
|
|
145
|
|
76
|
|
||
|
|
|
$
|
10,225
|
|
$
|
7,557
|
|
F-18
FIBERSTARS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006 and 2005
A
summary
of sales by product line is as follows (in
thousands):
|
|
|
Years Ended December 31,
|
|
|||||||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
Pool
and Spa Lighting
|
|
$
|
13,364
|
|
$
|
14,744
|
|
$
|
16,888
|
|
|
Commercial
Lighting
|
|
13,672
|
|
13,593
|
|
12,843
|
|
|||
|
|
|
$
|
27,036
|
|
$
|
28,337
|
|
$
|
29,731
|
|
12.
Employee Retirement Plan:
The
Company maintains a 401(k) profit sharing plan for its employees who meet
certain qualifications. The Plan allows eligible employees to defer up to
15% of
their earnings, not to exceed the statutory amount per year on a pretax basis
through contributions to the Plan. The Plan provides for employer contributions
at the discretion of the Board of Directors; however, no such contributions
were
made in 2006, 2005 or 2004.
13.
Reorganization
In
June 2005, the Company announced its plans to close its Fremont office and
consolidate most of its operations in Solon, Ohio, where the Company already
had
a local sales office and a manufacturing facility. The relocation resulted
in a
restructuring charge of approximately $3.5 million for severance payments,
redundancy, lease and inventory write-offs. The Company recognized a $3,120,000
restructuring charge in the year ended December 31, 2005. During 2006, the
Company charged to operations $734,000 for costs associated with the
reorganization.
The
following table details the activity of the Company’s accrued liabilities for
restructuring:
|
December
31, 2005 Accrued liability
|
$
|
1,220
|
||
|
Payments
for restructuring
|
1,954
|
|||
|
Additional
restructuring expense
|
734
|
|||
|
December
31, 2006 Accrued liability
|
$
|
-
|
14.
Related Party Transactions
The
Company entered into a consulting agreement with Jeffrey H. Brite, a member
of
its Board of Directors, effective date of November 1, 2004. As a consultant
under this agreement, Mr. Brite is to assist Fiberstars, Inc.’s President and
Vice President of Sales in identifying, contacting and making introductions
to
key building project personnel in a position to facilitate the purchase of
Fiberstars, Inc. products. In return, Fiberstars, Inc. is to compensate Mr.
Brite with the award of an option for the acquisition of up to 40,000 shares
of
its common stock at a per share exercise price of $7.23 and with annual
aggregate cash payments of $50,000 to be paid in quarterly installments during
each of the years 2005, 2006 and 2007.
Gensler
Architecture, Design & Planning, P.C., a New York Professional Corporation
(“Gensler”) provides contract services to the Company in the areas of fixture
design and marketing targeted at expanding the market for the Company’s EFO®
products. Mr. Jeffrey H. Brite, an employee of Gensler, is a member of the
Company's Board of Directors. The Company entered into a three year consulting
agreement with Gensler, effective December 15, 2004. Gensler has agreed to
assist Fiberstars’ marketing group with matters of structure, procedure and
practices as they relate to the design, real estate and procurement communities,
and to advise Fiberstars on strategies to enhance its visibility and image
within the design and construction community as a manufacturer of preferred
technology. In return, Fiberstars has agreed to compensate Gensler with a
one-time cash payment of $60,750 for services delivered in advance of the
completion of the negotiation of the Consulting Agreement, $50,000 annual
cash
payments to be paid in quarterly installments of $12,500 in arrears for each
of
the calendar years 2005, 2006 and 2007, and a one-time option award to acquire
up to 75,000 shares of Fiberstars’ common stock at a per share exercise price of
$6.57 which has been expensed in 2006 under FAS 123R. For the fiscal years
ended
December 31, 2006, 2005 and 2004, the Company paid Gensler $50,000, $50,000
and
$60,750 ,respectively, for services performed.
On
July
1, 2005, David Ruckert, the Company’s CEO resigned as CEO and served as
President and Director through September 30, 2005 after which he served as
director. Mr. Ruckert signed a severance agreement with the Company which
was effective July 1, 2005, and which resulted in a payment of $332,076 upon
his
departure as an employee, October 1, 2005.
F-19
Item
15 (continued)
(a)
(continued)
(2)
Financial Statement Schedules
The
following Financial Statement Schedule of Fiberstars, Inc. is filed as part
of this Form 10-K included in Item 15(c) below:
Schedule II—Valuation
and Qualifying Accounts.
All
other
schedules are omitted either because they are not applicable or the required
information is shown in the financial statements or the notes
thereto.
(3)
Exhibits
See
Item 15 (b) below.
Each
management contract or compensatory plan or arrangement required to be filed
has
been identified.
(c)
Exhibits
|
Exhibit
|
|
|
|
Number
|
|
Description
of Documents
|
|
2.1
|
|
Agreement
and Plan of Merger between Fiberstars, Inc., a California corporation,
and
Fiberstars, Inc., a Delaware corporation (incorporated by reference
to
Appendix C to the Registrant’s Definitive Proxy Statement on Schedule 14A
filed on May 1, 2006).
|
|
3.1
|
|
Certificate
of Incorporation of the Registrant (incorporated by reference
to Appendix
A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed May
1, 2006).
|
|
3(i).2
|
|
Certificate
of Designation of Series A Participating Preferred Stock of
the Registrant
(incorporated by reference to Appendix B to the Registrant’s Definitive
Proxy Statement shown on Schedule 14A filed May 1,
2006).
|
|
3.2
|
|
Bylaws
of the Registrant, (incorporated by reference to Appendix C
to the
Registrant’s Current Report on Form 8-K filed November 27,
2006).
|
|
4.1
|
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to
the Registrant’s Current Report on Form 8-K filed November 27,
2006).
|
|
4.2
|
|
Rights
Agreement dated as of October 25, 2006 between the Registrant
and Mellon
Investor Services, as rights agent (incorporated by reference
to Exhibit
4.2 to the Registrant’s Current Report on Form 8-K filed November 27,
2006).
|
|
4.3
|
|
Form
of Warrant for the purchase of shares of Common Stock (incorporated
by
reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
filed November 27, 2006)).
|
|
10.1†
|
|
Form
of Indemnification Agreement for directors and officers of
the Registrant
(incorporated by reference to Exhibit 10.1 to the Registrant’s
Registration Statement on Form SB-2 (Commission File No.
33-79116-LA)).
|
|
10.2†
|
|
1994
Employee Stock Purchase Plan, amended as of December 7, 2000,
(incorporated by reference to Exhibit 99.3 to the Registrant’s
Registration Statement on Form S-8 (Commission File No. 333-52042)
filed
on December 18, 2000).
|
|
10.3
|
|
Registration
Rights Agreement dated as of June 27, 1990, between the Registrant
and
certain holders of the Registrant’s capital stock, as amended by Amendment
No. 1 dated as of February 6, 1991 and Amendment No. 2 dated
as of April
30, 1994 (incorporated by reference to Exhibit 10.10 to the
Registrant’s
Registration Statement on Form SB-2 (Commission File No.
33-79116-LA)).
|
|
10.4
|
|
Amendment
No. 3 to Registration Rights Agreement to include Warrant shares
as
Registerable Securities (incorporated by reference to Exhibit
1.2 to the
Registrant’s Registration Statement on Form SB-2 (Commission File No.
33-79116-LA)).
|
|
10.5
|
|
Form
of Agreement between the Registrant and independent sales representatives
(incorporated by reference to Exhibit 10.20 to the Registrant’s
Registration Statement on Form SB-2 (Commission File No.
33-79116-LA)).
|
|
10.6
|
|
Stock
Purchase Agreement dated March 21, 1995, among the Registrant,
Mitsubishi
International Corporation and Mitsubishi Corporation (incorporated
by
reference to Exhibit 10.20 to the Registrant’s Annual Report on Form
10-KSB for the year ended December 31, 1994).
|
|
10.7*
|
|
Three
(3)Year Supply Agreement dated November 30, 2000, between the
Registrant
and Mitsubishi International Corporation (incorporated by reference
to
Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2000).
|
|
10.8
|
|
Common
Stock and Warrant Purchase Agreement, dated March 29, 2002,
by and among
the Registrant and the investors named therein (incorporated
by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).
|
|
10.9
|
|
Securities
Purchase Agreement dated June 17, 2003, by and among the Registrant
and
the investors named therein (incorporated by reference to Exhibit
99.2 to
the Registrant’s Current Report on Form 8-K filed on June 19,
2003).
|
|
10.10
|
|
Form
of Warrant by and between the Registrants and each of the investors
party
to the Securities Purchase Agreement dated June 17, 2003 (incorporated
by
reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K
filed on June 19, 2003).
|
|
10.11†
|
|
Form
of Indemnification Agreement for officers of the Registrant
(incorporated
by reference to exhibit 10.42 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2003).
|
|
10.12
|
|
Form
of Indemnification Agreement for directors of the Registrant
(incorporated
by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2003).
|
|
10.13
|
|
Production
Share Agreement dated October 9, 2003, by and among the Registrant,
North
American Production Sharing, Inc. and Industrias Unidas de
B.C., S.A. de
C.V (incorporated by reference to exhibit 10.45 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31,
2003).
|
|
10.14
|
|
Consulting
Agreement effective as of November 1, 2004, between the Registrant
and
Gensler Architecture, Design& Planning, P.C. (Incorporated by
reference to exhibit 10.28 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2005)
|
|
10.15†
|
|
Consulting
Agreement effective as of November 1, 2004, between the Registrant
and
Jeffrey H. Brite. (Incorporated by reference to exhibit 10.29
to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2005)
|
|
10.16
|
|
Loan
and Security Agreement between Silicon Valley Bank and the
Registrant,
dated August 15, 2005 (incorporated by reference from Exhibit
10.1 to the
Registrant’s Current Report on Form 8-K filed August 18,
2005).
|
|
10.17†
|
|
Employment
Agreement between the Registrant and John N. Davenport, dated
July 1, 2005
(incorporated by reference from Exhibit 10.2 to the Registrant’s Quarterly
Report on Form 10-Q (File No. 000-24230) filed on November
14,
2005).
|
|
10.18†
|
|
Severance
Agreement between the Registrant and David N. Ruckert, dated
September 16,
2005 (incorporated by reference from Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q (File No. 000-24230) filed on
November 14,
2005).
|
|
10.19
|
|
Fiberstars
Development Agreement between the Registrant and Advanced Lighting
Technologies, Inc. dated September 19, 2005 (incorporated by
reference
from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-24230) filed on November 14, 2005).
|
|
10.20
|
|
ADLT
Development Agreement between the Registrant and Advanced Lighting
Technologies, Inc. dated September 19, 2005 (incorporated by
reference
from Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-24230) filed on November 14,
2005).
|
|
10.21
|
|
Equipment
Purchase and Supply Agreement between the Registrant and
Deposition
Services, Inc. dated September 19, 2005 (incorporated by
reference from
Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File No.
000-24230) filed on November 14, 2005).
|
|
10.22
|
|
Cross
License Agreement between the Registrant and Advanced Lighting
Technologies, Inc. dated September 19, 2005 (incorporated
by reference
from Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-24230) filed on November 14, 2005).
|
|
10.23
|
|
Master
Services Agreement between the Registrant and Advanced Lighting
Technologies, Inc. dated September 19, 2005 (incorporated
by reference
from Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-24230) filed on November 14, 2005).
|
|
10.24
|
|
First
Amendment to Production Share Agreement, effective as of
August 17, 2005,
by and among the Registrant, North American Production Sharing,
Inc. and
Industrias Unidas de B.C., S.A. de C.V. (incorporated by
reference from
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October
25, 2005).
|
|
10.25
|
|
Sublease
between Venture Lighting International, Inc. and the Registrant
dated as
of November 11, 2005 (incorporated by reference from Exhibit
10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-24230) filed on
November 17, 2005).
|
|
10.26
|
|
Amended
and Restated Loan and Security Agreement (together with Schedule
to
Amended and Restated Loan and Security Agreement and Compliance
Certificate) between Fiberstars, Inc. and Silicon Valley
Bank dated
December 30, 2005 (incorporated by reference from Exhibit
10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-24230) filed on
January 6, 2006).
|
|
10.27†
|
|
Consulting
Agreement by and between Registrant and David N. Ruckert
dated as of
February 3, 2006 (incorporated by reference from Exhibit
10.1 to the
Registrant’s Quarterly Report on Form 10-Q (File No. 000-24230) filed
on
May 15, 2006).
|
|
10.28*
|
|
Equipment
and Supply Agreement entered into May 25, 2006 between Fiberstars,
Inc.
and Deposition Sciences, Inc.(incorporated by reference from
Exhibit 10.1
to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-24230)
filed on August 11, 2006).
|
|
10.29
|
|
Modification
to sublease between Fiberstars, Inc. and Keystone Ruby, LLC.(incorporated
by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q (File No. 000-24230) filed on August 11,
2006).
|
|
10.30
|
|
Amendment
No. 1 To Amended And Restated Loan And Security Agreement
between
Fiberstars, Inc and Silicon Valley Bank dated September 25,
2006
|
|
10.31†
|
|
Form
of Indemnification Agreement for directors and officers of
the
Registrant.
|
|
10.32†
|
|
Amendment
to Consulting Agreement by and between Registrant and David
N. Ruckert
dated as of February 3, 2006.
|
|
21.1
|
|
Significant
subsidiaries of the Registrant.
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
31.1
|
|
Rule
13a-14(a)Certification by Chief Executive Officer.
|
|
31.2
|
|
Rule
13a-14(a)Certification by Chief Financial Officer.
|
|
32.1**
|
|
Statement
of Chief Executive Officer under 18 United States Code
§1350.
|
|
32.2**
|
|
Statement
of Chief Financial Officer under 18 United States Code
§1350.
|
_________________
| * |
Confidential
treatment has been granted with respect to certain portions of
this
agreement.
|
| ** |
In
accordance with item 601(b)(32)(ii) of Regulation S-K and SEC Release
Nos. 33-8338 and 34-47986, Final Rule: Management’s Reports on Internal
Control Over Financial Report and Certification of Disclosure in
Exchange
Act Periodic Reports, the certifications furnished in Exhibits 32.1
and 32.2 hereto are deemed to accompany this form 10-K and will
not be
deemed “filed” for purposes of Section 18 of the Exchange Act. Such
certifications will not be deemed incorporated by reference into
any
filing under the Securities Act or the Exchange Act, except to
the extent
that the Registrant specifically incorporates it by
reference.
|
| † |
Indicates
management contracts or compensatory plan or
arrangement.
|
(d)
Financial Statement Schedules
SCHEDULE
II
FIBERSTARS, INC.
SCHEDULE
OF VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Description
|
|
|
|
Balance at
Beginning of
Year
|
|
Charges
To Revenue
|
|
Charges
To Expenses
|
|
Deductions
|
|
Balance at
End of Year
|
|
|||||||||||||||
|
|
|
(Amounts in thousands)
|
|
|||||||||||||||||||||||||
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Allowance
for doubtful accounts and returns
|
|
|
$
|
448
|
$
|
—
|
$
|
220
|
$
|
68
|
$
|
600
|
|
|||||||||||||||
|
Valuation
allowance for deferred tax assets
|
|
|
6,749
|
—
|
2,931
|
—
|
9,680
|
|
||||||||||||||||||||
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Allowance
for doubtful accounts and returns
|
|
|
381
|
|
|
|
—
|
|
|
|
106
|
|
|
|
39
|
|
|
|
448
|
|
|
|||||||
|
Valuation
allowance for deferred tax Assets
|
|
|
3,349
|
|
|
|
—
|
|
|
|
3,400
|
|
|
|
—
|
|
|
|
6,749
|
|
|
|||||||
|
Year
Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Allowance
for doubtful accounts and returns
|
|
|
465
|
|
|
|
—
|
|
|
|
47
|
|
|
|
131
|
|
|
|
381
|
|
|
|||||||
|
Valuation
allowance for deferred tax Assets
|
|
|
2,596
|
|
|
|
—
|
|
|
|
753
|
|
|
|
—
|
|
|
|
3,349
|
|
|
|||||||
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereto duly authorized.
|
FIBERSTARS,INC.
|
||
|
Date:
March16, 2007
|
By:
|
/s/
JOHN M. DAVENPORT
|
|
John
M. Davenport
|
||
|
Chief
Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
In
accordance with the Securities Exchange Act of 1934, this Report has been
signed
by the following persons in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
JOHN M. DAVENPORT
|
Chief
Executive Officer and Director
|
March
16, 2007
|
||
|
John
M. Davenport
|
(Principal
Executive Officer)
|
|||
|
/s/
ROBERT A. CONNORS
|
Chief
Financial Officer
|
March
16, 2007
|
||
|
Robert
A. Connors
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/
JOHN B. STUPPIN
|
Director
|
March
16, 2007
|
||
|
John
B. Stuppin
|
||||
|
/s/
RONALD CASENTINI
|
Director
|
March
16, 2007
|
||
|
Ronald
Casentini
|
||||
|
/s/
MICHAEL KASPER
|
Director
|
March
16, 2007
|
||
|
Michael
Kasper
|
||||
|
/s/
PAUL VON PAUMGARTTEN
|
Director
|
March
16, 2007
|
||
|
Paul
Von Paumgartten
|
||||
|
/s/
PHILIP WOLFSON
|
Director
|
March
16, 2007
|
||
|
Philip
Wolfson
|
||||
|
/s/
DAVID N. RUCKERT
|
Director
|
March
16, 2007
|
||
|
David
N. Ruckert
|
|
Exhibit
|
|
|
|
Number
|
|
Description
of Documents
|
|
2.1
|
|
Agreement
and Plan of Merger between Fiberstars, Inc., a California corporation,
and
Fiberstars, Inc., a Delaware corporation (incorporated by reference
to
Appendix C to the Registrant’s Definitive Proxy Statement on Schedule 14A
filed on May 1, 2006).
|
|
3.1
|
|
Certificate
of Incorporation of the Registrant (incorporated by reference
to Appendix
A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed May
1, 2006).
|
|
3(i).2
|
|
Certificate
of Designation of Series A Participating Preferred Stock of the
Registrant
(incorporated by reference to Appendix B to the Registrant’s Definitive
Proxy Statement shown on Schedule 14A filed May 1,
2006).
|
|
3.2
|
|
Bylaws
of the Registrant, (incorporated by reference to Appendix C to
the
Registrant’s Current Report on Form 8-K filed November 27,
2006).
|
|
4.1
|
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to
the Registrant’s Current Report on Form 8-K filed November 27,
2006).
|
|
4.2
|
|
Rights
Agreement dated as of October 25, 2006 between the Registrant
and Mellon
Investor Services, as rights agent (incorporated by reference
to Exhibit
4.2 to the Registrant’s Current Report on Form 8-K filed November 27,
2006).
|
|
4.3
|
|
Form
of Warrant for the purchase of shares of Common Stock (incorporated
by
reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
filed November 27, 2006)).
|
|
10.1†
|
|
Form
of Indemnification Agreement for directors and officers of the
Registrant
(incorporated by reference to Exhibit 10.1 to the Registrant’s
Registration Statement on Form SB-2 (Commission File No.
33-79116-LA)).
|
|
10.2†
|
|
1994
Employee Stock Purchase Plan, amended as of December 7, 2000,
(incorporated by reference to Exhibit 99.3 to the Registrant’s
Registration Statement on Form S-8 (Commission File No. 333-52042)
filed
on December 18, 2000).
|
|
10.3
|
|
Registration
Rights Agreement dated as of June 27, 1990, between the Registrant
and
certain holders of the Registrant’s capital stock, as amended by Amendment
No. 1 dated as of February 6, 1991 and Amendment No. 2 dated
as of April
30, 1994 (incorporated by reference to Exhibit 10.10 to the Registrant’s
Registration Statement on Form SB-2 (Commission File No.
33-79116-LA)).
|
|
10.4
|
|
Amendment
No. 3 to Registration Rights Agreement to include Warrant shares
as
Registerable Securities (incorporated by reference to Exhibit
1.2 to the
Registrant’s Registration Statement on Form SB-2 (Commission File No.
33-79116-LA)).
|
|
10.5
|
|
Form
of Agreement between the Registrant and independent sales representatives
(incorporated by reference to Exhibit 10.20 to the Registrant’s
Registration Statement on Form SB-2 (Commission File No.
33-79116-LA)).
|
|
10.6
|
|
Stock
Purchase Agreement dated March 21, 1995, among the Registrant,
Mitsubishi
International Corporation and Mitsubishi Corporation (incorporated
by
reference to Exhibit 10.20 to the Registrant’s Annual Report on Form
10-KSB for the year ended December 31, 1994).
|
|
10.7*
|
|
Three
(3)Year Supply Agreement dated November 30, 2000, between the
Registrant
and Mitsubishi International Corporation (incorporated by reference
to
Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2000).
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|
10.8
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|
Common
Stock and Warrant Purchase Agreement, dated March 29, 2002, by
and among
the Registrant and the investors named therein (incorporated
by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).
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|
10.9
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|
Securities
Purchase Agreement dated June 17, 2003, by and among the Registrant
and
the investors named therein (incorporated by reference to Exhibit
99.2 to
the Registrant’s Current Report on Form 8-K filed on June 19,
2003).
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|
10.10
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|
Form
of Warrant by and between the Registrants and each of the investors
party
to the Securities Purchase Agreement dated June 17, 2003 (incorporated
by
reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K
filed on June 19, 2003).
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|
10.11†
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|
Form
of Indemnification Agreement for officers of the Registrant (incorporated
by reference to exhibit 10.42 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2003).
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|
10.12
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|
Form
of Indemnification Agreement for directors of the Registrant
(incorporated
by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2003).
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|
10.13
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|
Production
Share Agreement dated October 9, 2003, by and among the Registrant,
North
American Production Sharing, Inc. and Industrias Unidas de B.C.,
S.A. de
C.V (incorporated by reference to exhibit 10.45 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31,
2003).
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|
10.14
|
|
Consulting
Agreement effective as of November 1, 2004, between the Registrant
and
Gensler Architecture, Design& Planning, P.C. (Incorporated by
reference to exhibit 10.28 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2005)
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|
10.15†
|
|
Consulting
Agreement effective as of November 1, 2004, between the Registrant
and
Jeffrey H. Brite. (Incorporated by reference to exhibit 10.29
to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2005)
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|
10.16
|
|
Loan
and Security Agreement between Silicon Valley Bank and the Registrant,
dated August 15, 2005 (incorporated by reference from Exhibit
10.1 to the
Registrant’s Current Report on Form 8-K filed August 18,
2005).
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|
10.17†
|
|
Employment
Agreement between the Registrant and John N. Davenport, dated
July 1, 2005
(incorporated by reference from Exhibit 10.2 to the Registrant’s Quarterly
Report on Form 10-Q (File No. 000-24230) filed on November 14,
2005).
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|
10.18†
|
|
Severance
Agreement between the Registrant and David N. Ruckert, dated
September 16,
2005 (incorporated by reference from Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q (File No. 000-24230) filed on November
14,
2005).
|
|
10.19
|
|
Fiberstars
Development Agreement between the Registrant and Advanced Lighting
Technologies, Inc. dated September 19, 2005 (incorporated by
reference
from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-24230) filed on November 14, 2005).
|
|
10.20
|
|
ADLT
Development Agreement between the Registrant and Advanced Lighting
Technologies, Inc. dated September 19, 2005 (incorporated by
reference
from Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-24230) filed on November 14,
2005).
|
|
10.21
|
|
Equipment
Purchase and Supply Agreement between the Registrant and Deposition
Services, Inc. dated September 19, 2005 (incorporated by reference
from
Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File No.
000-24230) filed on November 14, 2005).
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|
10.22
|
|
Cross
License Agreement between the Registrant and Advanced Lighting
Technologies, Inc. dated September 19, 2005 (incorporated by
reference
from Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-24230) filed on November 14, 2005).
|
|
10.23
|
|
Master
Services Agreement between the Registrant and Advanced Lighting
Technologies, Inc. dated September 19, 2005 (incorporated by
reference
from Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-24230) filed on November 14, 2005).
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|
10.24
|
|
First
Amendment to Production Share Agreement, effective as of August
17, 2005,
by and among the Registrant, North American Production Sharing,
Inc. and
Industrias Unidas de B.C., S.A. de C.V. (incorporated by reference
from
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October
25, 2005).
|
|
10.25
|
|
Sublease
between Venture Lighting International, Inc. and the Registrant
dated as
of November 11, 2005 (incorporated by reference from Exhibit
10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-24230) filed on
November 17, 2005).
|
|
10.26
|
|
Amended
and Restated Loan and Security Agreement (together with Schedule
to
Amended and Restated Loan and Security Agreement and Compliance
Certificate) between Fiberstars, Inc. and Silicon Valley Bank dated
December 30, 2005 (incorporated by reference from Exhibit 10.1
to the
Registrant’s Current Report on Form 8-K (File No. 000-24230) filed on
January 6, 2006).
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|
10.27†
|
|
Consulting
Agreement by and between Registrant and David N. Ruckert dated
as of
February 3, 2006 (incorporated by reference from Exhibit 10.1 to
the
Registrant’s Quarterly Report on Form 10-Q (File No. 000-24230) filed on
May 15, 2006).
|
|
10.28*
|
|
Equipment
and Supply Agreement entered into May 25, 2006 between Fiberstars,
Inc.
and Deposition Sciences, Inc.(incorporated by reference from Exhibit
10.1
to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-24230)
filed on August 11, 2006).
|
|
10.29
|
|
Modification
to sublease between Fiberstars, Inc. and Keystone Ruby, LLC.(incorporated
by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q (File No. 000-24230) filed on August 11,
2006).
|
|
10.30
|
|
Amendment
No. 1 To Amended And Restated Loan And Security Agreement between
Fiberstars, Inc and Silicon Valley Bank dated September 25, 2006
|
|
10.31†
|
|
Form
of Indemnification Agreement for directors and officers of the
Registrant.
|
|
10.32†
|
|
Amendment
to Consulting Agreement by and between Registrant and David N.
Ruckert
dated as of February 3, 2006.
|
|
21.1
|
|
Significant
subsidiaries of the Registrant.
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
31.1
|
|
Rule
13a-14(a)Certification by Chief Executive Officer.
|
|
31.2
|
|
Rule
13a-14(a)Certification by Chief Financial Officer.
|
|
32.1**
|
|
Statement
of Chief Executive Officer under 18 United States Code
§1350.
|
|
32.2**
|
|
Statement
of Chief Financial Officer under 18 United States Code
§1350.
|
________________
| * |
Confidential
treatment has been granted with respect to certain portions of
this
agreement.
|
| ** |
In
accordance with item 601(b)(32)(ii) of Regulation S-K and SEC Release
Nos. 33-8338 and 34-47986, Final Rule: Management’s Reports on Internal
Control Over Financial Report and Certification of Disclosure in
Exchange
Act Periodic Reports, the certifications furnished in Exhibits 32.1
and 32.2 hereto are deemed to accompany this form 10-K and will
not be
deemed “filed” for purposes of Section 18 of the Exchange Act. Such
certifications will not be deemed incorporated by reference into
any
filing under the Securities Act or the Exchange Act, except to
the extent
that the Registrant specifically incorporates it by
reference.
|
| † |
Indicates
management contracts or compensatory plan or
arrangement.
|
(d)
Financial Statement Schedules