Energy Focus - 10-Q quarterly report FY

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements

CONDENSED

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

The accompanying notes are an integral part of these financial statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(unaudited)

 

The accompanying notes are an integral part of these financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these financial statements

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

The year-end balance sheet information was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2003, contained in the Company’s 2003 Annual Report on Form 10-K.

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

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

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

The shares outstanding used for calculating basic and diluted EPS include 120,000 shares of common stock issuable for no cash consideration upon exercise of certain exchange provisions of warrants held by Advanced Lighting Technologies, Inc. (“ADLT”).

At June 30, 2004, options and warrants to purchase 1,105,322 shares of common stock were outstanding, but were not included in the calculation of diluted EPS because their inclusion would have been antidilutive. Options to purchase 1,872,000 shares of common stock were outstanding at June 30, 2003, but were not included in the calculation of diluted EPS for the six months ended June 30, 2003 because their inclusion would have been antidilutive.

 

                     

 

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. A liability for the estimated future costs under product warranties is maintained for products outstanding under warranty:

 

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

The Company has a $5,000,000 Loan and Security Agreement (Accounts Receivable and Inventory) dated December 7, 2001, with Comerica Bank bearing interest equal to prime plus 0.25% per annum computed daily or a fixed rate term option of LIBOR plus 3%. Borrowings under this Loan and Security Agreement are collateralized by the Company’s assets and intellectual property. Specific borrowings are tied to accounts receivable and inventory balances, and the Company must comply with certain covenants with respect to effective net worth and financial ratios. The Company had no borrowings against this facility as of June 30, 2004 and December 31, 2003. The Company was in conformity with its bank covenants as of June 30, 2004. On April 2, 2004, the Company and Comerica Bank amended the Loan and Security Agreement to eliminate the profitability covenant.

The Company also has a $413,000 (in UK pounds sterling based on the exchange rate at June 30, 2004) bank overdraft agreement with Lloyds Bank Plc through its UK subsidiary. There were no borrowings against this facility as of June 30, 2004 and December 31, 2003.

The Company has a $671,000 (contracted in Euros, based on the exchange rate at June 30, 2004) bank borrowing facility secured by real property owned by its German subsidiary, with Sparkasse Neumarkt Bank. As of June 30, 2004, the Company had a total borrowing of $464,000 against this credit facility. As of December 31, 2003, the Company had $475,000 borrowed against this facility. Additionally, there is a revolving line of credit of $233,000 (contracted in Euros, based on the exchange rate at June 30, 2004) with Sparkasse Neumarkt Bank. As of June 30, 2004, there was a total borrowing of $179,000 against this facility, and there were no borrowings against this facility as of December 31, 2003.

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

The Company operates in a single industry segment that manufactures, markets and sells fiber optic lighting products. The Company has two primary product lines: the pool and spa lighting product line and the commercial lighting product line, each of which markets and sells fiber optic lighting products. The Company markets its products for worldwide distribution primarily through independent sales representatives, distributors and swimming pool builders in North America, Europe and the Far East.

 

A summary of sales by geographic area is as follows (unaudited, in thousands):

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

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

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

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer.  This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2004, except for mandatory redeemable financial instruments of nonpubli c entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption.  The adoption of SFAS No. 150 did not have an impact on the Company’s financial position, results of operations or cash flows.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In addition, FIN 46 requires that a company make disc losures in its consolidated financial statements for the year ended December 31, 2002 when the company believes it is reasonably possible that it will consolidate or disclose information about variable interest entities after FIN 46 becomes effective. In December 2003, FASB issued a revised FIN 46. The FASB deferred the effective date for VIEs that are non-special purpose entities created before February 1, 2003, to the first interim or annual reporting period that ends after March 15, 2004. At this time, the Company does not believe that it is reasonably possible that it will consolidate or disclose information about VIEs. However, the Company will continue to assess the impact of FIN 46 on its consolidated financial statements.

 

In February 2000, the Company purchased certain assets of Unison Fiber Optic Systems, Inc. (“Unison”) and accounted for the acquisition as a purchase. Acquired intangible assets are being amortized using the straight-line method over the estimated useful life of the assets ranging from 3 to 7 years.

A full valuation allowance is recorded against the Company’s U.S. deferred tax assets as management cannot conclude, based on available objective evidence, when the gross value of its deferred tax assets will be realized. The Company accrues foreign tax expenses or benefits as these are incurred.

Refer to Note 8 of the Company’s Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed with the SEC.

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

RESULTS OF OPERATIONS

Gross profit was $3,567,000 in the second quarter of fiscal 2004, a 24% increase compared to the same period in the prior year. The gross profit margin was 42% for the second quarter of fiscal 2004, compared to the 38% gross profit margin achieved in the same period in 2003. The gross profit margin improved due to lower direct product costs for pool lighting products and for commercial lighting products in Europe. Gross profit for the first six months of 2004 was $5,668,000, up 15% from gross profit for the same period last year. Gross profit margins was 39% for the first six months of 2004 compared to 37% for the first six months of 2003. The majority of the increase in the gross profit margin was a result of improvements in direct costs for pool lighting products as a result of the move to offshore production. If net sales increase, we believe overall gross profit will increase in 20 04, as we expect our cost of sales to decrease as we increase our offshore manufacturing in Mexico and India.

 

In the second quarter of 2004, we accrued $719,000 in credits for funds to be received from DARPA under this contract. This compares to $478,000 in credits received in the second quarter of 2003. For the first six months of 2004, net research and development expenses were $487,000 compared to $398,000 for the same period in 2003. The increase in expense was primarily due to higher gross expenses for research and development on personnel and project costs in the first half of 2004, partially offset by higher DARPA credits to research and development expense of $1,306,000 for funds to be received for milestones achieved during the first six months of 2004. This compares to $820,000 in DARPA credits received during the same period in 2003. The increase in gross research and development expenses was due to additional costs for personnel and project costs associated with meeting the DARPA m ilestones. We expect research and development expenses to increase in 2004 as we plan to increase our development of commercial lighting products along with additional DARPA work.

Sales and marketing expenses increased by 19% to $2,210,000 in the second quarter of fiscal 2004 as compared to $1,865,000 for the same period in fiscal 2003. This increase was largely due to an increase in commission expenses of $194,000, due in part to higher sales volume and a change in our method of marketing pool products from the second quarter of 2003 to the second quarter of 2004. In the second quarter of 2004, we relied on outside sales agents at higher commission rates to sell pool products. In the second quarter of 2003, we used inside sales managers to sell pool products, which resulted in a lower commission expense rate. In addition, there were increased expenses in U.S. domestic lighting and in European sales and marketing of $140,000 due to exchange rate effects (for Europe) and higher trade show and literature costs. For the first six months of 2004 sales and marketing expenses were $4,187,000 compared to $3,613,000 for the same period in 2003, a 16% increase. The increase was also due to the higher commission expenses, along with higher expenses in U.S. and European sales and marketing due to higher expenditures for personnel, trade shows, literature and exchange rate effects (in Europe). We expect sales and marketing expenses to increase for 2004 as we anticipate increasing our sales and marketing efforts for our new products.

General and administrative costs were $645,000 in the second quarter of fiscal 2004, a decrease of 5% compared to costs in the second quarter of fiscal 2003. For the first six months of 2004, general and administrative costs were $1,268,000 compared to $1,344,000 for the same period in 2003, a 6% decrease. These decreases were largely a result of lower accounting fees resulting from the change in public accounting firms taken in the third quarter of 2003. We expect general and administrative costs to be relatively flat in 2004 compared to 2003.

We recorded net income of $461,000 in the second quarter of fiscal 2004 as compared to net income of $85,000 in the second quarter of fiscal 2003. For the first six months of 2004, we had a net loss of $303,000 compared to a net loss of $537,000 for the same period in 2003. The lower net loss in 2004 was due primarily to the increase in net sales and the improvement in gross profit margin in the second quarter of 2004 compared to the second quarter of 2003.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2004, our cash and cash equivalents were $2,957,000 as compared to $4,254,000 at December 31, 2003, a net cash decrease of $1,297,000 during the first six months of 2004. This compares to a net cash increase of $735,000 for the same period in 2003, and an ending cash balance of $966,000 as of June 30, 2003.

We had no bank borrowings against our U.S. line of credit at June 30, 2004 and at December 31, 2003.

Cash decreased from operations during the first six months of 2004 principally due to a net loss of $303,000, an increase in accounts receivable of $989,000, an increase in prepaid expenses of $535,000, an increase in inventories of $794,000 and a decrease in accrued liabilities of $348,000. Our accounts receivable increased due to higher DARPA receivables and higher pool and spa accounts receivable resulting from higher sales in the second quarter of 2004 compared to the second quarter of 2003. These uses of cash from operations were partially offset by depreciation and amortization of $498,000 and an increase in accounts payable of $135,000. After these and other adjustments our total net cash used in operating activities in the second quarter of 2004 was $2,304,000 compared to $1,087,000 used in operating activities in the second quarter of 2003.

Investing activities used cash of $352,000 during the first six months of 2004, compared to a use of cash of $93,000 for the same period of 2003. During both periods, cash was used for the acquisition of fixed assets.

Financing activities contributed $1,372,000 to cash during the first six months of 2004. This net contribution was due primarily to the proceeds from the exercise of employee stock options. For the same period in 2003, financing activities, from the sale of common stock of $2,769,000 was partially offset by repayment of bank borrowings, contributed $1,746,000 to cash. During both periods, we received cash contributions from the repayment of shareholder loans of $224,000 in 2004 and $75,000 in 2003.

We have a $5,000,000 Loan and Security Agreement (Accounts Receivable and Inventory) dated December 7, 2001, with Comerica Bank bearing interest equal to prime plus 0.25% per annum computed daily or a fixed rate term option of LIBOR plus 3%. Borrowings under this Loan and Security Agreement are collateralized by our assets and intellectual property. Specific borrowings are tied to accounts receivable and inventory balances, and we must comply with certain covenants with respect to effective net worth and financial ratios. We had no borrowings against this facility as of June 30, 2004 and December 31, 2003. On April 2, 2004, Fiberstars and Comerica Bank amended the Loan and Security Agreement to eliminate the profitability covenant.

We also have a $413,000 (in UK pounds sterling based on the exchange rate at June 30, 2004) bank overdraft agreement with Lloyds Bank Plc through its UK subsidiary. There were no borrowings against this facility as of June 30, 2004 and December 31, 2003.

We have a total bank borrowing facility of $671,000 (in Euros, based on the exchange rate at June 30, 2004) secured by real property owned by our German subsidiary, with Sparkasse Neumarkt Bank. As of June 30, 2004, we had total borrowings of $464,000 against this credit facility. As of December 31, 2003, we had $475,000 borrowed against this facility. Additionally, we have a revolving line of credit of $233,000 (in Euros, based on the exchange rate at June 30, 2004) with Sparkasse Neumarkt Bank. As of June 30, 2004, there was a total borrowing of $179,000 against this facility, and there were no borrowings against this facility as of December 31, 2003.

In May 2003, the Financial Accounting Standards Board, or FASB, issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer.  This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2004, except for mandatory redeemable financial instruments of nonpublic entitie s. It is t o be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption.  The adoption of SFAS No. 150 did not have an impact on the our financial position, results of operations or cash flows.

In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In addition, FIN 46 requires that a company make disclosures in its consolidated financial statements for the year ended December 31, 2002 when the company believes it is reasonably possible that it will consolidate or disclose information about variable interest entities after FIN 46 becomes effective. In December 2003, FASB issued a revised FIN 46. The FASB deferred the effective date for VIEs that are non-special purpose entities created before February 1, 2003, to the first interim or annual reporting period that ends after march 15, 2004. At this time, we do not believe that it is reasonably possible that we will consolidate or disclose information about VIEs. However, we will continue to assess the impact of FIN 46 on our consolidated financial statements.

Our quarterly operating results can vary significantly depending upon a number of factors. It is difficult to predict the lighting market’s acceptance of and demand for our products on a quarterly basis, and the level and timing of orders received can fluctuate substantially. Our sales volumes fluctuate, as does the relative volume of sales of our various products with significantly different product margins. Historically we have shipped a substantial portion of our quarterly sales in the last month of each of the second and fourth quarters of the year. Our product development and marketing expenditures may vary significantly from quarter to quarter and are made well in advance of potential resulting revenue. Significant portions of our expenses are relatively fixed in advance based upon our forecasts of future sales. If sales fall below our expectations in any given quarter, w e will not be able to make any significant adjustment in our operating expenses, and our operating results will be adversely affected.

Sales of our pool and spa lighting products, which currently are available only with newly constructed pools and spas, depend substantially upon the level of new construction of pools. Sales of commercial lighting products also depend significantly upon the level of new building construction and renovation. Construction levels are affected by housing market trends, interest rates and the weather. Because of the seasonality of construction, our sales of swimming pool and commercial lighting products, and thus our overall revenues and income, have tended to be significantly lower in the first and third quarter of each year. Various economic and other trends may alter these seasonal trends from year to year, and we cannot predict the extent to which these seasonal trends will continue.

On-going terrorist threats and actual terrorist attacks have increased the uncertainty in both the U.S. and European economy, which are primary markets for our products. Terrorist acts and similar events, could weaken the demand for our products as they did following the September 11, 2001 tragedy.

We currently hold 40 patents. There can be no assurance, however, that our issued patents are valid or that any patents applied for will be issued. We have a policy of seeking to protect our intellectual property through, among other things, the prosecution of patents with respect to certain of our technologies. There are many issued patents and pending patent applications in the field of fiber optic technology, and certain of our competitors hold and have applied for patents related to fiber optic lighting. Although, to date, we have not been involved in litigation challenging our intellectual property rights or asserting intellectual property rights of others, we have in the past received communications from third parties and recently received a communication from one of our competitors asserting rights in our patents or that our technology infringes intellectual property rig hts held by such third parties. Based on information currently available to us, we do not believe that any such claims involving our technology or patents are meritorious. However, we may be required to engage in litigation to protect our patent rights or to defend against the claims of others. In the event of litigation to determine the validity of any third party claims or claims by us against such third party, such litigation, whether or not determined in our favor, could result in significant expense and divert the efforts of our technical and management personnel, regardless of the outcome of such litigation.

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

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 an outside sales agent could interfere with our ability to maintain customer relationships and result in declines in our net sales and operating results.

Our future success will depend to a large extent on the continued contributions of certain employees, many of whom 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 and retain any such persons could delay product development cycles, disrupt our operations or otherwise harm our business or results of operations.

Mitsubishi is the sole supplier of our stranded fiber, which is used extensively in our fiber pool and spa lighting products. We also rely on a sole source for certain lamps, reflectors, remote control devices, power supplies and thin film coatings. The loss of one or more of our suppliers 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.

In order to save costs, we are continually seeking off-shore supply of components and assemblies. 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 U.S., and this could lead to an interruption of 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.

We depend on various components and raw materials for use in the manufacturing of our products. We may not be able to successfully manage price fluctuations due to market demand or shortages. In addition to risks associated with sole and foreign suppliers, significant increases in the costs of or sustained interruptions in our receipt of adequate amounts of necessary components and raw materials could harm our margins, result in manufacturing halts and negatively impact our results of operations.

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 products. To do so, we must advance certain raw materials, inventory and production costs to these offshore manufacturers. The supply of finished goods from these companies, and the raw materials, inventory and funds which 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.

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. The loss of any significant customer 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.

We cannot be assured 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 revenues, 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.

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. As a result we may experience declines in sales and lose, or fail to gain, market share.

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 would 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.

While we have historically been able to fund cash needs from operations, from bank lines of credit or from capital markets, due to competitive, economic or other factors there can be no assurance that 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 continued 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 an d 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 have a material adverse effect on 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.

Our stock price has been and is likely to be highly volatile, particularly due to our relatively limited trading volume. Our stock price could fluctuate significantly due to a number of factors, including:

In addition, the stock markets in general, and The Nasdaq National Market and the market for fiber optic lighting and technology companies in particular, have experienced extreme price and volume fluctuations recently. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance.

In the past, companies that have experienced volatility in the market prices of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources.

As of June 30, 2004, we had $381,000 in cash held in foreign currencies based on the exchange rates at June 30, 2004. The balances for cash held overseas in foreign currencies are subject to exchange rate risk. We have a policy of maintaining cash balances in local currencies unless an amount of cash is occasionally transferred in order to repay intercompany debts.

As of June 30, 2004, we had total borrowings of $464,000 (in Euros, based on the exchange rate at June 30, 2004) against a note payable secured by real property owned by our German subsidiary, with Sparkasse Neumarkt Bank. As of December 31, 2003, the Company had $475,000 borrowed against this facility. We have a total bank borrowing facility of $671,000. Additionally, there is a revolving line of credit of $233,000 (contracted in Euros, based on the exchange rate at June 30, 2004) with Sparkasse Neumarkt Bank. As of June 30, 2004, there was a total borrowing of $179,000 against this facility, and there were no borrowings against this facility as of December 31, 2003.

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or 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 Chief Executive Officer and Chief 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 object ives of the disclosure controls and procedures are met. 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 our stated goals under all potential future conditions.

 

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief 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 Quarterly Report on Form 10-Q was being prepared.

There was no significant changes in our internal control or over our financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation described in item 4(a) above that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

 

 

(a)  The Annual Meeting of Stockholders was held on May 19, 2004.

 

(b)  The matters voted upon at the meeting and results of the voting with respect to those matters were as follows:

 

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On April 21, 2004, the Company filed a Current Report on Form 8-K furnishing under item 12 the Company’s press release relating to its financial results for the quarter ended March 31, 2004.

 

 

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

 

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