Energy Focus - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

 

 

 

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

 

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 only 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 date. 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, 2005, contained in the Company’s 2005 Annual Report on Form 10-K.

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 shareholder’s equity until realized.

The short-term investments maturing over the next year total $10,741,000. The remaining short-term investments have scheduled maturity dates from October 2007 through December 2036.

The change in net unrealized holding gains on securities available for sale in the amount of $(67,000) has been charged to other comprehensive income for the quarter ended September 30, 2006. The cost of securities sold is based on the specific identification method.

Proceeds from the sale of available securities during 2006 were approximately $95,000,000. Gross gains of $408,000 were realized on the sales of available for sale securities during 2006. These gains on interest bearing securities are included as part of the Interest Income/(expense) in the Statement of Operations.

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

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

At September 30, 2006, options and warrants to purchase 1,495,000 shares of common stock were outstanding, but were not included in the calculation of diluted EPS because their inclusion would have been antidilutive. Options and warrants to purchase 1,838,912 shares of common stock were outstanding at September 30, 2005, but were not included in the calculation of diluted EPS because their inclusion would have been antidilutive.

 

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.

 

For the quarter ended September 30, 2006, the Company recorded compensation expense of $238,000. For the nine month period ended September 30, 2006, the Company recorded $752,000 of compensation expense. Total cash flow remains unchanged from what would have been reported under prior accounting rules.  At December 31, 2005, the Company had unamortized compensation expenses of $397,000. This amount was reclassified to reduce the balance of additional paid-in capital and is now part of our total unearned compensation of $1,874,000 remaining at September 30, 2006. These costs will be charged to expense in future periods through 2009 in accordance with our FAS 123R accounting. Additional options were granted in the three months ended September 30, 2006 and have been valued in accordance with FAS 123R.

 

 

 

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 (in thousands):

 

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

 

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.

 

 

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

 

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

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

 

 

 

In July, 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” providing guidance on the accounting for and reporting of corrections accounting changes and error corrections. The standard is effective for fiscal years beginning after December 15, 2006. The impact of adopting SFAS 154 is not anticipated to have a material impact on our financial position.

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 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. As of September 30, 2006, we are evaluating the effect, if any, SAB No. 108 may have on our financial statements, but management does not currently believe SAB No. 108 will have a 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.

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. Management does not believe the suit will have a material affect on our financial condition and results of operations.

 

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 was expected to result in a restructuring charge of approximately $3,500,000 for severance payments, redundancy, and lease and inventory write-offs. The Company recognized a $3,120,000 restructuring charge in the year ended December 31, 2005. During the first three quarters of 2006, the Company charged to Operations $734,000 for costs associated with the reorganization.

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. compensated 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. Payments in the third quarter of 2006 to Brite totaled $15,500 and total $46,500 for the nine months ending September 30, 2006. Payments in the third quarter of 2005 totaled $15,000 and for the nine months ending September 30, 2005 totaled $30,000.

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 in 2005 of $332,076 upon his departure as an employee, October 1, 2005. Mr. Ruckert also entered into a consulting agreement with the Company on December 9, 2005. Payments to Mr. Ruckert in the third quarter of 2006 totaled $13,000 and $82,000 for the nine months ended September 30, 2006.

On September 19, 2005, the Company entered into a master services agreement and related ancillary agreements with Advanced Lighting Technologies, Inc. (“ADLT”). These agreements include development agreements governing the provision of research and development services by ADLT to the Company and by the Company to ADLT, which agreements are subject to pre-determined cost limitations and the ability of either party to terminate these agreements for convenience and with proper notice, and under which the Company expects ADLT to develop new lamps for the Company’s energy efficient lighting system known as EFO™, and ADLT expects the Company to adapt the Company’s patented CPC optic technology to certain ADLT products; an equipment purchase and supply agreement governing the Company’s purchase of manufacturing equipment from ADLT and the supply of support and manufacturing services by ADLT related to the purchased equipment; a mutual supply agreement governing the sale and purchase of the Company’s products by ADLT and of ADLT’s products by the Company; and a cross license agreement governing the mutual grant of rights and licenses between the Company and ADLT for specified uses of intellectual property. These agreements became effective upon ADLT’s sale of certain shares of the Company’s Common Stock on November 8, 2005, as described in a registration statement on Form S-3 filed with the Securities and Exchange Commission on September 19, 2005, in which ADLT participated as a selling shareholder and their shares of the company stock were sold. ADLT has no remaining ownership interest in the Company.

 

Purchases from ADLT, excluding rent, were $165,000 in the third quarter of 2006 and $1,639,000 for the nine months ended September 30, 2006. Purchases in 2006 included $1,325,000 in capital equipment and purchases in the third quarter of 2005 and nine months ending September 30, 2005 were $112,000 and $305,000, respectively. Purchases in the fourth quarter of 2005 included $1,092,000 in capital equipment. Sales to ADLT were $3,000 in the third quarter of 2006 and $114,000 for the nine months ending September 30, 2006, compared to $80,000 and $121,000 for the third quarter and nine months ending of September 30, 2005. Accounts receivable with ADLT were $55,000 at September 30, 2006 and $132,000 at December 31, 2005. These amounts are included in the accounts receivable trade balance on the accompanying consolidated balance sheets. Accounts payable were $16,000 at September 30, 2006 and $33,000 at December 31, 2005, respectively. These amounts are included in the accounts payable trade balance on the accompanying consolidated balance sheets.

Further, as a part of our relocation of our base operations from Fremont, California to Solon, Ohio, we expanded our lease with ADLT to rent a portion of their building in Solon, Ohio. During the second quarter of 2006, the lease was assigned to a non-related third party and extended through 2011. There were no lease payments to ADLT in the third quarter of 2006. Lease payments for the nine months ending September 30, 2006 totaled $138,000. Lease payments were $46,000 in the third quarter of 2005 and $98,000 for the nine months ending September 30, 2005. This site is now the Company’s Corporate Administrative headquarters, Engineering, and Commercial sales and operations hub.

The following discussion and analysis of our 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 our Annual Report on Form 10-K for the year ended December 31, 2005.

 

RESULTS OF OPERATIONS

Net sales decreased 11% to $6,808,000 for the quarter ended September 30, 2006, as compared to the same quarter a year ago. The decrease was primarily a result of lower pool sales (down 15%) due to the slowdown in housing starts along with lower sales from Europe (down 29%) as a result of a large one-time sale in the third quarter of 2005 which was not duplicated in the third quarter of 2006. These shortfalls were partially offset by higher EFO sales of $1,346,000 in the quarter compared to $454,000 in the third quarter of 2005. Third quarter sales include $850,000 in revenue from the achievement of Navy ship install contract milestones. Net sales for the first nine months of 2006 were $19,845,000 compared to net sales of $22,102,000 for the same period in 2005, a decrease of 10%. The sales decrease in the first nine months is also due to lower traditional fiber optic sales in pool lighting products (down 13%) and Europe (down 15%) partially offset by higher EFO sales, which were $2,547,000 for nine months ending September 30, 2006 compared to $1,220,000 for the nine months ending September 30, 2005. Due to lower sales in the traditional fiber optic lines, pool lighting and traditional commercial, we expect overall sales to be down for fiscal 2006. However, the market for our products is highly dependent upon general economic conditions.

 

On March 31, 2006, we announced that we had received funding from DARPA for $2,100,000 to develop and install our high efficiency distributed lighting systems as a “commercial” product on three US Navy ships. This project will result in revenue being recognized on a percentage of completion basis as milestones are completed over the next two years. We recognized revenue of $850,000 in the third quarter of 2006 and $1,399,000 for the nine months ending September 30, 2006 for the completion of milestones.

Gross profit was $2,036,000 in the third quarter of fiscal 2006, a 31% decrease compared to the same period in the prior year. The gross profit margin as a percentage of sales decreased from 39% for the third quarter of fiscal 2005 to 30 % for the third quarter of 2006. Gross profit margin declined primarily due to lower gross profit margins on U.S. pool lighting and commercial lighting sales. Gross profit for the first nine months of 2006 was $5,966,000, a decrease of 29% over gross profit margins for the same period in 2005. This represents gross profit margins of 30% for the first nine months of 2006 compared to 38% in 2005. The decline was due to lower margins on U.S. pool lighting and commercial lighting sales. It was partially offset by higher margins in Europe due to increased margins on several projects. We expect gross profit margins for the full 2006 year, to be lower than 2005, assuming general economic conditions remain consistent.

Research and development expenses were $630,000 in the third quarter of fiscal 2006, a decrease of $9,000 compared with the third quarter of fiscal 2005. Gross expenses for research and development decreased by 34% due to lower project costs and due to engineering costs associated with delivering the Navy ship install milestones being included in cost of sales in the third quarter of 2006, whereas there were no such reclassed expenses in 2005. Our research and development expense are reduced by credits received for achieving milestones under a development contract with the Department of Energy, “DOE” that was signed in 2005 for a total of $1,500,000. In addition, further awards were taken for a Small Business Innovative Research award with the Defense Advanced Research Projects Agency, “DARPA” totaling $199,000 signed in October, 2005. Gross research and development expenses were $2,658,000 in the first 9 months of 2006, compared to $3,149,000 for the same period in 2005. The decrease was a result of lower project costs and engineering costs included in cost of sales for the first nine months of 2006 as discussed above for the quarter. The gross research and development spending along with credits from government contracts is shown in the table:

 

We expect research and development expense nearly flat for the full year 2006 compared to 2005 due to reduced DARPA credits offset by lower gross expenses as discussed above.

Sales and marketing expenses decreased by 13% to $2,280,000 in the third quarter of fiscal 2006 as compared to $2,611,000 for the same period in fiscal 2005. The decrease is due to a one time increase in pool sales and marketing expense in the third quarter of 2005 due to expenses associated with the settlement of a lawsuit with Pentair Water Pool and Spa, Inc. There was no such legal expense in 2006. Sales and marketing expense decreased by 3% to $7,132,000 in the first nine months of 2006 as compared to the same period in 2005, for the same reason it decreased for the quarter as described above. We expect sales and marketing expenses to increase slightly for the full year 2006 as we anticipate increasing our sales and marketing efforts for our new products.

 

 

In June 2005, we announced our plans to close our Fremont office and consolidate most of our operations in Solon, Ohio, where we have a local sales office and a manufacturing facility. The relocation resulted in a restructuring charge of approximately $3,100,000 for severance payments, redundancy, and lease and inventory write-offs for the fiscal year 2005. During the first nine months of 2006, we charged to operations $734,000 for costs associated with this restructuring. Additional restructuring costs were necessary in 2006 beyond what was originally estimated in order to further consolidate distribution operations into our Mexican production site. Restructuring is now complete and there will be no further costs charged in 2006. We expect the total restructuring to produce cost savings of between $1,500,000 and $2,000,000 on an annual basis, and we have begun to see the impact of this savings in Q3 of 2006. These savings will be reflected largely in reduced cost of sales with a lesser amount in operating expenses. 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 pool lighting products.

 

We recorded a net loss of $2,125,000 in the third quarter of fiscal 2006 as compared to a net loss of $2,074,000 in the third quarter of fiscal 2005. The net loss for the nine months ending September 30, 2006 and 2005 was $6,866,000 and $3,887,000, respectively. The net loss in 2006 was due primarily to soft sales, reduced margin from changes in product mix, and higher operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2006, our cash and cash equivalents were $3,319,000 as compared to $5,554,000 at December 31, 2005, a net cash decrease of $2,235,000 during the first nine months of 2006. This compares to a net cash increase of $757,000 for the same period in 2005, and an ending cash balance of $4,366,000 as of September 30, 2005. We also had $14,597,000 in short-term securities at September 30, 2006 as compared to $18,024,000 in short-term securities at December 31, 2005, a decrease of $3,427,000.

Due to seasonality in the sales of our pool lighting products, our cash balances tend to decrease in the first half of the year and increase in the second half of the year. This year we expect there to be some cash utilization in the second half of the year due to increased investment in new products, however at a slower rate than in the first half. This is subject to the condition that the market for our products is highly dependent upon general economic conditions.

Cash was used in the period to purchase fixed assets and pay other accruals from December 31, 2005 relating to costs incurred in 2005 for our restructuring and resolution of legal commitments.

Investing activities provided cash of $205,000 during the first nine months of 2006, compared to a use of cash of $532,000 for the same period of 2005. During both periods, cash was used for the acquisition of fixed assets. Fixed asset purchases from ADLT were $1,325,000 in the first nine months of 2006. The increase was due to additional fixed assets required in order to move forward with the EFO product line and future R & D efforts. The sale of short-term securities in 2006 provided cash to fund fixed asset purchases and operations.

 

The Company has a $5,000,000 Loan and Security Agreement (Accounts Receivable and Inventory) with Silicon Valley Bank. This agreement is dated August 15, 2005. It was subsequently amended and restated at December 31, 2005. It was further amended September 25, 2006 and extended through August 13, 2007. The interest rate equals prime plus 1.75% per annum computed daily. Borrowings under this Loan and Security Agreement were collateralized by its assets and intellectual property. Specific borrowings were tied to accounts receivable and inventory balances, and the Company is required to comply with certain covenants with respect to effective net worth. The Company had $1,000,000 of borrowings against this facility as of June 30, 2006 and no borrowings at December 31, 2005. The Company had total borrowings of $2,430,000 under the term-loan agreement as of September 30, 2006 and $1,092,000 as of December 31, 2005. The Company was in conformity with the bank covenants of the Silicon Valley Bank agreement as of September 30, 2006.

Through our U.K. subsidiary, we maintain a $468,000 (in UK pounds sterling based on the exchange rate at September 30, 2006) bank overdraft agreement with Lloyds Bank Plc through its UK subsidiary. There were no borrowings against this facility as of September 30, 2006 and December 31, 2005. The facility is renewed annually on January 1 and bears an interest rate of 7%.

Through our German subsidiary, we maintain a credit facility under an agreement with Sparkasse Neumarkt Bank. This credit facility is in place to finance, and is secured by, our offices owned and occupied by our German subsidiary. As of September 30, 2006 we had total borrowings of $375,000 (in Euros, based on the exchange rate at June 30, 2006) against this credit facility. As of December 31, 2005, we had $331,000 (in Euros, based on the exchange rate at December 31, 2005) borrowed against this facility. Additionally, we have a revolving line of credit of $254,000 (in Euros, based on the exchange rate at September 30, 2006) with Sparkasse Neumarkt Bank. As of September 30, 2006 there were borrowings against this facility of $222,000 (in Euros, based on the exchange rate at September 30, 2006), and there were $47,000 of borrowings against this facility as of December 31, 2005 (in Euros, based on the exchange rate at December 31, 2005). The facility is renewed annually on January 1 and bears an interest rate of 8.75%.

We believe that our existing cash balances 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 the next twelve 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.

CRITICAL ACCOUNTING POLICIES

The preparation of our 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 include allowances for doubtful accounts, returns, warranties, valuation of inventories, and stock based compensation. For the detailed discussion of the application of policies critical to our business operations, see our Annual Report Form on 10-K for the year ended December 31, 2005.

RECENTLY ADOPTED STANDARDS

 

 

 

RECENT PRONOUNCEMENTS

In July, 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” providing guidance on the accounting for and reporting of corrections accounting changes and error corrections. The standard is effective for fiscal years beginning after December 15, 2006. The impact of adopting SFAS 154 is not anticipated to have a material impact on our financial position.

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 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. As of September 30, 2006, we are evaluating the effect, if any, SAB No. 108 may have on our financial statements, but management does not currently believe SAB No. 108 will have a 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.

As of September 30, 2006, we had $606,000 in cash held in foreign currencies based on the exchange rates at September 30, 2006. 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 inter-company debts.

As of September 30, 2006 we had borrowings of $222,000 (in Euros, based on the exchange rate at September 30, 2006) against a credit facility secured by real property owned by our German subsidiary. As of December 31, 2005, we had $47,000 (in Euros, based on the exchange rate at December 31, 2005) borrowed against this credit facility.

 

 

 

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 change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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. Management does not believe the suit will have a material affect on our financial condition.

There are no significant changes in risk factors from our Annual Report Form 10-K for the year ended December 31, 2005.

 

 

 

 

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.