Energy Focus, Inc. (EFOI) - Description of business
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 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:
l Commercial
Lighting. Within
this market we sell both EFO lighting systems and traditional fiber
optic
lighting systems used in commercial
applications.
l 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.
l 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.
l LED
Lighting Systems. We
market a line of LED lighting products for the decorative and general
lighting markets.
l 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. 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. 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. Industry
Overview 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:
·
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.
· 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.
· 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.
· 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. 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. 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:
· Produce
a high quality bright, white light;
· Emit
significant heat, infrared and ultraviolet radiation that can damage
perishable goods and increases room temperature adding to
cooling
costs; and
· Require
significant electricity and frequent replacement due to short
life. 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:
· Offer
high energy efficiency with modern fluorescent lamps reaching efficiencies
of about 80 lumens per watt;
· Produce
a non-directional beam of light not ideal for accent
lighting;
· Emit
light with unfavorable color
characteristics;
· Contain
mercury, which leads to disposal issues;
and
· Exhibit
lower light output and a shorter life in a cold
environment. 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:
· Offer
energy efficiency comparable to halogen
sources;
· Demonstrate
long life cycles; and
· Emit
low luminosity. 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:
· Emit
high quality white light;
· Offer
energy efficiency;
· 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
· Radiate
significant heat. Emergence
of Fiber Optic Lighting Given
the
limitations of traditional lighting technologies and the opportunity to develop
an alternative lighting solution for particular applications, Fiberstars and
other companies began to experiment in the 1980s with connecting optical fiber
to MR-16 halogen lamps. The primary applications for early fiber optic
technology had relatively low light output and short lamp life, and were limited
to color illumination in swimming pools and commercial decorative markets.
In
the 1990s optical fiber was applied in combination with metal halide light
sources. This led to longer lamp life and higher light outputs. Additional
addressable markets were unattainable with the early fiber optic lighting
technology primarily due to the inefficiency of the system, which in turn was
a
result of the size and geometry of the light source, inefficiency of the
collection optics and the small diameter fiber optic cables. 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. The
Fiberstars Solution 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: Light Source Number equivalent in 70 Watt EFO Total Watts Estimated Energy Savings
% 70W
EFO accent light 70W — 26W
Compact fluorescent down light 104W % 50W
MR-16 halogen accent light 400W % 60W
Incandescent down light 420W % 3W
Luxeon3 LED accent light 180W % 25W
Ceramic metal halide accent light 125W % 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
Strategy 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. Our
Products 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. 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. These
fixtures leverage the strengths of fiber optics to deliver well-defined beams,
in an attractive package, at a low cost. Traditional
Fiber Optic Products and Other Products 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. 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
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. 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. 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
