Business
Our Company
Color Kinetics is a pioneer in the design,
marketing and licensing of intelligent solid-state lighting
systems. Our systems use solid-state semiconductor devices known
as light emitting diodes, or LEDs, as the light source. The
performance, efficiency and cost of LEDs have been improving
rapidly, enabling them to displace traditional light sources,
such as incandescent bulbs, in many applications. Our systems
combine the increasing advantages of LEDs as a light source with
our patented digital control technology, to create a new
category of lighting technology, which we refer to as
“intelligent solid-state lighting systems.” Using
proprietary digital control methods, such as our patented
Chromacore and Chromasic technologies, our intelligent
solid-state lighting systems enable our customers to achieve
dramatic lighting effects, cost savings and other practical
benefits not attainable using traditional lighting technology.
Since our founding in 1997, we have invested
substantially in research and development in a number of
disciplines related to solid-state lighting, including thermal
and optical engineering, analog and digital circuit design,
network architectures, control software and user interfaces. As
a result of this process of continuous innovation, we have
developed a broad range of products, services and technologies
and have a patent portfolio with 28 issued patents and over 115
patent applications pending. We also have an extensive pipeline
of new technologies under development. Our patents and patent
applications apply to many aspects of solid-state lighting
technology, and also apply to many methods of implementing
solid-state lighting in a wide variety of markets and
applications.
We incorporate our proprietary technology in a
wide range of products, including LED lighting devices, digital
controllers, software for creating and controlling lighting
effects, and related hardware and accessories. We offer our
products for sale as individual components, or as complete,
integrated lighting systems that include all the elements
necessary to create and operate solid-state lighting
installations for many types of interior and exterior
applications. We sell solid-state lighting modules incorporating
our proprietary technology to lighting manufacturers and others
on an OEM basis, enabling them to bring the benefits of our
technology rapidly to market. We also license our technology on
a royalty-bearing basis. We draw upon our domain expertise in
electrical, optical, mechanical and thermal engineering to
provide applications engineering, integration and technical
support services to assist our customers in specifying,
installing and operating our systems.
We operate in two principal lines of business:
|
|
|
|
|
|
•
|
Lighting systems:
we
offer intelligent solid-state lighting systems sold under the
Color Kinetics brand for installation in lighting projects where
their use has been specified, typically by a designer or
architect.
|
|
|
|
|
•
|
OEM and licensing:
we offer a standard line of intelligent solid-state lighting
modules that can readily be incorporated by manufacturers in
products sold under their own brands. We also license our
technology.
|
We sell our lighting systems and OEM products
through our direct sales force and through manufacturer’s
representatives and distributors in North America, Asia, Europe,
Latin America and the Middle East.
As our patent portfolio expands, we believe that
our proprietary technology will not only continue to provide
competitive advantage in many markets where we compete directly,
but will also offer increasing opportunities, through our OEM
and licensing programs, to reach markets and applications that
cannot be served efficiently by our own direct sales force.
To date, we have targeted our sales and marketing
primarily in high performance lighting markets, such as
architectural, retail and entertainment lighting and electronic
signage. In these markets, our customers value highly the
flexibility, performance and control that our intelligent
solid-state lighting systems offer.
40
As the performance and cost-effectiveness of
LEDs, particularly white light LEDs, continue to improve, we
believe that solid-state lighting will increasingly displace
traditional lighting technology in applications beyond high
performance lighting markets. Because we do not make the LEDs we
use in our products, but rather buy them from major
semiconductor manufacturers, we expect to benefit from the
fierce competition among LED manufacturers to create more
powerful and cheaper solid-state lighting devices.
According to a 2003 report by The Freedonia
Group, Inc., a market research firm, the worldwide market for
electric lamps and lighting fixtures was approximately
$79 billion in 2002. We believe that, with our proprietary
technology, industry expertise and proven products and track
record, we are well positioned to take advantage of emerging
opportunities to penetrate segments of this large general
lighting market with our intelligent solid-state lighting
technology.
Background of the Solid-State Lighting
Industry
Since the invention of the transistor in the
mid-twentieth century, solid-state semiconductor devices
offering continually smaller size, reduced cost and power
consumption, improved reliability and, above all, powerful new
capabilities for digital control have revolutionized industries
such as radio, television, telecommunications and computing and
have also penetrated broad consumer markets such as home
appliances and the automotive industry. Semiconductor, or
solid-state, devices such as transistors and diodes rely on
electrical interaction between adjacent layers of solid
semiconductor materials, rather than mechanical operation, to
perform a desired function. As mechanical controls, vacuum tubes
and analog signal processing have been replaced by digital
technology, existing devices have been made cheaper and more
useful, and entirely new applications and capabilities not
previously imagined have arisen. We believe that the lighting
industry, which has not substantially changed its basic
technology since electric light bulbs replaced gas lamps more
than a hundred years ago, is embarking upon a similar digital
solid-state revolution.
|
|
|
|
|
Solid-State Lighting: A Disruptive Technology
Transforming the Lighting Industry
|
We believe that solid-state lighting, in which
semiconductors replace incandescent or fluorescent lamps as the
light source, is a disruptive technology that has begun to
transform the lighting industry. A wave of product innovation is
displacing traditional lighting technologies in existing
applications, creating entirely new market segments and
applications and paving the way for entry by new competitors.
LEDs as a light source have already achieved significant
penetration in a number of markets, including mobile electronic
devices such as cellular telephones and personal digital
assistants and signaling devices such as automotive brake
lights, traffic lights and in personal illumination devices such
as flashlights and bicycle lights. Their use is expanding to
more complex and demanding lighting applications. We believe
this rapid adoption, which has been driven by the increasing
pace of advances in solid-state lighting technologies, will
continue and accelerate.
|
|
|
|
|
Evolution of Solid-State Lighting
|
Traditional Lighting
Technologies.
Since the introduction
of the light bulb in the late 19th century, electric light has
been provided primarily by incandescent, halogen, fluorescent or
gas-discharge (such as neon) light sources. Devices using these
traditional lighting technologies provide high light output and
can be manufactured cheaply and sold at relatively low initial
cost, but they have a number of disadvantages. These include
large size, high energy consumption and heat output,
susceptibility to breakage, safety and environmental hazards,
and limited source life before the lamp must be replaced.
Further, these are mature technologies in which relatively
little recent innovation has taken place: the standard
incandescent light bulb has improved very little in efficiency
over the last century, and even for newer technologies such as
compact fluorescent lamps, the rate of innovation is slowing.
Introduction of Solid-State
Lighting.
Solid-state lighting, using
LEDs as the light source, provides an increasingly effective
replacement for these traditional technologies. LEDs are
semiconductor devices that, when voltage is applied to them in
the proper direction, release energy in the form of light, with
little
41
production of heat. When first introduced in the
1960s, LEDs could produce only red light, and their low output
made them unsuitable for lighting. As a result, their use was
initially limited to simple applications involving indication,
such as showing the “on-off” state of a switch on an
instrument panel. As LED technology advanced in the 1970s,
green, yellow and orange LEDs were developed and market
acceptance increased with applications such as digital watches,
calculators and test equipment. In the 1980s and 1990s, further
developments added a wider spectrum of colors and enabled LEDs
to produce progressively greater amounts of light using less
power. The development of blue LEDs in the mid-1990s enabled the
production of the full spectrum of colors, including white
light. Advances in the design and manufacture of LEDs have also
led to continuous improvement in their cost and efficiency.
Industry sources expect these trends to continue.
These improvements in the capabilities of LEDs,
combined with advances in digital control technology, have begun
to revolutionize lighting, with broad implications for many
industries that use lighting in their products or businesses.
Advantages of Solid-State Lighting Over
Traditional Lighting Technology.
Solid-state lighting can offer significant benefits in
capability and cost-effectiveness in comparison to traditional
lighting technology. These include the following:
|
|
|
|
|
|
•
|
Greater Efficiency.
LEDs now provide greater efficiency than traditional lighting
sources, producing more light with the same amount of power, and
less heat. In the early 1970s, a typical LED could produce only
0.2 lumens (a standard measure of light output). Following a
pattern known in the LED industry as Haitz’s Law (a
corollary to Moore’s Law, which describes the rapid rate of
growth in computing power per integrated circuit), light output
per LED package has doubled every 18 to 24 months for the
last 30 years. Today, a high brightness LED package smaller
than a dime can generate over 120 lumens. Manufacturers have
demonstrated multi-chip white light modules with outputs of over
1,000 lumens, equal to or greater than the output of a 75 watt
incandescent bulb. By combining a small number of LED packages,
it is now possible to generate light of sufficient intensity to
provide general lighting in many applications that currently use
conventional lighting technologies.
|
|
|
|
|
|
At the same time, the luminous efficacy of LEDs
(i.e., their light output in lumens per unit of electrical power
consumed) has improved dramatically in the last 30 years.
The introduction of new designs, materials and fabrication
processes has increased the efficiency with which LEDs convert
electrical energy to light, as well as improving their
extraction efficiency (i.e., the percentage of useful light that
actually escapes the semiconductor and its package). LEDs have
already surpassed incandescent lamps in efficacy, as measured in
lumens per watt, and many industry experts expect LEDs to
surpass even the most efficient traditional light source,
fluorescent lamps, within the next few years.
|
|
|
|
|
|
|
•
|
Increasingly Competitive Initial
Costs.
The initial cost of an LED
light source is currently higher than that of a traditional
light source of comparable output. However, as the LED industry
makes the transition from manufacturing in small quantities,
often in the laboratory, to manufacturing in large volumes in
modern semiconductor factories, LEDs are rapidly decreasing in
cost per lumen. According to Strategies Unlimited, the price of
high brightness LEDs has declined at a rate of 10% to
15% per year in recent years, while light output has
continued to improve. A high brightness white LED in 2000 had a
cost per lumen of approximately $0.50, while in 2003 high
brightness white LEDs are available for approximately
$0.19 per lumen. Industry sources expect LED costs to
continue to fall.
|
|
|
|
|
•
|
Greater Reliability and Longer
Life.
The actual life of any light
source depends on a variety of factors, including usage patterns
and environmental factors. Unlike traditional light sources,
which typically fail abruptly, the light output of LEDs
gradually diminishes over time. Currently available LEDs have
predicted source lives, under average conditions, of up to
50,000 hours (representing the point at which they are
predicted to have lost 30% of their original brightness),
compared with source lives of 1,000 to 2,000 hours for a
typical incandescent light bulb or 10,000 to 20,000 hours
for a fluorescent lamp. This longer source life permits their
initial cost to be spread over a longer period. It
|
42
|
|
|
|
|
|
|
also reduces the labor costs associated with
replacement and facilitates their use in remote or inaccessible
environments. LEDs also break less frequently because they have
no filaments, glass tubes or moving parts and are able to
withstand shock, vibration and other environmental factors that
would shorten the life of a traditional lighting device.
|
|
|
|
|
•
|
Cost-Effectiveness: The “Cost of
Light.”
The cost-effectiveness of
a light source is a function of its initial cost, its efficiency
at converting electrical energy to light and the length of its
source life. Sophisticated purchasers of lighting systems, such
as managers of large buildings or public works installations,
evaluate the cost of competing lighting products based on the
cost to buy, install and operate them over their expected
lifetimes. This measure is referred to in the lighting industry
as the “cost of light.” The cost of light for a given
lighting device takes account of:
|
|
|
|
|
|
|
•
|
the initial cost to acquire and install the
device;
|
|
|
|
|
•
|
labor and other costs associated with maintenance
over its predicted source life; and
|
|
|
|
|
•
|
the cost of energy consumed by the device over
its predicted source life.
|
|
|
|
|
|
Spreading these costs over the predicted source
life of the device yields the cost of light. This calculation,
expressed in dollars per lumen-hour, is used in the industry as
a measure of the hourly cost of the light produced by the
device. The cost of light provided by LED light sources, in
dollars per lumen-hour, has dropped steadily over the past
30 years, due primarily to the improvements in their cost
and efficiency described above.
|
|
|
|
|
|
|
•
|
Better Color
Characteristics.
While traditional
lighting technologies require the use of special coatings or
mechanical devices such as gels or filters to produce colored
light, LEDs are capable of producing light in pure, saturated
colors. The range and purity of the colors produced by LEDs has
accelerated adoption of the technology by end-users for whom the
color characteristics of light are highly important. Recently,
LED manufacturers have devoted substantial resources to
developing methods of producing white light from single LEDs,
for example by using blue or UV-emitting LEDs to excite
phosphors deposited on the inside of the LED package so that
they emit white light. Development efforts continue toward
producing white light from a single LED with appropriate color
characteristics and sufficiently high output for use in general
lighting applications.
|
|
|
|
|
•
|
Capability for Digital
Control.
Unlike traditional lighting
devices, which typically draw large current loads and require
cumbersome switching devices, LEDs operate at relatively low
voltages and current loads and can be controlled directly by a
digital interface. Lamps using traditional technologies, which
typically operate at line voltages such as 110 volts or 230
volts and draw large current loads, require heavy wiring to
supply their power and must be controlled by mechanical
rheostats, switches or relays or by large solid-state devices.
By contrast, LEDs usually operate at much lower semiconductor
voltages, and can be controlled directly by a digital device
controlled by a computer.
|
|
|
|
|
•
|
Increased
Flexibility.
LEDs’ small size,
reduced low power consumption and low heat permit greater
flexibility in designing and installing lighting fixtures,
systems and installations. Their directional characteristics
permit light to be more efficiently directed where it is needed.
The ability to design and deploy lighting displays without the
need for heavy cabling and cumbersome switching devices, and the
capability to digitally control dynamic lighting effects in a
full range of colors, have given lighting designers, architects
and other users new freedom and flexibility to create entirely
new types of lighting applications.
|
|
|
|
|
|
Adoption of Solid-State Lighting
Technology
|
As the light output, cost-effectiveness, color
capabilities and digital control of LEDs have improved, they
have rapidly penetrated new industries and applications. As an
indication of the rapid rate of adoption of solid-state lighting
technology, Strategies Unlimited, a market research firm,
estimates that the market for high brightness LEDs increased
from approximately $1.8 billion in 2002 to
$2.5 billion in 2003. Use of high brightness LEDs as
components of solid-state systems such as ours, where they
provide illumination rather than indication, accounted for only
5% of this market in 2003, but this segment is the fastest
growing segment of the high brightness LED market. Strategies
Unlimited forecasts that the market for
43
high brightness LEDs in illumination applications
will increase at a compound annual growth rate of approximately
44% from 2002 to 2007.
Solid-State Lighting in Indication, Signaling
and Mobile Electronics Applications.
As the light output and initial cost of LEDs have improved,
characteristics such as their energy efficiency, ruggedness and
flexible form factor have prompted their adoption in a wide
range of new indication applications. For example, LEDs are now
widely used in automotive brake lights, where they offer
automobile manufacturers increased design flexibility and their
reliability and rapid response provide safety advantages.
Similarly, LEDs have replaced incandescent lamps in many traffic
lights, where their long source life and low power consumption
provide municipalities with substantial savings in the cost of
light. As a result, nearly 30% of the traffic lights in the
United States now use LEDs as their light source. The market for
high brightness LEDs in mobile appliances such as cellular
telephones, digital cameras and other hand-held electronic
devices is estimated by Strategies Unlimited to have exceeded
$1.2 billion in 2003. High-end cellular telephones contain
as many as 30 LEDs, used as backlights to displays and in
keypads. In markets such as these, where LEDs have proven
effective, they have achieved rapid penetration.
Solid-State Lighting in the High Performance
Lighting Market.
The unique
performance characteristics of LEDs, combined with their
potential for powerful digital control, have also made
solid-state lighting attractive to customers in various high
performance lighting markets that have historically placed high
value on lighting products that offer advanced technology,
specialized capabilities and high performance. These include
markets such as:
|
|
|
|
|
|
•
|
architectural lighting;
|
|
|
|
|
•
|
restaurant and hospitality lighting;
|
|
|
|
|
•
|
retail and merchandising;
|
|
|
|
|
•
|
theatrical and television studio
lighting; and
|
|
|
|
|
•
|
signage and corporate identity.
|
In high performance lighting markets such as
these, light is used primarily for visual impact, to create a
specific aesthetic or other effect integral to the operation of
the user’s business. Customers in these high performance
lighting markets use colored light to transform spaces, build
brands, stimulate purchases or create excitement. They often
deploy lighting systems in novel ways, or in technically
challenging environments. The lighting and design professionals
and end-users who use light in these kinds of applications are
often early adopters of new technology, and have been among the
first to embrace solid-state lighting technology as a means of
exceeding some of the limitations of conventional lighting
technologies.
Attributes of solid-state lighting that have made
it attractive to early adopters in high performance color
lighting markets are also potentially valuable in general
lighting applications. In these applications, white light is
used for utility, i.e., for illumination of areas and tasks
rather than for visual impact. Innovative uses of solid-state
lighting are already appearing in new construction projects, as
developers of high-end commercial projects seek to distinguish
their properties visually and also to reduce their operating
costs. Opportunities are emerging to apply solid-state
technology in specialized illumination applications where, for
example, lighting of small spaces is required, installations are
in remote or awkward locations or in harsh, vibration-prone
environments, or other special challenges make the unique
attributes of solid-state lighting necessary or desirable.
Further improvements in the brightness, color
quality and color-rendering capabilities of white light LEDs, as
well as in their initial cost and source life, will be necessary
before solid-state lighting can be widely adopted as a
substitute for traditional technologies as a source of white
light for general illumination purposes. LED manufacturers
currently are devoting substantial development effort to
improving the aesthetic quality of white light produced by LEDs,
such as its color temperature, to make it more suitable for use
in general lighting. Color temperature is an indication of the
color of the light, with lower color temperature corresponding
to warmer shades of white and light of higher color temperatures
corresponding to light that contains more blue. Early white
light LEDs produced light that was too high in color
44
temperature to be acceptable by consumers for use
in residences or in many commercial applications. The ability of
a light source to properly render the colors of objects it
illuminates, or color rendering index, is another important
attribute where use in general lighting applications is
concerned. To date, the color rendering index of commercially
available white light LEDs has been inferior to that of
traditional light sources.
We believe that competition among LED
manufacturers will overcome many of these technical obstacles,
and that just as solid-state lighting has rapidly penetrated
other markets, advancing white light LED technology and customer
demand for new uses of light will create growing opportunities
for application of solid-state white light technology in
segments of the general lighting market.
The Color Kinetics Solution
We are a pioneer in the development, marketing
and licensing of intelligent solid-state lighting systems that
meet the demanding requirements of the high performance lighting
market. Our systems take advantage of the rapid advances in LED
performance, efficiency and cost that have resulted from
competition among the semiconductor manufacturers that supply us
with LEDs. We seek to make the benefits of solid-state lighting
technology accessible to users, and to promote its adoption in
new markets, by providing solid-state lighting products and
systems that are easy for customers to specify, purchase,
install and operate.
We believe that we offer our customers a number
of key benefits, including the following:
|
|
|
|
|
|
•
|
Breadth of Intelligent Solid-State Lighting
Solutions.
We believe customers in the
high performance lighting market seek a vendor that can offer
the full range of products and services necessary to provide a
complete, turn-key lighting solution. We offer a broad line of
solid-state lighting products that, we believe, provide superior
functionality, reliability, safety and environmental
friendliness. The patented digital control technology embedded
in our products enables them to act intelligently and to provide
large, complex light installations that display millions of
colors in dynamic, changing effects, and yet are easy for
customers to program and use. We know of no other vendor that
can match our ability to deliver, from a single source,
integrated lighting systems that include all the components and
services necessary to design, install and operate sophisticated
solid-state lighting displays for a wide range of applications.
|
|
|
|
|
•
|
Reliability and Ease of Use of Our
Systems.
Our intelligent solid-state
illumination systems are designed to be easy for customers to
install and use, from their installer-friendly form factors, to
their powerful and flexible digital control intelligence, to the
intuitive drag-and-drop functionality of our light show
authoring software. Our products are certified by Underwriters
Laboratories and by similar certification organizations in
Canada, Europe and elsewhere. Due to their mature design and our
rigorous quality control processes, our systems are reliable and
field proven, having been installed in thousands of customer
sites worldwide.
|
|
|
|
|
•
|
Ability to Rapidly Commercialize New
Technologies.
We work closely with our
customers to conceptualize, develop and rapidly deliver to
market products that meet their requirements as to
functionality, performance, quality and price. Our product
development cycle, from conception to commercial product
release, is relatively short, typically ranging from six to
twelve months. During 2003, we introduced more than 15 new
products and major product enhancements, and expect to announce
more than 30 new products and major product enhancements in
2004. We believe that our ability to rapidly bring to market new
products incorporating advanced technology enables us to better
serve our existing customers, as well as to quickly take
advantage of opportunities in new markets as they arise.
|
|
|
|
|
•
|
Breadth and Depth of Domain
Expertise.
The design, manufacture and
installation of solid-state lighting systems is complex and
presents unique technical, environmental and regulatory
challenges. We have developed extensive know-how in electrical,
optical, mechanical and thermal engineering which we use in
developing and manufacturing our products and in providing a
range of engineering, and support services to our customers. We
also have extensive knowledge of the specialized
|
45
|
|
|
|
|
|
|
requirements of customers in a variety of
vertical markets, such as the entertainment and theatrical
lighting industries and the hospitality industry. We believe
that our deep technical expertise and applications knowledge
enables us both to deliver superior products and to better
support our customers in designing, implementing and operating
high-impact lighting installations.
|
|
|
|
|
•
|
Proven Track Record.
Our intelligent solid-state lighting systems have been installed
in thousands of user sites around the world. At May 14,
2004, we had agreements with 25 OEM customers and licensees
that we believe are developing or making products incorporating
our technology in a variety of markets. We have gained the
confidence of lighting and design professionals and their
clients around the world, who rely upon us to deliver advanced
technology, reliable, high performance products and
comprehensive support services. We use our extensive portfolio
of high-profile reference sites as an important selling tool, to
evidence the breadth and depth of our experience, the quality of
our products and the satisfaction of our customers.
|
Our Strategy
Our objective is to be the leading provider of
intelligent solid-state lighting systems. We also seek to use
superior digital control technology as a point of entry to new
products, applications and markets. Our strategy in seeking to
attain these objectives includes the following key elements:
|
|
|
|
|
|
•
|
Extend Technology Leadership and Intellectual
Property Position.
We believe our
proprietary technology and the protection afforded by our patent
portfolio are significant competitive advantages. We further
believe that as the technology involved in the design and
manufacture of LEDs matures and standards emerge, the greatest
opportunity to provide compelling new products and applications
for solid-state lighting will come through advances in digital
control technology. Our objective is to have our proprietary
digital control technology become the de facto standard for
solid-state lighting. We currently hold 28 patents and have more
than 115 patent applications pending in areas ranging from
production techniques to new methods and applications of digital
control of solid-state lighting devices. We intend to continue
to innovate by developing new advanced digital control
techniques, exploring the capabilities of new generations of
LEDs as they become available and refining our product
engineering and manufacturing capabilities. We will seek, and
where necessary, take appropriate action to enforce patent
protection for these innovations. We will also seek to promote
the adoption of solid-state lighting technology by participating
in and cooperating with industry groups and standard-setting
bodies.
|
|
|
|
|
•
|
Leverage Core Technologies to Expand Product
Offering.
In our research and
development efforts, we intend to focus on the digital control
technologies that we believe provide our strongest competitive
advantage, of which our patented Chromacore and Chromasic
technologies already provide the core. We also intend to
continue to expand our product line by adding new categories of
lighting devices, enhanced digital control and authoring
capabilities and new value-added services, with the goal of
providing our customers with the most complete solution to their
solid-state lighting requirements, whether simple or complex.
|
|
|
|
|
•
|
Expand OEM and Licensing
Businesses.
We are devoting
significant resources to further developing our OEM and
licensing businesses. We seek to develop relationships with
leading companies both inside and outside the lighting industry,
with a view not only to expanding our market reach, increasing
our total revenues and improving our profit margins, but also to
promoting the rapid adoption of our digital control technology.
We will continue to seek additional opportunities to license our
technology to companies in industries that cannot efficiently be
addressed by our direct sales force, manufacturers and
distributors.
|
|
|
|
|
•
|
Strengthen Brand
Awareness.
A key component of our
marketing strategy is to strengthen awareness of our Color
Kinetics, Chromacore and Chromasic brands. Our agreements with
OEM customers and licensees generally require that OEM products
containing our intelligent solid-state lighting modules be
labeled with our Chromacore mark, and that products utilizing
technology licensed from us be identified as licensed by Color
Kinetics. We aim to reinforce the marketplace perception of high
|
46
|
|
|
|
|
|
|
quality of our products by branding their most
important element: the digital control technology behind the
system.
|
|
|
|
|
•
|
Expand Direct Sales Operations and
Distribution Channels.
We use multiple
distribution channels to extend the reach of our sales and
support organizations, accelerate adoption of our intelligent
solid-state technology in new markets and create additional
sources of revenue. We intend to devote substantial resources to
expanding these distribution channels, as well as to increasing
the scale and geographical coverage of our direct sales efforts,
particularly in international markets.
|
|
|
|
|
•
|
Enter Markets Beyond High Performance Color
Lighting.
We believe that our patents
and patent applications that are applicable to the white light
market, which include techniques for controlling the color
temperature of white light produced by solid-state lighting
devices, will help us to move beyond our core specialty lighting
market to more widespread application in the broader lighting
market. We expect to introduce products in the white light
market for the first time in the second half of 2004. We expect
these products to include dimmable accent lights, high output
linear lights using our new digital power processing technology,
wall washers and linear strip lights.
|
Products and Services
We offer a broad range of intelligent solid-state
lighting products and services that are designed to meet the
diverse requirements of our customers. Our products combine the
advantages of LEDs as a light source with the intelligence of
digital control. Each lighting device includes a subassembly
typically consisting of red, green and blue LEDs, mounted on a
circuit board with a microprocessor. Using our patented
Chromacore technology, the microprocessor drives the LEDs to
provide millions of colors, controlling all aspects of the
illumination, including color, brightness and special effects.
Many of our newest products also employ our patent-pending
Chromasic technology, in which a custom-designed integrated
circuit combines power, communication and control in a single
silicon chip, enabling a module the size of a pencil eraser and
containing as few as four components to generate billions of
color combinations. Our Chromasic technology also provides
significantly increased flexibility in addressing and
controlling large numbers of lighting addresses. We believe that
the patented digital control technology that is embedded in our
products enables features, performance and practical benefits
that are not available from other vendors.
We offer two principal product lines: lighting
systems and OEM modules. Our lighting systems include all the
hardware, software and other components necessary to implement
dynamic, color lighting installations in interior or exterior
environments. Our OEM products are a standardized line of
solid-state modules that can readily be incorporated by other
manufacturers in their products, enabling them to rapidly bring
to market the benefits of our proprietary technology. We provide
engineering, integration and technical support services to
assist our customers in specifying, designing, integrating,
installing and operating our systems.
Our lighting systems, marketed under the Color
Kinetics brand, are typically specified by a lighting designer,
architect or interior designer, and are purchased by electrical
contractors or project owners for installation. Our lighting
systems product line includes lighting devices, digital
controllers and software, power and data supplies, peripherals
and accessories.
We house subassemblies containing varying numbers
and types of LEDs in enclosures of different shapes and sizes,
to provide lighting devices that offer form factor, brightness,
directional characteristics and other attributes that are
appropriate for a variety of environments and purposes. We
purchase the LEDs we use in our lighting devices from
semiconductor manufacturers and combine them with other standard
electrical components and enclosures, lenses and other
components and subassemblies designed specifically for use in
47
our products. Our lighting devices are available
in a range of intensities, physical configurations and price
points, and include the following:
|
|
|
|
|
|
•
|
indirect cove lights in numerous configurations
for alcove, under cabinet and backlighting (iColor Cove, iColor
Cove NXT, iColor Cove EC, unoColor Cove);
|
|
|
|
|
•
|
direct-view and indirect view linear lights for
interior and exterior accents, contours and highlights (iColor
Accent, iColor Fresco);
|
|
|
|
|
•
|
intelligent “string lights” utilizing
our Chromasic technology, suitable for interior and exterior
illumination of three-dimensional shapes for signage, landscape,
alcove and aisle lighting (iColor Flex SL);
|
|
|
|
|
•
|
light tiles utilizing our Chromasic technology
for recessed or surface mounting to create intricate, dynamic
color light displays on interior and exterior ceilings, walls,
facades or other surfaces (iColor Tile FX);
|
|
|
|
|
•
|
replacement bulbs designed to be compatible with
standard bi-pin and Edison-mount based fixtures (iColor MR
and LightTro);
|
|
|
|
|
•
|
architecturally-styled interior and exterior
flood, spot and linear lights for washing walls and other large
surface areas (ColorBlast 12, ColorBlast 6,
ColorBurst 6, ColorBurst 4, ColorCast 14);
|
|
|
|
|
•
|
fully submersible spotlights for use in
fountains, landscaping, theme parks and marine applications
(C-Splash 2); and
|
|
|
|
|
•
|
high performance “border lights” that
provide far-reaching casts of color for theatrical,
entertainment, TV studio and architectural applications
(ColorBlaze 72, ColorBlaze 48).
|
|
|
|
|
|
Digital Controllers and Software
|
Control technologies are at the heart of an
intelligent solid-state lighting system. The objective of our
digital control technology is to provide sophisticated control,
easy-to-use interfaces and simplified integration. Our products
support the DMX communication standard widely used to control
theatrical lighting and stage equipment, and are also compatible
with Ethernet protocols and other standard computer interfaces,
as well as popular third-party architectural lighting control
systems. Our control systems and authoring software eliminate
the need for expensive lighting boards and automate the
time-consuming process of manually programming each individual
lighting address for each step in the progression of the light
show.
We offer controller products suitable for
applications ranging from small, simple installations to
extremely large and complex installations. Our controller and
software offerings include:
|
|
|
|
|
|
•
|
entry-level controllers that allow the user to
easily select pre-programmed lighting effects though the push of
a button or a twist of the dial, for installations involving
smaller numbers of lighting addresses (ColorDial, Synchronizer,
Multi Synchronizer);
|
|
|
|
|
•
|
mid-level digital storage and playback control
devices that accept the download of custom lighting shows and
play them back, for installations with up to 170 individual
lighting addresses (iPlayer 2, Controller Keypad,
SmartJack 3);
|
|
|
|
|
•
|
authoring software with a graphical user
interface that permits end users to design custom lighting shows
on a PC, for download to one of our storage and playback devices
or playback directly from a PC (ColorPlay); and
|
|
|
|
|
•
|
advanced control system, consisting of integrated
hardware and software modules, which dramatically reduces the
effort involved in designing and playing back intricate,
large-scale lighting effects. The Ethernet-based system is
scalable to multiple DMX universes, permitting the control of
tens of thousands of individual lighting addresses (Light System
Manager).
|
|
|
|
|
|
Power Supplies, Peripherals and
Accessories
|
We supply a range of power supplies, some
including integrated Ethernet capabilities, designed
specifically to provide power and send data from digital
controllers to our lighting products. Additionally, we provide
48
data enablers, addressing devices, wiring
harnesses, power and data cables, adapters and other specialized
components for use in installation of our products. We also sell
lighting accessories that are used to direct and control the
quality of light, particularly in theatrical or entertainment
applications. In addition, numerous companies now offer
peripherals and accessories specifically designed to be
compatible with Color Kinetics products.
We offer a range of intelligent solid-state
lighting modules and other products for sale on an OEM basis.
Many of the subassemblies and components developed for use in
our lighting devices are made available as OEM products. Our OEM
offerings include:
|
|
|
|
|
|
•
|
standardized modules, which we call Digital Light
Engines, consisting of LEDs and microprocessors mounted on
circuit boards, in various sizes, shapes and brightness
configurations;
|
|
|
|
|
•
|
replacement bulbs designed to fit into standard
bi-pin and Edison-mount based fixtures (iColor MR and LightTro);
|
|
|
|
|
•
|
digital controllers, authoring software and
power/data supplies;
|
|
|
|
|
•
|
custom designed subassemblies;
|
|
|
|
|
•
|
components, including microprocessors and LEDs;
and
|
|
|
|
|
•
|
consumer novelty products which were previously
marketed under the Color Kinetics Sauce brand and are now made
available under license to OEMs, including battery-operated
light wands and other novelty lights, color-changing light
jewelry, and color-changing accent lights that plug into
standard wall sockets.
|
OEM customers have incorporated our Digital Light
Engines and other OEM products in applications in a variety of
industries, including architectural and entertainment lighting,
automotive aftermarket, pool and spa, aerospace and gaming. The
purchase of a Digital Light Engine or other OEM product includes
a license to use any applicable Color Kinetics patents. In most
cases, our OEM customers market their products under their own
brands. To promote awareness of our proprietary solid-state
lighting technology and our brand, our agreements with OEM
customers generally require that products that contain our OEM
lighting modules be labeled with our Chromacore mark, and that
products including our licensed technology be identified as
licensed by Color Kinetics.
We provide a range of professional services to
assist our customers in specifying, designing, installing, and
operating our lighting systems. We provide site surveys to
assist in the specification of appropriate products, on-site
installation supervision services to ensure that the system is
properly installed and operational, and programming services
using our authoring software tools to create customized light
shows. When customers request that we develop specific
modifications to our products in response to their specific
requirements, we perform these non-recurring engineering
services at the customer’s expense. We also offer technical
support that includes extensive technical documentation,
tutorials, software downloads, development tools and
around-the-clock telephone hotline support.
We offer OEM customers technical support services
to assist them in successfully integrating our technology in
their products. They also receive detailed reference information
covering thermal, power, optics, regulatory and other
considerations affecting the integration of our OEM products, as
well as guidance concerning the use of our authoring products
and standard DMX and other control techniques.
|
|
|
|
|
Next Generation Products and
Technologies
|
During 2004 we plan to announce a number of new
technologies and new and enhanced products that we believe will
continue to distance us from our competitors and broaden the
market opportunities for our
49
intelligent solid-state lighting systems. Among
the most significant of these next generation products and
technologies are the following:
|
|
|
|
|
|
•
|
Digital power processing supply and drive
technologies which enable the power supply to be integrated into
the lighting unit, eliminating the need for a separate remote
power supply. An installer can now run 110 or 230-volt line
voltage directly to the light fixture, greatly simplifying
installation complexity and reducing cost. This technology will
be incorporated into a number of new products introduced in 2004.
|
|
|
|
|
•
|
Linear indoor/ outdoor lighting products
incorporating high output LEDs that will be our first product to
feature our new digital power processing technology. An
electrical contractor will be able to install long runs of these
units on a standard 15-amp household circuit.
|
|
|
|
|
•
|
A range of white light products, including
dimmable and color temperature-controllable accent lights,
linear high output lights using our new digital power processing
technology, wall washers, and linear strip lights.
|
|
|
|
|
•
|
Enhanced versions of our advanced authoring
software with extended multimedia capabilities, as well as new
hardware modules intended to simplify integration with
third-party control systems and provide enhanced performance for
ultra-large installations.
|
Markets and Applications
We believe certain key attributes are sought by
most customers in all the markets we serve. These include:
|
|
|
|
|
|
•
|
Flexibility:
Lighting and design professionals seek flexibility in designing,
locating and installing lighting displays in a variety of
interior and exterior environments and on scales ranging from
the intimate to the monumental.
|
|
|
|
|
•
|
Performance:
Users
in these markets require systems that are capable of providing
light of varying intensity in a full range of saturated colors
that are accurate and consistent over time, and also are robust,
reliable and energy-efficient.
|
|
|
|
|
•
|
Control:
Our
customers demand control. They seek the creative freedom to
create complex, dynamic lighting displays or shows, potentially
involving thousands of individual light sources and including
dramatic, color-changing effects such as fades, wipes and
chases, animated graphics, coordination with musical or other
programming, and interaction with external data sources such as
building automation systems.
|
The markets for our lighting systems include the
traditional markets for color-changing lighting such as theater
and entertainment venues. However, many applications for this
technology exist in additional markets such as retail
merchandising, hospitality, signage, exhibits, and commercial
and residential architectural spaces. Our lighting systems have
been installed in thousands of end-user sites worldwide. The
following table describes applications of our technology in
selected target markets, and describes representative end-users
or installation sites in each market.
|
|
|
|
|
Market Segment
|
|
Representative End-Users or Installation Sites
|
|
|
|
Commercial and Civic
Architecture
|
|
|
|
|
|
Our lighting systems are used to differentiate
and accentuate architectural elements in a wide variety of
corporate offices, public spaces, bridges, monuments, fountains,
government facilities, churches, schools, universities, and
hospitals
|
|
Cathay Financial Center, Children’s Hospital
Boston, Delaware River Port Authority, New York State
Bridge Authority, Nortel Networks
Example: Northwest Airlines McNamara Terminal (Detroit)
An 800-foot passenger tunnel, featuring sculpted art glass
panels, stretch fabric ceilings, and custom-composed music is
lit entirely by Color Kinetics’ systems. Nearly
9,000 feet of cove lights and 120 high output floodlights
installed.
|
50
|
|
|
|
|
Market Segment
|
|
Representative End-Users or Installation Sites
|
|
|
|
Hospitality
|
|
|
|
|
|
Hotels, casinos, cruise ships, restaurants, bars,
and nightclubs add entertainment elements to their properties to
attract and retain patrons. Dynamic lighting is an effective
tool because much of this industry’s business comes alive
in the evening hours
|
|
Carnival Cruise Lines, Foxwoods Resort Casino,
Harrah’s Atlantic City, MGM Grand Hotel and Casino, Mohegan
Sun, New York Marriott Marquis, Rainforest Café, Royal
Caribbean International, Sands Casino Hotel, Sheraton Seattle
Example: Hard Rock Hotel & Casino (Las Vegas)
Color
Kinetics systems replaced a conventional lighting system to
illuminate the 120-foot façade of this landmark hotel and
casino, delivering not only new levels of creative capabilities,
but also ease of maintenance and energy conservation.
|
|
|
|
Retail and Merchandising
|
|
|
|
|
|
Retailers competing for customer attention add
entertainment value to the shopping experience by using dynamic
lighting in their overall store design, in visual merchandising
programs, and in store window displays
|
|
Esprit, Harrods, Limited Too, Michael K, Saks
Fifth Avenue
Example: Pokèmon Center (New York)
Color
Kinetics systems are used throughout the store’s
10,000 square foot retail space in ceiling accents, domes,
interior displays and a street level window display.
|
|
|
|
Entertainment, Events and Theatrical
Production
|
|
|
|
|
|
Theaters, concert halls, amusement parks, themed
environments, and producers of live performances and events make
extensive use of dramatic theatrical lighting and appreciate the
enhancement dynamic lighting adds to set design, stage lighting
and themed displays
|
|
Brunswick Zone, Goodman Theater, NBA and NHL
All-Star Games, N’Sync Performance/ MTV Video Music Awards,
Symphony Hall/ Boston
Example: Hairspray (Broadway musical)
The set of the
award-winning musical Hairspray features a unique backdrop
comprising hundreds of digitally controlled points of
color-changing light designed using Color Kinetics systems. Over
600 spotlights are installed.
|
|
|
|
TV Production
|
|
|
|
|
|
Studio-based television news programs, game shows
and talk shows use dynamic lighting to add excitement, glamour
and identity to show set designs and fill lighting
|
|
Super Millionaire
Example: Wheel of Fortune (Sony Pictures Television)
The
set of this popular television game show features several
applications of our technology, including the famed wheel
itself, the state-of-the-art electronic puzzle board and the
frame of two large TV monitors.
|
|
|
|
Electronic Signage and Corporate
Identity
|
|
|
|
|
|
Signage and point of purchase designers and
fabricators use dynamic lighting in projects such as backlit and
uplit displays, glass signs, interior or exterior signs, and
channel letters
|
|
Brookstone, Legal Sea Foods, ClearChannel
Spectacolor (Washington Mutual Bank)
Example: Loews Theaters (New York)
The six-story
sign for the flagship Times Square theater uses our custom
designed floodlights within the Loews letters to create dazzling
synchronized lighting effects.
|
51
|
|
|
|
|
Market Segment
|
|
Representative End-Users or Installation Sites
|
|
|
|
Residential Architecture
|
|
|
|
|
|
Specialty and accent lighting are used in
residential projects for applications such as cove, cabinet,
under counter and landscape lighting and home theaters
|
|
Private residences worldwide
Example: Hawaii Residence
Our systems are used
throughout a contemporary home, from the grand hallway, to the
master bedroom, to the home theater.
|
|
|
|
Exhibits, Display, and
Museums
|
|
|
|
|
|
Dynamic lighting is used in trade show booths and
museum displays to highlight featured areas or to add impact and
entertainment value to the overall display
|
|
The Mary Baker Eddy Library, Henry Art Gallery,
Metropolitan Museum of Art/ New York, The Children’s
Museum of Indianapolis
Example: Sub Postmaster 2003 (London, England)
At the
annual Post Office and Convenience Retailing show in London, our
systems illuminated the interior of an ultra high-tech tunnel
that was the exhibit’s focal point.
|
|
|
|
|
|
OEM and Licensing Markets and
Applications
|
We seek to establish OEM relationships with
companies that we believe are leaders in their respective
markets, offer high quality products, have strong product
development and distribution capabilities and can rapidly bring
to market the benefits of our proprietary technology in markets
that are not otherwise served by our direct sales efforts.
We actively seek to license our patents and
technology, both in the architectural lighting market and in
specialty lighting markets. We typically require that OEM
products interoperate with our control systems, consistent with
our objective of establishing our control systems as the
industry standard for intelligent lighting systems.
In our licensing efforts we seek to negotiate
high royalty rates that reflect the value of our technology and
know-how and our patent position. Other factors that influence
royalty rates include product margins, committed minimum
royalties, fixture prices, the market position of the partner,
and other factors.
In general, we do not enter into exclusive OEM
agreements or licenses except where we believe that a single
company has a strong position in a vertical market.
A partial list of our current OEM and licensing
customers, and their market segments, is as follows:
Architectural Lighting:
Arc Lighting Systems:
a manufacturer of architectural
lighting
Sistemalux:
a
Canadian manufacturer of architectural lighting
Targetti Sankey:
an
Italian manufacturer of architectural lighting
Visa Lighting:
a
manufacturer of architectural lighting
Zumtobel Staff Lighting:
a division of Zumtobel AG, an Austrian
manufacturer of architectural lighting and control systems
Automotive Aftermarket
Lighting:
Theory3:
a
manufacturer of automotive aftermarket products
52
Entertainment Lighting:
Altman Stage Lighting:
a manufacturer of theatrical lighting
products
Cinepronic:
a
Mexican manufacturer of theatrical lighting products
Pool and Spa:
Balboa Instruments:
a manufacturer of OEM control systems
in portable and above-ground spas
Hayward Pool Products:
a manufacturer of pool and in-ground
spa products
Consumer Products:
Display Supply and Lighting:
a licensed reseller of consumer
products
Holmes Group:
a
manufacturer of a diversified line of consumer products
Landscape Lighting:
Pathlight:
a British
manufacturer of paving lights
Aerospace:
B/E Aerospace:
a
manufacturer of cabin interior products for commercial aircraft
and business jets, and an aftermarket distributor of aerospace
fasteners
Digital Entertainment and
Gaming:
James Industries:
a
sub-assembly manufacturer and distributor for the coin-operation
market, including slot machines, vending machines, pinball
machines, pachinko machines, and jukeboxes
Mikohn Gaming:
a
manufacturer of gaming devices
Touchtunes:
a
Canadian manufacturer of digital downloadable jukeboxes
We are exploring opportunities in additional
vertical markets in which we believe our technology could find
ready application. In certain of these markets we have already
obtained patents or have patent applications pending to protect
the use of our proprietary technology. Potential OEM and
licensing markets currently under evaluation include:
|
|
|
|
|
|
•
|
agriculture
|
|
|
|
|
•
|
automotive OEM suppliers
|
|
|
|
|
•
|
defense systems
|
|
|
|
|
•
|
machine vision
|
|
|
|
|
•
|
medicine
|
|
|
|
|
|
|
•
|
photography
|
|
|
|
|
|
|
•
|
salon and beauty
|
Intellectual Property Strategy and
Technology
Our intellectual property strategy has two
elements. We employ a market-driven intellectual property
strategy, intended to establish a strong patent position in each
of three areas: the color architectural lighting market; other
specialty markets for color lighting applications; and the
general white light market. We also employ a technology-driven
intellectual property strategy, focused on obtaining patents
that cover our innovations at all levels, ranging from core
technology and products to high-level control systems, complete
lighting systems, applications and methods of use.
Our intellectual property strategy is directed by
a cross-functional team that includes both of our co-founders
and other members of senior management, executives from the OEM
and licensing and engineering groups and inside and outside
patent counsel. Since our inception, we have sought to build a
patent portfolio that will protect our core business and provide
high-value licensing potential. Rather than filing short, narrow
patent applications on core technologies and products, as is
typical of the
53
semiconductor and lighting industries, we
generally file extensive patent applications, usually hundreds
of pages long. Accordingly, we have disclosed many different
technologies and market applications in each filing, including
not only our own implementations, but also identifiable
alternatives and design-around solutions. We file continuation
and divisional applications as appropriate, with the objective
of generating multiple patents from each application, ideally
with overlapping coverage that applies to many different
products and markets. We have 28 issued patents and over 115
pending patent applications, including foreign applications in
many jurisdictions.
|
|
|
|
|
Fundamental Technology Patents
|
As an early entrant to the solid-state lighting
market in 1997, we sought to patent many aspects of intelligent
solid-state lighting systems that we consider to be fundamental
to our business.
One of our earliest patents protects our
Chromacore technology, a method of controlling the intensity and
color of light provided by multiple colored light sources such
as LEDs. Chromacore applies the previously known technique of
pulse-width modulation, whereby each LED is switched on and off
so rapidly that the human eye perceives the LED as constantly
lighted, with an intensity that is proportional to the duration,
or “width,” of the pulses of light (i.e., that
corresponds to the percentage of time that the LED is switched
on, rather than off). If multiple LEDs of different colors are
driven in this way, the result, as seen by the human eye, is a
single, mixed color, based upon the perceived intensity of each
colored light source. Our Chromacore technology is a proprietary
method of implementing pulse-width modulation through software
and firmware that is embedded in a microprocessor, which drives
the LEDs. Chromacore technology is incorporated in each of our
color-changing solid-state lighting modules, including white
light products we expect to release in 2004.
Many of our patents and patent applications apply
to digital control technologies that we use in all of our served
markets, such as:
|
|
|
|
|
|
•
|
pulse-width-modulation systems for driving
solid-state lighting components to produce color changes in
response to a data signal, embodied in our Chromacore
technology, as well as other driving techniques, such as pulse
amplitude modulation;
|
|
|
|
|
•
|
improved drive circuits for high-power LEDs;
|
|
|
|
|
•
|
interfaces for delivering control signals to
solid-state lighting devices over networks using a variety of
standard communications protocols, including Ethernet and DMX
(the industry standard for theatrical lighting);
|
|
|
|
|
•
|
methods for conveniently associating network
addresses of solid-state lighting devices that are deployed in
large or complex arrangements with physical locations, including
smart sockets, smart network cables, and a linear addressing
protocol that is embodied in our proprietary Chromasic chip;
|
|
|
|
|
•
|
authoring systems for complex lighting shows and
effects, including object-oriented systems that translate inputs
like Flash software animation and video into corresponding
lighting control signals;
|
|
|
|
|
•
|
user interfaces for solid-state lighting systems,
including players for downloading and conveniently delivering
control signals for shows and effects to solid-state lighting
units; and
|
|
|
|
|
•
|
operating system software and related hardware
for conveniently delivering complex shows and effects rapidly
over a network.
|
In addition to control technologies, we have
designed and optimized thermal, power, mechanical and optical
aspects of our systems. For example, we have developed:
|
|
|
|
|
|
•
|
thermal management systems for solid-state
lighting, including conductive and convective systems designed
to optimize retrofitting solid-state lightings into conventional
sockets and fixtures;
|
|
|
|
|
•
|
power systems for solid-state lighting
illuminators, including combined power/data systems embodied in
our Smartjuice technology, power factor control systems, methods
for allowing solid-state lighting to operate with conventional
line voltage, and systems for placing solid-state lighting units
on dimmer circuits;
|
54
|
|
|
|
|
|
•
|
mechanical systems for enabling solid-state
lighting, including circuit boards for architectural lighting
fixtures and mechanisms for allowing solid-state lighting
systems to retrofit into conventional sockets and
fixtures; and
|
|
|
|
|
•
|
optics for solid-state lighting systems, such as
lenses, diffusing tubes and diffusing panels.
|
Our patents and patent applications apply to
solid-state lighting implementations using many forms of
semiconductor lighting in addition to LEDs, including emerging
solid-state technologies such as organic LEDs, fluorescing
chemicals, luminescent polymers, and others.
|
|
|
|
|
Market-Driven Intellectual Property
Strategy
|
In addition to obtaining patents directed to
fundamental technologies used in our products, we also seek
patent protection for methods of using our technology in
specific markets and applications. For example, in the
architectural lighting market, we have patents that are directed
to:
|
|
|
|
|
|
•
|
various architectural lighting fixture types,
including wall-washing lights, linear lighting fixtures, and
tile lights;
|
|
|
|
|
•
|
lamps, bulbs, and circuit boards designed to work
with architectural lighting fixtures;
|
|
|
|
|
•
|
methods to make solid-state lighting systems
compatible with the installed fixtures and wiring for
traditional lighting; and
|
|
|
|
|
•
|
methods for illuminating materials in
architectural lighting environments based on features of the
materials.
|
Other vertical markets to which we have directed
patents and patent applications that relate to industry-specific
applications and methods of use include, pools and spas,
transportation environments, automotive aftermarket lighting and
a number of other markets in which we already have, or are
pursuing, OEM and licensing relationships.
A number of our patents that apply to color
solid-state lighting in the architectural lighting market and
the specialty lighting markets also apply to the white light
market, as white light color temperature control is one
implementation of general color control. In addition to those
relating to white light color temperature control systems, we
have patents and patent filings covering:
|
|
|
|
|
|
•
|
placing solid-state lighting systems on dimmer
circuits;
|
|
|
|
|
•
|
mechanical and electrical systems for
retrofitting solid-state lighting systems into fixtures and
sockets for traditional lighting sources, such as incandescent,
fluorescent, and halogen;
|
|
|
|
|
•
|
color temperature control systems for producing
high-quality white light from solid-state lighting
systems; and
|
|
|
|
|
•
|
methods for using white light systems in a
variety of environments, such as retail, beauty, medical,
machine vision, and other environments where light quality is
important.
|
We believe that our patent activity in color
solid-state lighting systems and the applicability of many of
those patents in the white light market provide us with an
opportunity to take a leadership position in intellectual
property for the white light market. We also have other
innovations in the white light field and are actively working to
extend our patent coverage in that market.
|
|
|
|
|
Intellectual Property Protection
|
Because the patent position of technology
companies involves complex legal, scientific, and factual
questions, the issuance, scope, validity and enforceability of
patents cannot be predicted with certainty. Issued patents can
be challenged, invalidated, or circumvented. Furthermore, others
may independently develop alternative products or technologies
that compete with our patented products. Thus, our patents may
not provide adequate protection against competitors.
55
We also attempt where appropriate to protect our
proprietary information with contractual arrangements and under
trade secret laws. Our employees and consultants generally enter
into agreements containing provisions with respect to
confidentiality and the assignment of rights to inventions made
by them while in our employ that relate to our business. We
cannot assure you that the degree of protection offered by trade
secret laws and by our contracts will be sufficient to protect
our intellectual property rights. Moreover, the laws of many
foreign countries may not protect our intellectual property
rights to the same extent as do the laws of the United States.
In recent years, there has been significant
litigation involving patents and other intellectual property
rights. We have from time to time been notified of claims
alleging that we are or may be infringing patents or
intellectual property rights owned by third parties. A company
that we sued for patent infringement in 2002, against which we
still have litigation pending, recently acquired a patent from a
third party and sued us for infringement of that patent. We
could be sued by other parties for patent infringement in the
future. Such lawsuits could subject us to liability for damages
and invalidate our proprietary rights. In addition, intellectual
property lawsuits may be brought by third parties against OEM
and licensing customers that incorporate our intelligent
solid-state lighting technology in their products. Plaintiffs in
intellectual property cases often seek injunctive relief,
sometimes on a preliminary basis before trial, which, if
granted, could require us to stop selling products that contain
the allegedly infringing intellectual property or take other
actions that could be harmful to our business. If we were to be
found liable for infringement of proprietary rights of a third
party, the amount of damages we might have to pay could be
substantial and is difficult to predict.
In addition to being subject to claims by third
parties that we infringe their proprietary rights, we have in
the past asserted, and may in the future assert, our
intellectual property rights by instituting legal proceedings
against others. We are currently the plaintiff in two patent
infringement lawsuits. We cannot assure you that we will be
successful in enforcing our patents in those or any other
lawsuits we may commence, and any such litigation could result
in a determination that one or more of our patents are invalid
or unenforceable.
Whether we are defending the assertion of
intellectual property rights against us or asserting our own
intellectual property rights against others, such litigation can
be complex, costly, protracted and highly disruptive to our
business operations by diverting the attention and energies of
our management and key technical personnel.
Sales and Marketing
We sell our intelligent solid-state lighting
systems and OEM products through our direct sales force and
through our global network of manufacturer’s
representatives and distributors. At June 10, 2004, our
direct sales force consisted of 20 sales professionals. These
include direct sales, OEM sales and inside sales
representatives, sales managers, and sales support personnel,
located at our headquarters in Boston, Massachusetts, in the
United Kingdom, in Hong Kong and elsewhere in China.
The sales channel for our intelligent solid-state
lighting systems varies by application. For example, we
typically serve the architectural lighting market in North
America through manufacturer’s representatives who call on
lighting designers, architects and other specifiers to educate
them about the capabilities of our systems, promote the use of
our products in particular projects, and assist in the design
and implementation phases of the project. By contrast, we
typically serve the entertainment niche through
dealer/distributors who have expertise in the specialized
requirements of the theatrical or television studio environment,
and who provide system integration services. Other customers,
such as national retailers with multiple locations, are served
directly by our sales force.
Our indirect distribution network consists of
manufacturer’s representatives throughout North America and
dealer/distributors and value added resellers, or VARs, who
stock our products and provide integration services in local
markets worldwide. In North America, we refer orders for smaller
lighting systems, generally those having a value of less than
$10,000, to our distributor Color Kinetics
Distribution, Inc., which is not affiliated with Color
Kinetics. Distribution in Japan is carried out by Color Kinetics
Japan, a
56
joint venture in which we hold a 50% interest. We
intend to increase the size of our direct sales force, both
domestically and abroad, and to develop relationships with
additional dealers, distributors and VARs.
We have developed strong relationships with
prominent lighting designers, interior designers, architects and
other professionals who design and oversee the installation of
advanced lighting systems and influence the opinions and
practices of others in the lighting industry. In the OEM market,
we have entered into relationships with manufacturers of
lighting equipment and related products who are, we believe,
leaders in their respective market segments and can offer both
significant expertise and broad distribution capabilities in
selected target markets. Our relationships with these
specifiers, influencers and industry participants enable us to
educate the marketplace as to the benefits of our intelligent
solid-state lighting systems. They also give us early notice of
industry trends and assist us in developing and bringing to
market products that are responsive to the evolving needs of the
marketplace.
We host educational seminars, distribute product
samples for demonstration purposes and make available an
extensive portfolio of reference installations that showcase the
use of our products by well-known architects and designers in
prominent applications in various markets. We also maintain a
marketing and marketing communication program, which conducts
active media outreach to gain editorial coverage of our products
and services in appropriate trade and business publications.
We have been active in solid-state lighting
initiatives in industry organizations such as the National
Electrical Manufacturers Association and the Illumination
Engineering Society. We believe our participation in efforts to
standardize the solid-state lighting field will help promote the
wider use of solid-state lighting as well as further our
standing as a leader in the field. We participate actively in
industry events and trade shows and our executives frequently
speak at conferences and seminars on subjects related to
intelligent solid-state lighting.
Government Programs
The US Department of Energy, or DoE, has
shown keen interest in development of solid-state lighting
technology, because of its potential for large energy savings.
The DoE has commissioned several studies that have concluded
that substantial energy savings would result from use of
solid-state lighting technologies. The DoE is actively funding
further research and development initiatives in solid-state
lighting within government and academic laboratories as well as
many industry programs. The Environmental Protection
Agency’s Energy Star program, an information and branding
program facilitating identification and purchase of energy
efficient products, includes standards for certain solid-state
lighting systems, such as LED-based traffic signals and exit
signs. Government agencies in other parts of the world,
including the European Union, Canada, Japan, Taiwan and Korea,
are also putting programs in place to encourage the adoption of
energy-efficient devices such as solid-state lighting. We
believe that government initiatives such as these are indicative
of the long-term promise of solid-state lighting and also have
the potential to accelerate the development and adoption of
solid-state lighting systems.
Research and Development
Our products require the sophisticated
integration of electronics, mechanical engineering, optics,
thermal management, integrated circuit design, software and
network communications technology. Our scientists and engineers
design solid-state lighting modules, lighting devices, power
sub-systems, digital controllers, application-specific
integrated circuits, microprocessor firmware, applications
software and network communications software, among other things.
We conduct separate programs for fundamental
technology research and product development. Our fundamental
technology research team, which includes our co-founders, is
augmented by experts in digital control systems, software,
electrical, thermal and optical engineering and power systems.
Inventions by our fundamental technology research team are
captured in patent applications and evaluated for their
potential to be embodied in products. The most promising
inventions are subjected to a rigorous product development
process that includes feasibility analysis, market research and
customer feedback. Products
57
that receive market validation in this process
are added to our product roadmap and are assigned aggressive
engineering and development milestones leading to product
introduction.
We perform research and development at our
facilities in Boston and in Shenzhen, China. Our research and
development expenditures for 2001, 2002 and 2003 were
$2.8 million, $2.8 million, and $2.5 million,
respectively.
Manufacturing, Distribution and
Quality
We use contract manufacturers, primarily in
China, to manufacture our products. These contract manufacturers
supply all necessary labor and raw materials, other than LEDs
and certain other key components. Recognizing the importance of
managing our supply relationships through the use of on-site
personnel, in early 2003 we opened an office in Shenzhen, China.
This office is staffed by engineers and supply chain management
and quality specialists, who are able to communicate on a daily
basis with our contract manufacturers. We also maintain a
warehouse facility in Shenzhen where we maintain an inventory of
LEDs and other critical components, such as the ASICs used in
our Chromasic technology. This close communication with our
contract manufacturers and local staging of critical components
helps us to maintain quality, tightly monitor our supply chain
and accelerate our product development cycles.
We employ rigorous quality control procedures,
conducting failure mode effect analysis during product design
and conducting testing and acceptance of products at the
contract manufacturers, including testing and burn-in of all
solid-state lighting components to ensure proper function before
shipment.
We source LEDs and other standard electronic
components from a variety of solid-state lighting manufacturers.
We depend on a small number of suppliers for certain components
critical to the operation of our solid-state lighting systems.
For some of these components we have only a single qualified
supplier. For example, we currently purchase all the ASICs used
in our Chromastic products from a single vendor. Similarly, we
have a single qualified source of packaged power LEDs that we
use in some of our products. We currently are qualifying
multiple sources of power LEDs and white LEDs to better assure
ourselves of adequate supplies of these components at reasonable
costs. The process of identifying a qualified vendor and
obtaining components in needed quantities from the new vendor is
a time-consuming process, which can take from six to nine months
or more. Our systems incorporate standard electronic components
and other raw materials that are typically available from a
number of vendors. However, we have in the past occasionally
experienced delays in delivery or shortages of such components
and materials. We typically do not enter into long-term
agreements with our vendors, and thus in general have no
contractual assurances of continued availability or favorable
pricing of components and raw materials utilized in our systems.
One of the most significant challenges in
semiconductor lighting markets is color consistency. Despite the
efforts of semiconductor manufacturers to increase quality and
consistency, LEDs of the same type from a single manufacturer
can vary significantly in wavelength and intensity.
Manufacturers place groups of similar LEDs in lots, or bins,
that have similar color characteristics; however, if only a
limited set of high-quality bins are used, then the
manufacturer’s yield falls and the unit cost of the device
typically increases. To address the need for color consistency
while also facilitating the use of LEDs from a wider range of
bins, we developed proprietary software, known as Optibin, for
grouping LEDs from a wide range of different bins into lighting
devices that produce light that is highly consistent from device
to device. We license the Optibin software to our LED
manufacturers, solely for use in sorting products for us, so
that they can group LEDs from a wider range of bins for us, thus
improving quality and reducing our costs.
We also outsource the order fulfillment function
for our products. Large orders are fulfilled through a supply
chain fulfillment center operated by a third party or by
shipment direct from the contract manufacturer. Smaller orders,
generally for less than $10,000, are fulfilled in the United
States and Canada through an unaffiliated fulfillment
organization, Color Kinetics Distribution, Inc., and in
Europe by an unaffiliated distributor.
58
Certification and Compliance
We have developed and maintained a core
competency in certification and listing processes for
solid-state lighting systems. We believe we were the first to
provide Underwriters Laboratory or UL-listed and UL-classified
products for intelligent solid-state lighting. Where appropriate
in jurisdictions outside the United States, we obtain other
similar national or regional certifications for our products.
Our broad knowledge and experience with electrical codes and
safety standards has facilitated installation of our products
even in municipalities with strict codes. Since existing codes
and standards were not created with solid-state lighting systems
in mind, we have worked closely with organizations that oversee
codes and standards that are germane to solid-state lighting
systems. We believe that certification and compliance issues are
critical to adoption by customers, and our expertise in these
areas provides us with an advantage over competitors.
Competition
In the high performance lighting markets in which
we have primarily competed to date for the sale of our
intelligent solid-state lighting systems, competition is
fragmented. Our systems compete with lighting products utilizing
traditional lighting technology provided by many vendors. In
addition, we face competition from a smaller number of
manufacturers of traditional lighting equipment that have
developed one or more solid-state lighting products. In general,
each of these competitors has, to date, offered only a limited
range of solid-state lighting products, often directed to narrow
applications, and none, to our knowledge, is currently able to
offer an integrated digital control system such as ours, or the
breadth of products and services that we provide.
In the white light market, which we plan to enter
in 2004, we expect to encounter competition from some of the
types of competitors described above. Additionally, to the
extent that we seek to introduce white light products for use in
general lighting applications, such as retrofit bulbs and lamps
for standard fixtures, we expect to encounter competition from
large, established companies in the general lighting industry
such as General Electric, Matsushita, Osram Sylvania and Philips
Lighting, each of which has, we believe, undertaken initiatives
to develop white light LED technology. These companies have
global marketing capabilities and substantially greater
resources to devote to research and development and other
aspects of the development, manufacture and marketing of
solid-state lighting systems than we do.
In each of our markets, we anticipate the
possibility that LED manufacturers, including those that
currently supply us with LEDs, may seek to compete with us by
introducing more complete systems that do not infringe our
patents.
Employees
As of June 10, 2004, we had
79 full-time employees, including 26 in sales, marketing
and licensing, 37 in research and development and product
related support service, including product management,
engineering, supply chain management and quality and 16 in
general and administrative functions. Of these, 65 are employed
at our headquarters in Boston, Massachusetts and elsewhere in
the United States, and the remainder are employed in the United
Kingdom, Germany and China. From time to time, we also employ
independent contractors and temporary employees to support our
general and administrative functions, engineering and supply
chain management. None of our employees is represented by a
labor union, and we have never experienced a work stoppage. We
believe that our relations with our employees are good.
Facilities
Our headquarters are located in Boston,
Massachusetts, where we lease approximately 44,000 square
feet under a lease expiring in August 2007, with a five-year
renewal option. We occupy approximately 24,000 square feet
of this space, and sublease the balance of this space to an
unrelated party under a sublease expiring in August 2007. We
expect that these facilities will be adequate to meet our needs
through the end of 2005, and that suitable additional or
substitute space will be available thereafter as
59
needed. We also lease approximately
2,000 square feet of office space used by our
manufacturing, supply chain management and quality control
personnel and an additional 4,000 square feet of warehouse
space used for staging of raw materials and finished goods, in
Shenzhen, China. The leases for our facilities in China have
remaining terms of between one and two years.
Legal Proceedings
|
|
|
|
|
Super Vision
International, Inc.
|
In March 2002, Super Vision
International, Inc., or Super Vision, filed a lawsuit in
the United States District Court for the Middle District of
Florida seeking a declaratory judgment that certain of our
patents are invalid, that Super Vision’s products do not
infringe the patents in question, and that the patents are
unenforceable. Super Vision subsequently amended the complaint
to add claims for interference with prospective business
relationships, unfair competition, trade disparagement and
defamation.
In June 2002, we filed a lawsuit against Super
Vision in the United States District Court for the District of
Massachusetts. In this litigation, we allege that certain
products of Super Vision, including solid-state architectural
lighting fixtures, pool lights and spa lights, infringe five of
the patents at issue in Super Vision’s declaratory judgment
action. Proceedings in our lawsuit against Super Vision were
temporarily stayed for the purpose of pursuing settlement
negotiations, but these negotiations were not fruitful.
Upon renewal of the proceedings, Super
Vision’s lawsuit in Florida was removed by the court to the
United States District Court for the District of Massachusetts,
where our motion to consolidate the two cases is pending. The
cases are in the discovery phase, with a so-called
“Markman” hearing on patent claim interpretation
scheduled for October 2004 and trial scheduled for January 2005.
We believe that Super Vision’s claims of invalidity,
unenforceability and non-infringement of the patents at issue in
our infringement suit against Super Vision, and its claims
against us of interference with prospective business
relationships, unfair competition, trade disparagement and
defamation, are without merit.
On March 4, 2004, Super Vision announced
that it had acquired from High End Systems a patent relating to
variable color lighting systems. On March 5, 2004, Super
Vision filed a lawsuit in the United States District Court for
the Middle District of Florida alleging that Color Kinetics has
infringed the High End patent and seeking damages of
$10.5 million. We had previously investigated the High End
patent and concluded that our products and technology do not
infringe any valid claim of the patent. Accordingly, we believe
that Super Vision’s High End Patent Lawsuit is without
merit and intend to defend against it vigorously.
In April 2004, we commenced an action in the
United States District Court for the District of Massachusetts
against TIR Systems, Ltd., a supplier of traditional lighting
products used primarily in corporate identity, commercial and
industrial applications that has recently begun to market
solid-state lighting products. In our complaint, we allege that
solid-state lighting products sold by the defendant infringe
multiple patents owned by us, and we seek injunctive relief,
damages, and attorney’s fees.
60
Next Section
Previous Section